Improve Cash Management
to Control Budget Deficits

By Renee Ordeneaux

In an economic downturn, when most nonprofits simultaneously face revenue losses and the growing needs of their constituencies, it would be wonderful to find a simple and painless way to improve cash flow. However, there’s no easy solution to the cash crunch.

Hard work and a steadfast focus on your mission are essential. And to make it all work, you need to evaluate your operations for potential expense-cutting, bring in revenue in a timely manner and develop a simple cash flow forecast.

Getting the Cash in the Door

The first step toward good cash management is reviewing the sources of your funds. If your nonprofit collects fees for services, you’ll want to be even more attentive to accounts receivable than you would in healthier economic scenarios. For example, if your payment terms are “30 days after the receipt of service,” consider contacting your clients on day 31 or soon thereafter.

For clients with a history of paying late, you might work out a payment plan before providing the service. Don’t view this measure as harsh — if you’re sensitive to your members’, students’ or clients’ financial challenges by offering payment terms, they may be more apt to continue to use your services. This is especially true if they can find less costly options in the marketplace.

If much of your revenue comes from foundation grants, you’ll need to make sure that your grant-supported programming ties to your primary mission. If not, refocus it there. Many foundations with dramatic asset-value losses have cut back, or eliminated, grant making this fiscal year. Funders continuing to support charitable efforts want to make sure that their money goes to the population with the greatest need.

Particularly if your services target hunger, the homeless, employment opportunity or housing issues, you need to show how your program and your mission fulfill a greater community need. Use newsletters, your Web site, meetings and events to communicate specific cases — show how your organization has directly affected the lives of people in your community.

Other Sources

After all of your regular avenues for cash have been exhausted, you’ll need to turn to other sources. Your cash reserves, or the investments your board has designated for future use, offer other ways to support your operations, and the time to use them may be now.

For example, if you have an endowment that was initially restricted by the donor to be maintained “in perpetuity,” you have no legal right to spend the amount of that gift — unless the donor removes the restriction. But if your endowment was designated for a certain purpose by your board, the board may change that desig-nation and release the funds to support current programming.

Watching Your Expenses

The continued flow of revenue into your not-for-profit organization is important, but don’t neglect the flow of cash leaving for operating expenses. Scrutinize areas of potential cost-cutting that won’t affect services to your community. Look first at your largest expenses where change will have the greatest effect on cash flow:

Rent or lease expense. Try to negotiate a lower monthly rent, a rent holiday or even a change in payment timing that works better with your income stream.

Travel costs. Compare the costs of different airlines and hotel chains. Evaluate whether a video conference or phone conference might be able to take the place of a face-to-face meeting. If you currently pay for a phone conference service, explore free web-based options.

Payroll. Closely analyze your staff members. While it might be difficult to let employees go, your organization’s health may depend on it. Look for the employees who aren’t holding their own or are less utilized than others. Determine if any of your organization’s processes could be improved to increase productivity. For example, by analyzing the addresses of a home health care worker’s patient assignments, you may be able to reduce travel time while adding units of service provided. If all employees are irreplaceable, consider asking the full staff to cut back their hours or take one or two unpaid days off per month.

Supplies. By comparing costs, joining a buying club or contracting with your supplier, you may be able to reduce the cash you need for supplies. Your suppliers also may be willing to contribute a percentage of your annual purchases as an in-kind donation to your cause. It doesn’t hurt to ask.

Surviving the Drought

Strong cash management tools are important for short-term decision making, and they’ll help your nonprofit control budget deficits and survive to accomplish its long-term goals. The investment that your organization makes in this process is likely to be paid back many times over the next several years.

Renee Ordeneaux
Principal
Nonprofit Services Group

For more information about this article, click here to send Renee an email.

It's inevitable. For many nonprofit organizations (NPOs) to survive in this economy either a merger or acquisition is going to be the answer. Funding shortages have caused many organizations with similar mission statements to look twice at this option. And what a better time for the Financial Accounting Standards Board (FASB) to (finally) come up with the definitive statement (Statement of Financial Accounting Standards No. 164 for those of you that care) as to how these transactions should be accounted.

The first step is to determine whether the two organizations have merged or whether one has acquired the other. This used to be one and the same since the accounting treatment was the same in either case. But under the new rules the accounting is different depending on whether the transaction is deemed a merger or an acquisition.

In the past most transactions between organizations have been labeled mergers even when the transaction was clearly an acquisition by a stronger organization. In the non-profit world we are more concerned about "feelings" and marginalizing an entity and the communities they serve by calling a transaction an acquisition. This practice may still continue in the "papering" of any transaction but the reality might be far different. We accountants will be looking beyond the signed merger agreement to determine whether a transaction is a merger or if it is truly an acquisition.

Let's deal with a merger transaction first.

Merger

In order for a merger to have taken place, the two organizations must cede control of their respective organizations and create a new entity. Merger transactions will be those in which no one organization dominates the negotiations and has a proportionate share of Board members and key senior officers from both organizations. Even adopting the bylaws or operating policies of one of the organizations or an uneven financial strength could indicate that a transaction is an acquisition, and not a merger. The FASB folks did provide some practical leeway in that the new entity does not need be a new legal entity, one of the merged entities can be used as the merging vehicle.

Merger transactions are accounted for by applying the "carryover" method. Under this method the assets and liabilities of the two organizations are combined at merger date values. The real difference in this method of accounting versus the treatment of old is that the new merged organization is considered to be a new entity and its initial reporting period begins at the merger date with the merger transaction already completed. There is no past history of this entity.

Acquisition

An acquisition occurs when an NPO takes control of another NPO (or a for-profit business for that matter). The method used to account for an acquisition is (funny enough) the "acquisition" method. Just like the "purchase' method of yesterday, the identifiable assets acquired and liabilities assumed are accounted for at acquisition-date fair values.

Sometimes these acquisitions will essentially be one entity handing the other the keys to the front door-no consideration is exchanged. And occasionally there will be consideration involved-particularly when an NPO buys a for-profit business. The consideration transferred (if any) in excess of the fair values of the assets acquired/liabilities assumed is the goodwill—just as it always has been. What is different under this guidance is how goodwill is treated and that depends on the acquiring NPO's business model.

Many NPOs are supported predominantly by contributions and returns on investments (think food banks). And then there are NPOs that resemble traditional for-profit organizations in that the primary revenue is fees for services (think hospitals). In the case of the former, information regarding goodwill will be of limited use to donors in their assessments whether to donate whereas, in the latter case, the goodwill provided by an acquisition might be quite relevant. Accordingly, if an acquirer more closely resembles a for-profit business (the hospital example) goodwill is accounted for as an asset and reviewed for impairment on a regular basis. But if the acquiring organization is more like the food bank example the goodwill is accounted for as a charge on the statement of activities. And in the cases where no consideration is exchanged (which is usually the case) the resulting "negative" goodwill is accounted for as a credit in the statement of activities.

In all acquisition instances, the direct costs paid in the transaction are no longer considered to be additional but instead will be expensed as period costs.

Just like any guidance ever issued by the FASB, this 101 page epic covers every conceivable merger/acquisition situation from every angle that can be considered. And there are scads of new disclosure that will now also be required. On the other end of the spectrum, this article only provides the most basic aspects to the new guidance. So if considering such a transaction it would be prudent to consult your independent auditors to see if any of the miscellany that often accompanies transactions might impact the ultimate accounting.

The effective dates for No. 164 is for reporting periods beginning on or after December 15, 2009. No early or retroactive implementation is allowed so if such a transaction is on your organization's radar screen keep this new standard foremost in mind.

Thomas Schulte
Partner-in-Charge
Nonprofit Services Group

For more information about this article, click here to send Tom an email.

With new Form 990 tax return requirements having reached its first filing deadline on May 15, you’ll need to become more aware of, and advise on, how your nonprofit tracks information for its tax return. One new schedule that will likely apply to many organizations is Schedule G, “Supplemental Information Regarding Fundraising or Gaming Activities.”

If your nonprofit reports professional fundraising expenses of more than $15,000, you must prepare Schedule G, Part I:

1. Fundraising activities. Activities to solicit funds include e-mail, mail, phone and in-person solicitations. Your nonprofit must report all agreements for professional fundraising services. And, for those individuals or entities to whom you paid at least $5,000 for fundraising services during the year, you must list the 10 highest paid. Additionally, you need to report the nature of the service, whether the fundraiser had custody or control of the contributions, and the total receipts connected to the fundraising services. You also must disclose the amount paid to, or retained by, the fundraiser and the amount paid to, or retained by, your nonprofit.

If your nonprofit reports revenue of more than $15,000 from one of the following, you must prepare Schedule G:

2. Fundraising events. All organizations that report more than $15,000 in gross receipts from fundraising events or special events — such as a golf outing, a charity dinner or an annual ball — must supply the following information on Schedule G, Part II about the two largest events that raised more than $5,000, plus the sum of all other events:
   • Gross receipts
   • Less charitable contributions
   • Equals gross revenue
   • Direct expenses from the event need to be reported in separate line items for:
     • cash prizes
     • noncash prizes
     • rent/facility costs
     • other direct expenses. Although your organization doesn’t need to detail these, the IRS has indicated nonprofits should retain in their records a summary of all other direct expenses in case they’re requested in an audit.
       
       
3. Gaming activities. Extensive reporting on Schedule G, Part III is required if you raise more than $15,000 from gaming activities — such as bingo (a separate category), pull tabs/instant bingo/progressive bingo (combined into a 2nd separate category)and all other gaming activities (reported as a 3rd separate category) as part of your fundraising. In addition to gross revenue, you need to report the same direct-expense information as you do for fundraising activities:
   • Gross receipts
   • Less charitable contributions
   • Equals gross revenue
   • Direct expenses from the event need to be reported in separate line items for:
     • cash prizes
     • noncash prizes
     • rent/facility costs
     • other direct expenses.
   • Number of volunteers that were needed to produce the event. The IRS also wants to know the percentage of volunteer labor used for the activity. Although the IRS doesn’t give a reason why this information is important, it is likely trying to ascertain the reasonableness of the wages actually paid for the particular event.

You must indicate:

• in which state(s) the gaming activity is conducted
• whether you are licensed appropriately in each of these states (with an explanation required if not)
• whether any gaming licenses have been revoked, suspended, terminated (with an explanation required if yes)

There are also several inquiries about the relationship with the gaming administrator, whether the gaming takes place on site or at another location, name and address of the person keeping the gaming books and records, and questions about the contractual arrangement with any third party in connection with gaming, the name and contact information of the gaming manager, and required mandatory distributions from gaming proceeds. For your convenience, here are the links for Schedule G and the instructions for completion:

Schedule G: www.irs.gov/pub/irs-pdf/f990sg.pdf

Schedule G Instructions: www.irs.gov/pub/irs-pdf/i990sg.pdf

As you can see, fundraising is coming under much more scrutiny, with a particular focus on gaming activity. Before you embark on these events in this new compliance and reporting environment, think very carefully how your responses to these questions will be perceived on the new Form 990, a very public document.

Michael Cantrill
Director
Nonprofit Services Group

For more information about this article, click here to send Mike an email.

Noncash Contributions: Know Your Reporting Obligations

When your charity receives noncash contributions, don’t overlook these reporting requirements:

First, you may have an obligation to complete Part IV of form 8283, “noncash charitable contributions.” It is the donor’s responsibility to submit the form to you for completion, because only the donor knows the value of the donation and whether Form 8283 is required. Part IV acknowledges that your organization is qualified to receive charitable donations and provides general information. The signer of the acknowledgment must be an official authorized to sign your organization’s tax returns, or someone specifically designated to sign Form 8283.

Second, file Form 8282, “donee information return: sale, exchange or other disposition of donated property,” if you sell, exchange, consume or otherwise dispose of donated noncash contributions within three years of when they were received. The form isn’t required for disposal of 1) publicly traded securities, 2) items valued at $500 or less or 3) items consumed or distributed for charitable purposes. File within 125 days after the date of disposition. Finally, your organization will need to track noncash contributions by type for Form 990, Schedule M, if your organization received more than $25,000 in noncash contributions during the year.

2009 IRS Focus

IRS initiatives this year affecting nonprofits include a new charitable spending initiative, continued work on nonprofit governance, noncash contributions and a study of student loan organizations:

Charitable spending initiative. The IRS says it will look at fundraising, public contributions, grants and revenue from related or unrelated trades or businesses to learn more about the sources of funds in the charitable sector and their impact on the accomplishment of charitable purposes. It also plans to review officer compensation, fundraising expenses and program service activities to learn the effect each has on the funds that are available for charitable spending. According to the agency, it will focus on organizations with unusual fundraising levels and those that report unrelated trade or business activity but have low levels of program service expenditures.

Nonprofit governance. The IRS plans to develop a checklist to be used by agents when they examine exempt organizations. The checklist is intended to help determine whether the organization’s governance practices have impacted the tax compliance issues identified in the examinations. The agency will also begin a training program to educate IRS employees about governance implications. A third area of focus is identifying additional Form 990 governance questions that could be used in compliance initiatives.

Noncash contributions. This initiative will focus on how noncash gifts are valued, the expenditures involved in the transactions and the accuracy of the Form 990 reporting in this area.

Student loan organizations. The IRS study will look at internal and external information to identify student loan organizations with related for-profits that may be providing impermissible benefits to insiders or third parties. The IRS announced these initiatives in its “work plan for FY 2009,” which was contained in its first annual report, published in November 2008.

Tax-Exempt Entities Ring in at 1.8 Million

According to Lois Lerner, Director of the IRS’s Exempt Organizations Division, there are approximately 1.8 million tax-exempt organizations in the United States (compared with 1.1 million tax-exempt organizations in 1995). The division processed more than 70,000 exemption applications in fiscal year 2008, Lerner stated at a November 25 press conference.