This is an excerpt from Leisure Services Financial Management by David N. Emanuelson.
Fundamentals of Nonprofit Budgeting
Back in the day when YMCAs, Boys Clubs, Girl Scouts, and a few other charitable nonprofit leisure organizations received a good amount of financial support from United Way and Community Chest, these nonprofit organizations usually had only one fund to manage. That fund, today called the operating fund, received the revenues from fund-raising and fees and distributed the money.
The reason for just having one fund was that United Way and Community Chest preferred to receive a relatively simple budget from the agencies when they made their annual requests. The United Way or Community Chest board would review the budgets of the YMCA, Boys Club, Girl Scouts, and social services agencies and then determine how much money it would seek in its annual fund-raising campaign.
As United Way became more about providing funds for in-demand social services, funding for youth leisure services began to decline. During the heyday of United Way, there was a prohibition against individual agency fund-raising so as not to diminish the United Way campaign. But as it became clear that the burden of fund-raising would fall on the agencies themselves, the prohibition was removed. Today, United Way and Community Chest funds primarily go to social services. Some funding still exists for youth leisure services, though, such as soccer and YMCA memberships in the form of money to underwrite scholarships for children who otherwise could not afford to participate.
With the decline in United Way funding, one of the first changes made by boards of directors of nonprofit leisure services agencies was to develop alternative sources of revenues. As chapter 7 described, in many cases board members would rather set policy than raise funds. One policy they set was a focus on revenue generation, rather than fund-raising, to defray operating expenses while still focusing on the agency mission.
The budgeting process for nonprofit leisure services is both technical and political. The technical aspects involve following accounting standards once budgets are adopted for the various funds. Politics come in when board members have their own ideas about the direction the agency should take and how the money should be raised.
Leisure services managers are ethically bound to make it clear to the board of directors that political concerns must never get in the way of technical concerns, such as adherence to the FASB guidelines or IRS codes. Another responsibility is to make sure political concerns never get in the way of managing the overall financial health of the agency.
Applying fund-raising principles to our example of the Children’s Discovery Museum of Recreation, the museum raised $200,000 in contributions for the unrestricted fund and $1 million in contributions for the temporarily restricted fund to build the space-shuttle wing. The unrestricted contributions could have been United Way or Community Chest donations, but they were not. Instead, they resulted from an annual fund-raising effort of soliciting members to contribute tax-deductible donations in addition to their membership fees. To encourage the extra donations, the membership director of the museum might have offered social events that charged extra fees.
The capital campaign for the space-shuttle wing was conducted by a professional consultant who targeted donors to make large contributions. As a large nonprofit organization, hiring a consultant allowed the board of directors to oversee the effort rather than getting directly involved.
Whereas fund-raising is partially the responsibility of the board of directors and partially the responsibility of designated staff members, managing program revenues is exclusively the responsibility of the staff. Because revenue-engine and mission program revenues are the major sources of funds, predicting the amount that each will generate is crucial for the financial health of the nonprofit leisure services organization. This is not difficult if the prediction process is a function of historical data. Therefore, keeping historical program revenue data is essential.
In the example of the Children’s Discovery Museum of Recreation, admissions and memberships are the program revenues. The number of line items the museum financial manager uses in the budget is a function of how that information might be used to make management decisions.
For instance, if it’s important to track admissions by days of the week, a line item for daily revenues for each day is useful. That way, the budget can be used much the same way an admissions report is used to manage staffing levels of the facility based on attendance. The same budgetary line-item process can be developed for the concessions line items under program revenues. Revenue for concession stands could be separated into line items to see which are the most profitable. Staffing levels and their associated costs could be managed by identifying revenue streams and assigning more people to the concession stands that are expected to be busy and fewer people to the concession stands that aren’t.
Budget line items for program revenue, therefore, become a management tool for making decisions. The budget is different in that way from the statement of activities introduced earlier. The statement of activities shows the net effect of decisions that occurred during the fiscal year. Program budgets are the tool that makes those numbers come out good instead of bad.
Cash flows are the movement of money within an entity, in this case, the individual fund entities of nonprofit organizations. The two types of cash flows are inflows and outflows, money moving in and out. Cash flows are conceptual in that inflows are derived from revenue streams created by revenue and nonrevenue engines, and outflows are created by expenses.
The timing of inflows and outflows is important to a nonprofit agency that doesn’t carry large balances in its funds. In the old days, leisure agencies were not permitted to carry large balances by the United Way or Community Chest because having a large fund balance was a sign it didn’t need fund-raising assistance.
Because of low fund balances and the resulting low cash reserves, leisure services agencies tended to run short on cash until they received their first advance from United Way or Community Chest. With lower levels of funding coming from these organizations, nonprofit leisure agencies are now permitted to carry larger fund balances in their operating funds. Cash-flow management becomes more about making sure that membership fees are received in a timely manner than waiting for the United Way or Community Chest check.
From a technical point of view, cash-flow management begins with making sure FASB guidelines are followed. The “FASB is concerned with how entities report their overall financial position and operating results, not with the specific funds they maintain” or dollar amounts in those funds (Granof and Wardlow 2003, p. 297). This makes nonprofit leisure organizations similar to businesses. The FASB position suggests that nonprofit organizations maintain a number of entities in a businesslike way, but not that they act like businesses entirely.
This would suggest that the essence of managing funds in a businesslike way is measuring the cash flows of each fund. But in the end, the FASB has little concern for whether the nonprofit entity is profitable; it is more concerned that the reports are accurate and follow GAAP.
In addition to operating activities, cash flows are budgeted for investing activities and financing activities, the two financial activities upon which nonprofit organizations focus. Pledges and contributions are activities that take place within certain funds, and exchange transactions are activities that take place in other funds. Depending on the nonprofit organization, these cash-flow activities are managed in segregated funds, each with its own budgeted revenues and expenses.
If cash-flow management is the essence of financial management in the nonprofit sector, the challenge that most nonprofit organizations face, particularly the smaller ones, is to make sure that the outflows do not exceed the inflows. For larger organizations, the challenge is to make sure there is not a huge amount of surplus revenues caused by excessive inflows.
FASB standards are important in terms of their effect on the preparation of financial statements, budgeting, and financial management. The most important FASB topic discussed in this chapter is how nonprofit leisure services managers use their understanding of nonprofit financial management to advance the mission of the organization. In nonprofit management, the ability to manage cash flow is a tool that nonprofit managers use to accomplish good things.
One budgeting issue related to nonprofit financial management in leisure services that other nonprofits may not confront is cash-flow timing. Nonprofit organizations that carry large fund balances, much of it in the form of cash on their balance sheets, have a large enough cushion to pay their bills at the beginning of the fiscal year. But consider a local youth baseball nonprofit organization as an example. It needs to order equipment and uniforms for the players before the season begins. To do so, the program needs to have cash available to pay the sporting goods store shortly after the equipment and uniforms arrive.
If the youth baseball organization has a relatively lowcash balance at the end of the season, it needs to make sure registration for the next season takes place far enough in advance to have the cash on hand to pay for equipment and uniforms when they are delivered. That is what cash-flow management means to a small nonprofit leisure services organization.
For larger nonprofit leisure services organizations, cash management becomes an issue if they don’t have enough cash to pay bills at the beginning of the fiscal year. More often than not, cash-flow management is an issue during capital projects, which provide two cash-flow management challenges. The first is when a capital campaign falls short of raising enough money to complete the project. That happened to the Geneva Lakes Family YMCA in Wisconsin in 2001. During the capital campaign for a new swimming pool, the YMCA raised $750,000 of the $1 million it needed for the project. When it seemed probable that the final goal would not be achieved, the YMCA had to decide what to do with the money it had raised: Either return it to donors or build the addition using the $750,000 and borrowing the other $250,000. It chose to borrow the balance.
The other cash-flow challenge the YMCA faced was collecting the original $750,000 from the pledges it had received. Some of the pledges were slow coming in while the project was under construction. Since the YMCA did not have the cash on hand in other funds to loan to the capital project, it had to borrow more money via a bridge loan to pay the contractor until the donations were paid. A bridge loan is a short-term loan used until permanent financing is secured or the obligation is met.
Cash-flow issues can exist for medium and large nonprofit leisure services agencies in their operating budgets as well. Many large agencies live hand to mouth when it comes to cash flow. Larger metropolitan YMCAs, which share funding with their suburban branches, have cash-flow problems from time to time. The solution that many nonprofit leisure agencies adopt is to acquire fund balances and cash during their fat years that will get them through their leaner years. But if there are no fat years, the only other solution is to go out of business, so it is essential for nonprofit leisure organizations to create appropriate fund balances.
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