Outsourced Accounting

Hiring an Accountant for your Nonprofit Isn’t Gettting Any Easier

Overall unemployment levels are historically low at 3 – 4% which is approaching full employment.   Robert Half reports that unemployment for accounts is actually below 2%.  As a result, hiring qualified talent is becoming more difficult if not impossible to achieve.  Nonprofits make double the number of errors compared to for profit businesses due to the complexity and under investing in the nonprofit accounting function.  Most nonprofits use accounting software that is not designed for nonprofit accounting.  This might be the perfect time to explore outsourcing a portion of the accounting depending on what types of activities you need internal staff to perform.

In the nonprofit community, outsourcing typically means long-term delegation of key operation to outside experts.  The accompanying expectation is improvement of the quality, strengthening effectiveness, and lowering or controlling costs.

A key difference in the nonprofit sector is not only controlling costs, but becoming a more effective organization.

Outsourcing accounting provides nonprofit organizations with a team of experts who have multiple client experiences which benefits its clients and the nonprofit organization’s it serves.  FTM has a team of nonprofit accounting experts to assist your organization with its accounting and finance function including hiring and training your internal staff.

You should look for the following in any accountant candidate that you are considering hiring for your Nonprofit:

  1. Your accountant should be able to keep your finances organized and under control.
  2. Your accountant should be able to enter your income, expenses, assets, and liabilities into accounting software.
  3.  Your accountant should understand the IRS requirements and generally accepted accounting practices to insure financial reports are properly prepared and accurate.
  4. Your accountant will make sure any employer taxes and tax filings are completed timely.
  5. Your accountant should be familiar with fund accounting and used fund accounting software.
  6. Your accountant should be familiar with reporting and be able to answer questions efficiently and effectively.
  7. Your accountant should be a resourceful problem solver.
  8. Your accountant should be self-motivated.

As difficult as it is to hire a good accountant, hiring an incompetent or incompatible person is even worse.    Competition for strong candidates can be challenging.  You can recruit applicants by asking us, your auditor, advertise in different places, and announce broadly.  You will want to assess the technical skills, communication skills, and timeliness of task completion of the applicants.    You will need to spend time on reference checks and be sure to ask about relevant nonprofit accounting experience and familiarity with your accounting software.  If cash flow is a significant problem in your organization, discuss it with the finalists.  When deciding salary, you might want to check with salary surveys or other organizations to see what they pay.

There are many right ways to hire a great accountant, and as you do so remember to balance your need for technical skills with someone who will help you strategize what are the best decisions for the organization.

Financial Health of the US Nonprofit Sector – Facts and Observations Report

We felt this report was important to share to the nonprofit sector and hope you find these observations helpful.  This report was provided by GuideStar, SeaChange Capital Partners, and Oliver Wyman.

Nonprofits play a critical social role in improving education, alleviating poverty, providing economic opportunities, supporting the health care system, and sustaining the arts. Their health is vital to our nation. So, when they face financial distress, it creates hardship for some of the most vulnerable and fragile segments of society. It also means that hardworking staff may lose paychecks or pensions and that trustees may be exposed to personal liability.

Our analysis shows just how fragile the nation’s nonprofits really are:

  • 7-8% are technically insolvent with liabilities exceeding assets
  • 30% face potential liquidity issues with minimal cash reserves and/or short-term assets less than short-term liabilities
  • 30% have lost money over the last three years
  • ~50% have less than one month of operating reserves

What can Funders, Regulators, and Policy-Makers Do?

A nonprofit’s ability to substantially improve its financial situation is often limited. Taking action to enhance risk management practices is important, but may not be enough. Improving the financial health of the nonprofit sector will require coordination between nonprofits, funders, regulators, and policy-makers.

The following ideas may help to improve financial health:

  1. Provide adequate funding for overhead
  2. Provide more flexible funding
  3. Encourage nonprofit restructurings, closures and/or mergers
  4. Create a rescue fund for strategically important nonprofit

We hope everyone will take this report seriously and see what we can all do to improve the financial health of the US Nonprofit Sector going forward.

Effective Grants Management

In order to provide effective grants management, we need to make sure that we are performing bookkeeping at the grant level.  Our grant accounting needs to properly allocate costs to the grants while maximizing our grant reimbursement and avoiding any cost disallowance.

Our board members and related governance should be knowledgeable and informed about grant budgets and compliance requirements.  The board should stay knowledgeable of grant administration trends, developments, and regulations.  The board should understand what the organization is committed to and are Its programs delivering what is required.

The program staff needs to be involved in the data collection and reporting responsibilities including the proper reporting to the correct grant budget categories.  We need to establish and schedule future grant deadlines to insure timely grant report submission.  We would suggest sharing the grant agreement with the program staff to insure all grant requirements and deadlines are met.

Federal grants are governed by the super circular which is also referred to as the uniform grant guidance.   Auditors audit based on these requirements with the assumption that the nonprofit is knowledgeable and informed about this grant guidance.  Federal grants and awards are specifically identified and require a financial management system that identifies the source and application of federal funded activities.  Federal grants typically require written procedures around payment requirements, allowability of costs, procurement procedures, and standards of conduct.  For example, procurement procedures need to be written with good procurement records and follow the guidelines.

The grant audit requirements include the ability for management to prepare the Schedule of Federal Awards (SEFA) and it should be reconciled to the accounting records.  If the SEFA is a required part of the audited financial statements, the auditor will issue an opinion if the SEFA is fairly stated as a part of the audited financial statements.

Cost allocations are an integral part of effective grants management.  Effective cost allocations will allow to report and recover the fully loaded program costs to facilities and administrative costs.  Some organizations could benefit from documenting their cost allocation and federal programs may require a formal cost allocation plan.  Some acceptable methods of cost allocation would include hours worked for variable costs, and square footage for fixed costs like facilities.

Grant advance would be for grants that provide advanced funding.  It is important that you don’t spend these restricted funds on other activities and you can keep track of restricted expenditures and restricted grant cash balance.  You may want to track these advances by grant and as deferred revenue to show how much of the cash or accounts receivable balance is restricted.

Cost reimbursement for grants require you to submit reimbursement request timely to minimize cash flow delays.   Your grantors typically believe you have already paid these costs when you submit your reimbursement request.  You may want to obtain a line of credit for reimbursement delays and disclose the possible longer payment terms with your contractors and vendors.

The grant reporting needs include grant budgets which match grant budget line items with financial reporting.  Grant reporting should be able to report total grant spending including direct and indirect cost allocation.   Proper grant reporting requires a grant reconciliation to insure internal and external reports agree and that you are maximizing the reimbursement along with minimizing over and under grant spending.

Grant close out requires you met the compliance requirements and make any final grant budget revisions.  You will want to make sure you make any budget revisions in a timely manner to make sure you have time for any grant budget revision approval that is required.

Your accounting system should be able to meet your grantor reporting needs including their budget line items.   This typically requires segment tracking to track your grant as a separate fund including tracking by program.

Some examples of lack of effective grants management would include grant findings, monitoring visits, spending issues, and lack of a grant budget and related projections.

It is important that you continue to strive for effective grants management within your organization.  Our firm is here to help your organization perform more effective grants management so please let us know if we can be of assistance.

Boards can provide effective financial governance for your nonprofit

Boards can provide effective financial governance for your nonprofit

By Jim Simpson, CPA and director, Financial Technologies & Management

In the nonprofit community, board members don’t always provide effective financial governance. One key difference in the nonprofit sector is that the board focuses on the nonprofit’s mission and not the finances or profits. But all are necessary.

Nonprofits would have more public trust if all board members performed their financial governance at a high level and challenged one another and executive management for excellent financial performance.

There may, however, be some roadblocks. As a board member, are you unsure or scared of your financial governance role with the nonprofits you serve?

If the desire is to have a more effective board, there are some essential financial governance responsibilities that a board should be performing for a nonprofit.

Here are eight effective financial governance responsibilities to look for in your nonprofit.

  1. Financial tracking by funds and program. It is not good enough just to know if your organization has a surplus or a deficit for the organization. You should know if your individual funds and programs are generating a surplus or deficit. It is impossible to be a financial steward if you don’t know which funds or programs are overspent or underspent.
  2. Financial reports need to be produced monthly. It is imperative that board members receive financial reports at least monthly. A board member can only perform his or her financial governance role if he or she can help the organization to anticipate and plan for changes based on financial results. It is important that these financial reports are timely and accurate to avoid making the wrong financial decisions. The financial reports should be goal oriented to allow the financial governance to focus on its accomplishments. Best practices financial reporting would include both budget and historical variance financial analysis. A goal oriented report would focus on the budget priorities and key financial areas of the nonprofit.
  3. Financial health is priority. Poor financial health usually results when no one knows the financial condition and when one person controls all financial information. Significant comments from the annual audit and staff turnover are also indicators of poor financial health. It is important that the board pays attention when these conditions exist and work towards increasing financial expertise and capacity. Financially healthy organizations hold themselves accountable, understand roles, and maintain compliance with adequate and qualified staff. Effective board and management practices are essential for segregation of duties and internal controls. These board financial practices should promote communication, expectations, and operating efficiencies so the organization can be monitored efficiently and effectively.
  4. Proper accounting software. Many nonprofits use manual or commercial applications to perform nonprofit accounting. It is important that you provide the finance staff with the right tools and accounting software to do the job properly.  It is important that board members ask questions regarding how the organization tracks financial information. One financial question to ask might be: Does the organization track financial information by funding source, by program and by accounts?  An annual review of accounting software and tools can uncover what additional software modules are needed including whether you have outgrown your current software.  It is important that organizations review software that is designed for nonprofit organizations. Nonprofit accounting software typically allows integration of third party systems like fundraising and payroll to increase efficiencies of various systems.
  5. Financial stewardship. All board members need to act as financial stewards not just the treasurer for the nonprofit’s that they govern. Unfortunately, board members don’t take this role seriously enough and thus organization’s fail financially which significantly reduces public trust.  Board members must understand financial stewardship and make it a priority for the organization that they govern. Board financial practices should include financial policies and procedures that promote stewardship and accountability.
  6. Budget management. Board members need to work to enable management to know when to modify programs and operations. It is important the budgets be realistic and revenue based to anticipate any shortfalls. Budget management should include budget projections and cash flow management to insure stable nonprofit operations and programming.
  7. Financial reserves. Board member financial stewardship roles should include establishing financial reserves for the organization. Financial supporters would rather support well established and financial stable organizations. It is important board and management are committed to generating an operating surplus and positive cash balances. It takes a lot of financial discipline to establish financial reserves.  A nonprofit is typically financially stable once it can generate financial reserves of several months of operating reserves. The financial reserves are essential to shield the organization from reductions or delays in funding
  8. Financial plans. Board members need to have financial plans for the organization. Just as an individual has a financial plan that changes as the individuals needs changes, the nonprofit needs financial plans that are reviewed and modified as needed. Financial goals and strategies should change and anticipate the future.

As a board member, I challenge you to review these financial governance areas of your organization to see how you are performing your financial governance role. It is important that you help the organization perform its financial role and not just rely on the treasurer or executive director to perform this role. It is important that you don’t just assume financial governance is occurring, but verify that it is actually taking place.

Board members need to be equipped board members with the tools and abilities to perform the financial governance roles. Board members need to verify that management and staff has the proper capacity and expertise to perform the finance function for the organization. If the organization does not have the proper internal resources, then they may need to look for outside expertise.

Overlooked Benefits of Outsourcing Nonprofit Accounting

Overlooked Benefits of Outsourcing Nonprofit Accounting

By Jim Simpson, CPA and director, Financial Technologies & Management

In the nonprofit community, outsourcing typically means long-term delegation of key operation to outside experts. The accompanying expectation is improvement of the quality, strengthening effectiveness, and lowering or controlling costs.

A key difference in the nonprofit sector is not only controlling costs, but becoming a more effective organization. Finance and accounting departments are two essential back-office areas in nonprofit organizations.

With limited resources, a nonprofit can outsource some or all its financial functions, which can help a nonprofit efficiently staff and conduct its financial operations. It also respects the board and executives limited time or expertise to manage the finance functions, and allow more allocation of resources toward mission and program outcomes.

Here are six overlooked, and sometimes unknown, benefits of outsourcing nonprofit accounting.

  1. Improved efficiencies. The less time internal staff members spend on duties that can be outsourced, the more time they can focus on mission and program outcomes. Typically, outsourcing also results in more timely and accurate financial information, which leads to a better operating organization. One way to assess this is to review how much time is currently spent weekly on accounting and finance to determine where this time could be better utilized with a better functioning finance department.
  2. Reduce costs. The organization can save money by outsourcing the finance functions that are not core to its mission. It is not uncommon for an organization to save 20 to 40 percent in total personnel costs and control these costs. By purchasing services and expertise for time needed by your organization, you can better afford the multiple staff levels an organization needs that includes bookkeeping, accounting, controller, and CFO service levels.  An additional cost saving is that services can be provided off-site, which can save facility costs and overhead-related expenses. Outsourcing can be used for major finance projects including the annual audit, budget preparation, software implementation, and other projects that drain internal staff’s time and energy. There are many intangible benefits to include timely and accurate financial reports, eliminated frustrations related to staff management and turnover, and saving management’s valuable time. If your accounting staff leaves for another job, the knowledge and expertise leaves the organization, as well, and is typically costly and difficult to replace.
  3. Reduce fraud threat. Segregating accounting duties between internal and external staff inherently reduces fraud risks. Outsourced accounting provides the organization with checks and balances along the proper oversight to prevent fraud. Many nonprofits rely exclusively on external auditors to detect fraud but these are not intended to detect fraud and only detect fraud it 3 percent of the time. The increased segregation of duties strengthens your internal controls and procedures, while providing increased transparency and accountability in the overall financial operations.
  4. Higher level of expertise. Many nonprofits can’t afford to employ a staff member who has controller and CFO skill sets and can perform the day-to-day bookkeeping and accounting needs for an organization. By outsourcing, you can take advantage of an expert team’s significant financial expertise, while staying current on the latest regulations and laws. Best practices and improved efficiency can result from the implementation and improve your accounting and reporting functions. The higher-level expertise provides a strategic and fresh perspective to identify deficiencies and add capacity to enable bookkeeping and accounting staff to complete day-to-day activities.
  5. Ability to scale. A nonprofit organization needs the flexibility to increase or decrease the size of its finance department, a difficult task when you have allocated internal staff to the finance function. With outsourcing, you can scale your service level up or down to meet your current situation and needs. You can outsource certain finance functions or the entire accounting function. Outsourcing can be performed on-site or off-site, which also provides flexibility to the organization.
  6. Accounting software expertise. It is unlikely that the internal staff will be able to stay current and fully utilize the updated accounting software. Normally, an organization is faced with staff turnover and no training budget. It is likely that the internal staff has never experienced a new software implementation and is relying on how previous internal staff utilized the accounting software. Furthermore, internal processes and systems don’t change to accommodate new software features and enhancements so software utilization doesn’t improve.

Outsourcing accounting provides nonprofit organizations with a team of experts who have multiple client experiences which benefits its clients and the nonprofit organization’s it serves.

Having the right team in place allow you to focus more resources on your mission and related program outcomes while having a better functioning finance function. It is important that you have the right expertise with an outsourcing firm that you trust and enjoy working together so that a long-term relationship can develop. Keep in mind the organization will still be making the financial decisions, but should be able to make better decisions with the financial advisor performing the role and making recommendations to assist with the organization’s decision-making. Look for a firm that will tailor to clients’ needs and become an extension of the organization’s team regardless of the service levels.