Benchmark your organization to improve performance
uring tough economic times, your nonprofit organization should always be looking for ways to improve and differentiate itself from other groups. One helpful tool is benchmarking. Benchmarking is defined by the International Benchmarking Clearinghouse as the systematic, continuous process of measuring and comparing an organization’s business processes against leaders in any industry to gain insights that will help the organization take action to improve its performance.
Why should nonprofit groups use benchmarking?
There are many reasons your nonprofit should consider benchmarking. The most important one is that benchmarking is likely to improve performance by identifying strengths and weaknesses. There may enchmarking will help your nonprofit set higher be some segstandards, become more ments of your organization creative and gain competitive that are not advantage over other groups. p er for m i ng very well. In looking at your results against a benchmark, especially over time in a graph, it may become evident that you should be focusing more on those areas that are performing well, or perhaps refocusing more energy on improving the areas that aren’t performing as well. Other reasons to use benchmarking include gaining a competitive advantage over other organizations, setting higher standards for your organization, increasing donations and becoming more creative by thinking outside the box when establishing best practices.
What are the most important benchmarks to use?
What benchmarks should you use? It depends on the organization. Most for-profit companies will use ratios such as the current ratio, number of days cash on hand, quick ratio, inventory turnover, debt ratio, accounts receivable aging, accounts payable aging, gross profit and return on sales. For nonprofit organizations, some of these ratios can be used, but other important ones include program services percentage, fundraising efficiency, primary revenue growth, program expense growth, ➜ Demystifying the audit working capital ratio, donor retenprocess: An independent tion, average donation per donor auditor can be a wealth of and diversification of funding. information Some nonfinancial program benchmarks include number of ➜ Online auctions: Done people served, client satisfaction rate well, they can become a and number of new clients. strong revenue source Some management benchmarks include employee turnover, employee satisfaction, board attendance rates, board meeting satisfaction and number of volunteers.
How do you get started?
The easiest way to get started is to collect both financial and nonfinancial data from internal records. By collecting this information, you can determine your baseline – or your current levels of results for a specific measure. This can be measured over a set period of time, maybe five years, or the most recent fiscal year. See Benchmarking on back
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Demystifying the audit process
An independent auditor can be a wealth of information
f the annual audit of your nonprofit organization is approaching, staff and board members alike may be wondering exactly what the purpose of the audit is and what they can expect. An external audit is performed by an independent CPA. The purpose it to determine, with reasonable assurance, that the financial statements are free of material misstatement. While the independent hile the independent auditor is responsible for auditor is responsible expressing an opinion, the board of directors is for expressing an responsible for the finanopinion, the board of directors cial statements themselves. is responsible for the financial Audits generally occur over a period of time in two statements themselves. general phases: interim and year-end. As the names imply, part of the work is performed before year-end, and the remainder after the accounting records for the year have closed, accounts have been reconciled and financial statements prepared. During the interim or preliminary phase, the auditor obtains and updates his or her understanding of the accounting systems and internal controls. Auditors will identify and “walk through” key controls, will perform tests of accounting cycles and may identify internal control weaknesses. During this phase, management and staff will provide information as to the day-to-day processing of transactions and activities that support the organization’s financial reporting function. Some staff and board members are interviewed to allow the auditor to better understand risks associated with the financial reporting process, and the auditor will meet with those charged with governance to discuss the scope and objectives of the audit. This initial phase allows the auditor to perform a required risk assessment. This simply means looking at an entity and determining the areas where errors, omissions or fraud may occur. Once this assessment has been established, the audit approach is determined and will include special focus on areas of elevated or high risk. Risk factors include complexity of transactions, knowledge of individuals performing accounting procedures, and ease of misappropriation. Risk factors include human and inherent aspects. During the final phase of an audit, the auditor completes audit procedures that include tests of balances and financial assertions. Auditors may perform confirmation of account balances and observation of assets owned, as well as tests and procedures using a sample of transactions. The auditor ultimately renders an opinion on the financial statements. The auditor will also hold final meetings with those charged with governance – often the finance or audit committee – to discuss the results of the audit, any difficulties or concerns encountered, and the presence of any identified
significant deficiencies or material weaknesses. An auditor may conclude on the financial statements in a number of ways: ❖A n unqualified opinion indicates the financial statements are free of material misstatement and stated in accordance with Generally Accepted Accounting Principles (GAAP). An unqualified opinion is often referred to as a “clean” opinion. This is, of course, the standard that all entities strive to meet. ❖A qualified opinion indicates the financial statements contain one or more departures from GAAP or components upon which the auditor could not form a clean opinion. ❖A disclaimer occurs when the auditor was not able to form an opinion on the financial statements in conformance with GAAP. A key point to understand in the relationship between the auditor and the organization being audited is the role of the auditor vs. the role of management. It is the auditor’s role to render an opinion on the content of the financial statement. Auditors may not assume a management role. In other words, auditors may not take responsibility for, or make decisions for, management. Independence is a key concept. The CPA renders an “independent auditor’s report” and must remain independent in fact and appearance. The requirement for independence often precludes auditors from performing consulting services for their audit clients, so do not be surprised when an auditor indicates a particular service is not permissible. An audit can be likened to an annual checkup for your business – a bit like a visit to your doctor. Just as your physician is not responsible for your physical well-being and good decision making, there are oard members should be certain things for sure to make time for which an auditor is dialogue with the auditor not responsible. For example, an – to understand what the audit is not designed auditor does and how that to find fraud. Many organizations are function helps the organization. not aware of this. Rest assured, however, if material fraud is detected, the auditor is required to report the information to management. All board members must understand the financial condition of the organization in order to serve and protect it. The independent auditor can be a wealth of information. Board members should be sure to make time for dialogue with the auditor – to understand what the auditor does and how that function helps the organization. The value derived from clear dialogue and a healthy relationship with the independent auditor is worth its weight in gold. – Gail Kinsella, CPA, Testone, Marshall & Discenza, LLP, CPAmerica International’s affiliate in Syracuse, N.Y. ■
Jan./Feb. 2013 More Than Money
Done well, they can become a strong revenue source
achael Ray has it so easy. When raising money for her foundation Yum-O, the celebrity chef was able to turn to friends like former “All My Children” doyenne Susan Lucci for online auction items. Recent bidders for Ms. Lucci’s vintage red leather Chanel bag ran the price up to nearly $4,000. But, have no fear – online auctions have turned into revenue streams for agencies large and small, locally-based and national in scope. Public schools, clinics and small arts organizations have all significantly profited by going this route. One of the largest online auction companies, BiddingforGood, reports having helped nonprofits raise more than $164 million since its 2003 founding.
Auction items may also come from some of the online auction companies themselves. They offer below price travel or entertainment packages that you can auction off, and you don’t have to pay the companies unless the packages sell.
Planning and Strategy
Going the online auction route is less demanding than pulling off an on-site auction because scheduling and partyplanning are not an issue. They do, however, require careful planning and staff time. Before you can post the items up for bid, you must write descriptions, take photos and be prepared to upload information. While it is possible to run an in-house “manual” auction directly off your website, especially if you have only a few items, most organizations now opt for online platforms. These platforms have the necessary technical expertise and often have international footprints. Results of online auctions are highly measurable, offer information on what item categories received bids, and provide a map for how best to run your next auction. Before you select your online auctioneer, you need to consider your overall approach. ❖ How big will your auction be? ❖ Will it be a one-time event held over a pre-determined period of time (one to three weeks appears optimum), or will it be something you do on an ongoing weekly or monthly basis? ❖W ill it have a theme? A sports-related organization, for example, might seek auction items such as sports equipment, tickets to sporting events or private lessons. ❖H ow will you measure financial success or the impact of the auction on the public’s vision of your agency?
The Real Challenge
Then, there is the major challenge: acquiring items or services. The more you gather, the more you make. Some of your usual supporters may have desirable items to donate. Those without valuable items to chip in can contribute by reaching out to local businesses for gifts of products or services. Also invaluable are “experience” items, such as lunch with an author or a tour of a local television station. Keep in mind when soliciting items that unlike what occurs at on-site auctions, where men are typically the biggest buyers, about 70 percent of online bidders are women. So solicit accordingly.
While many of the online auctioneers have a significant ongoing base of followers, it still helps to reach out to your base and let them know when the auction will occur. Urge them to bid early and often and to alert their friends. Use every social media tool you have to reach as many people as possible. Ask supporters to make use of announcements on Facebook or in the newsletters of other organizations they support. If you have a theme, music for example, place ads in arts sections of local publications, especially the free ones. Auctions are e-commerce. Have a method for responding to potential bidder inquiries or to help them troubleshoot. Remember you will be responsible for mailing or delivering the sold items, and shipping costs money. Most of the Web companies feature customer ratings, so make sure yours are on the high side.
Online Auction Sites
There is no shortage of online companies eager for your business. There are two especially big fish in this sea: MissionFish (eBay), and BiddingforGood. Both have strengths and drawbacks. Once you are registered, at little or no expense, MissionFish displays your logo, mission and a link to your website. MissionFish offers an organizational page, and your constituents can be sent links to that page. It’s wonderful that eBay automatically draws thousands of bidders, but most won’t have ties to your organization, so your auction may not enlarge your target community. MissionFish’s standard listing expenses and commissions are lower than BiddingforGood’s. Unlike eBay, most bidders on BiddingforGood will be your supporters, so you must be far more aggressive about getting the word out. Many nonprofits have found Biddingfor Good to have an easier interface when they want to add items. BiddingforGood also allows for a more customized home page that better allows you to profile your organization and describe auction items. On the negative side, this site is expensive: nearly $600 per year plus up to 9 percent of your revenue. Other auction platforms that specialize in nonprofit ventures include charitybuzz, BenefitEvents.com. and Wild Apricot. – Anne Sommers ■
Jan./Feb. 2013 More Than Money
Benchmarking continued from front After you determine your baseline, you can determine what your benchmark is. The benchmark is the desired level of results you hope to achieve. After you determine the benchmark, it is time to outline the best practices and key activities that need to be put into place to help you achieve your benchmark. Your CPA can assist you with the ratios and determining your baseline.
Who should you benchmark against?
Once benchmarks have been established internally, the next step is to benchmark your organization against others. The hardest part will likely be selecting benchmarking partners that are similar to your organization. Is there an association, nonprofit publication or website that collects statistics that would be pertinent to your nonprofit? If not, perhaps you could ask them if it would be possible for them to begin collecting those statistics. The website GuideStar (www.guidestar.com) provides financial statements and tax returns of many nonprofits. At our CPA firm, Wegner CPA’s, LLP, an affiliate of CPAmerica International, our audit practice has historically
been concentrated in the nonprofit area. In 2011, our staff compiled information from our audits and IRS Form 990s to determine averages for different key financial, and some nonfinancial, statistics. We then produced a benchmarking report that we sent to all of our nonprofit clients to use in their own organizations to help them establish benchmarks. We now plan to do this annually. Many of our clients have appreciated this valuable information, and they have begun to understand the importance of using benchmarking as a tool to improve their performance. If you’re not benchmarking already, consider beginning. It could become one of your organization’s most effective tools. – Jason Stephens, CPA, Wegner CPA’s, LLP, CPAmerica International’s Madison, Wis., affiliate ■
More Than Money The technical information in this newsletter is necessarily brief. No final conclusion on these topics should be drawn without further review and consultation. Please be advised that, based on current IRS rules and standards, the information contained herein is not intended to be used, nor can it be used, for the avoidance of any tax penalty assessed by the IRS. © 2013 CPAmerica International
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