Episode 241: Counting vs. Accounting - How to Recognize Fundraising Activity and Follow Finance Rules
Welcome to another edition of Around with Randall, your weekly podcast for making your nonprofit more effective for your community. And here is your host, the CEO and founder of Hallett Philanthropy, Randall Hallett.
I'm thankful for your time today as we do another episode. Talk about philanthropy. This time here in A round with Randall. I've had a couple clients actually dealing with very similar circumstances in different contexts, but this idea of the coordination organizationally and in particular with finance around what I might construe or what I talk about as accounting versus accounting.
We sometimes run into scenarios where we have a challenge, because we want to make sure we maximize and count everything. That might be a gift for a lot of different reasons we'll get into in a moment, but at times we run into organizational structure or knowledge where maybe there's not as quite as much as we want where there are restrictions on this.
And usually those fall back to what I would call accounting. Today we want to take apart these particular concepts and then figure out a way in which we can maximize and the rationale as to why our accounting of the activity of the organization philanthropically, but also align with the rules and regulations that finance and accounting brings to the table.
So let's start with the accounting side. First and some of these things you may know. Some of them may be new, but in accounting or in finance they work under several different depending on the industry or part of the industry. Several different codes, but the big ones are what's called FAS, B and GAAP. General accounting principles. Phase B is kind of the rules of how accounting works.
I am not an accountant. I took a number of those classes, both in undergrad and my master's programs. Understand the finance. Understand just enough to be dangerous. But these rules dictate how things get done in an accounting system, and they're not really all that negotiable. It's what auditors look at and use to figure out. R is the organization doing the right things, and we want the organization to do the right things.
So how does this work into philanthropy? Well, let me give you a couple of examples. There are rules in general, general accounting principles as well as FAS be the specific rules that things like when someone makes a five year pledge and it's pledge, let's say $500,000, $100,000 a year, you from an a finance and accounting perspective recognize that the entire 500,000 when that in the year in which that pledge form was signed.
While we may get cash payments over the next five years, or if they make the first payment the next four after that, we don't recognize the cash coming in. That's an accounting rule. Another one plan giving that if for the most part, there are a couple of exceptions with campaigns, which we're not going to get into here, but for the most part, when you have someone who makes an intention known in an estate plan, but it's revocable, meaning they can change it, the accounting rules indicate that we can't recognize that gift at all.
There's no dollar figure to it. Now, if it's a irrevocable gift, like a charitable remainder trust or an annuity, that's a different conversation. Those kinds of rules, which I'm actually for and supportive of, are at times contradictory to what we're looking for on the philanthropy metrics. Making sure that we have some type of, of recognition of the work, the activity, because we want to make sure that we are recording all of the work that's being done, and we want to incentivize our teams to do the things that are in the best interest, not only of the donor.
Most important, but also in terms of the organization and where these two moments come together. A couple of examples is gift officers out building relationships, working with donors, hopefully more transformational conversations and transactional all of a sudden come to this moment where a gift becomes a possibility. And if we don't have these things aligned or handled or discuss it in the right way, the gift officer says, I'll take the $50,000 in cash because that's what I get recognized for, and I'm not going to enter into the discussion or push into or have a meaningful discussion, or listen to the donors intent around an estate gift that may be in a bequest or maybe allocated in
a trust to the beneficiary, because I don't get credit for that, or they push too heavily into cash and not pledges because they're afraid that the credit might not over, might not lay out in the right way, because counting only wants to do three years worth of of pledges. But this donor wants to do five. What we're doing is we're creating limitations.
Sometimes these things get difficult. And we'll talk about some of those stories here in a moment, at least from my experience. I think the question is, what's our overreaching overall goal to accomplish what we all want, which is to maximize philanthropy, to give people the best opportunities to make gifts, and to, most importantly, align with what the donor wants to accomplish and that our organizations might be able to help them with.
So the first thing is, which I mentioned a second ago, number one, three things to think about philosophically, what to maximize philanthropy 90% of the dollars, the the the value, the wealth in the United States. I don't have the numbers from the rest of the world, but I would tell you it's probably not much different is behind what I call a marketable wall.
It's not in cash. It's not in liquid stocks. It's not in, in in bonds that can be given to a nonprofit. 90% of the assets are in 401 K programs and in 403 B programs for retirement. They're in IRAs, Roth or regular, they're in, land or some type of IV asset could be considered a durable good. They're in pensions.
Well, those type of things, which are all possible with philanthropy, are not really able to be given without some type of a state planning process. There's usually got to be some type of of conversation. And I don't mean when they die. Estate planning does not mean we have to wait till someone dies. Charitable remainder trust can be set up where payments can be made immediately, but it's part of the planning process.
That's why I don't use planned gifts as much as I use estate planning. We want to maximize the philanthropic opportunity not just for the organization, but because that's maybe where the person's passion, the donor, the prospect's passion can be best aligned. The second is, is that we want to reflect accurately. Two things. Number one, we want to reflect the organization through the accounting principles, phase B and GAAP, which we talked about how the organization is doing financially.
We have an affirmative responsibility in our community and with our donors. And what the people in our constituents, people who believe in us, people to show here's our financial situation and be honest and accurate about it. At the same time, we want to incentivize compensation packages, bonus structures for gift officers that reflect the actual work they're doing and the work we want them to do.
Human nature is one where if you incentivize something and I think about my kids, I incentivize certain things. They tend to do them more often. Sometimes that's negative incentive, meaning they don't want the difficulty or the pain sometimes is positive. The point is, is that incentives in human nature are normal, and they drive behavior decisions. Well, if we're not doing this in the right way and we're not finding ways to mark or to to count activity and incentivize plan giving, where 90% of the assets are a state, giving 9% of the assets are, or to incentivize the opportunity for entry into conversations that are unique, closely held business, something of a nature.
And all we do is cash. What we end up with is a disconnect. The third and last thing is, is that we tend and I don't want to completely blame finance, but it generally comes from that side. We seem to worry about 5 or $0.10 an awful lot. And what I mean by that is we have a challenge because and I think finance and I do this with my own company every year, how do we minimize expense without compromising mission or outcome or performance?
Do you want to look at it deliverable? But is the $0.05 we're really talking about here the $0.10 going to make that big of a difference on the financials? But yet it's impact if we're not doing this the right way on revenue, short and long term is exponential. The old adage you cut off your nose to spite your face.
We have to realize that sometimes we have to look at this in a larger perspective, which brings us into the tactical. How do we do this? So let's start with the kind of the bigger picture and then start morphing down. And the last piece in the tactical be what would I recommend you do to have meaningful conversations? Every organization I've had the privilege of being chief development officer for, and that's all I ever was when I was a practitioner.
A little odd, but really a privilege. There were conversations about three sets of numbers that I always wanted to make sure finance the auditors and the Advancement Development Foundation office, whatever I was, we're always on the same page. These are the numbers there is cash, which is easy. There is accounting. And then the third one is accounting. Without the asset at the beginning, kind of break these apart for a moment.
Cash is easy. When cash comes in you count it finance and have an issue with it. You don't have an issue with it checks. I would call stocks, bonds, things that are marketable. You can set a value to them, things that are fairly easy. So we're going to move past that fairly quickly. But I was always tracking cash.
And by the way finance was more important tracking cash because we hear this. That's what they want. But that's not how philanthropy generally works I mean very little of what we do is actually in cash most of the time. If we're doing it well. Which brings us to this definitional nexus of counting versus accounting. So we'll start with accounting.
If you're trying to get your finance office to change how they view their accounting, you're wrong. The rules that are out there as mentioned GAAP and fast are ironclad. There are ways in which accounting in the finance area works. I am not advocating a change in that. I can't. They're not going to know. There are always adjustments in the rules and sometimes good sometimes said.
But that's really not what we're talking about. You have to look at your finance partnership as one of their doing the work that needs to be done to ensure the financial viability and direction of the organization, and they're doing so with best practice utilizing the guidelines that fast be GAAP. There's a group called the Cubo for and education that these organizations are setting the rules, not quite laws, but when we audit, everything is based upon what they do in in their bookkeeping.
And these rules are ironclad. So much of what we're talking about isn't about accounting, because we can't change that. But it's the third category that's always the most important. And this was the different set of numbers that I always was advocating for and fighting for was, how do we count dollars? So let's talk about this for a second.
How do you count dollars? And really what we're talking about is different types of pledges, maybe more unique. And anything and everything related to estate planning, particularly irrevocable and revocable gifts, irrevocable or easy, because there's accounting rules for that. If somebody sets up a Crowder credit annuity, that's pretty easy. Where the real rub comes when it's revocable, because accounting and finance does want to count that.
But yet we want our gift officers in the organization to open as many of those conversations as we can. Because as we talk, about 90% of the dollars come from there, which means we need some direction on this. We need to talk about this. So when we talk about plan giving, how do you document this? I always like two sets of details to know that we could account for the activity.
Number one was some type of declaration which I think most organizations have. Could be a form, could be a copy of the of the instrument, whatever that wherever the assets are or the intention is being shown in it, in a will or trust, whatever. But the second part, because there's usually dollars with this on the accounting side, not on the accounting, not on finance, just we need.
I always said, I don't know how to give you credit for something that's like nebulous. And so to really do this, if you wanted a dollar figure, the form takes care of like, we want three plain gifts a year or eight gifts. There's a form. Well, we can a document that. But if you wanted a dollar figure, there has to be something more.
The donor signs a declaration. There's a copy of what the actual instrument or, different opportunities are the stock, the bonds that the house stubs, whatever. There's got to be more detail. And this is where we can interrupt because some donors don't do this out there in my state. But I'm not going to go into detail. Okay.
But if we want to recognize count dollars, then we need more. And I've never shied away from this now from a pure CRM perspective, you might have to put I always put it in for a dollar that an estate gift in the record was a dollar, unless we had like a soft credit it, we had some type of ability to show more meaning.
We had documentation, but I wanted the gift off screen credit. If they're supposed to raise $2 million and they find a and work with and build a relationship, that gets them 1.5 and an estate gift, and we can show the one five in some way, shape or form. I want the gift of credit for that. That's what the problem is with the organizations, is they're trying to incentivize where the assets are and the gift officers, their compensation packages are tied to this and they're like, why would I go do this and maximize my opportunities, the organization's opportunities, and the donors opportunities if I don't get credit for it?
But you got to have enough documentation to show it. Then there's the question of now versus the future. Let's say I make an estate gift intention known to a nonprofit. I was working with a gift officer. We want that gift officer to get credit for the work they do. And all of a sudden that gift officer decides to leave.
But it's a revocable gift, meaning I can change my mind. While the studies indicate that once you're in someone's estate, it's kind of hard to come out. The number one reason why people or organizations lose a state gift intentions people change their mind is, is they don't feel connected to the organization anymore. So here comes the new gift officer.
My let's take $500,000 gift is good or bad. Example was credited to the organization and to gift officer a gift officer Z has now come in. What are you doing to incentivize them to continue and build that relationship with me? Maybe there's more money there. At a minimum, keep them. Keep the intention as it is. And this is where we get into the discussion of double counting.
Because what happens when Randall dies leaves the 500,000. And there is meaningful, proven, documented work by gift officers who did not get the original intention but worked for ten years to keep that relationship all alive. Basically some level of stewardship, and then they don't get credit for it. And we're back to do you incentivize the activities, the things you want for your gift officers to be involved with?
And this is where finance goes crazy. Well, we're giving double credit. Yes. We are. This is the same issue when we talk about shared credit in an organization. Two people working on a gift together. Are they really going to get into a battle, $1 million gift, an idea and 60%. So I get 60%, 40%. You did know, but I did for the 50%.
And we're not going have a fight. Universities have figured this out more so than most. They've said, to heck with it. You can both get $1 million credit. We just want the money. We want to make this a great donor experience. We are not trying to figure out how to. In some places, the plan giving officers don't even have a dollar amount.
They're just out there as advocates and support mechanism for the gift officers. There's lots of different ways of doing that. But the key is, is you have to incentivize the work. I have a specific client that's going exactly through this scenario, and finance is throwing a fit around. Well, that's double counting. I'm like, yeah, but what are you going to do to make gift officers who did not get the original intent, wanting to build?
Well, just tell them to do it well. But they are naturally going to do the things that are related to their competition and bonus structure and evaluation. And so there is this conflict. Which brings us to what do you do? The ultimate tactical. Three things I recommend in these conversations. The first is on you. If you're the chief treatment officer, if you're in the finance area, inside the foundation or infrastructure, I would you want to put it or you're a board member or whatever.
The first thing is, you have to make sure your books are clean. What I mean by that is, is if you're not using the CRM correctly, if you're not, document everything, if you're not doing things like what I would call regular reconciliation and monthly would be preferable with finance, this amount of money came in. Finance can account for it in their system as well.
We lock up. When I started, there were two places I worked where there wasn't monthly reconciliation and within three months, I said we have to have monthly reconciliation. It's not negotiable. What I take in, in terms of what my CRM says is a dollar for this month. Finance has to be. We need a report that shows both of them connect, because if your books are bad, you have less credibility with the CFO, with the finance, maybe the committee who might be involved with this from, from like, say, a governance board perspective, and certainly with a CEO who's listening to a CFO, not like any of this.
You've got to make sure your books are clean. You're doing your part that you are reconciling, that it's being done monthly, that the audits when it comes to philanthropy are clean. You're using your CRM to the fullest, because if you're not, then you are already five steps behind this conversation because all the CFO says, well, your numbers never make sense, they don't work.
Why would I trust them? And your debt? Get your books in order. Number two is sit down with the CEOs, CFO, CEO, finance committee, whatever. Maybe it's finance committee, the chair of the foundation board and then the governance board, finance committee chair, and have a discussion, say, here's our challenge. We have several options. But the common goal sitting down, common goal is we want to raise more money, and I want to incentivize the team to do so.
Here's the challenge.
The conversation's the most important piece. Maybe you have to bring in an outside source, which is what a client's actually doing. The bringing in me in this case to sit down and say, look, here's the challenge. Finance are not bad people. They're just doing their job. And my experience is they don't understand philanthropy at the level that we need or want.
Sometimes it's education. Sometimes it's if you go in accusatory like you're wrong, you don't understand. We're all on the same team here, but you have to find a way to work together. The last thing is, is that you need to be ensuring that you're utilizing internally with your teams. And if you're gift officer, your work with metrics and with best practices, if you want to incentivize bonus structure, certainly compensation, the types of more complex gifts we're talking about here and align with finance.
You need a robust metrics process if it's just while you raise some money. And no, no, we're into calls, visits, get proposals, gifts closed because you can't create a sense of credibility with finance unless you can show productivity. These three things are more important than you might realize. Number one, your data. Your books are clean. Number two, you're not accusing finance and the organization of trying to destroy philanthropy.
We're gonna have a conversation. Here's what the common goal is. We all want to raise more money because we need it. And the third is, is that we are holding our gift officers accountable, whether it's with plain giving or cash. The point is, is we're doing our job and we can prove it. If you do those three things, you'll find a more robust conversation about, as I talked about cash accounting, which we can't change, and creating that third rail to account the activity and the success of our gift officers.
That is how you'll get to the right discussions around this difficult subject, which is most importantly known by all as ensuring philanthropy is a critical part of the strategy and the execution. Revenue. Limited expenses for the nonprofit organizations we represent for the good things that they do. Don't forget to check out the blogs at how it's going to become two per week, and if you'd like, you can reach out to me at Podcast Helpline Topeka.
The complications of our world. You can look at it in a million different ways. Just keep sending more and more power, more and more signals that philanthropy nonprofits are more and more important, that the work that we do, the work that nonprofits represent to take care of the not hurt the misaligned, those that need the most amount of help that we are the cover between for profit business that don't want to do some of the things we do because it's not profitable, and government, which is inefficient.
We're in this middle part. It's now more important than ever for us to be good at what we do today. He's talking about alignment and conversation and about how do we get the best opportunities to raise the most amount of money. But there are lots of different ways and different moments, and we talk about them throughout all these podcasts.
How we do what we do, know that the work you're doing, either externally with donors or internally trying to figure things out, like today's subject of accounting versus accounting, are critical to your community. Your work is valuable. You're making a difference. Remember, some people make things happen. Some people watch things happen. Then there are those who wondered what happened were people who make things happen.
If we're doing what we should, we partner with philanthropists who are also wanting to make things happen for the people in the organizations. Our community are wondering what happened? How do you not go to work everyday thinking, I got the coolest job in the world? Because you do. It doesn't mean it's not complicated. It doesn't mean it's not frustrating.
But if we have the largesse and understanding of the value, it makes it a lot easier. And that's what you deliver every day. And remembering that we'll make each day a little bit easier, I'll look forward to seeing in the next time, right back here on the next edition of Around with Randall. And don't you forget, make it a great day.