Educating Your Board About Nonprofit Accounting

March 26, 2020

By Matthew Castellano, CPA

The Boards of Directors of nonprofit organizations are full of reputable individuals who share their expertise, energy, and judgment because they care about the organization’s cause. The Board is not self-serving, but selfless, and organizations rely on them to further their mission. Board members come from a  multitude of backgrounds and industries, serving as excellent resources for many facets of a nonprofit, but one area of specialty where it can be hard to find an expert for a Board is nonprofit accounting. This can put nonprofit management in a difficult position when trying to explain the organization’s numbers and financial position to their Board.

The majority of nonprofits budget at breakeven with the anticipation that expenses will be covered by income. To manage liquidity, nonprofits rely on the collection of accounts receivable for their general expenditures. When there are timing or collection issues with accounts receivable, organizations must dip into reserves or borrow on lines of credit to cover short-term expenditures. In other words, nonprofits do not operate like most other businesses, which creates an education gap between nonprofit management and their Boards.

When presenting your budget to the Board of Directors, you will present your projected revenue. If you are a human services organization, your projection will likely include your current census of residents, multiplied by your rate. But what if you do not have a final rate? How do you explain to your Board that although you are currently being paid a prospective rate, you are not sure when you will know what the final rate and potential recoupment will be? In addition, you need to explain that the rate you are getting for the service is not dollar for dollar; the cost of what you are providing is substantially higher. With prospective rates, rate component cutbacks and recoupments considered common practice in this industry, Board members with accounting and finance backgrounds are left scratching their heads because they don’t understand the nuances of nonprofit accounting.

A great example of recoupment is the Certified Community Behavioral Health Clinics (CCBHCs) that were created through Section 223 of the Protecting Access to Medicare Act. The CCBHC implementation began in 2017 as a two-year demonstration program consisting of 13 providers in New York State. CCBHCs have a uniform payment amount per visit and day, regardless of the number of services or intensity of services used by an individual that day, and the providers were all issued their respective fixed rates. After the implementation period, the providers were notified of a substantial retroactive decrease in the rate, and that the monies paid previously would be recouped. This notification had a negative effect on the bottom line of all 13 providers in 2019. It also proved the nonprofit 2017–2019 budgets incorrect.

Management must educate their Board members so that they understand that there is a lot of gray area from service to service, and from budget line item to budget line item. Teaching your Board about nonprofit accounting is a key way to get more brains from different industries and backgrounds all working toward improving the financial viability of your organization. The importance of adding management discussion and analysis (MD&A) to everything with numbers presented to the Board cannot be stressed enough. MD&A gives management a chance to comment on each revenue stream. This commentary should explain the gray areas and can explain the best- and worst-case scenarios of a budget. The MD&A can be taken a step further and address future goals and approaches. The more the MD&A is put in front of the Board, the more times they will be able to read it and educate themselves about how the different revenue streams of the organization operate. For the three scenarios listed above, this is a sample MD&A:

• Human services organization residential unit multiplied by rate revenue stream—The program has had consistent attendance and limited vacancy during the past three years, leading the organization to expect near full attendance in 2020. The current rate is a prospective rate; the final rate is expected in June 2020. Because of food component cuts, the final rate is expected to be lower or remain the same (offset by a cost of living adjustment). This projects program revenue to be at best $1.5 million and at worst $1.25 million.
• CCBHC recoupment—We received notification that the CCBHC fixed rate is retroactively reduced by 20%. This will result in liability for 2017–2019 revenue received of $2 million (20% of $10 million). In addition, 2020 revenue is projected to be 20% lower than the prior year.
• New York  City  Indirect   Cost   Reimbursement— Per the March 2019 Cost Policies and Procedures Manual, we are entitled to a 12% indirect cost rate reimbursement for eligible New York City Health and Human Services contracts. Our calculation is that we will receive $180,000 of revenue for our indirect costs in 2020.

Another way to educate your Board is through training. Boards often go to training focused on governance and leadership, but those are general training for all Boards. We recommend a training session tailored specifically to your programs, explaining how they operate and how to expect the unexpected. Management can run training or hire outside professionals to do so. Board members do not serve forever, and new suitable members are recruited, nominated and voted upon to fill vacancies. Adding education to the onboarding of new Board members is a great strategy. If you previously provided your Board with tailored training, film it and show the film to new members as part of their orientation.

Although it can be difficult to find an expert in nonprofit accounting for your Board of Directors, educating your Board with plenty of MD&A and annual training is a great way to start turning them into the experts you are seeking. Once your Board members understand the nonprofit accounting of your programs, the knowledge they provide will include a better perspective, which will enable your organization to further its mission.