Nonprofits: Facing Financial Challenges in a Changing World
by Gregory S. Dowell
An article dated August 8, 2016 in the Journal of Accountancy by Ken Tysiac titled “How not-for-profits can stay strong amid uncertainty” focused on some of the challenges facing nonprofits today, which range from cyber security threats to changing accounting rules to an uneven and uncertain political landscape as we steamroll to the November elections. Executive leadership at nonprofits, as well as their boards, must stay informed and assess these risks quickly and with clarity . . . and, of course, with a budget that leaves no room for extras.
At a recent AICPA Nonprofit Industry Conference, Tysiac notes that there were six points that were stressed for nonprofit boards and their executive teams to consider, which are listed below:
Accounting rule changes: The Financial Accounting Standards Board (FASB) is preparing to issue a new standard that will affect nonprofit financial statements. One of the goals of the new standard is to improve the readability and transparency of financial reporting. Information should be more apparent to users of the financials under the new standard, including information on the performance and strength of the entity.
The standard will require all nonprofits to consider how their financial data is currently captured internally, and how that data will need to be reflected under the new reporting format.
Stay vigilant with cyber security: Hackers have taken to using “ransomware” to infiltrate a computer system and to hold data hostage. We hear about big data breaches, and small organizations may rationalize that the hackers have no interest in them, but they couldn’t be more wrong. Hackers will tailor the ransom to the organization, making sure it isn’t set so high that it won’t get paid. Of course, once ransom is paid, the hackers know they have an easy target and can be expected to return.
Think about the data that is stored – not only financial data, but in many cases a serious amount of personal data about donors is in these systems. The nonprofit’s servers are not the only thing at risk – think of the smartphones of employees or the laptops and flashdrives that contain downloads of data. Many nonprofits take credit cards from donors and use third party vendors; how safe is that data? How secure is historical information, whether held offsite or on? Donors will not take kindly to receiving a letter from the nonprofit that their personal data has been comprised. Nonprofits have little choice but to employ technicians or outside vendors to install and inspect systems on a regular basis. Insurance coverages should be looked at as well; often the cost to include cyber protection is not unreasonable.
Stock market turmoil: It seems that globalization has caused markets to react with much more volatility than in the past. Consider the change in the markets following Brexit, or following a terrorist event. Nonprofits must consider how much risk and volatility can be accepted in their endowment portfolios. The best capitalized nonprofits can wait out most events that occur, but smaller groups, who may have need to redeem positions to fund cash flow, can find themselves selling into the teeth of a bear market. Boards need to consider ways to mitigate this market risk.
Take advantage of opportunities: Yes, it is nearly impossible to earn a return on investments these days in certificates of deposit or in a money market account, but focus on what is controllable. For instance, take steps to convert transactions to cash as quickly as possible. Lock boxes or using credit card deposits may be a viable way to speed up cash flow. Be sure to pay bills at the end of the grace periods, and scrub the expense side of the financials to make sure that spending is under control. The benefits of cost containment are recurring annually, in many cases. This may recall challenging some assumptions, particularly if employment is on the table. In that way, the nonprofit’s liquidity can be improved on effectively the same dollar volume.
Keep a strong gift-acceptance policy: In times of financial stress, it may be tempting to broaden the types of gifts that a nonprofit is willing to accept. Sometimes saying “no” to a donation, in the right manner and with the right constructive suggestions, is the best answer for the nonprofit.
Financial strength is key: Every organization should set a target for reserves, which might be reflected as a percentage range of gross receipts. This target should be high enough to sustain the nonprofit through a financial hardship – think along the lines of state or federal funding be slowed, or perhaps a lawsuit or loss of a large donor. In difficult times, those reserves may be the last and only lifeline that the nonprofit has. Without reserves, other drastic steps are accelerated – perhaps key staff have to be laid off or let go, or key programs closed. If not devastating, the scars can be permanent: Those staff members and the momentum of those closed programs can not be easily reclaimed when the economic turmoil passes. The challenge is that this can not be done overnight, but must be part of an orchestrated and well-considered plan. In good times, leadership and the board must fight spending temptations and reserve funds.
I have sat on the boards of a number of nonprofits, and my CPA firm has provided audit, consulting, tax, and accounting services to dozens of nonprofits over the years. Each of the above items barely grazes the topic, and each is worthy of additional discussion. This was a very well-written article, and I thought it presented some key items for nonprofit boards to consider.