Mark Koscinski Uncategorized

Budgets and Smaller NFP Organizations (Part 1)

With  many Not-For-Profit entities (“NFPs”) using a June 30 year end, the budget cycle for the new fiscal year has already begun. The budgeting process can be a very painful ordeal for many smaller NFPs, causing much groaning, complaining, and the gnashing of teeth.  The most common complaints are  budget preparation  takes too long and the budget  is quickly out of date shortly after it has been  published. 

There are many reasons why an organization needs to budget.  I won’t address them here as you can pick up any accounting or management textbook and get those answers. Nevertheless,  budgeting can be a significant contributor to the success of the organization. In this  and a future blog,  I want to make some suggestions  that  might make the budgeting process more informative and potentially less difficult.  

Let’s begin with the mindset management needs when it begins budgeting. There are generally three ways an annual budget can be built:

  • Incremental budgeting.  This is the lazy method of budgeting.  You start with last year’s actual results and adjust for anticipated changes  such as the inflation rate, the addition of personnel, etc. While this can be the quickest way to get a budget, it is also the most ineffective. Incremental budgeting has many problems, including the potential omission of expenditures and necessary additions of new line items simply because they did not occur in the prior year.  As such, they can be easily missed. Secondly, incremental budgeting can build in inefficiencies since it uses the prior year actual data as its starting point.  Inefficient or even unnecessary expenditures made in the year just closed are simply carried forward to the current year’s budget, sometimes with insufficient analysis being done to see if the expenditures were required. 
  • Zero based budgeting (“ZBB”). This method of budgeting is the polar opposite of incremental budgeting.  Incremental budgeting begins with last year’s actual expenditures and makes adjustments for the current year. It accepts last year’s actual results as the base for the current year’s budget. ZBB assumes NO expenditures as the starting point for the budget.  The department or person proposing an expenditure must support the request for it  with good reasons since the budget for that item is presumed to be zero in the upcoming year. While ZBB is a theoretically correct way to budget, it can be extremely time consuming as all expenditures need to be supported. 
  • Value proposition budgeting. My favorite style of budgeting, as it is a Golden Mean between incremental budgeting and ZBB. In value proposition budgeting, each expenditure from the prior year and any new expenditures are scrutinized to see if it and the amount are  necessary to achieve the vision and mission of the organization.  Any expenditure not necessary to attain the entity’s objectives is eliminated.  This method keeps everyone’s eyes on the vision and mission of the organization and reminds everyone why the doors are opened every morning. It aligns the budgeting process and its results with the organization’s vision and mission. 

In line with the use of value proposition budgeting, the categorization of budgeted expenditures can also achieve the same purpose. One common way to classify expenditures is this:

  • Capex. I am sure we have all heard of Capex, or capital expenditures.  These are expenditures for items such as equipment that will last over a period of years.  
  • Opex.  These are operational expenditures required to keep the organization running on a day to day basis. These include personnel expenses, rent, utilities, etc. 
  • Riskex. Expenditures  reducing risks to the employees, clients, and operations of the organization. Examples of these include insurance expenditures and alterations to the working environment to eliminate potentially hazardous working conditions.
  • Stratex. Expenditures required to achieve the mission of the organization. These could be ongoing, annual expenditures or expenditures for new programs.  

Thinking of expenditures in this manner also focuses management on the vision and the mission of the organization, particularly when riskex and stratex expenditures are being evaluated.  Management is forced to ask what expenditures are needed to achieve the organization’s objectives.  In the next instalment of this blog, I will continue to explore how good budgeting is truly mission-critical.

Mark Koscinski Uncategorized

AI and NFPs

Artificial Intelligence (“AI”) has made amazing progress in recent years and has had  an incredible impact on the business world. Scanning resumes and making credit decisions are two examples of common AI utilizations that come immediately to mind. Even NFL teams are using it to evaluate players.  As time goes on, it will become more and more ubiquitous. Small NFP organizations  often lack the funds to deploy this technology, but as its cost comes down NFP entities will need to utilize AI to efficiently achieve their missions. However, before they do, management will need to understand that AI is not the panacea for all of its problems. The sad truth is that AIs often do make mistakes.  How can I prove this bold statement? Let’s look at the world of chess. 

The internet is ablaze with the story of AlphaZero, currently the best chess player in the world. AlphaZero is an AI owned by Google that trained itself to play chess.  It was given the rules of the game and then played 44 million games against itself to become the best player in the world. AlphaZero played two historic matches against Stockfish, a brute force chess engine that calculates millions and upon millions of moves  a second.  The first match was 100 games.  AlphaZero won 28 games and 72 games were drawn. This would be a staggering achievement for a human player. For technical reasons we don’t have to get into here,  many discounted this smashing victory.  The technical deficiencies were corrected in the second, longer match of 1,000 games. AlphaZero won 155 games, drew 839, and lost 6. This was another very lopsided match, but AlphaZero did make mistakes since it lost games.  

 AI can make mistakes. They are not infallible. (Of course, those of us from the Baby Boomer generation do remember Terminator and HAL 9000…) Granted, AlphaZero had a very limited number of losses but these were only the discernible mistakes.  There is a second type of mistake. AlphaZero may have made inferior moves earlier in drawn games it was able to compensate for later in the game.  Put another way, AlphaZero could have won the game but it only ended up with a draw. A third type of mistake could occur when AlphaZero played an inferior move and then had to fight for a draw. The latter two types of mistakes are often overlooked because we tend to focus on the games won and lost.  Drawn games are often insufficiently analyzed. 

What lessons can NFP management learn when they begin installing AI? NFP organizations need to understand their tolerance for errors and omissions mistakes and put appropriate internal controls in place to insure against them.  After all, many NFP organizations deal with human services.  Six mistakes out of 1,000 can still be devastating when dealing with human lives. 

In short, AIs are very efficient assistants, but they can make mistakes. Sometimes these mistakes can be hard to find. An organization employing AI needs to make sure it has sufficient safeguards and internal controls in place to make sure these errors are not dangerous to the organization’s mission. 

Mark Koscinski Uncategorized

NFP Horseshoes–Summer 2021

With Memorial Day right around the corner, it is time for Not For Profit (NFP) Horseshoes.  Well, actually we are not going to physically play horseshoes, nor are we going to use Zoom to watch a horseshoes game.  I use the horseshoe scoring system to rate various developments in the NFP world. As a refresher for those of you who don’t play horseshoes or haven’t played in a long time (not only has it been a year since the last Memorial Day, but who knows how many of you actually played horseshoes last year during the pandemic?), here are the scoring rules.  A “ringer” is worth two points.  A “double ringer” is worth four. A “leaner” or “closest to the stake” is worth one point.  So, here we go!

Completely missing the horseshoe pit—The impending divorce of Bill and Melinda Gates.  A divorce is a sad event for any couple. I have often been a critic of Bill Gates’ business practices and some of the gossip about the marriage becoming public is less than flattering to him.  Nevertheless, I have often said that what goes on in a marriage (or civil union)  is the private business of those in the marriage and one can’t listen to gossip about the sad situation.  This divorce could have repercussions throughout the NFP world.  I have also said Gates has done a tremendous job in this arena.  The Bill and Melinda Gates Foundation has reportedly donated $50 billion to charities since 1994. Both parties have said they will continue to cooperate after the divorce so their foundation can continue its good work.  I think it is appropriate at this time to simply thank each of them for their past generosity and wish them the best of luck. 

Closest to the stake– Pope Francis’ financial reforms at the Vatican.  I have also been critical of the Pope in the past for the way he has handled the financial scandals in the Vatican.  His actions (and inactions) included terminating Price Waterhouse before it completed the audit of the Vatican and allowing the Vatican Secretariat of State to invest Peter’s Pence (the annual collection taken up by dioceses throughout the world in support of the Vatican) in a real estate scheme in the United Kingdom. Francis has now reversed course and implemented a string of reforms at the Vatican.  Cardinal Becciu, a close assistant to Francis and who used Vatican funds for the real estate scheme and was allegedly involved in other financial scandals, was stripped of his authority and his ability to function in future papal conclaves in September 2020. Other reforms were instituted. Clergy involved in fraudulent activity in the Vatican will now be subject to the Vatican court system and not just to ecclesiastical punishment.  Contract authorization and approval has now been centralized in the Vatican. Why then only a “leaner”?  It is too soon to see if these and other reforms will go far enough, be enforced or even survive.  The Vatican has the reputation for being notoriously corrupt (sadly) so many of these reforms may not outlast the Pontificate of Francis.  Only time will tell. 

Update: It was announced on July 2, 2021 Cardinal Becciu would face a trail at the Vatican for various crimes ranging from embezzlement to extortion. Eight others were included in the indictment. The trial is due to begin on July 27, 2021.

A double ringer–All the NFP organizations that labored through the  COVID pandemic. The last year has been incredibly tough for all NFP organizations. The enforced shutdown, loss of revenue and employees have taken a toll on these organizations. The fact that so many are left standing is a testament to the goodwill and charitable nature of their management and employees. Hats off to them and our gratitude! Please find a way to show your gratitude and support to an NFP by donating, volunteering, or both!

Mark Koscinski Uncategorized

Diversity and Inclusion in NFP Management

We have long known diversity and inclusion in NFP management are moral and ethical imperatives. Recent studies have also shown powerful decision science reasons why they are important.  Professor Daniel O’Connor and I had the pleasure of being faculty advisors to Delia Geyer, who completed her senior thesis in economics with honors at Moravian College in 2021. Delia’s topic was the CEO Pay Ratio, a topic germane to publicly traded companies. As part of her project, Delia also analyzed how certain social justice aspects affected the Pay Ratio, and indirectly corporate management.  Her findings on this topic are just as relevant to NFP organizations as they are to large public companies. Delia wrote::

“McKinsey and Company (2020) found companies with the greatest ethnic diversity on executive teams outperformed those with the least by 36% in profitability. They also found companies with more than 30% women on their executive teams were more likely to outperform those with fewer women on their teams (McKinsey and Company, 2020). Another study found Fortune 500 firms with the highest percentage of women on their boards outperform those with the lowest (Women on Corporate Boards (n.d.)). Companies with higher than average diversity percentages of their management teams report higher revenue levels than companies with less diverse management teams (Lorenzo, et al., 2021).” (Geyer, 2021, unpublished thesis, quoted with permission).

Why is this so? Several reasons come to mind.  James Surowiecki,in his bestselling book the Wisdom of the Crowds, noted that more information brought to bear on a situation results in better decisions but only if  the information from each source is independent from other sources. Having a diverse board and management helps ensure many independent viewpoints and information are considered in the decision making process.  

Another reason why diversity is important on the board is it minimizes the possibility of groupthink.  This phenomenon occurs when members of a group place harmony and agreement ahead of good decision making.  In such a situation, issues and information  are not adequately explored and silence is often taken as agreement. One cause of groupthink is a highly cohesive (read “non diverse”) decision making group.  A more diverse board will bring more and varied opinions to the fore, resulting in better decisions.  Diverse opinions are important, even if they only force the majority of the board and management to sharpen their reasoning about why their proposed decision is correct. 

NFP management take heed.  Diversity and inclusion initiatives are not only the right thing to do, but will also improve the operation of your organization!

Mark Koscinski Uncategorized

The Colonial Pipeline Cyberattack

The cyberattack on May 7, 2021 shutting down the Colonial Pipeline caused gas shortages throughout the Southeastern United States This ransomware attack is a stark reminder of how important technology is in the modern world.  In the most recent semester that just ended I spent a considerable amount of time with my students studying critical new  technologies such as  Blockchain, the Cloud, VR/AR, AI,  and RPA.  These and  other new technologies will permanently impact how  organizations operate.  

It is also a reminder  cyberattacks against NFP organizations and governmental entities have continued unabated.  At the same time the pipeline cyberattack was occurring, the District of Columbia police department systems were hacked.  The hackers began releasing the personal information from 22 police officers.  Obviously, this can be a life threatening situation for these officers.   

NFP organizations that ignore the new technological reality and the “New Normal” risk failure in carrying out their vision and their mission.  At the same time, organizations must ensure cybersecurity is still a major concern.  It is inconceivable an NFP can operate in the modern world without adequate technology. Yet, many ignore the risk of cyberattack.  Perhaps they believe they are too small or inconsequential to be of interest to a hacker.  That is a dangerous assumption.  A client of mine, a small church, suffered a devastating cyberattack.  

 At the end of the day, technology can be a great boon for the efficiency of an organization’s operations.  With increased return though, there is often increased risk.  One of management’s core functions is to manage and balance risk and return. Cyberattacks are a risk to the mission critical new technology.  A management that ignores this risk is simply not doing its job. 

Mark Koscinski Uncategorized

On the Horizon

As summer approaches, it is time to take a look and see if any large issues are on the horizon for NFP organizations.  Of course, the biggest one will be how to cope with reopening after the COVID pandemic.  Many NFPs have been financially weakened by the enforced shutdowns and social distancing.  Finding employees and volunteers may prove to be difficult in the “New Normal”.  The final accounting for the Payroll Protection Plan (PPP) loans will also be looming on the horizon.  Nevertheless, as NFPs fight for their survival in the post pandemic era, there are some other interesting developments on the horizon management may wish to keep an eye on. .  

The first is the United States Supreme Court has recently heard oral arguments in a major NFP case, Americans for Prosperity Foundation v. Rodriquez.  The State of California requires NFP organizations to disclose major donors.  The petitioner is backed by a large donor to the Republican Party  causes and opposed the Constitutionality of the California law, claiming it is a restriction on the freedom of association and could put a chilling effect on donors to potentially unpopular causes.  California has responded by claiming the collection of this information is one way to combat fraud.  What makes this case so interesting is not only its implications for NFPs but the unusual alignment of groups for or against this particular law.  For instance, the ACLU has come out in support of the petitioner, a group largely composed of Republicans. It is difficult to predict how the Court will rule on this case and a decision is expected by June, 2020. 

All NFP development personnel need to keep an eye on the Biden Administration tax proposals.  The proposed increase in the capital gains rate for wealthy Americans as well as the proposed change in the inheritance tax law (elimination in the stepped-up basis)  would make gifts of appreciated property significantly more attractive to potential donors.  There are  a lot of things that can change between now and Congress adopting the new taxes and there is no certainty the proposed changes will even be adopted given the slim Democrat majorities in both houses of Congress.  Nevertheless, the effective dates of any new tax legislation will probably be January 1, 2022. Therefore, NFPs have to be ready to discuss these possibilities this year in order to generate additional donations. Wealthier individuals will need to do tax planning this year to minimize future taxes. NFPs will have to get up to speed very quickly in order to take advantage of this fundraising opportunity. 

The third development is the pending divorce of Bill and Melinda Gates. While I have been critical of his business practices, I have also applauded his charitable work. It is truly sad that anyone would get divorced, but we are all happy to hear the soon to be former couple will still cooperate and continue to run their foundation. It has done a lot of good for a lot of people. I wish them good luck in their personal lives.

Mark Koscinski Uncategorized

Pink Week!

The Zeta Tau Sorority of Moravian College does its major fundraising for Breast Cancer Awareness during this week. It is truly a worthy cause undertaken by a remarkable group of students here at Moravian College. Despite the ravages of COVID, breast cancer still occurs at an alarming rate and we can’t forget that. One out of eight women are diagnosed with breast cancer, so sadly, the odds it will afflict someone we know is pretty high. Please consider giving generously to help contain and hopefully eradicate this scourge.

I reminded my classes this week it is important to be involved and to give back to your community. It doesn’t matter what cause you champion or what not-for-profit group you join. The important thing is to help change and improve the world. The good work may only effect one person at a time today, but sustained good work will ripple through the years like the “Butterfly Effect”, impacting more people in a positive way than you could possibly imagine.

Mark Koscinski Uncategorized

Assistance to NFP Organizations

Even though this is being sponsored by NJ, the discussion is about grants to NFP organizations from the federal governments. What NFP doesn’t need financial help these days from COVID? The seminar is on Oct 22, so you don’t have much time to register!

Non-Profit Assistance from USDA Rural DevelopmentRegister now to Learn about Grant, Loan andTechnical Assistance ProgramsThursday, October 22, 2020, 9:00 a.m. to 10:00 a.m. 
COVID-19 magnified ongoing challenges to non-profit sustainability including maintaining income, finding funding, and reducing costs while enhancing community services.    Join an informative webinar, sponsored by the Hunterdon Chamber of Commerce and Sussex County Chamber of Commerce, on USDA Rural Development grant, loan and technical assistance programs for non-profits.  Michael Thulen, Jr. New Jersey State Director, USDA Rural Development adds, “Non-profits are the foundation to many communities they serve and the demand for help seems to increase constantly these days.  The USDA can be a resource to provide working capital for carrying expenses while income has dropped during the pandemic and provide assistance with real estate, equipment purchases, or renovations to existing space to make them safe.  

 We hope you can participate in the webinar sponsored by the Hunterdon and Sussex Chambers of Commerce on October 22nd at 9:00 to 10:00 a.m.”Find out how USDA Rural Development Community and Business Programs can help your organization fund its critical projects to recover from the pandemic and grow the organizational mission.   Here’s a sample of projects

USDA can fund:·     
 Technologies and equipment needed to improve operations or services·      
 Vehicles for transportation or deliveries ·   
    Building improvements to make safe places·      
   Heating and Air Conditioning upgrades·      
   UV disinfecting or lighting·      
   Touchless entrances, lighting, and voice activated equipment·       
  Working capital·       
  Acquisition and renovation of real estate

Michael Thulen, Jr. New Jersey State Director, USDA Rural Development, and Directors, Christine Schmelzle and Maryann Tancredi, will highlight new and current programs to help your non-profit:·     
    Business and Industry Cares Act·        
 One RD Guarantee Program effective 10/1/20·       
  Community Facilities Programs·     
    Rural Business Development Grant Program

Through these programs, USDA Rural Development has funded charter schools, health care facilities, group homes, fire trucks and police vehicles, community centers, and many more essential building and equipment projects.  To register, go to https://attendee.gotowebinar.com/register/5896776926929735696