Don’t wait for your next audit to assess revenue. You can employ the same techniques an auditor uses to monitor your organization’s financial health. When professional auditors review a not-for-profit’s books, they usually spend significant time on revenue. Inadequate revenue — or revenue trending in the wrong direction — can provide an early warning of future trouble.
Contributions and Grants
Start by comparing the donation dollars raised in past periods to pinpoint trends. For example, have individual contributions been increasing over the past five years? What campaigns have you implemented during that period? You might go beyond the totals and determine if the number of major donors has grown.
Also estimate what portion of contributions is restricted. If a large percentage of donations are tied up in restricted funds, you might want to re-evaluate your gift acceptance policy or fundraising materials.
Pay attention to grant trends, too. Grants can vary dramatically in size and purpose — from covering operational costs, to launching a program, to funding client services. Did one funder supply 50% of total revenue in 2019, 75% in 2020, and 80% last year? A growing reliance on a single funding source is a red flag to auditors and it should be to you, too. In this case, if funding stopped and impacted your financial health, your organization might be forced to close its doors.
Fees and Dues
Fees collected from clients, joint venture partners or other third parties can be similar to fees that for-profit organizations collect. They’re generally considered exchange transactions because the client receives a product or service of value in exchange for payment. Sometimes fees are charged on a sliding scale based on income or ability to pay. In other cases, fees are subject to legal limitations set by government agencies. You’ll need to assess whether these services are paying for themselves and affect your organization’s financial health.
Also, if your not-for-profit is a membership organization and charges dues, determine whether membership has grown or declined in recent years. How does this compare with your peers? Do you suspect that dues income will decline? You might consider dropping dues altogether and restructuring. If so, examine other income sources for growth potential.
Handling Anomalous Data
As you make year-by-year comparisons for your financial health, keep in mind that numbers from 2020 and 2021 — or the height of the COVID-19 pandemic — may be less useful or reliable. If, for example, you closed your doors and discontinued fundraising for several months in 2020, figures from 2019 and before may make better comparisons with current numbers. For help interpreting such data and for answers to your revenue questions, contact us.
To learn more about how PKF Texas serves not-for-profit organizations, visit www.PKFTexas.com/NotForProfit.