As nonprofits continue to compete for fewer resources and limited funding, those that thrive have taken several pages from the books of the for-profit world, engaging in technology updates, mergers and acquisitions, and increasingly transparent operations. The sector also continues to contend with new regulations and requirements, while seeking out and developing new streams of revenue and fundraising methods.
We asked three experts in the space for their thoughts on these current and future trends impacting their nonprofit clientele. We spoke to Gerald Archibald, partner-in-charge of the healthcare/tax-exempt central division of Top 100 Firm The Bonadio Group; Carlye Dooley, nonprofit practice leader at Atlanta-based CPA firm Windham Brannon; and John Coppola, audit manager and member of Baltimore accounting firm Ellin & Tucker's Not-for-Profit Services Group.
Currently, what are the three biggest issues you see your nonprofit clients facing?
Archibald: The significant challenges are:
1. Continued reductions/constraints on government funding sources paid to support nonprofit programs and services.
2. The resulting gap created by reductions in government funding have resulted in a requirement for nonprofits to replace the reduction in revenue with new fundraising and development efforts from the private sector, as well as public and private foundation grants.
3. Government regulatory requirements continue to increase the level of technology sophistication necessary in each nonprofit, regardless of its size. The technology area, as well as increased regulatory requirements, scrutiny and oversight, are driving up administrative costs at the same time that funding levels are static or decreasing.
Coppola: While nonprofit organizations face many challenges in carrying out their mission, the three biggest issues are:
1. Inadequate or unrealistic long-term strategic planning.
2. The inability to maximize non-program revenue.
3. Lack of resources to develop an efficient and effective enterprise risk management (ERM) system.
Dooley: The three biggest issues are:
1. Fundraising. It's becoming increasingly harder. With big donors, it's not as easy as just receiving a check. Donors are putting more restrictions on how they want their money to be used, which, in turn, is taking up more of the charities' administration time to develop related policies. Similarly, younger donors require more information about how their donations are put to use and are less likely to give without more detailed, up-to-date information about programs.
2. Better reporting. Reporting has moved beyond tax returns. All in all, donors are being more thoughtful with their charitable giving in terms of supporting organizations that will truly put their dollars to work. Watchdog groups, such as BBB Wise Giving Alliance (Give.org) and Charity Navigator, are integrating new grading systems that report on "results" versus just "money in and money out."
3. Staffing. It's an ongoing issue for all-sized organizations. Large organizations have to compete with for-profit companies that can pay higher salaries or offer more benefits. For small-to-midsized organizations where a few crucial staff members run the show, when a person leaves, it impacts everything, from day-to-day operations to fundraising to event planning. Retaining good staff is an ongoing issue, but even organizations that have been around for a while are struggling to attract quality people into the fold.
How are you helping your nonprofit clients address and/or meet those challenges?
Coppola: At Ellin & Tucker, we strive to be more than simply auditors and accountants for our nonprofit client base. We are always seeking ways to help our clients understand the importance of attacking challenges in a proactive, rather than reactive, way. In regard to strategic planning, we advise our clients that the development of strategic plans should be treated as a fluid process that is constantly revisited and updated as needed, not a static document that isn't updated after first being developed. Business models change, the economy goes through ups and downs, and new challenges and opportunities arise every day. If a five-year (or more) strategic plan is not evolving with changes independent of and within their organization, the plan will not succeed.
Dooley: We do that by:
Utilizing the Windham Brannon network. Our firm has a deep and wide network of resources that we can tap for our nonprofit clients. I've shared resources with my clients that can aid them in everything from how to effectively run boards, develop joint ventures, raise money, etc.
Serving as my clients' eyes and ears. Most executives of organizations don't have time to read and keep up with what's going on inside their industry since they wear so many hats. I consider myself their eyes and ears when it comes to helping them address a problem - and it doesn't have to be a tax matter. My role as an advisor for my clients is more far-reaching. I often share articles and books, possible conferences or training they can attend, and even poll CEOs and boards on issues that are impacting them. It's about bringing value beyond the tax return.
Keeping up to date on tax law changes. This can be a lot to keep up with. I look for the most condensed, easy way to stay up to date on changes or new developments so I can be timely and efficient in sharing this information with my clients throughout the year, especially when there is immediate risk involved or we need to start tracking data differently. It is so much easier to make changes throughout the year, instead of having to backtrack after the year is over to try and dig up information.
Archibald: Every nonprofit organization, regardless of its service sector, must evaluate its fiscal viability and sustainability in relation to continuing to fulfill its mission. Bonadio is emphasizing strategic positioning in lieu of long-range planning, as well as board education and training. In addition, there is an increasing need for nonprofit boards and management to assess whether deficit-producing programs and services can continue to be subsidized from other surplus/reserve sources within the organization.
Coppola: We are constantly working with our clients to help them find ways to develop other revenue streams above and beyond program revenue. As the former CFO at Archbishop Spalding High School in Severn, Md., I can tell you firsthand that accomplishing our organizational goals was dependent upon not just the tuition revenue stream, but revenue through capital campaigns, annual fundraising events, grant writing and appealing to those in the local business community that were supportive of our goals. Additionally, maximizing less traditional revenue sources (such as summer camps and dining services for a school) while streamlining processes to reduce expenses, can all contribute to a healthier bottom line to support the organization's long-term goals such as construction projects and building an endowment.
In a recent article in The Journal of Accountancy, it was reported that 24 percent of not-for-profit organizations have no enterprise-wide risk management in place. The best place for those nonprofits to start developing an ERM would be the Committee of Sponsoring Organizations of the Treadway Commission framework, which was recently updated in 2013. The COSO framework focuses on ERMs, internal controls, and fraud deterrence. Ellin & Tucker works with our clients to develop efficient and effective ERMs, focusing on need and cost-benefit relationships.
Of which compliance and/or regulatory trends should nonprofits be aware?
Archibald: The federal and state governments continue to increase regulatory requirements across most segments of the nonprofit service sectors. The additional scrutiny and regulatory requirements, in most cases, are a direct result of scandals that have occurred. These scandals in the nonprofit sector have resulted in increased government reporting requirements (e.g., Form 990, Medicaid and Medicare regulatory compliance, NCAA compliance, HIPAA compliance, and a plethora of federal legislation dealing with security and protection of technology systems). These increased regulatory requirements are almost always "unfunded mandates" that put additional stress on the fiscal viability of the nonprofit, particularly those with annual revenues below $10 million.
Coppola: Nonprofits should be aware of the Financial Accounting Standards Board's project to improve the financial reporting for not-for-profit organizations (updating FAS 117), specifically as it relates to the classifications of net assets, the standardization of liquidity and financial performance indicators, as well as changes to the cash flow statement. The board is also examining the reporting of expenses both on the statement of activities and the statement of functional expenses, as well as the proper reporting of investment expenses. FASB is continuing their deliberation on these topics, but all not-for-profit organizations should be aware of these pending changes.
Additionally, ASU 2013-06, Services Received from Personnel of an Affiliate, is effective for nonprofit organizations with fiscal years beginning after June 15, 2014. This standard dictates that personnel services received from an affiliate (where there is common control) for which the affiliate does not charge the recipient nonprofit organization for those services, should be recognized in the recipient's financial statements, measured at the actual cost incurred by the affiliate. Early adoption is permitted for this standard.
Dooley: They should be aware of:
These will be concentrating more heavily on for-profit motive of unrelated business activities; disallowing losses for activities that have not generated income in three of the last five years; and examining transfer pricing, especially when a nonprofit entity sells goods or services to a for-profit subsidiary
The IRS backlog:
The IRS Exempt Organization Division is losing staffing due to budget constraints but has much more work with the revocation reinstatement applications.
It is slow to approve new tax-exempt applications and reinstatement applications of lost-tax-exempt status for organizations that have not filed a return for the prior three years.
It cannot address new issues quickly (e-filing of 990-T, possibility of six-month extensions for 990s, etc.).
The IRS has brought in Six Sigma to help evaluate, improve and streamline its processes, but it takes time to get the suggested changes in place and efficient.
Form 1023-EZ, Streamlined Application for Recognition of Exemption, which applies to:
Organizations with less than $200,000 of anticipated gross receipts in the three subsequent years; and,
Organizations with total assets less than $500,000.
What are the biggest business opportunities currently available to nonprofits? How can they take advantage of them?
Dooley: Charities need to make it easy to participate and make donations. That means being tech-savvy and having an up-to-date online presence - for example, having mobile sites, apps, text capabilities, hashtags and crowdfunding functions.
They can also capitalize on point-in-time giving. Organizations need to get creative to help drive fundraising. We've all seen what happens when a video of a rescued dog or crying child after a disaster goes viral. These images stir great emotions and produce powerful increases in impulse giving.
Additionally, they can use joint ventures strategically. Joint ventures can help organizations accomplish their missions through additional programming and resources. When structured properly, joint ventures can produce for-profit subsidiaries, which have more leeway than the parent tax-exempt organization and can bring a different pool of funds to the table.
Archibald: Strategic positioning and related analysis are focused on identifying and pursuing business opportunities for nonprofits. The Affordable Care Act has significantly increased the number of Medicaid-eligible individuals in the U.S. (i.e., 133 percent of the federal poverty level as of Jan. 1, 2014). Technology sophistication provides opportunities for a dramatic shift away from facility-based services in favor of community-based services. For example, thousands of nursing home-eligible residents will, in the future, remain in their own homes. Finally, every nonprofit organization needs to focus on growth in programs and services or otherwise be acquired by larger nonprofit organizations. This "Walmart-ing" of the nonprofit sector will be similar to the last three decades of consolidation that have occurred in virtually every other industry sector of the U.S. economy (e.g., banking, airlines, retail, auto manufacturing, telecommunications, etc.).
Coppola: The biggest business opportunity currently available to nonprofits is to strategically align their organization with business partners that are committed to helping them achieve their mission. At Ellin & Tucker, supporting the Baltimore community and its neighboring nonprofit organizations is not only a passion of ours; it is a responsibility. Whether our Giving Back Committee is working with local organizations to strengthen our community or our leaders are serving on boards and committees of local organizations, we continuously look for ways to support their programs. Whenever going through a bid process for a good or service that you rely on another company for, always remember that you have every right to ask what they do to give back to the community.
What other trends do you foresee in the near future in the nonprofit space?
Coppola: Often, not-for-profit organizations struggle or fail because they are unwilling to run it like the business that it truly is. While not-for-profits typically take a mission-driven approach to defining their success, they still encounter similar financial challenges to for-profit companies. They have to manage a budget, forecast cash flows, report to lenders and other stakeholders on a consistent and accurate basis, keep up with accounting pronouncements, etc., yet they often sacrifice both the quality and quantity of their lean accounting team at a cost that could cause irreversible effects on their organizations' sustainability. In the future, we see more nonprofit executives and their governing bodies taking an approach to running their organization that is more in line with for-profit strategies. The leadership team must be positioned in a way that will allow them to not only manage the day-to-day accounting operations of their entity, but contribute to its long-term financial viability so they can continue to accomplish their mission and goals.
Dooley: The trends I see are:
1. An increase in public exposure risk:
More and more reporters are trying to find a story or politician trying to get their name in the press and are using not-for-profits as the vehicle.
Charities used to only worry about the IRS finding something wrong. Today, bad press and public opinion can damage an organization so much more than an IRS audit or tax penalties, as your income stream will be diminished should the public lose faith in your organization.
Charities will continue to have to be more and more diligent to strictly follow the rules, watch how they are spending their money, and have policies in place and make sure they are followed.
Reporting and disclosure for charities will only get more and more transparent in the future.
2. [Ways and Means Committee Chairman Dave] Camp's tax proposal:
Individuals can deduct charitable contribution made after December 31 but before April 15 of the next year on the current year's tax return.
There is a requirement that nonprofits separately calculate [Unrelated Business Taxable Income] on each unrelated business. Losses from an activity can only offset income from that same activity.
It would impose a 2 percent of adjusted gross income floor for deductible charitable gifts by individuals.
It would change the excise tax on net investment income to 1 percent for all private foundations.
It includes harmonization of AGI limitations for all gifts (cash and non-cash) to public charities to 40 percent and all gifts to private foundations to 25 percent.
3. Changes to Guidestar [which gathers and disseminates information about every single IRS-registered nonprofit organization]:
Partnering with other organizations in order to expand the benefit of using Guidestar so that more nonprofits can use the site as an information center
Making profiles for nonprofit entities which will include goals and strategies, etc., to allow for better comparison of similar organizations for better practices, board governance, etc.
4. The trend toward crowdfunding, where donors pool money to contribute collectively. It is mostly online, and more successful than posting something on Facebook.
This is a growing trend, as the younger generation does not have the same mentality toward giving (i.e., committing to give 10 percent of their income to charity).
Archibald: The nation currently has more than 1.5 million nonprofit organizations deemed to be tax-exempt by the Internal Revenue Service. The industry issues described above are forcing and will continue to force major efforts in favor of mergers, acquisitions, and larger geographical provider networks in most nonprofit service sectors.
The current era can best be described as "survival of the fittest and most fiscally viable" since predictions are that mergers, consolidations and bankruptcies in the nonprofit sector could eliminate up to 50 percent of the current number of independent autonomous nonprofit organizations in the country.
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