Mark Koscinski NFP

NFP Budgeting Tips

As the month of June comes to a close, many NFP organizations will have to close their books and begin their next fiscal year. This may also begin the dreaded budgeting process.  Many budgets are of dubious worth, often out of date before they are published.  In an effort to help NFP financial management,  I thought it would be worthwhile to discuss some often overlooked aspects of the budgeting process.  The inspiration for this blog comes from Gary Cokins, a prolific author and expert on the subject of managerial accounting.  He has some wonderful insights into the world of budgeting. 

Cokins states there are two general parts of the budget.  The first is demand driven.  This portion of the budget will take into account the expected activities of the organization for the year.  For instance, if the NFP has received a grant to perform certain services it must budget for those activities.  It will take into account the grant funding and any costs associated with it. The second part of the budget is the expenditure portion of the budget.  By expenditure portion we mean those expenditures driven by the mission, vision, and strategic plan of the NFP.  While these concepts are outside the scope of this article, any decent management book will cover these topics in sufficient detail. 

Cokins divides these expenditures into four types:

  • Capex–Capital expenditures needed to achieve the plan for the year and the strategic plan over a number of years;
  • Riskex–Expenditures needed to measure and control risk. Again, any management textbook will tell you that risk and reward can be two sides of the same coin;
  • Opex–those expenditures needed to actualize the operating budget for the year: and 
  • Stratex–Expenditures required to advance the strategic plan. 

Cokins believes by taking into account the demand driven requirements of  operations and the various types of expenditures required by the operating budget and the strategic plan, an organization can put together an insightful  budget that will also tie into the strategic plan. 

Some other words of advice on doing your budget:

  • Don’t just budget to continue operating your organization as you have in the past.  Remember, standardization can often reduce costs.  It has been my observation that organizations treating each individual transaction or activity on an ad hoc basis will be inefficient and will often make mistakes; 
  • Remember the power of technology.  Where can you leverage your operations and make them more efficient by automating your process flow? 
  • Try to use the principles of activity based costing.  Funding sources often do not like to fund “overhead”. To the extent you can trace costs you can turn them into direct costs and more palatable to the donors and funding organizations.  

So, with these tips  in mind, I wish you good luck on your budget preparation for the year.  If you have any questions, please feel free to contact me!

Mark Koscinski NFP

The Strategery

Many NFP organizations do not understand how to construct a strategic plan, or even know why one is needed. In this little article, I  discuss how to start your strategic plan.  First let’s start with why a strategic plan is necessary.  Without one, the organization could be likened to the Biblical Israelites wandering in the desert for forty years.  I have seen NFP organizations lurch from one activity to another, often without any guiding principle.  The strategic plan will often eliminate that problem by focusing the actions of the organization.  It guides the management in its daily decision making.  One famous management consultant used the phrase “sticking to your knitting” as the focus an organization needs to have to succeed, preventing it from losing its way and undertaking activities that are not core to its mission. 

The strategic plan is a communication tool as well.  It aids in fundraising and procuring bank loans.  Donors have a vast array of potential organizations they can contribute to. Your strategic plan tells them why they should give their scarce resources to your organization at the expense of all others. The strategic plan also has signal value, showing management is capable and will not fritter away funds secured from  lenders and patrons.  Finally, the strategic plan can also aid in budgeting.  

 Okay, so you understand why you need a strategic plan. Now it is time to build the plan. Unfortunately, many organizations do not even know where to start. They fear that this could be a massive undertaking. It is precisely this fear that prevents many organizations from building a strategic plan.  My suggestion would be to start with some core elements of the plan and then successively build on that model.  Let me try to demystify the process a little, by starting at the top.   You need to define the mission and vision of your NFP.  In broad terms, The mission of the organization is what you are doing now.  The vision of the organization is where you want your organization to be and what you want it to do. The mission and vision statements should be short, no more than a few sentences as most. They will become the mantra of the organization.  All the metrics you set up to measure the plan performance will flow from them. 

Sadly, the next step is sometimes not taken in the strategic planning process.  That is, how do I get from here to there?  What steps do I need to take to undertake that journey? Many NFPs will just spin their wheels in attempting to cross that gulf. The strategy map is your plan of how you will  do that. It is the general plan of action.  The strategy map was the brainchild of Robert S. Kaplan and David P. Norton, and came out of their work on the balanced scorecard. I have written about balanced scorecards already and can be found in another section of this website.The strategy map  is a visual representation of a company’s strategy, laying out the key objectives and how they connect to each other. It  usually includes  four key perspectives:

  1. Financial Perspective: This perspective focuses on the financial outcomes the organization wants to achieve through its strategy.  The annual budget will need to tie into the strategic plan.  That being said, management must be careful not to overemphasize the financial perspective, since by definition it is working in a not-for-profit environment. Objectives related to financial sustainability include funding operational expansion  and required human capital growth. 
  2. Constituent Perspective: This perspective identifies how the company will create value for its constituents and do it well. Objectives might relate to customer satisfaction and service  innovation.
  3. Internal Processes Perspective: This perspective shows the internal processes the company needs to excel at to deliver its value proposition to its constituents. Some common objectives would be  operational efficiency or process improvement.
  4. People/Learning & Growth Perspective: This perspective focuses on the human capital and knowledge required for successful strategy execution. Objectives might include employee and volunteer training, talent development, management succession or fostering a culture of innovation.

The strategy map is a tool ensuring everyone understands how their role contributes to the overall strategy. They can see how their actions contribute to the success of the program.   Above all, It’s a dynamic document that can be revisited and revised as the business environment or the company’s strategy changes.

Oh BTW. For those of you who don’t know where the term strategery comes from….

Mark Koscinski Uncategorized

Back Again!

Hello Everyone!  I have been absent from here since the beginning of the Spring semester.  My only excuse is that my workload has been extraordinarily heavy recently.   During the past semester, I was promoted to associate professor and have picked up some additional responsibilities at the Moravian School of Business and Economics (SOBE).  Before I go on, I want to thank the members of the Board of Trustees, the Administration, our Dean, and my colleagues for their support throughout this process.   I couldn’t have done this without them.

So what else have I been doing in my spare time?  I have been tasked with leading the ACBSP reaffirmation efforts for SOBE and have been actively working on the Moravian answer to the 150 credit hour issue for CPA licensure. Much more about that subject in later posts. I continue to work on my second doctorate. We also completed a successful search for a new accounting professor at SOBE.  I completed one course already this Spring (my second overall), and am signed up for a  summer course.  I am considering taking another  course this summer and  have a working dissertation subject. My target completion date is two years from today. Perhaps that is overly optimistic, but as my favorite singer belts out, “if we’re all going someplace lets get there soon!”  I have also been attending the Catholics on Campus meetings whenever I can.  As I was discussing all of this with one of my colleagues he said to me, “Stop whining and get on with it!” Never was more sagely advice offered and accepted. 

As times change, we do leave things behind.  For the past few years, I have been the faculty advisor to Sigma Phi Epsilon, one of the fraternities on campus. Given my change in circumstances, I have reluctantly asked to be relieved of this duty.  I also dropped my membership in the Disciplinary Review Committee at the College. Effectively, I am trading working with students for some more administrative roles.  This is sad, since I enjoy working with young adults. Nevertheless, the wheels of progress continue to roll. 

Despite changing circumstances, some things do stay the same.  I will remain as faculty advisor to  Stitches, the craft club of Moravian.  It is hard to describe what this hardworking group of women have accomplished. Two of the recently graduated seniors have been accepted into doctoral programs.  Another is starting a master’s degree program.  Pound for pound, this group had the most academically gifted club membership at the College.  More importantly, they demonstrated great concern for the less fortunate.  Through their hard work, Stitches raised $700 for the local women’s shelter by selling crocheted Valentine’s Day and Christmas ornaments  This was no mean feat considering they were selling their wares to other students at less than market prices. Stitches members  also crocheted a dozen sets of scarves and hats that were donated to the same shelter.  It was a most satisfying semester for everyone involved.

Mark Koscinski NFP

NFP New Year’s Resolutions

As the New Year has passed, it is time to get back to business.  Before we get lost in the day to day activity cluttering our calendars, we need to think about how we are going to do things differently this year. This takes time: time to think about what we would like to change and time to actually implement what we want to change. However, if we never take the opportunity  to plan and improve our current situation we are doomed to live a Ground Hog Day existence, repeating the same day (and probably the same mistakes)  over and over again. 

  Perhaps our New Year’s resolution will be to undertake at least one of those projects this year we have been putting off.  Need help thinking about this?   Here are five potential resolutions for NFP managers:

  1. Take the time to do formal planning.  No matter how large or small your organization is, this is a good time to formalize your planning process. Any organization can profit from organized, systematic planning. Look at the vision and the mission of your organization.  Think in terms of strategy maps ( example here) to put your plans into action. Budget in greater detail to get a deeper understanding of where the money leaks out. 
  2. Enhance your human capital.  Perhaps this is the year you start that graduate degree you have been thinking about. Larger organizations may offer tuition reimbursement, a cost effective way to compensate employees.  Even if your organization is too small to offer this benefit, look at using the various tuition tax credits that might be available to you.  Look around for colleges and universities  that offer discounts to employees of tax-exempt organizations.  Remember, an investment in your education will benefit not only you, but the organization you work with. 
  3. Be open to new points of view.  Effective leaders are willing to listen, to learn to get different points of view, even if they disagree with their own. As John Maynard Keynes is alleged to have said, “ When the facts change, I change my mind. What do you do?”
  4. Update the organization’s Social Media presence.  Perhaps it is time to refresh that website or even more importantly, look at new social media applications. What worked last year, or even yesterday for that matter may not work today.  Are you trying to reach a younger audience?  Maybe it is time to use Instagram or, perish forfend, TikTok.  Do you want to engender a lively discussion?  Perhaps Discord is the way to go.  You get the idea. 
  5. Look at new technology.  You don’t have to be on the bleeding edge of technology to benefit from the use of technology. Used correctly, it is a labor multiplier, not a labor divider.  What processes in your office can be automated?  Maybe something as simple as learning Quickbooks can cut down on your accounting fees. Investigate AI.  I have learned that even the free version of ChatGPT can provide insights to operational issues and extensive information we can use to run our organization. 

Good luck everyone, and once again, Happy New Year!

Mark Koscinski Uncategorized

Legally Right But Morally Wrong

Many years ago, I recommended a tax planning strategy  for the bank I was working for. I thought it was a very slick plan and it truly was when it came to avoiding ( as opposed to evading) taxes. Tax avoidance is legal. Tax evasion is a crime.   Unfortunately, the strategy  looked very, very wrong when it hit the newspapers. Without going into details I didn’t personally profit from this action but the bank did. Despite this, and with hindsight, it just wasn’t the right thing to do.  As one of the directors of the bank said to me, “Mark, it was legally right but morally wrong”. There are many examples of this principle. Think about slavery.  For centuries it was legal in the United States but certainly ethically repugnant. 

 I learned a very important lesson that day.  Thinking about how people will perceive an action has to be included in the consideration of the action. The same director was later the Vice-chair of the Board of Trustees of the University of Pennsylvania.  She was one of the first (if not the first) female graduates of the Penn Law School. For those not following the latest news, the President of Penn resigned and is going back to teach at this same law school. Liz Magilll  was forced from her job when she, after  repeated questioning would not say  if calls on campus for the genocide of Jews would violate the university’s  conduct policy. Relying on what sounded like a legalistic defense, MacGill insisted this was a matter of “context”.  Those of us that work in academia understand academic freedom and how important it and context is.  I have wondered what my old director (who sadly passed away before her time) would say about this situation.  I can almost hear her say, “ Penn was legally right, but morally wrong.”  Perhaps the presidents of other colleges should evaluate their positions under this same standard. 

A similar situation has come up in the Vatican.  Pope Francis recently met with the staff of the office of Vatican Auditor General. He asked that disclosure of financial impropriety be balanced by “merciful discretion”.  Anyone that knows anything about auditing understands  auditors have a fiduciary duty to their client, in this case the Pope.  Francis was absolutely correct in asking for  confidentiality.  On the other hand, Francis was supposed to “clean up” Vatican corruption during his pontificate. One must ask in the wake of the trial of Cardinal Becciu for financial malfeasance writ large on a massive scandal (one financial deal on its own was said to lose $150 million dollars) whether this is the morally right thing to do. Aren’t donors entitled to see how their gifts have been squandered? 

 I have always been deeply distrustful of the excuse of letting something illicit  pass “for the good of the organization”.  This is often only code for “someone needs to be protected.”  In the case of the Vatican, too much water has gone under the bridge, and it is time to realize “merciful discretion” is interpreted by many as continuing to cover up corruption. Sunshine is the best disinfectant for the  disease of corruption. It is odd to say, but even the Pope can be legally right and yet morally wrong. 

The Ethics Resource Council advocates the use of the PLUS model of ethical decision-making.  PLUS stands for:

Policies–does an action conform to  the organization’s policies and procedures?

Legal–Is the proposed action legal?

Universal–Does the proposed action conform to the organization’s values and universal principles?

Self–does this action comply with my own view of right or wrong? 

I have proposed a variation of this model I have called PLUMS.  In the modern world, one has to consider how other people will view a proposed action.  How will it be perceived by others when it hits the media?  It is often a good idea to just step back and think about how your action will look when it hits X, Youtube, or Facebook.  Maybe this pause for reflection  can prevent you from doing something that is legally right, but yet morally wrong. 

Cardinal Becciu in better days…

Mark Koscinski NFP

Shoutouts

The coming end of  2023  and the beginning of 2024 means it is time for shoutouts to some extraordinary people and organizations I have had the pleasure of working with this year. Higher Education and students have been taking a lot of hits lately.  Despite all of the negative press there has been a lot of good going on at campuses around the country.  Let’s look at just a few examples of that on the Moravian University campus: 

Dr. Sonia Aziz–a wonderful scholar and academic, whose work in health economics has helped reduce the sum total of misery in the world.  She was recently named Dean of the Moravian University School of Business and Economics, a well deserved appointment.  For more information about her work, click here.

The Moravian University Craft Club, Stitches– The members of this club crocheted and sold Christmas ornaments and collected donations for  the Bethlehem Emergency Shelter this holiday season. It was a great experience for me as their faculty advisor to watch their camaraderie develop from week to week as they worked toward their worthwhile goal. 

The Moravain University Catholics on Campus–Another remarkable group of students, who spent time every week learning and practicing their faith. It takes courage to say you are religious if you live on a college campus these days. These students are proud of their faith and aren’t afraid of saying so. 

Moravian University Chess Club–Members practiced the Game of Kings, not over the internet, but in person.  It was great to sit over the chessboard and once again hit the time clock….

And of course, let’s not forget all of the Moravian students and groups that participated in the annual Christmas Vespers. To listen to this truly majestic service, please click here.

And what about in the broader world? 

Bethlehem Emergency Sheltering– In Luke 3:11 we hear, “John answered, ‘Anyone who has two shirts should share with the one who has none, and anyone who has food should do the same.’” Need I say more?

All the volunteer workers, employees of not for profit organizations, and clergy tirelessly working for a better world–Although we are all sure you could work for a higher wage somewhere else, please do take the time to remember Matthew 5:12, “ Rejoice and be glad for your reward is great in heaven…”

Wishing you all a wonderful Christmas and a Happy New Year. 

Mark Koscinski behavioral economics, decision analysis

Stocking Stuffers

With  Christmas being upon us, we often scramble to find some small, last minute gifts that can be used as stocking stuffers.  This year, try something different. Why not give someone something old fashioned, like a book?  I mean an actual book in print and not a digital version of the book. Something they can hold in their hands.  I know, a quaint idea…. A book is a perfect stocking stuffer. 

So, If you are actively involved in management of any kind of organization, whether it is for profit, not for profit, or governmental, here is my reading list and ideas for last minute stocking stuffers.  They are listed in alphabetical order and not in suggested priority.  

The Beekeeper: Pollinating Your Organization for Transformative Growth by Katie Desiderio and  Michael Frino.  This is a wonderful and easy to read book describing how successful managers should run their organizations and treat their employees and colleagues.  The book is narrated by Catherine, the young founder of a business. A magical vacation experience transforms the way she leads her organization. Any manager will find this to be a thought provoking book.

Move: How Decisive Leaders Execute Strategy Despite Obstacles, Setbacks, and Stalls by Patty Azzarello. Discerning the proper strategy for an organization can be hard enough. Executing that strategy can be a whole different story.  Patty Azzarello, a successful consultant and business executive presents her ideas on how to get your organization moving forward. To be sure, this is not a book written for academics. Rather, It is written for the manager in the trenches who is trying to  execute strategy. This book  is a practical guide on implementing the organization’s mission and vision.

Noise: A Flaw in Human Judgement by Daniel Kahneman, Oliver Sibony, and Cass Sunstein. The authors of this book don’t need any introduction.  They are the Dream Team of Management Theorists.  Noise can be thought of as a sequel to Thinking Fast and Slow, Kahneman’s previous book on decision making.  Kahneman et. al. distinguish  between bias and noise. Bias receives all the attention, but noise can cause just as much variability in decision making. This is a well-written book that explains some difficult concepts in an understandable and accessible way. 

The Voltage Effect: How to Make Good Ideas Great and Great Ideas Scale by John List. Scalability has become a buzzword in the management community.  The author, a renowned academic and chief economist at Lyft and Uber, takes us on a tour of how to ramp up a small operation and make it larger.  List describes both the successful strategies for scaling and the pitfalls in trying to scale your organization.  It is a delightful book with many great ideas. 

All work and no play is not good for anyone.  So, if you are looking for pure pleasure reading on an offbeat topic,  I would suggest American Cosmic and Encounters, both written by Diana Walsh Pasulka.  These books discuss the UAP phenomena  from a fresh and interesting perspective. 

So everyone, good luck on beating the crowds in the shopping malls.  From someone who has always hated that, these books all have one advantage: you can order them from Amazon!

Have a great holiday season. 

Mark Koscinski Uncategorized

Giving

Even though Giving Tuesday has come and gone, we continue through the holiday season. Please remember to give generously to your favorite Not For Profit Organization. I am proud to say that Stitches, the crafts club of Moravian University crocheted hats and scarves for the local emergency shelter. They also raised $500 for the same organization by selling hand made Christmas ornaments and gathering donations. Stitches has a small membership, but they all have big hearts. Congratulations to the members, as they try to change the world by helping people as much as they can when they can

2nd stitches fundraiser-4Download
Mark Koscinski NFP

Being Tone Deaf, Part 2

Last week I began reviewing the Annual Report of the Diocese of Metuchen, NJ (the “Diocese”). In that entry, I concentrated on the seemingly devastating loss in its investment portfolio. Just as a reminder  I want to emphasize the phrase “seemingly devastating” since there is not enough information in the Annual Report to make that determination. I also want to reiterate that I am in no way being critical of the management of the Diocese except for how it didn’t address the unrealized losses in the mailing.  I am “picking” on the Diocese  to make some points.  If anything, its marketing arm is tone deaf to how some of its materials might be received by potential donors. 

 This week I want to focus on some of the other concerrs I have with the Annual Report: 

  •  The Annual Report was issued almost a year after the period end.  I received it in May 2023, eleven months after the period being reported on ended. By itself, this gives you some pause.  By comparison, public companies issue their financial statements within 90 days of year end.  Obviously,  a Catholic diocese isn’t a public company and doesn’t have the resources or the legal requirement to issue such a report that quickly.  However, taking so long to issue a financial report  is  often taken as a sign of weak financial management.  This is particularly important when you are sharing bad news such as the unrealized investment losses the Diocese incurred. 
  • There is no indication of an outside accountant’s review or audit of the financial data. The financial statements seem to be in good form so there is obviously  a capable financial team in place. Nevertheless, there are some very complex accounting issues involved.  For instance, the Diocese self-insures and has an Incurred But Not Reported (IBNR) liability of $22.5 million.  Similarly, the clergy retirement and post retirement obligations amounted to $24.5 million. I don’t know about other potential donors, but I  would feel much better if  an outside reviewer could provide me with some comfort about  these balances.  How would a donor know the correct actuarial assumptions were included in the computation of the liabilities and the accounting principles are correct? 
  • Donating should be made easy.  The Annual Report doesn’t say where to send donations and what they will be used for. Perhaps a QR code or a Paypal address would be helpful. Why make potential donors search for where to send their hard-earned money?

With all of that being said, I truly applaud the Diocese for hitting the “Abuse” issue head on.  It did a great job of outlining its programs to control and eliminate such a terrible plague. The importance of this can’t be underestimated as the now disgraced former Cardinal Theodore McCarrick was once the Bishop of the Diocese.  Finally, I wish the Diocese well in its activities for the upcoming year.  It has been a tremendous force for good in Central New Jersey.  With the help of its donors and parishioners, it will be for many years to come.

The lesson to be learned for any NFP organization is to stop and  ask what the perception of its stakeholders is.  Management needs to scrutinize its communication strategy to see if the proper message is being conveyed. Alternatively, can the message be misconstrued by the public?  Sometimes management is too close to the issue to see how this information is being  received.  

Mark Koscinski NFP

Being Tone Deaf

Sometimes, we don’t really appreciate what some of our marketing material can do to our fundraising.  The NFP world relies on fundraising as its lifeblood but we sometimes don’t pay enough attention to how the world sees us. Let’s look at a case in point:  The 2022 Annual Report of the Catholic Diocese of Metuchen. This is the first of a two part blog on things that I quickly picked out from its  annual report. For those of you not familiar with this organization, the Diocese of Metuchen (the “Diocese”)  is a very large Central Jersey Catholic diocese responsible for 90 parishes, 26 schools and a hospital, among other things. The Diocese does an amazing job in  four NJ counties.  It has a strong financial condition, with net assets of about $125 million and a strong positive cash flow.  Nothing in this article should be construed to be a criticism of how the Diocese operated. The Annual report itself is  a very fine piece  of marketing material, but was tone-deaf to fundraising concerns. There are several reasons for this, but for this week  let’s start with the 800 pound gorilla in the room. 

The Diocese reported unrealized investment losses of $51.2 million during the year, resulting in a decrease in net assets of $36 million dollars for the same period.  To put this in perspective, the decrease  was approximately 18.1% of  ending total assets and 25% of the ending total investment portfolio. At the same time, the Diocese reported positive net cash flow.  In short, a very creditable performance in managing operating cash flows in a tough economic environment was swamped by what appears to be a cataclysmic decrease in the investment portfolio. 

How could this be?  Unfortunately, the Annual Report does not disclose the reasons why, nor does it disclose the composition of the investment portfolio.  So, let’s make the assumption (and it is only an assumption!) the investment portfolio had a heavy element of fixed income securities. What happened to interest rates over the year? The Fed discount rate (the marginal cost of borrowing for a bank and therefore the rate that drives other other interest rates) was .25% at the beginning of the fiscal year (June 30, 2021) and 1.75% at the end of the period. The prime rate also increased from 3.25% to 4. 75% over the same period. Interest rates were rising as the Federal Reserve was trying to deal with inflation.  As interest rates rise the value of fixed income securities fall. Such a large increase in interest rates is presumably the reason why at least part of the investment portfolio took such a beating.  The stock portfolio also could have taken a beating in the same time period.  For instance, the Dow Jones Industrial Average was 34,292 on June 30, 2021 and 30,824 on June 30, 2022 a decline of about 10%. Again, there simply isn’t enough information provided to see how the various components performed. 

Why is this disclosure important?  If the investment portfolio is heavily concentrated in fixed income securities there will be no loss if the securities are held to maturity.  The loss will turn into unrealized gain in subsequent periods. As the investments securities near maturity the market value of those securities will begin to approach the maturity (par) value of the securities.  On the other hand, there is no assurance that a stock portfolio will ever recover its value.  It seems to be that any donor would be vitally interested in knowing this information.  Financially responsible management of a fixed income investment portfolio will lead to zero unrealized gain or loss over time.  However, if the loss was due to a stock portfolio, would you want to donate to an organization that  could blithely lose such vast amounts of money?  And heaven forbid such a loss could be due to speculative derivative securities…. Based on what I have seen, I find it highly improbable that the investment portfolio includes such problems.  I am only using this Annual Report to make a point. 

I will readily acknowledge what happened may not be completely the responsibility of the Diocese.  For the life of me I can’t figure out why the Financial Accounting Standards Board (FASB) would require fair market value accounting if the NFP organization could demonstrate it has the ability to hold the securities to maturity.  Clearly the Diocese does.  Even more unfortunate is the fact that a business entity incurring such unrealized losses might be able to mitigate the losses by recording deferred taxes, thereby reducing the impact to the “bottom line”.  Since the Diocese is a NFP organization there is no tax effect for such losses.  Nevertheless, the Diocese needs to do a better job of explaining what happened. 

In the next installment, I’ll examine some of the other issues contained in the Diocese’s Annual Report. Stay tuned.