Wednesday, April 16, 2014

Nonprofit Knowledge Matters | Having Fun With Nonprofit Financial Literacy

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How much is that doggy in the window?
Image of dogby Jennifer Chandler

April is financial literacy month, so in the nonprofit community it’s the right time of year to ask this question: “We’ve got some board members who don’t want to serve on the finance committee and claim not to understand financial reports. How can we help them become more comfortable with our nonprofit’s finances?”  Hmm. Without meaning to be flippant, I submit that helping board members with this is as simple as showing them a cute puppy and asking them how much it costs. They might not be familiar with cost allocations for programs, or restricted funds, but they can understand that the cost of the puppy is not just the initial cost, but also the direct costs of food, treats, vet bills, plus the real, yet indirect costs of washing towels (muddy paws!), and just in case – “Oops – the puppy just swallowed its leash!” (this actually happened to a neighbor of mine) – funds set aside for emergencies. 


So the puppy provides us with some important but pretty basic concepts in nonprofit finance: calculating full costsannual budgeting, and reserves. Another very important concept for board members to understand, that I confess I couldn’t figure out how to fit into the cute puppy analogy, is donor restricted funding. Why not take ten-minutes at the next board meeting to make sure everyone is on the same page with these basic concepts?

If you’re still asking: “What’s with the puppy?” I admit that nonprofit accounting is not THAT simple, but how about opening your next board meeting with some cute puppy pictures and then introducing your board to one of these options?   

Soon, what you don't know can cost you
Speaking of financial literacy, quick – tell me – what’s your nonprofit’s indirect cost rate? Need a hint? Sometimes it’s referred to as your “overhead” or “administrative” cost rates (although technically there is a difference). Still not sure? Most nonprofit executives don't know either, probably because no one has asked before. 

But what if there were a financial incentive for knowing your indirect costs, so that you would be paid more if you could accurately calculate those costs? Would an extra 10%, 15%, or even 26% inspire you to understand the full costs of delivering your nonprofit’s programs?

The National Council of Nonprofits has been focusing on a financial literacy challenge that will benefit the entire nonprofit sector and those we serve. The issue involves the source of a third of the nonprofit sector’s revenue every year: no, it is not foundation grants (which amount to only 2% of the total revenue to the nonprofit sector) or individual giving (9%), but government contracts/grants that provide 32% of the sector’s revenue. 

Fresh Air for Annual Reports
Fresh airWhen was the last time your nonprofit invested long hours and significant dollars in drafting, designing, editing, proofing, printing, and mailing a hard copy annual report? If you are scratching your head or thinking, ‘Never!’ you are not alone. With the ease of handheld video cameras, sending an e-blast, and posting a pdf, technology is morphing the traditional annual report into something else. But as these exciting alternative opportunities develop, let’s make sure we continue to honor the purpose: to let in the fresh air of transparency so our nation’s charitable organizations continue to earn the trust of the donating public.

A novel way to present an annual report that offers transparency as well as connections with stakeholders is to host a national conference call. That’s what GuideStar did earlier this year, experimenting with an innovative approach to annual reports. 

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