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Think Like an Auditor: What Can You Learn About Your Revenue Picture?

11/06/2018 Lauren Kreutzinger

When auditors examine a nonprofit’s financial statements, much time is spent evaluating the revenue figures. They look at the accounting methods used to record revenues and perform a detailed income analysis to gain a true understanding of the organization’s revenue profile, helping them get up to speed on the nonprofit’s financial health.

Get ready to roll

Whether or not you employ external auditors, audit techniques can be used to get a better view of your organization’s revenue. These techniques include year-to- year analysis, month to month income analysis by revenue stream, ratios for trend review, and benchmarking to other nonprofits. In particular, consider the following:

Individual contributions. To some degree, almost all nonprofits rely on contributions from supporters to balance their budget. Compare the dollars raised to past years and see if you can pinpoint any trends. For example, have individual contributions been decreasing in recent years? What campaigns have ended during that period? Go beyond the totals and determine, for instance, if the number of major donors — say, those who give $1,000 or more a year — has been decreasing. You can use the trends from the data to possibly increase your contributions in the current year. For example, are there past contributors who have not contributed in the current year? If so, you can have your board or development team contact those donors personally and request a current year donation. As those donors have supported the Organization in the past, it is possible they simply need a specific ask as a reminder to donate in the current year.

Also, it’s always beneficial to know what portion of contributions a donor is contributing are restricted for use or time. If your organization has a large percentage of its donations tied up in restricted funds, you might want to re-evaluate your gift acceptance policy or fundraising materials to make sure you’re pursuing contributions that give your organization the most flexibility. At first thought, a donated piece of land may seem like a generous gift, but if that land is not able to be sold for any reason, and the land does not fit a purpose for your organization, the donation may not be one you want to accept. A possible gift acceptance policy to adopt could be, “the organization only accepts cash and stock donations.” There can also be a policy in place stating all stock will immediately be liquidated upon receipt.

Grants. Grants include funding from corporate, foundation, and government sources. They can vary dramatically in size and purpose, from grants that cover your operational costs, to monies for launching a program, or payment for services to clients. For example, a state agency may pay you $500 for each low-income, unemployed individual who receives your job training.

Pay attention to trends here, too. Is there a grant that has a “cooling off period” and only allows an organization to be awarded the grant every other year? If the trend shows the grant will not be awarded in the current year, do you need to look into applying for a new grant to cover the needed funds? It could also remind you to verify that an application is in process or submitted for the grant in the next year.

There is another big reason to look at grant trends. Did a particular funder supply 50% of your total revenue in 2015, 75% in 2016, and 80% last year? A growing reliance on a single funding source can be an example of a “concentration.” A concentration will increase your risk as it is a red flag to auditors. In this case, if funding stopped, could the organization continue to operate?

Fees for services. Fees from clients, nonprofits in a joint venture, or other third parties, can be similar to fees earned by for-profit organizations. Fees are generally considered exchange transactions because the client receives a product or service of value in exchange for its payment. Some nonprofits charge fees on a sliding scale based on income or ability to pay. In other cases, fees (such as rent paid by low-income individuals) are subject to legal limitations set by government funding agencies.
On an ongoing basis, your nonprofit will need to assess if these services are paying for themselves. For example, fees set five years ago for a medical procedure may no longer be sufficient to cover costs. A decision to raise fees or discontinue the service will probably need to be made.

Membership dues. If your nonprofit is a membership organization, you likely charge membership dues. Has membership grown or declined in recent years, and how does this compare with similar groups? Make informed predictions about the future of membership dues, especially if you rely on them substantially for revenue. If you suspect a continuing decline in dues income, your organization might consider dropping dues altogether and restructuring. If so, examine other income sources for growth potential.

Apply what you’ve learned

Once you’ve gained a deeper understanding of your revenue picture, you can apply that knowledge to various aspects of managing your organization. For example, you can implement additional controls where exposure is identified and educate your management team to make pricing decisions.

It is also likely that you will acquire information that can help you set more realistic annual goals and prepare your budget. For example, if your organization is too dependent on a single government funder, make boosting individual contributions one of your nonprofit’s strategic objectives. Be sure to commit staff hours and dollars to achieving that goal.

You’re certain to find many other applications based on the information you’ve learned. Remember to look for concentration risks and upward and downward income trends.

Score with auditing techniques

Auditors use income analysis methods to gain assurance that the revenue reported on your financial statements is accurate. You can use these tools to do so much more. Income analysis can reveal whether you rely on too few revenue sources or too many restricted donations, enabling you to compete more effectively with others in your field. Reviewing the same information with an auditor’s eye won’t only help you pinpoint your nonprofit’s strengths and weaknesses, it will also enable you to initiate sensible changes. Best of all, if you receive an audit or review, this could reduce the amount of questions and time your auditor needs.

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