Financial Management
By Tom McLaughlin

Q&A with Tom McLaughlin from the live broadcast aired on 2/14/01 by the Learning Institute for Nonprofit Organizations collaboration*.

Other Q & A Topics:

Q1. What should be the proper response to a management letter. Should management disclose all issues with the board of directors or is it an "internal" issue? 
-Cindy, Philadelphia, PA 

A1. By the time an issue shows up in a management letter it's probably well known internally, if for no other reason than that the auditors will likely have raised it in the course of their work (it's also professional courtesy not to 'blindside' management in front of its own board). Also, the auditors typically give management a chance to respond to the finding in writing before the letter is issued. 

Truthfully, most management letter issues are highly technical and not all that appropriate for a board of directors to handle anyway. Boards usually want to know that the matter is being handled and have neither the interest nor the skill to take it up in detail. 

By the way -- one classic use of the management letter is for the auditors to include a recommendation that management would like to see implemented but which management feels would have more credibility if it came from the auditors. 

Q2. Please define "deferred revenue". 
-Avan, Philadelphia, PA 

A2. This is revenue that has been received but not yet earned. So a $25,000 grant received today to support next year's capital campaign feasibility study will show up as a liability of $25,000 in deferred revenue offsetting the $25,000 in cash on the asset side. 

Q3. Should there be information about unit costs of programs in an audit? Can you learn anything about an organization's effectiveness from its audited financial statements? 
-Anonymous, Jackson, MS

A3. It's highly unlikely that you will see info about units or effectiveness in audited financial statements. Unfortunately there is no widespread agreement about what constitutes effectiveness (or even about what unit cost might mean). In any event, that's not why you get an audited statement. Include data about effectiveness in your annual report or your agency promotional material. 

Q4. If you are a community based nonprofit organization that provide scholarships and grants, what is the standard number of days for collecting pledges/receivables? Also what is the standard for days cash? Does 6 months seem reasonable? 
- Sylvester, Pittsburgh, PA

A4. The most meaningful standard is your own historical performance. I am aware of no universal standard of collection for pledges or receivables, although I am sure that there are fund raising rules of thumb. Check the John Wiley web site for more resources of the topic. Jim Greenfield has written "Fund-Raising Cost Effectiveness: A Self-Assessment Workbook", among other 
things in this area. 

To a non-fundraising specialist like me six months days cash for a 
scholarship organization sounds like it might be reasonable -- at least at your peak times of the year -- but again the more meaningful standard would be your own track record. 
 
Q5. Is is typical to ask the auditor to supply a comparison with benchmarks? 
- Anonymous, Pittsburgh, PA 

A5. It's typical only in the sense that a highly qualified audit firm 
specializing in nonprofits might have access to a set of benchmarks, but comparative analysis is not part of a standard audit. If you auditor can do this kind of work it would be a separate project, most likely priced separately. 

Q6.  I'm not an accountant by training, and neither are any of my staff members. How can I ensure that the books and records are being kept accurately?

This is a good role for board members and outside advisors in a small agency. Don't worry-your job is not to keep the records but to see to it that they are being kept properly. Your most important job is to become an educated consumer of financial information. That means learning how to ask good questions and being able to evaluate the answers.

Q7. I came to my job up through the ranks. I never had any formal management training, so I've learned on the job. A lot of management stuff seems foreign to me, and more appropriate to an MBA. What can I do?

You've made a good start by attending these sessions. Keep coming to them. Also, subscribe to general not-for-profit management journals such as Nonprofit World. Third, look for more in-depth management ideas in the materials in the bibliography and at the LINO website. Fourth, see if your local college or university has a program for nonprofit management. Over 250 do, and some can be done by correspondence. Look on the Internet for such programs. Keep training yourself and your staff in good management. Q8. My Board is not as interested in financial management as much as mission. Thus, they don't want to invest in training or education. What can I do? Talk to them about the need to get the most mission for the money, and how that takes money to train and invest in staff. Get more board members who are business people and who understand the need for such an investment. Get board materials from such sources at the National Center for Nonprofit Boards, which exhort boards to invest in their staff expertise. Q9.  I don't think my community is ready for our not-for-profits to make profit a goal. What can I tell them?

Tell them that only if you make a profit can you expand, try new things and improve services. Tell them that profits are both legal and ethical for not-for-profits and that, as long as you reinvest the profits back into more mission, everyone in the community will benefit.

Q10. How long will it take me to get my financial house in order?

That, of course, depends on the shape you are in, the time and money you can commit, and your level of expertise. But management is not something you just fix; it is, like all other parts of the organization, something you are constantly improving. Continuous management improvement is the key.

Q11. How do you distinguish between an endowment fund and a cash reserve? An endowment fund is one that is set aside for the long term, and is used to generate interest or dividend income for use by the organization. A cash reserve is just that: cash held in reserve for short term needs-such as when your main funder's check doesn't show up.

*Responses were transcribed by Prof. Andrew Lewis from the live broadcasts produced by the Learning Institute for Nonprofit Organizations collaboration.

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