Fall 2016 issue of Horizons

NOT-FOR-PROFIT

Not-for-profit organizations with diversified revenue streams, including various program revenues for services provided and a variety of donors, such as private and public foundations, corporations, government agencies and individuals, will be better able to maintain successful operations and provide ongoing valuable services in our communities, even in tough economic conditions. Watch Estimates and Valuations Changes in estimates and valuations that result from significant economic events and the resultant effect on a not-for-profit organization’s financial statements should be closely evaluated. In particular, a not-for-profit organization with significant pledges should review and understand the promises pledged but not paid by donors, the timing of payments expected to be received, as well as the donors and all communications between the donors and the organization. Based on these factors, the not-for-profit organization should develop and record an estimated allowance for potentially uncollectible promises and a discount to present value for the pledged gifts expected to be collected over several years. The accuracy of such estimates and the factors on which these estimates are based can significantly impact the presentation of a nonprofit organization’s financial position in the near term, as well as future years, and should be carefully analyzed and reviewed, particularly when significant economic changes have occurred. In a similar manner, the allowance for potentially uncollectible accounts receivable should also be analyzed carefully in consideration of the impact of the economy on the organization’s clients and others providing program service revenue to the organization.

As demand for services provided by not-for-profit organizations continues to increase, continuous changes and adjustments toward providing more services with fewer resources are being implemented.

The average rate of return for endowments decreased to 2.4 percent in 2015, according to the 2015 NACUBO-Commonfund Study of Endowments report. Most organizations’ spending policies use the moving average method, with spend rates typically between 3.0 and 5.5%. Lower returns on investments in 2015 and expected low rates in 2016 mean organizations should evaluate their spend rates and consider whether the approved spend rate should be adjusted downward to maintain prudence of the entity’s spending policies. This decrease in the expected endowment earnings will have a negative impact on operating budgets of organizations with a heavy reliance on their endowments and may force them to make tough budget decisions. Diversify Revenue Streams Not-for-profit organizations continue to use strategies to diversify their revenue streams and strengthen relationships with current donors and funders. When nonprofit organizations rely solely on annual giving from the same pool of donors each year, these organizations are at risk for drastic increases or decreases in revenue if these donors are directly impacted by economic changes.

page 30 | horizons Fall 2016