Business practices that not-for-profits can’t afford to overlook

A strong foundation and structure can help organizations reach their full potential.
By Maria L. Murphy, CPA

Business practices that not-for-profits can’t afford to overlook
Image by Rawpixel LTD/iStock

Not-for-profits have different missions and goals than for-profit enterprises do, but both must have the right management team and business practices in place to function and grow.

"In a competitive marketplace, it is no longer sufficient to rely purely on government funds or donations," said Dorri McWhorter, CPA/CITP, CGMA, the CEO of the YWCA Metropolitan Chicago. "The idea of people giving money because they are feeling sorry for others is an outdated notion that can't be relied upon anymore. ... There must be leadership that can look at a not-for-profit organization differently to create a value proposition and new revenue streams."

Funding and staffing constraints and limited management resources can make maintaining strong business practices a challenge in the not-for-profit sector, preventing organizations from reaching their full potential.

Here are eight top business practices that all not-for-profits should consider implementing:

GOVERNANCE AND BOARD OVERSIGHT

Management and its governing board must have clarity about roles, responsibilities, and authority. This understanding should be formally documented in the not-for-profit's policies and procedures and board training materials. Andrew Prather, CPA, CGMA, shareholder, Clark Nuber PS, suggested that a variety of not-for-profit governance philosophies and methods are available for research in books and online and that there is no one right method for all. "Reach out to affiliates and others in your industry, network, or association," he said. "Talk to like-size organizations that are well run." Resources for effective board governance include the AICPA Not-for-Profit Section and interest area (aicpa.org/NFP), the Carver Policy Governance Model (carvergovernance.com), and BoardSource (boardsource.org).

Attracting and retaining board members can be a significant issue. Prather recommended that when seeking new board members, the CEO and other board members should provide key areas of expertise needed (e.g., financial, legal, programmatic) based on the organization's size and what it is trying to accomplish. A nominating committee can create an ongoing, formal recruitment process for existing board members to identify new board members.

It is important to train and educate board members on their responsibilities. The frequency and formality of the training will likely vary depending on the organization's size and its board members' backgrounds. CPA firms and other organizations provide resources and training on effective board practices. Training should include organization-specific matters, such as the entity's programs, activities, mission and philosophy, strategy, finances, and the board's relationship to the organization and its staff. Other topics that would enhance the ability of board members to fulfill their role include education on responsibilities of boards overall, such as fiduciary responsibility, legal liability, conflicts of interest, and independence; financial, tax, and regulatory matters; risk management; and public relations. Training could also include education on how to be a more effective board member, including interpersonal skills, problem-solving, dealing with conflict, and personnel relations.

STRATEGIC PLANNING

Many not-for-profits operate without a formal strategic plan or one that only covers 12 months. Prather said that a good strategic plan includes areas of both risk and opportunity and covers the next two to five years. "Most middle-of-the-road charities do fairly well with risk mitigation but poorly with capitalizing on opportunities like growing capacity and achieving their mission," he said. "Boards look to the CEO to identify opportunities, but the board needs to encourage the CEO to have vision and be mission-directed to make it happen day to day."

Strategic objectives should be set using a team approach that incorporates every department of the not-for-profit. "Strategic objectives should not all be on the program side," said Bob Mims, CPA, CGMA, controller and director of investments at Ducks Unlimited Inc. "It is important to form a consensus that includes programming, fundraising, and administrative [financial, IT, legal, human resources] core objectives to ensure buy-in from the whole entity."

FINANCIAL AND CASH FLOW MANAGEMENT

Financial strength is critical for any organization. "Not-for-profit status is a tax strategy, not a business plan," Mims said. "The need for financial strength can be argued to be on par with mission delivery. If there is not a financially viable organization, there is no mission delivery."

Most not-for-profits develop annual budgets, but many do not consider building operating reserves or monitoring and forecasting unrestricted net assets and cash flows. "Keep an eye on reserves. At any point in time, you need a long-term strategy for how to 'right the ship' from a financial standpoint," Mims said. "When the economy goes down, typically nonprofits respond by cutting spending in their budgets. Ironically, in falling economies, the mission or program needs become greater for nonprofits. We need a more balanced approach in good years to have and keep budget surpluses for future periods when the economy and philanthropy are down."

Prather said he encourages not-for-profits to have a policy for setting aside surplus cash to cover seasonal fluctuations and downturns in giving, and for unforeseen events or opportunities that arise. There should be a written operating reserve policy, approved by the board, that sets out parameters for how and when the reserves can be used and how they are funded. He suggested discussing recommendations in this area with peers and others in the industry.

DONOR AND CONTRIBUTION MANAGEMENT

Fundraising requires good practices and an investment in people and processes. "It costs money to raise money," Prather said. "Fundraising is not a free activity and must be funded appropriately. Like a service company, it could take 12 to 18 months to generate any sizable revenues." Not-for-profits should build relationships with significant givers, which can take additional time. In addition to the AICPA Not-for-Profit Section, the Association of Fundraising Professionals (AFPNet.org), a national organization with local chapters, can be a resource.

McWhorter and the YWCA created strategic partnerships to connect businesses to their constituents, make the best use of donor relationships, and increase awareness of their mission and values. "Not-for-profits must be able to demonstrate that they are able to deliver value in a number of ways," she said. "Because funders are being more selective about who they partner with, we must make ourselves attractive on a number of fronts."

The YWCA held cross-marketing merchant sales events, launched an e-commerce platform for merchants to sell products, received a percentage of the sales, and introduced merchants to their donors and to each other. They trained construction workers to support a local utility's workforce needs using a local industrial company's supplies and introduced local suppliers to that company. McWhorter encourages leaders to look at their organizations differently. "There is a lot of value in an organization, outside of traditional programs and services," she said. "Consider your different audiences and what could be of value to them." The YWCA developed a nutritional education program for parents and children, based on one it offered to child care providers, and was able to obtain sponsorship and funding for it from a major food products corporation.

An important element in effective not-for-profit management in this area is a well-crafted gift acceptance policy (see the sidebar, "Gift Acceptance Policy Can Help NFPs Avoid Trouble").

USE OF TECHNOLOGY

IT investment should be part of the strategic plan. There are many choices for systems and software, including cloud-based resources, available to not-for-profits in areas such as general accounting, donor management, records retention, and management reporting. Subscriptions available for a monthly fee may provide hosting, better functionality at a lower cost, and minimal required IT support. In the past several years, the marketplace for cloud-based services has offered better quality at much lower cost. A number of cloud-based service providers offer discounts to not-for-profits.

Risk management and security over financial, donor, and vendor data are critical for not-for-profits, as for all organizations. Prather recommended due diligence to ensure service providers are reputable and able to provide periodic reports on their controls and data security. Much information is available in articles and through CPA firms on controls around use of the cloud and data security.

Not-for-profits must be able to gather new data and report it differently. "Donors, granters, and funders increasingly want to see data and statistics about results and measurable impacts related to an organization's mission, not just hear that good work is being done," Prather said. He provided the example of a foster care organization that 10 years ago measured its success in improving the quality of life for children by describing the backpacks and pajamas provided. The organization now additionally describes how its program supports foster children so that their high school graduation rate is on par with the rest of the high school population. "Refining the mission and having the data available to measure results can be challenging," he said. "The data-gathering process could require new staff and systems."

NETWORKING AND BENCHMARKING

Not-for-profit managers can learn a lot from sharing information and business practices with peers, CPAs, and other not-for-profits. Mims shared his experience of reviewing the participant list at the first not-for-profit conference he attended over 10 years ago and seeking out other CFOs in his peer group. "I learned of a group of CFOs and joined their 'environmental round table,' " he said. "We meet several times every year to share best practices on topics like auditors, medical plans, and systems. We have developed friendships over time. Because we are partners and not competitors, we have a sense of accountability and transparency to answer each other's questions and formulate best practices for our organizations."

The group has developed an annual benchmark study that it completes, compares with other not-for-profits, and shares with its respective boards.

Useful insights also can be derived from relationships with other not-for-profits in the local community, even if they have different missions.

PEOPLE DEVELOPMENT

Human capital is a significant resource for not-for-profits, but it can be a challenging area. Volunteers frequently make up a significant percentage of the staff, and budgets may limit compensation and training. "People are attracted to working at nonprofits because of their mission delivery, not just profit delivery," Mims said. "They can spend their career having a good quality of life, along with feeling good about their work."

McWhorter noted that not-for-profits may not have this mission-driven advantage anymore, as employers in all industries are providing different work experiences to a Millennial generation that is seeking more fulfillment at work. She believes that "sentimental leverage" can be lost over time, so it is critical to understand what else drives people. "Create experiences that use their skills and abilities and appeal to their other interests, and provide good compensation," she said. She recommended investing in an experienced human resources professional, who reports to the CEO. Training should be a high priority, including in leadership skills.

Succession planning is a hot topic. "Many grass-roots organizations are run by a founder or executive director with personal connections to key donors that are critical to fundraising," Prather said. "As that person gets closer to retirement, it is difficult to discuss. ... But this should be one of the topics every year for board discussion with the CEO, and one of the key questions to ask the CEO should be 'Are you planning to leave, and when?' " A plan for a leader's departure can take years and may be less clear in smaller organizations. A written emergency succession plan should be in place if a leader can no longer fulfill his or her duties. In addition to the AICPA Not-for-Profit Section, the Leadership Network (leadnet.org) and networks in a not-for-profit's industry area can provide resources on this topic.

MARKETING

Not-for-profits should use marketing not only to educate the public about their mission but also to generate funding. "Marketing is extremely important," McWhorter said. "Redefine marketing and the customer experience, and use their experience lens to determine how you present information and leverage media relationships." She said not-for-profits should bring the right people together with the right skills, including those from outside the not-for-profit sector, for the most effective marketing.

Not-for-profits can face generational challenges, as new, younger donors may need to be educated about their mission and to volunteer. "Those in their 20s and 30s may not be as big givers as those in their 40s and 50s," Mims said. "They need to be attracted so that they are ready to give when they have the means and passion to give." Some of the best marketing may be the cheapest because of the potential to use social media to deliver messages.

"Word of mouth is the most powerful form of marketing," said Joe Stradinger, CPA (inactive), the CEO and founder of EdgeTheory, which helps enterprises use social media for brand messaging. "An organization's biggest asset is the conversations that influence customers who are not yet looking for them. Websites and search engines are only effective for organizations when people are looking for them. Not-for-profits need to own the conversation but let people talk for them."

Not-for-profits can "create the conversations" for others by sending out emails (providing the content and asking others to share it); providing content for blogs; and enlisting supporters through social media.


Gift acceptance policy can help NFPs avoid trouble

Accepting gifts is not as easy for not-for-profits as gratefully taking possession and thanking the donor.

While one charity may advertise that it accepts donations of used cars that have outlived their usefulness, for example, many not-for-profit executives would cringe if a would-be donor left a broken-down jalopy in the parking lot with the keys in the ignition. The value of gifts given in the form of securities or real estate may change over time, and legal or administrative responsibilities associated with some gifts may be costly.

That’s why a written gift acceptance policy is a critical component of effective not-for-profit management. Not-for-profits may wish to consult legal counsel for help in developing a gift acceptance policy. Such a policy generally would include guidance for the not-for-profit governing body, officers, staff, and other constituents regarding their responsibilities concerning gifts to the organization. It also would provide guidance to prospective donors and their advisers for making gifts.

Gift acceptance policies vary based on the nature and resources of the organization but may include:

  • Explanation of the type of gifts that the organization will accept, conditions for the acceptance of gifts, and what kind of review needs to take place before a gift is accepted.
  • Descriptions of gifts that the organization will not accept, such as gifts that are too challenging to administer, would jeopardize the organization’s tax-exempt status, do not further the organization’s objectives, or could damage the organization’s reputation.
  • Description of criteria for acknowledgement and donor recognition and details of how such recognition shall be carried out.
  • A clause explaining when legal counsel should be sought in matters relating to acceptance of gifts.

More information and a tool that can help not-for-profits create a gift acceptance policy are available to members of the AICPA Not-for-Profit Section at aicpa.org/NFP.

—Ken Tysiac (ktysiac@aicpa.org) is a JofA editorial director.


About the author

Maria L. Murphy (emailmariamurphy@gmail.com) is a freelance writer in Wilmington, N.C.

To comment on this article or to suggest an idea for another article, contact Ken Tysiac, a JofA editorial director, at ktysiac@aicpa.org or 919-402-2112.


AICPA resources

JofA articles

CPE self-study

  • Not-for-Profit Certificate I (#165160, two-year online access)
  • Not-for-Profit Certificate II (#165400, two-year online access)

Conference

  • Not-for-Profit Industry Conference, June 27—29, National Harbor, Md.

For more information or to make a purchase or register, go to cpa2biz.com or call the Institute at 888-777-7077.

Online resource

AICPA Not-for-Profit Section membership/interest area webpage, aicpa.org/NFP

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