Professional Accounting Blog

    Accounting For Your Prosperity

    When Should a Not-for-Profit Organization Make a Profit?

    Posted by Lynn Koster on May 20, 2014 9:18:00 AM

    non-profit-make-profitHave you heard that a not-for-profit should not make a profit? Crazy, right? What happens if an organization ends every year without a profit? One obvious answer is that the organization will begin the next year with no available cash to operate, because there have been no profits to provide for the opportunity to build cash reserves for unforeseen events. And one thing we are all learning, there are always unforeseen events!  So when should a not-for-profit organization make a profit? Answer: Always!

    Now that might sound like a lofty goal to some organizations. It is a struggle to break even! It might also sound confusing to some board members and donors. Why are they asking for financial support when they have resources that are not being used? Yet, this type of thinking is very short sighted - especially when considering the future long term goals and sustainability of an organization. At Meaden & Moore, we view our not-for-profit clients as businesses and a healthy business operates effectively, efficiently and profitably. In the case of profitable not-for-profits, surplus cash helps to create reserves, enables the payment of timely expenses, and most importantly helps to avoid the panic and desperation that accompanies financial stress. It is more difficult to focus on mission goals, client service, and community outreach effectively when there are impending financial worries.

    Thus the need to be sustainable is critical. The word to sustain is defined as to maintain, to support, to endure - to be able to be used without completely being used up or destroyed - to be able to continue or last for a long time. A donor should want to support an organization that is able to continue to provide services, goods, and support because the organization is important to the community and its clients and is able to meet goals to make a difference. A donor should shy away from providing support to an organization that is in financial trouble as they may feel their contributions are fueling a sinking ship.

    There are some clear steps that an organization may consider as part of their procedures to help management, governance and volunteers stay on the path of financial health and sustainability. Consider the following suggestions: 

    Budgeting

    Preparing an annual financial statement budget helps to clearly define the organizations' plan. The budget process should include a review of the actual results from prior years in combination with current strategic plan goals. There are various formats that can be used and a common format includes columns for actual monthly and year to date results and the year to date and annual budget plan. A reviewed, approved and balanced budget should be in place before the fiscal year begins. 

    Monitoring

    While the existence of a budget is very good start to financial health and sustainability, it is crucial that it is monitored. For example, actual results are compared and tracked against the annual budget. The monitoring process should include a periodic review of the actual year to date results against a year to date budget and the total annual budget. A column on the monthly internal management financial reports should include an over/under budget column or variance column to clearly show where the organization stands from actual results to the budget. Management should review this and provide explanations for all significant variances either positive or negative. A finance committee should be part of the review and obtain an understanding of all management explanations. And a summary reporting of the results should be made periodically to the board of trustees.

    Action

    The budget sets the goals, monitoring tracks the progress, and action provides the support to make changes in the organization based on the information. This step is key to sustainability. Once an issue has been identified, taking action to expand a program based on an increase in restricted revenue received for that purpose or cutting back on general expenses when contributions from the annual campaign did not reach budgeted goals are two examples. 

    Financial health of an organization includes many best practices which incorporate clear financial reporting, periodic meaningful communications, engaged oversight of governance, and opportunities to make timely changes when needed. The process to prepare a meaningful and realistic budget with the opportunity for review and analysis through monitoring the status and finally taking corrective actions as a result can be effective tools on the road to sustainability. 

    Use this opportunity to consider the sustainability plans at your organization and how Meaden & Moore might be able to help you.

    Economic Outlook

    View Lynn's other Not-for-Profit posts:

    4 Considerations for Non Profit Transparency
    5 Things to Consider Before Joining a Board of Directors
    Handling Your Funding: Capital Assets with Restricted Donations

    Image courtesy of ddpavumba via FreeDigitalPhotos.net

    Topics: Not For Profit

    Lynn Koster

    Written by Lynn Koster

    Lynn Koster is a Senior Manager at Meaden & Moore in the Assurance Services Group and serves both closely held businesses and not-for-profit clients.

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