In the not-so-distant past, charity watchdog groups such as GuideStar, Charity Navigator and the Better Business Bureau’s Wise Giving Alliance were notorious for giving overhead ratios significant weightings in their rankings of not-for-profits. While such a practice can help potential donors weed out spendthrift organizations, it also tends to unfairly penalize not-for-profits making reasonable expenditures for current needs and strategic investments for the future.

In recent years, not-for-profits have been urged to put more focus on transparency, governance, leadership and results. For many not-for-profits, funders and watchdog groups, “impact” is now the primary measure of an organization’s effectiveness. If it hasn’t already, your not-for-profit needs to ensure that it has made the necessary cultural changes and communicated the importance of impact to its supporters.

Possible Challenges
“Impact” generally is defined as the long-term or indirect effects of measurable outcomes (such as the number or percentage of individuals served). It typically refers to broader societal change and can be much less predictable than outcomes.

Hopefully, most of your donors may now use such impact-based yardsticks as “What difference does this organization make in our community?” But. while such a shift of perspective is good news, it may mean that your not-for-profit needs to make some cultural changes — including at the board level. For example, you might have to convince your board that spending more on such items as executive salaries and marketing programs will produce better outcomes and broader reach over time.

Communicating with Stakeholders
Although there’s no proven relationship between overhead and a not-for-profit’s effectiveness, some donors, funders and members of the public continue to use not-for-profit expense ratios to compare organizations. Communicating the value of impact can be challenging.

One practical solution is to revise such publications as your annual report. Compliance with Generally Accepted Accounting Principles requires not-for-profits to report costs in one of three functional categories — program services, general and administrative, and fundraising. But there’s no reason why you can’t provide supplemental financial statements or break out administrative items to tell how they were used to enhance programs and ultimately affect lives.

Advice for Change
If you’re unsure about how much your not-for-profit should spend on overhead and how it can best deploy resources for meaningful impact, contact your accountants. Times are changing — for the better — and your organization needs to change with them.

Note: Running weekly in FromGregsHead.com, PKF Texas – Entrepreneur’s Playbook® is a continuing series of tips brought to you by Greg Price. These run Sunday evenings during the BusinessMakers Radio Show on KPRC 950AM.

PKF Texas: The Entrepreneur’s Playbook® – Fraud from The Businessmakers on Vimeo.

 

Greg: This is PKF Texas and another chapter of The Entrepreneur’s Playbook. I’m Greg Price, director of Consulting Solutions, and I’m here with Dan Ramey, an audit director at PKF Texas. Dan, welcome to the playbook.

Dan: Thank you, Greg.

Greg: So Dan, today’s topic is fraud, and you’re one of our advisors in the forensics area. So what’s going on in the workplace today having to deal with fraud and forensics?

Dan: Quite a bit, Greg. Actually, the Association of Certified Fraud Examiners says that between five to seven percent of top line revenues of companies is being lost through internal fraud. This accounts for about $944 billion a year in the US.

Greg: Wow, that’s a very large number. So is anyone specifically involved in these frauds?

Dan: It’s actually spread evenly almost between all of the areas. Between employees, managers, and executives. So whether it’s an AP clerk or an inventory clerk or senior management, they’re all involved.

Greg: So Dan, I could understand how people closer to the transaction might be involved, but senior management as well?

Dan: Senior management is involved through overriding their controls either for their bonus program or for bank covenants, bank loans, things like that that have to be accounted for.

Greg: So Dan, I understand you do a number of investigations in this area. Have you come across any common themes or topics that might be something we want to share with our audience today?

Dan: One of the things that we find frequently is there has been a breakdown of the internal controls. And so as people are supposed to be monitoring and reviewing documents and processes, they fail to do that.

Greg: Dan, I appreciate you sharing that with us today. I can see why this is such an up and coming area for our practice.

Dan: Thank you, Greg.

Greg: We’ll have you back again to talk about some of your other specialties.

Dan: Sounds good.

Greg: All right, very good. This has been another Thought Leader Production, brought to you by PKF Texas, The Entrepreneur’s Playbook. Tune in next week for another chapter. And remember, if you have any questions about fraud or forensics, give PKF Texas a call.