Streetsmart Financial Basics for Nonprofit Managers

THOMAS A. MCLAUGHLIN is the founder of McLaughlin & Associates, a nonprofit consulting firm. He is a contributing editor for the NonProfit Times, and he taught financial management and strategic management to mission-based MBA and international students at Boston University and Brandeis University for 28 years.

• Preface xiiiAcknowledgments xviiNote to Reader xixPART ONE Analysis 1CHAPTER 1 Structure of Nonprofit Organizations 3Corporations 3Programs 6Hybrid Corporations 8Loss of Tax-Exempt Status: The Monster Within 14CHAPTER 2 Mission: Managing Your Two Bottom Lines 17The Role of a Value System 18The Nonprofit’s Dilemma and How to Solve It 20CHAPTER 3 Accounting as a Second Language: A Nine-Point Program 23The Entity Principle 23Money Measurement 24Conservatism Principle 24The Cost Concept 26The Materiality Principle 27Going Concern 29Dual Aspect 30Realization Principle 32Matching Principle 33CHAPTER 4 Assets Are for Boards, Activities Are for Managers 35Concepts Versus Details 36Boards Invest, Managers Spend 37If It Has to Be Decided Today, It’s Probably the Wrong Question 38Boards Own the Controls, Managers Implement Them 38CHAPTER 5 Balance Sheets: How They Get That Way 39Current Assets (from IRS Form 990, page 11) 40Noncurrent Assets 43Current Liabilities 45Noncurrent Liabilities 45Making the Balance Sheet Dance 49Transparency, Thy Name Is IRS Form 990 52What to Do 53CHAPTER 6 Financial Analysis: A Few Analytical Tools 67Financial Statement Analysis for Math Phobics 68Current Ratio 75Days’ Cash 77Days’ Receivables 79Cash Flow to Total Debt 81Debt to Net Assets 82Operating Margin 85Accounting Age of Plant/Equipment (or Land, Buildings, and Equipment) 86A Footnote 87CHAPTER 7 Beyond the C3: Alternate Corporate Structures 89Commonly Available Structures 92PART TWO Accounting 95CHAPTER 8 Nonprofit Accounting: Acknowledging the Strings Attached 97Net Asset Categories 98Other Provisions 99What It All Means 99CHAPTER 9 Cost Accounting: How Much Does It Cost? 103A Form of Management Accounting 104Indirect Costs 106Certain Support Costs Get Assigned to Other Support Costs 106Breakeven Analysis—Another Use for Cost Data 110Cost Accounting versus Cost Reporting 113CHAPTER 10 Auditing: Choosing and Using an Auditor 115Audit, Review, and Compilation 117The Auditor Market 119Getting Value from the Audit 122Conclusion 124PART THREE Operations 125CHAPTER 11 Cash Is King 127Up the Balance Sheet 128How Much Cash Is Enough? 141Conclusion 145CHAPTER 12 Capital: Not a Four-Letter Word 147Sources of Capital 148The Mechanics of Capital Financing 150The Present Value of Money 156The Great Divide among Nonprofits 157Future Access to Capital Markets 159The Role of Net Assets 161Strategic Capital Management 161CHAPTER 13 Budgeting: Taming the Budget Beast 163Playing Revenues Like a Symphony 165Expenses 166Conclusion 176CHAPTER 14 Indirect Costs and Other Despised Items 177Rules Govern Audits, Economics Rules Budgets 179Still, It’s Low That Counts 182Secrets of the Indirect Cost Game 185CHAPTER 15 Managing Money-Losing Programs 191The Origin of the Problem 192Solutions 192Other Sources of Value 192Ding Ding Ding Ding Ding! 194CHAPTER 16 The Milestones of Spending on Overhead Costs 199CHAPTER 17 Pricing: How Much Should It Cost? 205Pricing Methodologies 208Going the Other Way—Contractual Adjustments and Subsidies 212Pricing Strategies 213How to Price 214CHAPTER 18 Profit: Why and How Much? 217Profit Defined 217Uses of Profit 218Profit—How to Get It 226What Can Be Done 228CHAPTER 19 To Raise More Money, Think Cows 229Donations 230Bequests—Cow to Charity 230Charitable Remainder Trusts—Milk to Beneficiaries, Cow to Charity 230Pooled Income Funds—Donors Put Their Cows in a Herd, Keep Rights to Milk 233CHAPTER 20 Owning a Building: What’s in It for You? 235A Three-Part Calculation 236CHAPTER 21 Insurance: The Maddeningly Complicated Art of Covering Your Assets 239To Insure or Self-Insure? 241Risk Management 242Captive Insurance Companies 245Quality Assurance in Disguise 246CHAPTER 22 Internal Controls for External Goals 249The Elements of Internal Control 251How to Monitor the System 264Maintaining the System 266Conclusion 268CHAPTER 23 Scrutiny Intensifies 269Some Predictions 272The Growing Industry of Charity Watching 274CHAPTER 24 Management Controls: Toward Accountability for Performance 279Management Controls circa 1980 280Beyond Management Controls in the Twenty-First Century: How to Do It 281Messages 281How to Prepare—Changes in the CFO Role 283It’s Called Accounting for a Reason 286Appreciate the Abrupt Change 287Frame the New Role 288Meet Your New CFO 288PART FOUR Planning, Control, and Miscellaneous 289CHAPTER 25 Finance Is Oil, Development Is Water 291It’s All about Time 291The Fix 293CHAPTER 26 When Do You CFO? 295DIY 296The Financial Tasks Multiply 296CHAPTER 27 Business Models and Business Plans 301First the Model, Then the Plan 302How to Build Your Business Model 304What, Exactly, Is a Business Plan? 305What Is in a Business Plan (Usually…)? 306Start-Up Nonprofits 306The Restructuring Nonprofit 307New Program or Division 308Goals Drive the Plan 309CHAPTER 28 How to Beat the Next Recession 311Understand the Demand Pattern for Your Services 312Prepare for Reductions—in New Services 312Anticipate Foundation Behavior 313Proactively Communicate with Your Staff 314Consider Repurposing Your Reserves 315Stay Calm 315Appendix A A Financial Management Cultural Primer 317Appendix B Budget Bloopers 323Appendix C Using the Website: Table of Contents with Commentary 327Index 333