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How to Use Technology to Stay Audit Ready and Streamline Accounting

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How to Use Technology to Stay Audit Ready and Streamline Accounting
Interview with CFO Expert Tosha Anderson

Tosha AndersonTosha Anderson is the founder of The Charity CFO, an organization offering accounting and thought leadership skills to nonprofit agencies. Tosha created The Charity CFO after realizing the need for specialized skills in non-profits with limited financial resources and increasing pressure to keep costs low despite mounting compliance and financial reporting needs. With nonprofit experience as an auditor, a CFO, a board member, a volunteer and a consultant, Tosha works with non-profits with on-going accounting needs.

 

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Hugh Ballou: Welcome to The Nonprofit Exchange. We have a neat topic today. It’s a topic that haunts a lot of clergy and nonprofit leaders. It’s just a missing element. We have to keep those numbers lined up so we can have that accountability for reporting to the grant, reporting to the government, letting our donors know how we’re doing, and letting the board know how they can be in charge of approving the board and the numbers. We have Tosha Anderson today. I believe you’re in St. Louis, Missouri. Tosha, tell us a little bit about you and why you have the title that you have.

Tosha Anderson: That’s a really great question. I don’t know if anyone has ever asked me that question, but there is certainly a story behind it. I am a CPA. I have been working in the nonprofit space for about 15 years. I started as an auditor for a nonprofit; I did that for about seven years. I audited financial statements and compliance. I have seen that side of accounting.

Then after my stint in public accounting, I went on to be a CFO of a nonprofit. It was about $6.5 million at the time with 80-some-odd employees. We were audited by every local, state, and federal government contract known to man. I really realized in addition to the accounting work, I had all other duties as assigned, like many of us do in this particular space. I was also overseeing HR, risk management, IT, and facilities over four different campuses. It was quite a big job. I really learned not just how to do things right and what they are supposed to look like to stay in good standing with auditors, because I came in with that experience, but I also figured out a way to do it really efficiently out of survival, mostly because of all of the things I had to get done on any given day. I did that for about four years.

After that, I decided to find some way for all of the information I had learned over that period of time in public accounting and working for a specific nonprofit, what if there was a way to take what I had learned and apply that to smaller organizations? I had no plans to grow into a larger accounting practice, but that is precisely what happened. I expected to take on a couple clients that I would really like working with, and I’d have a pretty powerful impact on all while making it a high value for the clients and cost-sustainable. I started with a handful of clients. The word got out. More nonprofits were reaching out to me, asking if I could help them. Interestingly enough, I had other accountants reaching out to me wanting to work with nonprofits, too. People looking to leave banking, finance, and other corporate jobs and pursue something more meaningful. We take a lot of technology, the accounting technical experience, and merge them together in a means to find this perfect hybrid. I often joke we are an IT company that does accounting services for nonprofits because so much of this work now is digital and technology-driven.

The Charity CFO comes with the vision that we don’t want just to be an accounting/bookkeeping services firm that works with all other businesses. We know enough about accounting specific to nonprofits to weather you through your basic needs. But also somebody who can take all of these other nuances that nonprofits deal with at a higher level that is missing for so many of these organizations, and how to fill in that gap. I feel like you can find a bookkeeper, but you can’t find someone who can understand your contracts and how to renegotiate those, how to do unit cost reporting, these higher-level things, how to get you through an audit, but also have the bandwidth to reimagine processes that could be efficient, not just on the accounting side, but all of the other people involved in that. Your program staff, your fundraising staff. How can we all collaborate with a fresh set of eyes?

We have 50 clients all over the country now. We are able to take the best practices we have developed or seen and scruffed them up a bit and figured out how to apply these to our other clients. We take not just best practices with keeping our I’s dotted and our T’s crossed, but creative ways to get work done in an efficient and accurate way. That’s where the Charity CFO is. We want to be something than just bookkeepers.

Hugh: That’s good. It popped up a lot of issues in my mind. You’re on the program sponsored by the 501(c)3 that I founded, SynerVision Leadership Foundation. Our job is to educate nonprofit leaders. We have quite a few people in our network that look at these, come by our website. They will find you and have questions.

Let me raise some of the questions that in my 32 years, I find some of those gaps you talked about. First off, let’s talk about roles and responsibilities. You mentioned bookkeeper, accountant. I want to add into that mix a treasurer. The board has oversight responsibility of governance, not running the day-to-day, but approving contracts. They also have oversight of the budget and expenditures. They need to watch the money. Talk about the roles of an accountant, bookkeeper, and treasurer. How does the virtual CFO interface with the treasurer, who we need to have on our board?

Tosha: I’ll keep it general and simplistic in a way. Of course, there will always be one-off scenarios. What is interesting is that accounting now is becoming very database-driven. Differentiating a bookkeeper from a really good bookkeeper is going to fall down to attention to detail and full understanding and knowledge of how to use the database to its fullest potential. That person is generally getting the transactions into the system and hopefully a consistent and accurate way. An accountant is going to be someone who looks at something and says, “That doesn’t look right. Let me understand why, and let me understand how to fix it.” An accountant can do bookkeeping, but those skills aren’t necessarily transferable between somebody who might know how to use the system and get information into the system. Hopefully your accountant, whether it’s a senior accountant, controller, or CFO in some cases (depending on the complexity of the organization), that person should be able to predict what your auditors might be looking for, your outside stakeholders, your board, and also know this doesn’t look right. Let me follow up on it. Let me fix it. That’s where we come across a lot of our clients who have bookkeepers, but things aren’t right, and they don’t necessarily know they’re not right, and they don’t know how to fix it. That’s generally where we come into play.

That next level, when we start working with organizations, these are organizations looking at maybe we have had an in-house bookkeeper, maybe we have done it ourselves. Our executive director’s been doing some of it. But they know they have had additional scrutiny on the books. What do I mean by that? They have specialized reporting. They have restricted grants. They’re now launching into audit territory. Some states require specific thresholds for which you need to have audits. They really want to make sure that someone is looking at this and making sure they are not completely off track. A good CFO, and something we like to do for our clients, is really understanding are these contracts that we have entered into actually advantageous for us? Is this sustainable? If it’s not sustainable, how do we make it sustainable, if anything? What are the projections we’re looking at? What cash do we have? At what point do we need to ring the alarms to the board treasurer or CEO and say, “We’re going to run out of money”?

Also, coming up with other risk management contingency plans that seem relevant to the time we’re in right now. Considering other alternatives like if we don’t have a line of credit, should we look into that? Banks are often good about giving you money when you don’t necessarily need it, but when you need it, it becomes much more difficult. Refinancing things. I had a client that was leasing a copier, and they just received $10 million in capital campaigns. I said to them, “Do you realize you’re paying an interest rate equivalent to 40% on this copier?” They couldn’t believe it because they could have just bought one outright. Those kinds of things that somebody is asking those details.

I am obviously a little biased, but I don’t know if all outsourced accountants understand that. That’s why I come from an interesting background because I used to write the checks, and I used to ask why we had to spend that kind of money. The more people in your organization who are doing those sorts of things and asking why, and does this make sense, the better. This leads to how whether in-house or outsourced, someone could really help the CEO, who doesn’t always come from a business or financial background; they often come from the more programmatic side, be it education, ministry, or health. But educating the treasurer, which by the way doesn’t always come from the nonprofit background, they may come from investment or banking or finances, educating them on the operational financial decisions, not just, “Oh, the balance sheet looks healthy,” but are we being good stewards of our resources? Do these arrangements make sense? Can we be doing them differently? Collaborating with them either through finance committee meetings. For our clients, we tend to do an executive summary, which gives a story behind the numbers. Not just, “Looks good,” or a statement of activities or a balance sheet, but does it look good now? Is it projected to look good in the future? How will we end the year? Are we in line with our budget? Some of those conversations that can allow more people to work collaboratively to make sure we are on the right path.

Hugh: That’s a lot of good information. Of course, there is a lot of data underneath that. Who defines the chart of accounts? I’d like to talk about the reports. What is the chart of accounts? That is the different line items in your accounting. Explain what it is, and who sets those up?

Tosha: Good question. A chart of accounts is essentially a list of all of the accounts that you use. When people think of a chart of accounts, they generally think of revenue line items and expense line items. It also does include your cash line items, anything on your assets and liabilities and net assets or equity. It includes all of the accounts included in your accounting system, both on the balance sheet side of things (assets, liabilities, net assets), and it also includes your revenues and expenses.

That’s a really great question because who defines that? Generally, the answer is whatever accountant you might have started working with at some point in time, plus or minus any small changes you made over the years. To better answer that question, what should you be doing with a chart of accounts? I get on the phone with nonprofits often, and they say, “Tosha, my reports don’t match my budget. From a leadership perspective, we are modifying our budget based on who we are today as a management tool to run the business. The accounting system is often not updated to morph or pivot to what we have now become.” Sometimes these charts of accounts they are using are completely outdated, and they have not been updated to reflect a budget. I look every year with all of my clients that if the budget is changing because the nature of what they are doing is changing, then the chart of accounts needs to change as well. I would caution people not to change things every six months or quarter or something like that, but if you add new programs, if you add different kinds of expenses or revenues, and you feel that you will have to report on that, you should certainly update those things.

The simple answer is probably something like an accountant at some point in time, but a lot of people can’t realize that you can change those things. And you should as your operations change.

Hugh: That is good advice. Charts of accounts vary a lot. For my nonprofit, I have programs that people buy to study whatever aspect of nonprofit leadership and the membership community. Those are specific revenue line items. I am the president of the board of the symphony, and we have line items for concert tickets and concert expenses. Those are specific line items for a performing group that a non-performing group wouldn’t need. Basically, you have your income pieces, expenses, assets, and liabilities.

Before we talk about the nuances of the reports, we need to have these reports for the board to be able to make proper financial decisions for the organization. Not only for today, but to forecast the future.

Let’s talk about software. You mentioned software. There are some choices today. I know you can set up QuickBooks Online. You say you are a nonprofit, and boom. You have a basic chart of accounts to start with. What do you recommend? Why is it important to choose the right software?

Tosha: We work with small- to-mid-sized organizations. What does that mean? How I would define it is somewhere between start-up to about $6 million a year. I worked with all kinds of softwares. Some are expensive, and some are free because you get free licenses from them through a website called TechSoup.com. As long as you’re qualified, you can get good, cheap software.

Most of my clients use QuickBooks Online. I have zero financial affiliation with QuickBooks, but I am sure they will appreciate the plug here. It tends to work really well for our clients. Going back to the database administration, not all users know how to use software to the fullest extent. Think about any software we use. Who uses the software to its fullest power? Very few people use any software to its fullest power. But if you know how to use it well, and you know how to build things out within the software, you can take it quite far. In fact, I was in grad school getting my MBA, and there was a case study that this huge publicly traded retail company had used QuickBooks for their international sales up until recently. A multi-billion-dollar company was operating off QuickBooks. So you can take it pretty far if you know how to use it.

I’ll tell you one of the reasons that I like it, aside from the fact that you can build it out and you can get a lot of functionality from a succession plan, if you do get a really custom software and spend a lot of money on it, it’s a Cadillac. It’s difficult during transition. If you have an accountant working with you who helps implement the software, say they leave. To try to find another accountant who understands that particular software is going to be challenging. I like to put systems in place that are easily transferable, non-proprietary, that most bookkeepers or accountants could at least have the resources to get up to speed and familiar with the functionality of it. I think that’s important. I have come across that many times. I have seen enough software to navigate through most of the major players that are much more expensive. It’s difficult for organizations to continue to utilize it because every time you lose one of those accountants, you have now just lost functionality of the system.

For example, I have had a couple of clients who have had an expensive software that is a major name in town. But you almost need a computer programmer to be able to import the budget. It takes a very special text file. If you lose that text file and it becomes corrupt, the budget importing is essentially useless unless you pay for a $6,000-a-year annual maintenance subscription, in which case you can reach back out to the developer and get a new one. That is cost-prohibitive for most of the clients in our budget size.

That being said, there are some really good options out there that are cloud-based. I am a big fan of things virtually. I have had enough horror stories of people keeping their accounting system on a laptop and the laptop dies, and now they have zero accounting records. For that reason, I am all for cloud-based computing. It’s especially interesting in light of what is going on in the world that virtual accessibility is even more important.

There are a couple programs out there that work really well. Sage Intacct is another one that for those clients who have a lot of funds, I imagine you use the example of the symphony or faith-based organizations who get a lot of special funds, endowments, gifts you have to track at a very high level of detail. Sage Intacct would be a good solution for that. It’s cloud-based and fairly inexpensive compared to other more proprietary systems that require custom-building. But honestly, QuickBooks works for most of our clients. They generally come to us with QuickBooks because that’s what they have known, or they can get a steep discount on the subscription through something like TechSoup.

Hugh: It is, and it is cost-effective. When I had a retail business years ago, I did my own internal accounting. There was an inventory management system and a bookkeeping system and a billing system, and it all interfaced. There is accounting for chambers of commerce that are specialized. There are church software companies on the cloud that keeps their donation system and accounting system interfaced. There are specific verticals for software. Here is a debit, and here is a credit. It flows into your reporting. There are a lot of solutions.

What I am hearing you say is you need somebody in your seat who knows how to work it, give you the reports you need, and raise a red flag when there is something out of order.

Tosha: Exactly. You brought up something that I think is worth revisiting. It’s probably my #1 reason why I like QuickBooks. They put a lot into their R&D. Other than Sage Intacct, in my opinion, and another one called Xero, those three really put a lot into integration into other software. We have worked with churches where their donor platform feeds right into QuickBooks. School systems feed into QuickBooks. You are taking all this data entry that the bookkeeper is doing, with human errors, and you are importing that information directly in. There are not a lot of other software companies investing in that kind of integration. That is going back to my joke about being an IT company that does accounting services for nonprofits. That is what we are trying to do. Payroll companies that integrate with QuickBooks. You can almost take a lot of your information and have it completely integrated and dumped right into the system. Then, when it becomes important is not getting the information into the system, but somebody who is skilled at the software and looking at the numbers, examining if everything looks right. If something is broken, it probably is a system issue, so they need to be able to troubleshoot it and get you on the right path again. I didn’t mention that earlier, but that is probably one of my top reasons for choosing that software as well.

Hugh: The integration is the credit cards and checking accounts and savings accounts. Everything is integrated. It downloads, and 99% of the time it is correct. Balancing checkbooks all of my life, and it never came out in my favor if I had a mistake. It was always the bank’s favor.

Let’s talk about reports. Then we will do the happy things about audits. Fundamentally, the work you do, before we get to reports, and you’re interfaced with a treasurer. None of us are audit-resistant, like the IRS and other people who want to come after us. You make us audit-ready. If the books are correct and up-to-date all the time, then we are prepared for a tax audit or any kind of audit or audit for a grant. We have responsibility for reporting what we did with their money. Accounting is so essential.

Let’s go to reports. Presenting the right reports to the board. In my mind, it’s the treasurer’s job to interpret those. Why are these numbers important? The board can make informed decisions. Most people think they look good, but there are so many other things going on that we need to look at. We start out with creating a budget. How do you help organizations to think through how they set up a budget? Do you do it on a spreadsheet and then transfer it to QuickBooks? How does that process work for organizations?

Tosha: It’s interesting that you brought up the chart of accounts conversation earlier because we start with that first and foremost. I export that out of the system. These are the accounts we have in our system. Maybe some of these are not applicable anymore, so we can deactivate those.

Hugh: When you say export it out, what do you mean?

Tosha: You can actually go into QuickBooks, run a chart of accounts report, and export that out of the system so that you can see all of the different accounts. I like to start with that list because often I will get a budget, and they have names for accounts that don’t even exist in QuickBooks. If we could somehow start with what we have in the system, and if that doesn’t make sense, then we can update that in the system, too. So we are all on the same page.

My process in a summarized way. Starting with the accounts in the system. Let’s assume we’re looking at next year for budget. I am going to run reports on what we have spent this year to date. What are the trends? What are the known changes? What new programming or contracts are we looking at? Then I start putting those assumptions in for next year using the accounts we already have in place. I like to do it on a monthly basis to include some seasonality there, plus or minus any known changes we are anticipating. Also, thinking about what we want to do differently. What do we want to achieve? Figuring out those expenses we need to incur for that reason. Then figuring out the revenue. Of course, it never matches up, so we have to go back and make cuts. We really look at history, but also what our initiatives are, whether it’s through our strategic plan or what we have committed to funders.

Budgets get really hairy for people when talking with their board. Most accounting firms provide financial statements and what they call generally accepted accounting principles. This is essentially the accounting gods somewhere who do all things accounting for all industries come up with rules for how things need to be presented. They will give you financial statements that look like that. Most board members come from a for-profit world that is used to looking at financial statements that look like that. Where nonprofits start to get different, we have received a pledge for money last year, and we had recognized that revenue last year. But we know the expenses go in this year. How to communicate the fact that we had recognized revenue last year, but we had to have the expenses this year. The board is saying, “No, I need a balanced budget.” “But I had the money last year, and I have to spend it now.” “I want a balanced budget.” So you’re trying to fundraise for this gap of money because revenues are in last year, and expenses are in this year that is artificial. It’s those conversations where things get frustrating and confusing for people.

I think for organizations, they have to choose how to budget and manage. I hate not having a definitive answer. Well, it depends. In this case, it does depend what your governing body, how they want you to manage. It’s essentially two options. They want your revenues and expenses to balance on any particular given year. Or they want you to identify the resources that you have that you accumulate in a prior year for a mission you need to deliver this year. You also need to deliver on your contracts or anything else. Revenue that you are generating this year, and whatever expenses you want to incur. Managing the resources you have with the obligations you’ve made, or making sure that your revenues and expenses net to zero. I think that’s the natural tension between a nonprofit operationally. People on the inside, and those who are trying to articulate this difference for outside stakeholders, including their board oftentimes. Hugh, I don’t know if you have seen that in your experience as well.

Hugh: I have seen it all.

Tosha: In 30-something years, I’m sure you have.

Hugh: I’m happy when a board steps up and asks things because there are more occasions where a board just is passive. That’s because the leader hasn’t really presented good reports like you’re talking about. We’re in the cycle right now. It’s March, and we approve a budget in May. Committees are turning in budgets, and we are looking at how to do everything, and we will carve it down to what’s practical, and then we will present it to the board in the annual meeting in May. Boom, June 1. We have the budget. We have he historical data for years.

For years, I was the musical director in a church. I’d get my section of the budget. Here is the chart of accounts that go into the worship music ministry. There was a list of them. If it was a January budget, by the time you get to the summer, your committee is talking about the programming. By the time it gets to the fall, it goes through the approval process. Then there is the pledge season. Can we support it? Can you do the budget? January, you have a budget. I was responsible for starting the budgeting process with the committee. It’s always an interesting phenomenon. People want to say, “We had this much last year. I want to add $100 to it. We didn’t spend it all, so we are going to spend some and lose it.” Zero-based budgeting versus what I just described. The assumption is we want it to be more. What is the justification for that?

How do you effectively look at budgeting? Do you start with zero and say, “What do you want to do?” Give us some wisdom on that.

Tosha: I’ll give some historical information. For our organizations where we have more of a collaborative effort—the programming folks, the fundraising folks—I like them to think through what do you spend on a monthly basis, on a seasonal basis, on an event basis? Go through and think what expenses you are going to incur. Then we start matching up the revenue to see if we can do all those things. Then we have to cut back.

I’ll tell you why. Aside from the add 5% down the list and call it a day, even though we don’t have critical thinking in there. I like all of these individuals that have helped build the budget know when they say, “I had an expense for these supplies,” where did you plan for that? So when they ask me where that goes in my budget, I should be able to ask them, “Where does it go in your budget?” Give more people the accountability for those numbers. When they want to say, “We had this opportunity for professional development. Is it okay if I send my staffperson?” it generally comes back to the account and the CEO or executive director to make those difficult decisions even though we already have a budget. For the individuals I work with, I like to ask the program director for example, “If you want to send your staff to this event that wasn’t planned, where else in your budget do you want to cut?” The only way that we can really give that level of ownership is if we include them in that process, and they can actually think through what those specific expenses are. Maybe they can use last year’s expenses as a guide. I am not talking about the total expenses. I am not talking about total supplies. But going through and identifying if it’s software, what software do you continue keeping this year? Are there renewals? Do you want to have a new event? What do you want to spend on it? So we all have a level of accountability. When I was a CFO, it would be everyone coming to my office, “Tosha, am I allowed to do this? Tosha, am I allowed to do that?” We did the budget. You should all have some accountability there. I think the more people who can be accountable, the better.

Hugh: The board is approving the expenditures in advance. Whoever the committee is, they have a line item they are responsible for. Some of the churches I work for, we could only spend a certain percentage until we got the end-of-year budget and knew what we actually had in the bank. We could spend 80-90% and have to have approval until it was really there. There is a real discipline in managing the numbers and expenditures and accounting for it.

The other tendency that I see that is bad practice is okay, I have an annual budget amount, so I plug it in and divide it by 12. That is not realistic.

Tosha: No, it’s not.

Hugh: Music program. You buy the music in December for next year. There are peaks. When you spend money and pay for it. Looking at historical data, it’s a cash flow thing. When will you need the money?

Tosha: When the board asks, “How’s the budget?” they are really asking, “How is the budget compared to actual? How are we projecting until the end of the year? Are we in line with our expectations or not? By the way, do we have enough cash to deliver on the things that we want?” A lot of times, if you budget that way on 1/12 each month, you don’t understand how you’re actually doing.

I had a client who had 3-4% variance on payroll. That is pretty close. Except when your payroll budget is $2 million. That adds up to be a lot of money, a couple percentage points. Without having those detailed analyses on those numbers. That goes back to having a level of accountability or just a critical eye with a treasurer or someone diving into those and understanding. To the extent we can add personal accountability to the budget, a seasonality to the budget, and a granular analysis of why are things not in line rather than just timing difference or something like that. It could have a pretty big impact after 12 months.

Hugh: You mentioned strategy a minute ago. I help organizations become fundable, building the strategy. That way, the board knows where to be engaged. But you can’t build a budget out until you have built what programs you want to do and what they will cost. In my world, there is a circular reference. If you have a program, that should be a line item in your budget for that program. If you are spending a dollar, what does it support in your strategy? If it’s not in your strategy, you shouldn’t be spending money on it. Do you want to comment on the interface between your budget and your strategy?

Tosha: What gets confusing for a lot of people when they are developing their strategy and they have an opportunity to expand their programming and pivot into some sub-strategies, how does that change the budget? Also recognizing what potential impact that has overall. A lot of times, it’s this initiative we want to take on. When you are applying for grants and asking for partial funding, you have to think hard on if you don’t get this funding, what implication does that have? We think more money to the cause, that’s great. It depends.

I have a client who agreed to do a parenting program that is fully funded by one particular contract. We agreed to underwrite all the overhead, facilities, and benefits for the employees to the tune of $30,000 a year. We decided to take on this initiative which is a priority for our funder, but we just winded our fundraising gap by $30,000. Does that make sense? Going back to your comment about strategy, does that really have to do with our strategy? Can we get other people on board with helping to fund that gap? Or are we willing to underwrite it with our operating reserves to do that and why? What does that mean that we have to do long-term? Those are the bad deals that I find many of my clients are doing. I usually ask these difficult questions. “Why would I write a grant?” “I don’t know.” But if it’s the funder’s priority area, we should try to push back on them to get full coverage of that cost. Those are all the different ways.

When it gets really muddy is when you have multiple strategies, multiple program areas, and you are signing up for deals like that. When you put it all together, you realize you are doing all this work, and you have all this money and funding and contracts. Why am I now worse off than I was before I did this work? It’s those little deficits that keep adding up because we are afraid to ask for full funding. I understand why. It’s something to think through. How many strategies can we have? And at what true cost?

Hugh: There is no overarching strategy that everything must plug into. That brought up a couple other thoughts. I teach nonprofits there are fundamental eight streams of revenue. You have donations, grants, sponsorships, and in-kind. I have seen where people put in a number. I don’t get that. There is events and other ways. Would you set up a separate income account for each one of those so you could track them?

Tosha: I would say so. The more granular you can get, within reason. This echoes the chart of accounts conversation. You want it to be specific enough so you can analyze, but not so detailed that whoever does the accounting work can’t be consistent. If you have 50 revenue accounts, the odds of someone applying consistency in how they record it, the more accounts you get, the less likelihood you will have consistency. You want it to be clear enough to be able to analyze, but not so specific, not so detailed, not so high in volume that it’s inconsistent. Then the data becomes useless. I liked your comment about in-kind. I am happy to chime in more for anyone else who doesn’t understand that.

Hugh: It’s a tricky area for everybody.

Tosha: Let me give you an example about why it’s important. Of course, the accounting gods I talked about earlier, generally these words are all synonymous with one annual lawmaking body. Then there is the IRS. Of course, they are not on the same page. That’s neither here nor there.

In-kind, let me explain the significance of it in a clear way. I used to audit a food pantry, and they have a lot of relationships with local churches. It’s very interesting how rooted in faith organizations, not churches, tend to operate similarly to churches. They send newsletters and have offering envelopes they send to newsletter recipients. They get a lot of money from this. Small gifts that you would expect on a church offering. They have done wildly successful, and their budget was somewhere around $500,000, which is great for this food pantry.

When we went in to do the audit, we realized that none of the value of food or donated time, the entire place was ran on volunteers’ time. They served an entire county. They had one paid employee. All of their intake workers were volunteers. All of their warehouse workers were volunteers. All of their food drivers were volunteers. All of the food, with the exception of some fresh meat and dairy, was all in-kind. When you added up all of the donated stuff and services, they were a $2.5 million organization. Why is that important? Because if we had to pay for those things that are—obviously in this case, you can’t have a food pantry without food. If we had to pay for those things, if we never tracked it and recorded it, how would we then be able to articulate to a foundation. For example, if they wanted to know how large is your organization, we don’t have a real representation of that. Some foundations want to know that they are contributing to a solid, trustworthy organization, but they don’t want to be the predominant founder, and they certainly don’t want to invest in a sinking ship. By saying we are actually $2.5 million, and your gift of $100,000 is very welcome, but it is still reasonable given the size that we are. That looks much different than we are asking you to give $100,000 to a $500,000 organization. Much different picture we are painting. That is a very simple and real explanation for how big of an impact recognizing in-kind can have.

Another moment on how we valued that. This is where it gets more complicated because they have this whole warehousing system with this donated food. That is much more complex than most of us. We had to come up with a methodology for how we value it. We essentially went through and said, “There is generally 10 different categories of food. Canned food, boxed nonperishables, etc.” Then what we did, we wanted to take a very conservative approach. There is a spectrum of grocery expenses. If you go to a discount food store, private label versus name brand, we wanted to be conservative on the pricing. We chose a price point that was more in line with that discount food store for each one of those categories. Any time a box of convenient meals came in, we would value that at $1.50 because that is how much it would cost at the discount food store. We actually had to track all of the volume of things that came in.

It was remarkable to paint the picture of how big this organization really was. If you went there and you saw it, you’d think there is no way these people would survive on a $500,000-a-year operation. When you add the numbers, yeah, this is like a $2.5-million organization.

Hugh: That’s important, to be able to quantify that. This is a helpful interview. Thank you so much.

Tosha: You bet.

Hugh: Two questions on special gifts. You have your budget, and everything looks fine. Someone messes it up. Someone dies, and they leave you a bequest. Then you put that in. That greatly skews your income. We might have physically moved it over to an investment or savings account, but it’s still in our income. Where do you account for it so it doesn’t mess up your numbers?

Tosha: Some of my clients have the generally accounting principles because that’s where we have the right way to do the accounting. Then we have our operational statement of revenue and expenses. How do we budget? Some of those line items, when we look at it from our operational budget with operational revenues and expenses, we want to match those up to make sure we are in line with what we expected. You could set it up that way as well. But the truth is, once you get some of these bequests especially because you can’t really budget for them or plan for them, it’s either a footnote if you don’t want to mess with your reporting structure, or an explanation each month until the next year. If you get a lot of these restricted grants you weren’t expecting or weird passthrough or anything like that, depending on your organization, churches are a big example of that. They get a lot of passthrough membership accounting they do for clubs. You might want to have a separate income statement or profit and loss statement or revenues and expenses that includes some of those line items so that it really gives you a clear picture of are you operating in line with what the board had said minus all these extraordinary things?

Hugh: There is special events both ways. Right now, we are living in extraordinary times, so we have to be very creative but stay within the bounds of proper accounting.

We get money for a program. There is cash flow analysis. Where did the money go? There is the brake lights. In business, that’s what we call a burn rate. You are spending money, but not making money, so you are burning your cash. Then you are in profit. There is the burn negative. We get this money. So it’s important to do the headlights: a cash flow projection. How long can we go before this money runs out? How is that different from a budget?

Tosha: A budget is oftentimes created before all of the now-knowns are realized. I frankly we do a budget out of necessity and board expectations, but most of my clients internally, meaning the CEO and I, we go over projections. That is exactly it. We want to make sure. I have been on the phone a lot the past two weeks with everything going on, so I’m losing my voice. Those projections and how is that going to impact the rest of the year, and what kind of additional proactive appeals can we put out into the community to help us weather that storm. I do the same thing.

I run cash flow projections. It’s amazing how many organizations don’t know there are cash needs on a monthly basis. They need to understand that at a minimum, we need to bring in $50,000 to cover expenses. If we don’t, then we have to understand our cash will continue to fall until we do. At which point do we need to do something differently? I tell my clients all the time that revenues and expenses are important, but at the end of the day, cash is king. If we don’t have cash, it doesn’t matter what our revenues and expenses show. If you’re not keeping track of that, that needs to be #1 in my opinion because it all relates to cash revenues and expenses. It all works together. A lot of times, we dismiss cash and just look at the budget. The budget does not take cash into account.

Hugh: No. We are doing fine. Next minute. Where is the money? That is so crucial. To me, that is the function of the treasurer: to highlight those and report it to the board. Let’s talk about how to hire a person like you. I am ready to ask you to move to Virginia and work. How do we qualify somebody? At some point, we are going to need to hire someone part-time or full-time. In the meantime, you provide a whole lot of services, and we don’t have to pay big salaries or benefits or have an office. At some point, it will be important to bring someone in. How do you know when that is? How do you find someone like you? We will send people to your website, and they can decide whether you are competent or not by this conversation. When you are hiring someone, what are some of the parameters to look at?

Tosha: Up to $100,000 a year for your budget, you might be able to have the executive director do some simple bookkeeping. Then it gets more like you don’t have time; you need to hire someone to help you. Then you can hire a part-time or contracted person if they are really good somewhere up to- Many of our clients we work with, we do all of their accounting, up to $2 million. It varies, depending on the complexity and volume of work. Between $2-3 million, you might want to have a bookkeeper, boots on the ground, somebody to triage a lot of questions. Beyond $3-4 million a year, depending on your complexity, do you have a lot of government contracts and audits, then you want to consider having someone in-house.

One of my main focuses is recruiting my own accountants and training them on the specific nuances to nonprofit accounting. They come from all different backgrounds, not generally the nonprofit side. Those are unicorns. There are a lot of nonprofit-specific accountants out there. I think we get afraid of it and shy away from it. What is really important and a good indication is doing some working interviews, asking them specific questions.

Hugh: Thank you for your time today. Please visit TheCharityCFO.com for more information.

*Sponsor message from Wordsprint*

Tosha, what is a challenge you’d like to leave people with?

Tosha: We talked about a lot of things, and if you are not getting this out of your accountant, maybe share some of the show notes. Have them watch the video. Know that just because they are not sure how to do it, again, going back to the system capacity, certainly reach out to some of our resources. Visit my website. Contact me, and we can help you get some of that information. We talked about cash flow projections. We talked about financial reports. We talked about tracking. If your accountant is telling you that can’t be done with your system or operations, let’s get some more resources for you. We do it all the time for our clients. It’s a matter of educating folks on how to do it.

Hugh: Thank you for a great interview.

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