Do You Know What a Pledge Really is?

Most nonprofit organizations are familiar with pledges, as people, businesses, and foundations make promises to give in the future. Many times these promises are the results of fundraising campaigns or appeals. Depending on the situation, the pledge could be for a general or specific purpose, such as for a new child-care program.

Pledges, both short and long-term, may be shown as “Pledges” or “Unconditional Promises to Give” on the Statement of Position.

Promises to give may or may not be real. For example, if a person notifies an organization that he is including the nonprofit in his will, this isn’t a pledge. The same situation exists if someone promises to pay a certain amount twenty years in the future—it’s not a pledge. In both cases, donors can easily change their minds; circumstances can change, making the promises hard to keep.

  • Promises to give must have no conditions to be recognized as real pledges.

Note that  conditions are different from restrictions:

  • Conditions determine if the amount will be given or not
  • Restrictions determine how to use the proceeds

Suppose there is a condition associated with a pledge — the money will be given only if a relative recovers from a serious disease. In this situation, the nonprofit records the pledge only after the condition is met, that is, the person recovers. This situation is tricky since a lot can change, and it makes good sense not to recognize this promise until it’s paid. Same if the condition is the occurrence of a major disaster in California— this pledge is conditional, and the nonprofit should not record it. Once a disaster hits California, then the pledge may be valid.  Managers should use common sense here.

Another example of a condition is a company matching donations made by employees. If an employee gives $10, the firm would also pay $10, matching the donor’s amount. As the employee donates, the condition on the firm’s pledge is lifted. Therefore, each time an employee pays, the organization recognizes a matching pledge.

The wording of a pledge is crucial to determine when a promise is conditional or just restricted. The key word in conditional pledges is “if.” Those are usually not recorded as real pledges by the nonprofit, although they may be filed for future follow up.

Once a pledge is determined to be valid, it can be unrestricted or restricted to a particular time or event, such as for a reading program happening in the future. The classification depends on donors’ intentions. A pledge made on a general appeal can be safely assumed to be unrestricted, while others specific to an individual program should be considered restricted.

Organizations must have pledge documents in writing whenever possible. If a donor doesn’t want to acknowledge the pledge, a thank you letter confirming the gift is a good idea. The letter can be simple and brief but should leave no doubt about the existence of the pledge and its intent.

Issues usually associated with pledges are collectability, pledges paid in installments and privacy of donors, all discussed next.

Collectability

As promises are to give in the future, pledges may not be all collectible, and most organizations aren’t going to sue to collect promised amounts because of PR issues. Therefore, by its nature, pledges are riskier than regular accounts receivable. As expected, a pledge due in a year is less risky than another one due in two or more years since a lot can happen in a year or longer.  Fundraising staff usually follow up on promises to pay, diplomatically, of course.

Due to the risk of default on pledges receivable, an Allowance for Uncollectible Pledges account is employed. It may be created and adjusted every year based on history. If an organization experiences 15 percent in uncollectible pledges, for instance, this percentage may be applied. It’s the same concept as the Allowance for Uncollectible Receivables in the for-profit world.

A strange situation with promises to give has popped up recently with a young, wealthy supporter promising to give a significant amount to an organization. As expected, people got excited, made a public PR deal with the pledge and started planning how to spend the money. Low-and-behold — it was all fake. The guy liked the attention, but was not wealthy and had no intention to fulfill the promise. The organization lost a lot of credibility with this deal. So, I recommend that nonprofits set up policies and procedures to evaluate significant pledges and to refrain from announcing it and making plans for it until all checks out.

Installments

Besides lump sum promises, nonprofits could also have pledges payable in installments; for example, a commitment of $25,000 payable at $5,000 a year for five years. In this case, organizations are to discount the payments to present value using a reasonable percentage. The discount is amortized as in the for-profit world. FASB ASC 820-10 (FASB 157) relates to this topic to be sure organizations evaluate pledges in a fair and acceptable manner.

  • Government and other grants aren’t considered to be pledges and are presented separately in financial statements.

So, if an organization receives a pledge of $30,000 payable in 5 years, apart is considered to be current pledge receivable, and the rest is non-current. In addition, revenue is recognized along with a discount and the allowance account. Don’t double count pledges – once as revenue when the promise is made and again when payments are made.

Privacy

Many times big donors want to keep their donations and personal information private. To this end, nonprofits should implement proper care so that the donor is acknowledged, donations are recorded, and the donor’s identity is kept secret. So, to assure privacy, donor databases need to be kept secure. Only a few people should possess access to the donors’ records.

As an example, a nonprofit organization I worked with had celebrities donating significant amounts of money, and they didn’t want their names, email addresses or other information available. Therefore, instead of inputting the real names and information in the database, the organization used the names “Anonymous 1,” “Anonymous 2,” etc. The nonprofit kept the real names and personal information under lock and key in a file cabinet accessible only by a couple of people. This low-tech setup worked well.

Note that a pledge is assumed to be a donation, not an exchange, so FASB ASU 2014-09 Revenue from Contracts with Customers doesn’t apply.

 

 

( Excerpt from “Nonprofit Finance A Practical Guide– Second Edition)

Overhead Essentials

If the program is the heart of a nonprofit, overhead is its backbone. Overhead is known as general and administration costs and, in some circles, it includes fundraising as well. Since the definition of overhead may vary, you should be clear on what it means. For example, in government agencies, fundraising is usually not part of overhead, while other entities consider anything besides program costs, overhead.

Overhead rate on grants –Many grantors use “overhead rates” to reimburse nonprofits for administrative costs. This rate, a percentage, is usually calculated based on prior financial numbers and negotiated with grantors. The calculations can be complicated and detailed.

To decrease this complexity, the Federal government pays nonprofits a standard 10% overhead rate on their grants. This means that after reimbursing direct costs, it adds a 10% for overhead. If direct costs are $100, the reimbursement will be $110. This setup may be fine for smaller organizations, but not for larger ones that may negotiate a higher rate. The idea is for the overhead rate to cover costs that cannot be allocated easily to a program, like an electric bill for a building that houses many programs.

This rate should be reviewed every year to make sure that indeed the overhead rate is at least equal to actual overhead costs. If the rate of 10% reflects $100,000, but the actual overhead costs are $120,000, then the organization may need to negotiate a higher rate with the grantor for the next fiscal year.

Overhead requirement on grants and gifts–Another reason overhead is important is that it must be part of every grant proposal or gift. Some nonprofits have funds restricted for certain programs only with nothing much left over for overhead, forcing many to fundraise for overhead mostly. It’s a strange situation where an organization may have money to fund research programs, but cannot pay its phone bill and other basic needs. Quite real and disconcerting situation.

To avoid this issue, nonprofits have started to require a percentage for overhead to be included in the gift or grant or they cannot accept it. I have seen a large nonprofit say no to a large gift because of this issue.

Overhead should NOT be zero –Overhead exists for a reason and if it shows as zero on financial statements or tax forms, you have a problem.  It could be an accounting error in classification or not understanding what overhead is. Whether fundraising is included or not, there should be something allocated to overhead in items like insurance policies, salaries or supplies. Even if all employees are unpaid,  expenses exist that cannot be specifically assigned to a certain program and are part of overhead. While it’s understandable the wish to keep overhead costs low, it’s not realistic to keep it at zero.

The first thing to think about when someone mentions overhead is to understand what it means. That is very important to make sure everyone is talking about the same thing. The overhead definition and calculation may vary among grantors and even government agencies. So, ask questions about it, don’t assume anything and don’t forget about it in proposals.

 

Check out the book”Nonprofit Finance: A Practical Guide- Second Edition First edition nominated for a McAdam Book Award.

Preventing Fraud in Your Nonprofit– Tips

I don’t know about you, but I’m sick and tired of hearing about nonprofit fraud, especially when done by an in-house, trustworthy person. It’s heartbreaking to see people in stealing from such organizations. In many cases, the theft lasts for a while, until someone stumbles upon it by chance to the shock and dismay of many people. Unfortunately, this is not that rare. So, how can a nonprofit stop such unpleasant incidents and at the same not be overtly suspicious of people who are, in most cases, innocent?

There are a couple of activities that can be used to find errors that may be very innocent, while at the same time identify signs of fraud. These tasks, known as controls within financial circles, can do double-duty in keeping an organization safe and error-free. They are by no means the only controls to prevent or identify fraud, but they are fairly easy to perform and worth a close look.

1- Look at bank accounts online —-Someone from the board could review bank activities online, looking for unusual vendors or checks. This task should be specified in the organization’s policies and procedures and should be known by everyone. The idea here is to let people know that there’s a process established that is part of the day-to-day business of the organization and not a big deal. Having a board member ask questions about checks and deposits should be expected. This is not micro-management, but a way to double check on bank transactions, like unusual vendors or amounts paid out or deposited.

A second pair of eyes looking at online bank data at least once a week can also help to find errors. For example, if the board member knows that someone donated $20,000 recently, but only sees $2,000 deposited in the bank, then the bank should be contacted and asked if this was an error on the part of the bank, which can happen. This discrepancy could also be an error from accounting that can be fixed right away. However, if errors don’t explain the discrepancies, then the situation needs to be further investigated. There’s a chance that someone misappropriated the funds, even if you don’t want to think about it.

2- Contact donors often — Someone outside development dept. or the CEO’s office could contact donors, especially if they haven’t donated as before or as expected. The point is to have someone who usually doesn’t talk to donors to follow up on an informal basis, verifying if any donation or payment was made. Why is this important?

Fraudsters call donors as a follow-up, but when the money arrives instead of depositing the money in the organization’s bank account, they deposit it elsewhere. Sometimes the payment goes to a bank account with similar name or initials, while other times the check is endorsed and deposited elsewhere with a totally different name.  Banks usually don’t look this closely at the check to identify the ruse, unless there is a problem. Accounting staff wouldn’t  know about the donation, and nobody, except for the thief, knows about the payment. This issue may be found when someone different talks to the donors.

Note that issues found are likely to be very innocent as well. Maybe the donor forgot about making the donation. However, if the donor made a payment, but it didn’t make it to the organization’s bank account, it could be because it was lost or the bank deposited it in the wrong account by mistake. These situations usually don’t point to internal fraud, just errors that can be corrected.  The point is to follow the money trail.

These are only a few activities a nonprofit can do to protect itself against theft and fraud.  It’s sad that we have to be a bit paranoid running a nonprofit, but it’s a must in today’s environment. Auditors may come in once a year to double check on financial issues, but they usually don’t find all fraud. By following just these two processes, nonprofits can make fraud harder to happen and that’s always a good thing.

Check out the book “Nonprofit Finance: A Practical Guide- Second Edition” –– First edition was nominated for the 2016 McAdam Book Award.

 

Donation Details Matter– Some Pointers

Donors want to give, members want to renew memberships, but sometimes they cannot. It can be a real problem for an organization, which may have spent a lot of money and energy in development, but then, somehow it doesn’t receive the funds.  What could be the problem?  It’s on the details…  which some may consider to be a no-brainer, but still, they deserve a second look because they are so common problems.Below are a couple of details to pay attention to:

Detail 1– Links should work

Recently, I received an invoice as an attachment to a nice email. All was well done and professional until I clicked on the link for online payment. Then, I was taken to an error page on the nonprofit website.  Now it’s up to me to figure out how to pay the organization. Do I look around the website for a link? Write a check?  Maybe leave this alone for now…and the organization may never see any donation or membership payment. Some prospective donors may never contact the nonprofit with this issue, and the bad link detail will go on undetected.

*** Pointer —  Check regularly on the invoice or email master text to make sure it’s still valid.  Usually, changing only one invoice or email doesn’t work well, since most systems use a master file that populates all the communications with donors.

Detail 2 – Take information over the phone easily

Have everybody in the organization trained in handling payments over the phone. Not just accounting folks. All the information and forms should be easily accessible and ready to be used, including online forms. When donors or others call to make a payment, get it done, which may be easier said than done. I have seen people transfer donors from one person to another– don’t do that. Don’t frustrate the person on the other end of the line.  Everyone should know how to handle the calls, help and get any payment.

***Pointer — The nonprofit could have a phone setup for people who want to pay so that they can do it so easily. The message could be,  “If you want to make a donation or a payment, please press 1 and someone will get the information right away.”

Detail 3 — Process donations quickly

Money should be in the bank, not sitting in someone’s drawer or safety box. The longer a nonprofit waits to process a donation, the more likely it is for it to have issues with bounced checks or charge backs. Online donations take care of most of these issues, but part of processing donations should also include who, how and when you want to thank donors.  Maybe a donation over a certain amount would receive a different type of acknowledgment than those that give only $10.

***Pointer — Develop policies and procedures regarding donation processing with specific people in charge of sending thank you notes, using autopen and when to actually obtain a real signature.
Nonprofits are competing with other organizations for every cent they get. Sometimes the day-to-day activities cloud the importance of making donations easy and stress-free. Sorry, but if I’m put on hold for a bit too long or get attitude or cluelessness, I hang up and give my money to someone else. So it’s important to make donating an easy, pleasant experience, not one where donors get error messages on the computer or an aggravating phone person. Details matter.
 

 

Check out the book “Nonprofit Finance: A Practical Guide” –– Nominated for the 2016 McAdam Book Award

 

What You Need to Know to Organize Your Nonprofit

Are you starting or organizing your nonprofit?  Any business needs a setup to operate effectively, and nonprofits are no different. A basic organization may be a no-brainer for some people, but may not be that obvious many as well.

As in any business sector, there is a need for an effective infrastructure working behind the scenes to keep things running smoothly. This is especially true in the nonprofit sector where operations support the organization in a number of functional areas, including:

·   office management,

·   accounting and finance,

·   administration,

·    human resources,

·   information technology,

·   marketing and development.

Across all of these functional areas, there is one objective: to make sure the organization is operating efficiently at its full potential in providing goods and services to a community.  If a bill needs to be paid, people within the organization will know where the bill should go to, not just into a pile that once in awhile someone looks at.  Having a well and clear organization where functions are performed in accordance with a plan is a must for any nonprofit to survive and flourish.

One of the challenges of nonprofits is to create and manage a structure that works well. Many founders of nonprofits are not managers and do not have a background in management. They are “program” people. They created the nonprofit to fulfill a goal, a dream that they are familiar with, but management is not their expertise.  Knowing the basic structure of a nonprofit can only help in setting up an organization that is functional.

It is important for founders and boards of directors to realize this issue and to find proper personnel or volunteers to fill out the needed spots. I have seen new, small organizations fail to follow their mission statements because they didn’t have a basic infrastructure, management, personnel to deal with proper insurance, and other risk factors.

A common structure is for nonprofit operations to be divided into three areas,  all supervised  by the board  of directors that could have an executive director to manage the daily operations.

  • Programs/ Services — MOST IMPORTANT 
  • Management and General — usually overhead
  • Fundraising

Identification of the three main areas of nonprofit operations is crucial in having proper accounting systems, internal controls, reporting, and management.  If you have an area of operations, it must follow this setup. Sometimes it’s not that obvious.  For example, someone working in contract compliance is most likely part of management, even though the work relates to programs as well.

BEWARE>>> Note that tax returns and most financial reports are classified by these three areas.

 

Check out the book “Nonprofit Finance: A Practical Guide” –– Nominated for the McAdam Book Award

 

Checks & Balances Ideas for Nonprofits

Checks and balances are activities that protect organizations against errors and fraud. Also known as internal controls, these checks and balances provide an extra level of protection to the organization so that errors or losses are issues are caught and can be fixed or managed. Internal controls may also protect against fraud, including money theft. The good news is that you don’t  need to spend a fortune to have good controls at a small environment, nonprofit organizations.

Below are some ideas that can be implemented easily to protect your organization:

1- Have bank statements sent to the home of the executive director or a board member not involved in accounting. This person can take a quick look at the statement and at copies of checks for any unusual activity. Then he can give the statements to accounting personnel. Since many use online banking, someone apart from accounting can take a look online at bank transactions, even before statements are mailed out.

2- Always have two people counting cash. One person can count first while another one witnesses it, and then the other person counts it, writing down the total and then securing cash with a rubber band and/or an envelope. Keep it in a safe before depositing it in the bank, not in a drawer or in an obvious place. If needed, get a safe and have it bolted to the floor or wall.

3- Wire transfers must be done by two people- one to initiate the transfer and another one to approve it. Both could have passwords or PIN numbers for extra security. In the case of online payments where the bank pays someone directly, at least one person outside accounting should approve this before it is done. You can set this up with your bank.

4- Petty cash is kept in a safe, not in a desk drawer. Thieves know that drawers may contain petty cash and they go there first. Keep petty cash small and replenish often, checking on receipts.

5- Review bank reconciliations monthly with no delays and look at odd deposits that have not cleared the bank and old checks that are still outstanding. Check on deposit amounts on the books and on the bank to make sure they are the same. Also, look at checks being cashed to see if the amount and payee make sense. Many online banks allow you to actually see a copy of the check online, which can be very helpful.

6- Give receipts to everyone giving your organization money, especially cash. The receipt book should have duplicates so that the top receipt goes to the donor and the copy stays in the book. Depending on the amount, the person receiving the money could sign a receipt to make sure the organization has proper records.

7- If using faxed forms for donations or payments, mark the original faxed page as “Original” in red. This is especially important in credit card donations. Otherwise, it is too easy to charge a card multiple times for one donation. Make sure that donors know that faxed forms are NOT to be mailed. A good option here is to handle most cash inflows through a website.

8-People working with cash and accounting should take vacations. Many fraud cases are discovered when the perpetrator is home sick or away and someone else takes over for a few days. It’s good to have more than one person trained in certain accounting tasks so that if something happens, he or she can fit in with minimum training.

9- Make sure your insurance policy covers losses, such as fraud, just in case. This policy should also cover volunteers and part-timers. Be sure to double check with your insurance company regarding any special events or programs that may require a special rider.

10- Consider getting background checks on everybody handling financial tasks. It’s not that expensive and you can decide about hiring the person upon reviewing the background check. These checks are often required by insurance companies, so it’s usually not a big deal.

Check out the book “Nonprofit Finance: A Practical Guide” –– Nominated for the McAdam Book Award

 

Nonprofits – Mind Your Programs

The program area is the most important facet of a nonprofit organization. It defines the organization and it justifies its existence.  Without programs, the nonprofit has no reason to exist.  It doesn’t mean that all programs should be the same since nonprofits have different goals. For instance, if the purpose of an organization is to help the homeless, the nonprofit will offer programs in accordance with this goal. Most likely programs would involve temporary housing, food distribution, and job training.

Identification

This seems to be a no-brainer, but sometimes it can be a challenge. A program in one place may be fundraising in another organization. For instance, a nonprofit could sell used clothes in a thrift shop. The thrift shop is most likely part of the fundraising area and not the program. However, if the organization provides job training for teens, the thrift shop may be part of a program, especially if it has teens working there, being trained in the shop’s operations and selling techniques.

The first step in identifying programs is to look at the organization’s mission statement. A good, clear mission statement is critical. The clearer and simpler the mission statement, the easier it is to identify major programs–the reasons for the organization to exist. Suppose a nonprofit’s mission statement is to “provide temporary shelter to the homeless.” It is simple and focused. If the organization hosts a car race, then it is not part of a program–most likely it’s fundraising.

On the other hand, an organization with the mission statement “helping people to become self-sufficient” is too general, increasing the chances of confusion about what is a program and what is not. The more focused the mission statement, the easier it is to identify programs versus other operational areas. It makes it easier for the organization to stay on track, as well.

It’s worth noting that the IRS is also interested in this area, as both program information and mission statement are required on the tax form 990. If programs don’t connect well to the mission statement, the organization tax-exempt status may be at risk.

>>> Beware

“Mission creep” is an important item that should be reviewed often.  This creep usually happens when certain stakeholders want to take the nonprofit in directions not really related to its mission statement.  Donors and grantors may also contribute to this creep by offering funds for programs outside the scope of the organization’s mission. It’s management responsibility to identify and avoid mission creep. Or the nonprofit will be all over the place without a real path or strategy. Depending on the case, it may jeopardize its tax exemption as well.

Check out the book d“Nonprofit Finance: A Practical Guide- Second Edition” –– First edition was nominated for the 2016 McAdam Book Award.