Viewpoints

A Holiday Cornucopia of Ideas

Gerald Archibald

Originally Published In:
ROCHESTER BUSINESS JOURNAL
September 2007
Author: Gerald J. Archibald, CPA

“Get your facts first, then you can distort them as you please.”  - Mark Twain

The vast majority of calendar year-end nonprofits are in the midst of preparing, reviewing, and obtaining Board approval for their 2008 operating and capital budget plans.  Government-funded nonprofits have a particularly difficult challenge this year.  That is, the uncertainty of what the Spitzer administration intends to do to control the rate of growth in state spending, focused mainly on the $50 billion a year Medicaid program.

I have maintained for some time now that budget planning in the nonprofit sector should be based on the basic assumption of “doing more with less”.  The economics of double-digit fuel, utility, health insurance, workers compensation, and communication cost increases does not mesh with government budget projections that may be limiting government funding increases to less than 3% for next year.  This column is directed at providing the ideas for your consideration that might close the gap between operating cost increases and available revenue sources.

For the record, I do not support the application of Mark Twain’s above quote regarding distortion of facts.  Budgets must be based on the most appropriate and reasonable assumptions known at the time the budget is developed.  Since the New York State budget is not typically approved until April or May of each year, the estimates of revenue increases to be received from state funding sources are guesstimates at best.  This leads to my first recommendation.  Every budget proposal should include a list of key assumptions used in preparing the budget.  And perhaps most importantly, management and the board should understand the aggregate dollar impact on the organization of a 1% change in the amount of New York State and other government funding received by the organization.  That is, if your budget assumption projects a 3% increase in government funding, what is the dollar reduction that will occur if the percentage is reduced to 2%?  This approach is commonly referred to as a “sensitivity analysis”.  In my opinion, it should be a requirement of each and every nonprofit budget documentation and proposal, particularly for those organizations that receive more than 50% of their revenues from government payors.

So, the picture is quite clear.  Nonprofit organizations face another year of uncertainty with respect to the fiscal constraints that directly impact on their ability to provide program services and fulfill the objectives of their mission and vision statements. 
Budget preparation and related processes for a nonprofit organization can be time-consuming and complicated, particularly if there are substantial uncertainties with respect to the revenue to be received and/or the volume of services to be provided.  Therefore, for most of my career, I have been a strong supporter of “zero-based budgeting”. 

Investopedia.com defines zero-based budgeting as “A method of budgeting in which all expenses must be justified for each new period… [It] starts from a “zero base” and every function within an organization is analyzed for its needs and costs. Budgets are then built around what is needed for the upcoming period, regardless of whether the budget is higher or lower than the previous one.”

In the spirit of taking the challenge of reasonable and appropriate budget projections, I offer the following 10 areas for thorough investigation and research.  Your individual organization’s approach to these 10 areas can “close the gap” between limited revenue potential and inflationary increases in operating costs. 

1) Outsourcing administrative support functions – it is time for the nonprofit sector to embrace and follow the lead of the for-profit world in this country.  Evaluate each of the following functions and perform an honest assessment of whether the cost of providing these functions with internal staff exceed the potential cost and value of contracting these services to an organization with these functions as their core competency. 

Traditional functions for outsourcing consideration include payroll services, benefits administration, investment management, bookkeeping and accounting, cost report preparation, retirement plan administration, fundraising campaigns, maintenance, janitorial, temporary staffing, recruiting, employee assistance programs, and other human resource functions.

Non-traditional functions considered for outsourcing include document production, personnel administration, secretarial and administrative support services, reception functions, voice mail, work site support and maintenance of information technology, network administration, marketing and public relations, staff education and training, record retention and storage, electronic funds transfers, electronic data interchange, and volunteer coordination.

Your outsourcing mission, should you choose to accept it, is to identify the services that offer the potential of a cost-effective result and find a vendor that best meets your needs in each functional area.

2) Fuel costs, both transportation and utility – with gasoline pushing $3.50 per gallon and $100 per barrel oil apparently inevitable, this cost area is generally viewed as uncontrollable.  Or, is it?  Consider the following:

• Conversion of your vehicle fleet to hybrid or alternative fuel options may represent the most significant long-term operating cost benefit in this area.
  
• If you qualify, your organization should also apply  for an exemption from the need to pay the Federal Fuel Excise Tax on gasoline purchases.
  
• Using computer software and GPS technology to  establish the most efficient transportation routing system for your organization can produce significant cost reductions as well.
  
• Vehicle fleet maintenance and repair at the lowest cost with the best quality can produce cost savings.
  
• IRS mileage reimbursement rate pushing $0.50 per mile, carpooling and collaboration with other  nonprofits to identify the potential for elimination of duplicative transportation services may provide cost reduction opportunities.
  Be sure to evaluate your employee reimbursement for business miles driven and provide appropriate oversight and controls regarding the accurate reporting of business miles reported for employee reimbursement.

3) Health insurance costs – recent premium cost increase announcements by Excellus have continued the multi-year trend of healthcare cost increases significantly exceeding the “core inflation percentage”.  If you have not already done so, please evaluate the following options available for controlling the rate of health insurance cost increases for your organization.

• Evaluate the new product offerings from Excellus,  Preferred Care / MVP, and Aetna.  Generally speaking, the new product offerings involve the tailoring of benefits offerings to achieve a desired economical monthly health insurance premium for both singles and families.
  
• If you have the option, remove your organization  from the higher cost, richer benefit community rated product offerings which, due to the exodus of major corporate participation, now represent a  higher cost risk pool of generally “sicker” and higher healthcare cost subscribers.
  
• Evaluate the benefits and applicability of establishing health savings accounts (HSAs), health reimbursement accounts (HRAs), and flexible spending accounts (FSAs) to achieve improved cost efficiency in your health insurance  benefit program for your employees.
  
• Excellus offers a product that rewards a subscriber for healthy living.  Voluntary smoking cessation clinics, weight loss programs, and healthy exercise programs for your employees will pay dividends in the future in terms of lower healthcare costs.

4) Retirement plan funding – the vast majority of nonprofit organizations contribute between 3% and 6% of eligible participant salaries to some form of retirement plan (e.g., 401(k), 403(b), defined contribution plan, defined benefit plan, etc.).  The question to evaluate is who should receive the benefit of these contributions.  Many organizations are looking at a greater reward in traditional retirement funding for longer term employees, age-weighted plan design and/or providing incentives through matching programs to those individuals willing to contribute to their own retirement funding.  Please contact your retirement plan administrator regarding the options available to you.  This is particularly important in light of the recently enacted final IRS Treasury Regulations regarding discrimination testing that will be effective on January 1, 2009.  These regulations may require your plan to be modified to meet these new requirements.

5) Telecommunications costs – managing the ever-changing cost structure of voice, data, web, broadband, and wireless communications is a challenge for every organization.  Based on continued study results showing a high rate of billing errors from telecommunications service providers, an annual telecommunications audit is certainly appropriate for consideration.

The basic question to be answered is as follows: Are we achieving the most cost-effective result for our organization’s needs in the area of telecommunications?  If anyone in your organization can pick up any phone and make a long distance call without providing a passcode and/or if you have more than 10 cellular phones/wireless communication devices assigned to staff, I can virtually guarantee that there are savings waiting to be identified in this area.

Perhaps the best thing about a communications audit is that there are many vendors who will provide the services on a contingent fee basis.  That is, they must identify savings in order for you to incur costs associated with the audit.

6) Document imaging/paper and printing supply costs – I have one word for you in this area: Xerox.  Support a local company that has developed consulting expertise in advising organizations regarding the most cost-effective processes for managing your costs in this area.

Look around your office as you read this column.  If you see more paper than you care to see, you are a candidate for cost reduction in this area.  There are obviously many other vendors who provide similar services in conducting document management audits.  Choose the vendor that is most appropriate for your situation.

7) Worker’s Compensation costs – The Bonadio Group has recently conducted a benchmarking analysis in the area of workers compensation.  Surprisingly, nonprofit organizations in the same program service area have workers compensation costs per full-time equivalent employee that cover a range from $250 per employee to $1,800 per employee.  If you look at the reasons for an 800% differential between similar service providers, it will generally result in the identification of the core causes contributing to this result.

Risk management policies and procedures together with an aggressive safety training and incident reporting system are the keys to reducing costs in this area.  Legislative reforms that were enacted earlier this year in New York State will help in the long run to reduce costs in this area.  However, it is the initial avoidance of the injury or accident that has the greatest impact on cost reduction for your organization.

8) Information technology costs – ask your Chief Financial Officer the following questions: “How much are we spending on technology and employer training this year?  What percentage of our operating budget do these areas represent?”
Technology costs and training on technology applications continue to represent the “black hole” for this decade.  Consider the following actions:

• Establish a separate capital budget for technology equipment and software
  
• Perform a technology skills inventory for all personnel
  
• Identify technology training and staff development needs
  
• Conduct a productivity improvement review to identify opportunities for elimination for duplicative or excessive reporting and opportunities for improving staff efficiency
  
• Conduct a technology audit for your organization

9) Personnel costs, staff vacancies and salary deferrals – for most nonprofit organizations, salary and fringe benefits represent 60-75% of total operating expenses.  I would be remiss by not including strategies for consideration in this area.  There are many, many opportunities for achieving cost-efficiency in this area.  However, the two that I consider most beneficial are as follows:

• Planning and monitoring personnel vacancies is a  must. Your budget process should identify a “vacancy factor” for approved personnel positions that will remain vacant for some period of time during 2008.  Vacancy factors can range anywhere from 1% to 10% of total personnel salary costs.  In addition to identifying a budget assumption for your vacancy factor, consider the  possibility and reasonableness of increasing the assumption by one or two percent and the cost reduction impact that can be generated from not filling open positions.
  
• Annual salary increments – if you receive more than 50% of your revenue from government sources, consideration should be given to deferring on any and all salary increments for 2008 until the State budget is passed.  Deferring  on salary increments is becoming a more popular  trend for government-funded nonprofits.  It sets the tone of budget discipline throughout the organization.  It allows management and Board flexibility with respect to controlling personnel costs in line with revenue expectations.  Salary increments, once adopted, can be made retroactive.  In addition, this strategy allows for lump sum salary enhancements later in the calendar year without implementing a base salary adjustment which will affect future budget periods.

10) Fundraising opportunities – the previous nine areas focus on cost control and containment.  I must provide one opportunity for strategies that increase the revenue side of the ledger.  Consider the following strategies in the fundraising area:

• Implement or expand a memorial donation program
  
• Establish an endowment fund
  
• Scrub your mailing list for accuracy and elimination of duplication and necessary costs
  
• Establish a Legacy Society to recognize individuals who have named your organization in their wills while they are still alive
  
• Continue to emphasize successful and profitable special events
  
• Make sure your target constituency knows your “wish list” of why they should give to your organization

At a minimum, I hope that I have provided you with sufficient food for thought.  Follow the immortal words of Winston Churchill in your budgetary process.  He said, “History will be kind to me, for I intend to write it.”  Budgets are one critical component of writing the future history for your organization.

Disclaimer: The Bonadio Group provides the information in Viewpoints for general guidance only, and does not constitute the provision of legal advice, tax advice, accounting services, investment advice, or professional consulting of any kind. The information provided herein should not be used as a substitute for consultation with professional tax, accounting, legal, or other competent advisers. Before making any decision or taking any action, you should consult a professional adviser who has been provided with all pertinent facts relevant to your particular situation. Tax articles in Viewpoints are not intended to be used, and cannot be used by any taxpayer, for the purpose of avoiding accuracy-related penalties that may be imposed on the taxpayer. The information is provided "as is," with no assurance or guarantee of completeness, accuracy, or timeliness of the information, and without warranty of any kind, express or implied, including but not limited to warranties of performance, merchantability, and fitness for a particular purpose.