The Value in Thinking Like an Auditor
When auditors examine a nonprofit’s financial statements they spend a lot of time on the revenue figures. They look at the accounting methods used to record revenues and perform a detailed income analysis to gain a true understanding of the organization’s revenue profile. All of this helps them get up to speed on the nonprofit’s financial health.
Get Ready to Roll
Whether or not you employ external auditors, you can use audit techniques, including year-to- year trends and benchmarking to other nonprofits, to get a better view of your organization’s revenue. In particular, consider the following:
To some degree, almost all nonprofits rely on contributions from supporters to balance their budget. Compare the dollars raised to past years and see if you can pinpoint any trends. For example, have individual contributions been increasing since the peak of the recession? What campaigns have you implemented during that period? Go beyond the totals and determine, for instance, if the number of major donors — say, those who give $1,000 or more a year — has been rising. You get more bang for your fundraising buck when you’re able to add major donors to your roster of supporters.
Also estimate what portion of contributions is restricted by the donor as to how or when it can be used. If your organization has a large percentage of its donations tied up in restricted funds, you might want to re-evaluate your gift acceptance policy or fundraising materials to make sure you’re pursuing contributions that give your organization the most flexibility.
Grants include funding from corporate, foundation and government sources. They can vary dramatically in size and purpose, from grants that cover your operational costs, to monies for launching a program, or payment for services to clients. For example, a state agency may pay you $500 for each low-income, unemployed individual who receives your job training.
Pay attention to trends here, too. For instance, did a particular funder supply 50% of your total revenue in 2012, 75% in 2013, and 80% last year? A growing reliance on a single funding source — an example of a “concentration” that will increase your risk — is a red flag to auditors and it should be to you, too. In this case, if funding stopped, your organization might be forced to close its doors.
Fees for services
Fees from clients, nonprofits in a joint venture or other third parties can be similar to fees for-profit organizations earn. Fees are generally considered exchange transactions because the client receives a product or service of value in exchange for its payment. Some not- for-profits charge fees on a sliding scale based on income or ability to pay. In other cases, fees (such as rent paid by low-income individuals) are subject to legal limitations set by government funding agencies.
On an ongoing basis, your nonprofit will need to assess if these services are paying for themselves. For example, fees set five years ago for a medical procedure may no longer be sufficient to cover costs. A decision to raise fees or discontinue the service will probably need to be made.
If your nonprofit is a membership organization, you likely charge membership dues. Has membership grown or declined in recent years, and how does this compare with similar groups? Make informed predictions about the future of membership dues, especially if you rely on them substantially for revenue. If you suspect that dues income will continue to decline, your organization might consider dropping dues altogether and restructuring. If so, examine other income sources for growth potential.
Apply What You’ve Learned
Once you’ve gained a deeper understanding of your revenue picture, you can apply that knowledge to various aspects of managing your organization. For example, you can implement additional controls where exposure is identified and educate your management team to make pricing decisions.
You also will likely acquire information that can help you set annual goals and prepare your budget. For example, if your organization is too dependent on a single government funder, make boosting individual contributions one of your nonprofit’s strategic objectives. Be sure to commit staff hours and dollars to achieving that goal.
You’re certain to find many other applications based on the information you’ve learned. Remember to look for concentration risks and upward and downward income trends.
There’s a Big Up-Side to the Use of Auditing Techniques
Auditors use income analysis methods to gain assurance that the revenue reported on your financial statements is accurate. You can use these tools to do so much more. Income analysis can reveal whether you rely on too few revenue sources or too many restricted donations, and enable you to compete more effectively with others in your field. Reviewing the same information with an auditor’s eye won’t only help you pinpoint your not-for-profit’s strengths and weaknesses. It will also enable you to initiate sensible changes.
Contact MFA’s Nonprofit Team if you would like to discuss this matter in further detail.
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