Posted by Barney Beal, Content Director and Kendall Fisher, Executive Producer and Host of The NetSuite Podcast
With a background in finance at a technology solutions company, a document publishing and delivery organization and an accounting firm for midmarket companies, Chris Whitfield joined the nonprofit organization MANA Nutrition as CFO with a strong background in for-profit accounting principles.
That background has proven valuable in the nonprofit world as well, Whitfield relayed during a session at SuiteWorld19.
“Both for-profits and nonprofits are mission-based, the missions just tend to be a little different,” he said.
For example, MANA Nutrition has structured its organization more like that of a for-profit even while it maintains a strict mission-based focus. The Charlotte, N.C.-based nonprofit manufactures nutrient-rich milk suspended in peanut butter, a ready-to-use therapeutic food (RUTF) used to treat severe acute malnutrition, producing about 500,000 meals per day. As a manufacturer, it may seem to have more in common with for profits than nonprofits focused on services or curing diseases, but that’s not really the case, according to Whitfield.
“MANA is a mission-based organization,” he said. “Our mission is to save kids’ lives and have a meaningful impact on reducing the lives lost from severe and acute malnutrition.”
But for-profits and nonprofits have a lot more in common than one might assume, Whitfield assured the audience. Both have a mission, it’s just that for-profits’ mission is profit. Both have a similar organizational structure: an executive director and organizational leadership in the case of nonprofits and CEOs and senior leadership in the case of for-profits. And, both largely operate under the same GAAP principles, aside from a few exceptions, and work under the same fundamentals of accounting and internal controls.
“For-profit stakeholders are investors, and there’s nothing wrong with that. I’m a big believer in capitalism,” Whitfield said. “Nonprofits tend to be service focused. At MANA we have a view that our shareholders, who receive our dividends, are the kids we serve. We like to think of ourselves as having capital. We have benefactors who say, ‘I’m ready to invest in your business.’ Their return is not a financial return, it’s the dividends we give to kids.”
Those similarities, among others, offer finance professionals in nonprofits an opportunity to apply more for-profit principles to their organizations. For example, where a for-profit might focus on reducing costs to improve margins, MANA has reduced the cost of a case of RUTF from $60 when it first started to $38, allowing it to sell to aid organizations in greater volume at a lower price, increasing its impact.
There are similarities in financial statements, according to Whitfield. One might be a statement of financial position (nonprofit) and another might be a balance sheet (for profit), but they’re essentially both balance sheets. While nonprofits consider their net financial position to be a derivative of total assets minus liabilities, for-profits view the balance sheet are the cornerstone of internal control wherein total assets must equal total liabilities plus equity (that is, net assets).
“I think it’s an important and subtle difference, but nonprofits should take a look at what their equity position is,” he said.
Nonprofits can take a lead from for-profits when it comes to reporting on financials. Typically, nonprofits are focused on reporting to external constituents, whether it’s a board or donors or maybe outside agencies or creditors.
“Creditors, while they want to see external audited reports, are just as interested in internal reports that measure the success of your organization,” Whitfield said. “At MANA, we don’t report a statement of activities, we report a balance statement and income statement, but also a monthly analysis, KPIs in production, etc. That’s been valuable with creditors.”
Revenue Recognition, Subscription Models and Promises to Give
Nonprofits can also benefit from following the for-profit world when it comes to revenue recognition and subscription models. All over the for-profit world businesses are adding subscription models whether it be ongoing maintenance contracts or meal delivery kits. For nonprofits, pledges, or promises to give, can be treated similarly. Typically, a nonprofit will book the pledge as a receivable with installments paid against it. That needn’t be the case for internal reporting.
“When I have unconditional promises to give that extend over one year, I approach it like a subscription model,” he said. “We record it as a pledge receivable but instead of income we take deferred revenue and recognize it when conditions of the pledge are met, whether that condition is event-based or time-based.”
Whitfield added, “however, we of course have to restate pledges to meet the requirements of GAAP for external reporting in our audited financial statements.”
Whitfield concluded by summarizing, “Nonprofit organizations typically have a very different mission-based focus from for-profit companies, but many underlying financial management considerations are the same. The financial function in nonprofits must be focused on meeting the reporting requirements of its internal constituents, on establishing and maintaining strong systems of internal control, and on maintaining a healthy organization that has the financial fortitude to carry out its mission.”