Managerial Accounting in the NFP World

In its “Trends and Outlook 2022” (I am a little behind on my reading!), the NJ Center for Nonprofits conducted a survey of approximately 225 respondents. They reported funders often do not:  

• Like to make unrestricted grants;  
• Understand overhead costs and capacity building to  give the NFP greater impact; 
• Fund overhead costs and capacity building; 
• Understand the full cost of of projects; and 
• Allow overhead costs in grant applications. 

The reluctance of funders to support overhead costs often puts the NFP in an untenable position as these expenditures must be covered if the organization is to stay in business.  The same survey  also reported many of the NFPs tried to do this by:

• Initiating new fundraising appeals;
• Seeking funds from alternative sources; and
• Introducing and/or increasing fees for service.

Their success in accomplishing these efforts can be gauged by the following:

• 46% of the respondents reported financial uncertainty was the major challenge to viability and effectiveness,  and
• 55% of respondents reported infrastructure/capacity building was the most important issue NFPs face in 2022. 

How should NFPs deal with this problem?  Perhaps one way is to speak the same language the financial managers of their funders use: accounting.    Specifically, NFPs can:

• Think about using activity based costing (ABC).  This process does not allocate overhead but traces these costs, in essence converting them to direct costs. It will more effectively tie the indirect costs to each of the programs,  making funders much more willing to include them in grants. ABC also is very useful when supporting capacity planning, one of the main concerns of the respondents.  ABC has the reputation of being difficult to implement, but the number of cost drivers in an NFP organization is generally small, and the system can be built over time. 
• Do capital expenditure analyses using the traditional tools businesses use. However, make sure to include a discussion of the total welfare gain for the expenditure. In such situations the  qualitative data can outweigh the financial assessment. 
• Use CVP analysis.  Of course, there is no “P” (profit) in an NFP, so I like to say NFPs should do CVC analysis: Cost, Volume, and Cash. This type of analysis is particularly important when the NFP is attempting to obtain financing for increased volumes or changes to the budget. 
• Understand the concept of joint costs and their impact on the organization. As we have seen, funders like to see their donations go to programs rather than overhead.  Perhaps proper accounting for joint costs could result in more costs being allocated to programs. 
• Use responsibility accounting. The most common type of business unit accounting in NFP organizations is the cost center.  If there are different programs and managers, keep the accounting records in such a way that managers can be held accountable for the costs of their program. Also, the use of responsibility accounting will also provide the record-keeping to determine the actual cost of each program. 

Forty-three percent of the respondents said they had to draw against their credit line in 2021.  This is alarming, but it also demonstrates a critical point.  NFPs should try to establish a credit line with their local banks.  Not only is it a source of funding to smooth over the rough patches in the cash flow year, but local banking personnel are great sources of board members and volunteers. When approaching the bank, good managerial accounting as described above and good budgeting practices are critical. 

Where do you get the talent to do all of this? It is a lot to do.  I suggest you contact your local CPA firm.  I am sure they will be able to help you on either a volunteer basis or at a reduced price.  Remember, to secure funding, you need to speak the language of business: accounting!