Just like every other business, the business of nonprofits is changing. As nonprofit Boards grapple with succession planning for their executive leadership; ensuring compliance with the Nonprofit Revitalization Act and Executive Order 38; and better defining what the organization’s mission and operations should look like, there are certain trends that we are seeing in the nonprofit sector that management and boards need to consider in the ever changing nonprofit space:
Emphasis on outcomes rather than outputs
It used to be that organizational effectiveness was measured by how much of every dollar was spent on program accomplishments. While this is still important, as evidenced by Executive Order 38, funders are much more interested in how their dollars are driving impact; what change is your organization having on the community and on people’s lives. Rating organizations, such as Charity Navigator, are putting much more emphasis on social impact, creating new challenges for organizations who now have to develop ways to effectively measure and track their impact.
Infusion of business concepts
As we all know, nonprofits are businesses, just with different stakeholders. As accountants, too often we see nonprofits run into fiscal distress because they sometimes lose sight of this. If you look at the fall of FEGS, you can’t replace the implementation of strong business concepts with size. In order to be successful, nonprofits need to: build the appropriate infrastructure; institute proper controls; put in place appropriate cost/fund accounting systems; understand fiscal results on a program/contract basis; implement dashboards to be proactive in decision making; and actively monitor/evaluate results. With cutbacks in government funding and increased competition for fundraised dollars, those organizations that are able to assemble and evaluate data on a current basis are in the best position to ensure stronger financial results.
Increased collaboration and mergers
It used to be that mergers in the nonprofit sector were rare, but now, with changes in reimbursement, a more complex regulatory environment, and the need to develop economies of scale, mergers are on the rise. For many organizations, the decision as to whether they are a buyer or seller needs to be considered, as vertical and horizontal integration are important for organizations to make themselves more relevant. For certain government and private funding streams, such as managed care, size is an important consideration in establishing rates.
Increased government audits and regulations
It used to be the only two certainties were death and taxes. You can now add audits onto that list. It is no longer a matter of if you will get audited, it is a matter of when. The level of government regulations that nonprofits have to deal with: Department of Labor for payroll and pension; Government funders (e.g. DOH, OPWDD, OASAS, HUD) for reimbursement and compliance; the Justice Center for programmatic; and even the Department of Consumer Affairs for New York City sick pay regulations. With the myriad of regulation changes that feel like they happen daily, staying in compliance is difficult for agencies, and with the threat of audit and recovery if you are not in compliance, failure to comply can be costly. It is imperative that agencies stay abreast of these changing regulations through trade associations, seminars, and other sources, such as our newsletters and website. We also recommend signing up for information releases form your funders and reviewing released audit reports from funders and other auditors such as the Office of the State Comptroller and the Office of the Medicaid Inspector General. In addition, organizations should ensure that they have strong corporate compliance, quality assurance, and, if large enough, internal audit programs in place.
Pensions are the new concern
Pension plans have come under additional scrutiny, as the Department of Labor has been stepping up its audit of plans and several law firms have targeted nonprofit plans for class action lawsuits (employees did not maximize their retirement benefits). Nonprofits have a fiduciary responsibility surrounding the plans that they sponsor. This includes benchmarking the plan’s fees; reviewing investment options and replacing underperforming funds; ensuring that employees receive the correct level of both employee and employer contributions; and providing staff education. Too often nonprofits don’t realize their obligations until it’s too late.
These are just a few of the many issues that nonprofit management is grappling with. Add to this expanding the board, bringing in discretionary dollars, mitigating risks, and any one of twenty more topics and you’ll understand how much the sector has changed and how much harder it is to properly steer an agency today. Unfortunately, while the administration and funding is becoming more complex, the needs of the sector continue to rise. Nonprofit boards and management sit in the unenviable position of trying to deliver the highest level of impactful service, in the most cost effective and compliant way possible. If you have any really cool innovative ways you are changing lives, please let us know, so we can share them with the nonprofit community.
Kenneth R. Cerini, CPA, CFP, FABFA
Ken is the Managing Partner of Cerini & Associates, LLP and is the executive responsible for the administration of our not-for-profit and educational provider practice groups. In addition to his extensive audit experience, Ken has been directly involved in providing consulting services for nonprofits and educational facilities of all sizes throughout New York State in such areas as cost reporting, financial analysis, Medicaid compliance, government audit representation, rate maximization, board training, budgeting and forecasting, and more.