2 Accounting Issues You Need to Understand

Clearly charities must not heed the bullying of watchdogs — we need to adhere to the generally accepted accounting principles of the AICPA. At the same time, charities must be alert to the very real danger that the media and the giving public may be hoodwinked into falling for the “new math” of the watchdogs and develop an inaccurate and unfairly negative view of nonprofits.

Nonprofits need to stand together (for example through the Direct Marketing Association Nonprofit Federation) and publicly oppose misleading math and misguided reliance on ratios to evaluate the effectiveness of a nonprofit.

Long-term return on investment
While the most vital metrics to a nonprofit are net revenue (how much is left to accomplish the organization’s mission, after expenses) and impact of the program, another important criterion in evaluating a nonprofit’s fundraising prowess is long-term ROI. That is, the net amount a nonprofit raises for its cause over time divided by the amount it spends to raise the dollars —the operative words being over time. Sadly — and dangerously — some politicians, state regulators, the IRS section G and watchdogs mischaracterize fundraising efforts based on an almost meaningless calculation: short-term ROI. Allow me to illustrate how ludicrous this approach is:

• Take a prospect to lunch this week without coming home with a check? You look like a failure. Get a donation from that donor a week later (without spending an additional dime)? You look like a genius. Neither is a helpful evaluation.
• Spend $1 million on a prospecting effort (mail or phone) that raises $850,000 (acquiring 25,000 new donors) and the media will accuse you of fraud (“All the money went to fundraising costs!”). Cultivate those 25,000 new donors for the next five years at a cost of $900,000 to generate $3.3 million and you’ll win an award.

The point is, a nonprofit must not allow itself to get sucked in to evaluating fundraising results on a campaign-by-campaign, short-term basis.