NFPAdvisor Vol 11 2

NFP Advisor Vol. 11 Spring 2015 Cerini & Associates, Certified Public Accountants, bringing a unique understanding of ...

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NFP Advisor

Vol. 11 Spring 2015

Cerini & Associates, Certified Public Accountants, bringing a unique understanding of key issues facing not-for-profit organizations.

Copyright © 2015 by Cerini & Associates, LLP All rights reserved. Please request permission to reprint or copy any part of The NFP Advisor.

A Word from the Editor, Ken Cerini Welcome to the Spring/Summer 2015 edition of the NFP Advisor, the newsletter geared to help nonprofit organizations operate more effectively. If you play in the nonprofit space, you know that things are heating up. We are seeing an uptick in merger talks as organizations try to make up for government cutbacks and the movement towards managed care. In addition, it seems like regulatory audits are on the rise, with special education and OPWDD waiver funded agencies assured of being audited over the next few years, and increased OSC, OMIG, OASAS, and other audits being issued at a rapid pace. With Executive Order 38, and the inability for organizations to spend on infrastructure, it is making it much more difficult for organizations to maintain appropriate control environments. This makes it very hard for small community based organizations, the life-blood of the LI nonprofit sector, to make ends meet.

3340 Veterans Memorial Hwy Bohemia, N.Y. 11716 631-582-1600 www.ceriniandassociates.com

In this issue of the NFP Advisor, there are articles on: •

Strategic Planning – Organizations need to get out of crisis management and be forward thinking if they are going to flourish in the sector



Survey Benchmarking – We look at what you can learn from the most recent nonprofit survey



Succession Planning – With the greying of nonprofit leadership, is your organization prepared for the next generation of leadership



Surviving a Regulatory Audit – It’s no longer an issue of if you will be audited it’s a matter of when, are you prepared

We are here as a resource, if you have questions about something you’ve read, or anything that is impacting your agency, please feel free to call us, we want to help. Also, our nonprofit seminar will be on June 30, 2015 from 8 am to 1 pm at the Upsky Long Island Hotel on Vanderbilt Motor Parkway in Hauppauge. The seminar will include accounting and legal updates, a discussion on regulatory audits, a discussion on nonprofit mergers, and more. We look forward to seeing you there. To register, e-mail Lula Lukasiewicz at [email protected]. Sincerely,

Contributors Editor Ken Cerini, CPA, CFP, DABFA

Cerini & Associates, LLP Managing Partner

Associate Editors Lisa Epstein, CPA

Cerini & Associates, LLP Director of Audit

Lula Lukasiewicz

Cerini & Associates, LLP Marketing Coordinator 2   Cerini & Associates, LLP - NFP Advisor

Jeff Scott, CPA

Writers

Cerini & Associates, LLP Staff III Accoountant

Lisa Epstein, CPA

Cerini & Associates, LLP Director of Audit

Page Layout & Design Michael Feeney

Cerini & Associates, LLP Marketing Assistant/Graphic Artist

Tania Quigley

Cerini & Associates, LLP Supervisor

Elizabeth Crowe

Cerini & Associates, LLP Tax Staff

Strategic Planning

Where do you want your organization to be in three to five years from now? That question can be answered with a strategic plan. A strategic plan is a document outlining the objectives that an organization wants to achieve during the next few years and describes the process for how the organization plans to allocate its resources in order to achieve those objectives. Whether the objectives are driven towards increasing financial stability, improving programmatic operations or a combination of both, a strategic plan can be the map to guide the organization to those objectives. The organization’s Board of Directors and management work together to draft a strategic plan that is then formally adopted by the Board of Directors. What should be considered when drafting a strategic plan? During the brainstorming process, this should include identifying the current and future needs of the organization (i.e. has there been an increase in the demand for service? Is there a need to expand or introduce new programs? Is there a future project that the organization needs to take on and how should it reach out to its donor base for restricted funding, should the organization consider a merger/acquisition strategy, etc…). Also, during this process, consider if the organization attempted to attain these needs in the past and if so, consider the events that occurred and whether or not those events were beneficial to the organization. Then, based on the matters discussed, set realistic objectives. Some examples of those objectives would include: adjusting resources to accommodate

changes or expected changes to demand in service of the organization’s programs, introduce new or expand current programs, tap into new funding streams (increase discretionary funding), and establish or increase the growth of a reserve or endowment fund. Establishing an endowment or reserve fund can be extremely beneficial to an organization during times of limited cash flow. Now that the organization’s objectives are set, the next step is to determine the steps that need to be taken in order to accomplish the objectives. As mentioned above, the strategies need to be realistic for the organization to carry out. Does the organization have the resources to attain the objectives? Once the strategic plan is approved by the organization’s Board of Directors, it’s the responsibility of both the Board of Directors and management to ensure the organization is on track to meeting the objectives. This should be discussed at the Board of Director meetings a few times during the year or at least on an annual basis. Evaluating the actions that the organization has taken and just how on target the organization is to reaching the objectives will help to determine the likeliness of attaining the objectives and whether or not the strategic plan should be modified to ensure the objectives can be met. Having a strategic plan is beneficial to an organization. It indicates that management and the Board of Directors are proactive in looking into the future success of the organization. Cerini & Associates, LLP - NFP Advisor 

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Surviving a Regulatory Audit One thing is pretty much for certain, that is if you receive government funding, at some time you will be audited. It is no longer a matter of if, it is now a matter of when. If you are funded by the NY State Education Department, you know the OSC (the Office of the State Comptroller) will arrive sometime before the end of 2018. If you receive OPWDD waiver funding, your time frame is shorter; probably sometime over the next 12 months or so. OASAS, OMH, the Office of the Medicaid Inspector General, the OAG, and the Department of Health are all active on the audit front, as are many local county funders. With everyone looking over your shoulder, how do you get prepared for when that letter actually comes? At this point, audits are not new. When you get selected, you should not be blazing new ground. Most of the regulators have given you a roadmap to help prepare you. The key is to know where to look. Visit your funder’s websites. Most of them have audit protocols, questionnaires, checklists, and other tools that you can utilize to test your audit preparedness. Go through them and do a self-audit. You should also download copies of audit reports issued on agencies similar to yours and gain an understanding of the nature of the findings. If you had been the one audited, would the findings have 4   Cerini & Associates, LLP - NFP Advisor

been similar or would you have fared better or worse? There are multiple approaches that auditors will take in looking at your operations and trying to recoup funds. The key will hinge on how you are funded. If you receive deficit funded payments (cost-based reimbursement), the focus of the audit will be on the costs you charged to the grant/funding stream, are these costs permissible, were they done in accordance with your funding stream’s regulations, were the allocation methodologies appropriate and supportable by generally accepted accounting principles, and do you have appropriate substantiation to support your expense claims. If, on the other hand, you are funded on a fee for service basis, the audit approach will be more of a compliance based approach, focused on specific rules and regulations and required documentation that needs to be performed in order for your claim to be valid. Things like signatures, reviews, log notes, dates of service, etc. are all going to be properly documented. In either event, one thing is certain, if your information is not properly documented, the costs or services will be disallowed. I have heard more than one auditor mutter, “if it isn’t documented it didn’t occur.” Utilize your internal audit department or your quality control folks to do a mock audit and check that all documentation is appropriate. When a governmental agency comes in to perform an audit, they will request a lot of information, and provide you with a short period of time to gather it. Your ability to appropriately pull the necessary information will be directly linked to the strength of your systems and controls. If you have strong systems, all your files will be easy to find, they will be consistent, you will have information in the format requested by the auditors, and policies in place … such as allowable cost policies, allocation methodologies, bids and quotes policies, etc. If on the other hand, your systems are weaker, it will be harder to find information, your data will not be consistent, you won’t have support for your activities, and this could result in take-backs by the auditors. In order to prepare yourself for an audit, you should consider the following:



1) Stalk the OSC, OMIG, and your funders’ websites for reports issued. Review these reports to get a feel for what they are looking at and see if your agency would have a similar problem. 2) Download audit protocols and use it as a checklist to get your house in order. 3) Put together a formal accounting policy and procedural manual which includes among other things, an allocation policy, an allowable cost policy, purchasing policies, conflict of interest policies, and more. 4) Ensure that you have proper documentation to support your operations. Things like sign-in sheets, time studies, salary agreements, contractor agreements, and other support should all be in place. 5) Familiarize yourself with your funding stream’s regulations … whether it’s the claiming manual, cost reporting regulations, grant agreement, etc. Ensure that you are in compliance with these regulations. 6) If you have multiple programs or operations, make sure that your allocation methodologies are in accordance with regulatory guidelines, are supportable, are appropriate, and are documented. 7) Ensure all related party transactions are properly documented and considered for reimbursement. 8) Make sure you include your fiscal, compliance, and program staff in the process of preparing for an audit. If you take the proper steps up front to prepare yourself for when the audit comes, put proper controls in place, learn from others that have paved the way by being audited already, you won’t necessarily have a clean audit, but you will greatly reduce the impact of givebacks when the audit starts. Cerini & Associates, LLP - NFP Advisor 

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SUCCESSION PLANNING in the NONPROFIT WORLD Many nonprofit organizations find themselves in crisis mode when their Executive Director or a board member leaves unexpectedly. That is where proper succession planning can be a lifesaver. Succession planning is critical to maintaining continuity of leadership in nonprofit organizations. Nonprofit organizations need to have a plan in place for transitions, whether they occur due to an unexpected vacancy of a staff or board position or the anticipated departure of a long-tenured leader. Succession is a topic that should be discussed even if no one is anticipating a change in leadership. Organizations rely heavily on their staff to fulfill their mission, provide services, and meet their goals. They need to think about what would happen to those services and the ability for the organization to fulfill its mission if a key staff member leaves. Who is responsible for planning for these transitions? Both the board of directors and the Executive Director play key roles in succession planning. The board is responsible for planning for the succession of the Executive Director position while the Executive Director ensures a succession plan is in place for other key positions within the organization. Whenever possible, a succession plan should involve developing employees from within the organization. This will ensure that there are qualified and motivated employees who are able to take over should the need arise. This may not always be possible for smaller nonprofits. Similarly, it may not be possible to groom a successor from within the organization for the Executive Director 6   Cerini & Associates, LLP - NFP Advisor

position. In this situation, staff should be cross-trained to ensure that at least two people know the job well enough to fill in while a new Executive Director is located. Here are some helpful tips for successful succession planning: •

Ensure that top management and the board engage in the succession planning process.



Review and update the succession plan regularly.



Develop procedures manuals for important tasks carried out by each key position within the organization.



Identify successors early in the process to ensure the smoothest possible transition for the organization.



Remember that the succession plan is a direct reflection of the organization.

Organizations need to keep in mind that no matter how well or how far in advance they plan, even the best laid plans are not fool proof. Something could happen that the organization was not prepared for or did not address in their plan. Therefore, succession plans need to be flexible enough to adapt to these unforeseen obstacles. A well-designed succession plan shows the organization’s clients, funders, and employees that the organization is committed to and able to provide excellent programs and services at all times, even during times of transition.

Non-profits face many challenges in today’s financial environment including the needs to increase selfsufficiency, maintain transparency, attract donors, and follow more stringent regulations. In order to overcome these obstacles, the organizations’ leaders must analyze their current operations and plan effectively for the future. It is important for non-profits to understand the composition of their revenues and expenses and this information can aid immeasurably in decision making. Similarly, organizations should have procedures in place to evaluate their effectiveness in achieving their mission. Two effective tools that can assist non-profits to analyze their operations and increase their efficiencies include financial ratio analysis and survey benchmarking. Ratio analysis allows organizations to analyze trends over time and to compare their performance to similar non-profits. Perhaps the best part of ratio analysis is that there is no need to compile additional information; all of the information needed is in the organization’s financial reports. Keep in mind, however, that a single ratio in isolation will not provide the whole picture, but looking at all of the ratios together and over time can provide a multitude of useful information that will be very helpful when strategizing for the future. Two key ratios that non-profits should examine include the program efficiency ratio and the defensive ratio. Arguably, the most important ratio for getting donors excited is the program efficiency ratio. This ratio looks at how much money the organization spends on its mission as opposed to administrative and fundraising expenses. To calculate the program efficiency ratio, take the total amount spent on program services and divide by total expenses. The closer this ratio is to one, the more confident potential donors will be when contributing to the organization’s cause. If the ratio is much lower than one, it is possible

that the organization is not managing its funds efficiently and that non-program expenses are too high, or it could mean the agency is not properly classifying expenses. The defensive ratio is another important ratio because it allows organizations to calculate how many months they could remain in operation if their revenues were to stop or decline dramatically. To calculate the defensive ratio, take the sum of the organization’s liquid assets including cash, receivables, and securities, and divide by the organization’s average monthly expenses. It is advisable to always have high enough liquid assets to be able to sustain operations for three to six months. Survey benchmarking is another excellent tool and it helps organizations to understand how others perceive them over time. Survey benchmarking begins with conducting a survey of a target audience. The survey questions can be targeted to any specific area including customer service, community impact, and general perception to name a few. Once the results are collected, the organization should review them and determine the areas that they wish to improve. After the organization has taken the appropriate actions to improve the selected areas, they re-survey the population and can see whether their results have improved. By conducting surveys on an ongoing basis, an organization can ensure that it is constantly improving. When used to track progress over time and to indicate areas of change and success, ratio analysis and survey benchmarking can be great tools to keep organizations self-aware and ever improving. The benefits of these tools may also translate into more confident donors, higher revenues, and better managed expenses. There are many other tools that can help non-profits to grow and prosper and these two are just the tip of the iceberg. Cerini & Associates, LLP - NFP Advisor 

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