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Katie : Welcome to the Best Metrix podcast. Each episode, we meet with industry experts to discuss how they evaluate financial statements, what metrics they commonly use, and how their clients have improved. We'll also gather suggestions of how you can incorporate the same insights and processes into your own practice. Thanks for listening and enjoy this episode.

Glenn Dunlap: Welcome to today's episode of Best Metrix Metrics podcast. Today's [00:00:30] subject is one that interests many CPAs and certainly deserves attention. We'll be exploring the best metrics for nonprofit organizations. Cpas in this sector face challenges such as strict regulations, heightened transparency, and managing funds from many diverse sources, just to name a few. Here, to help us demystify the advisory role that you can play in this industry is Catherine Demas, Maidu Mayhew, director of government and nonprofit consulting at Creative Planning. Catherine has been working with nonprofit organizations for [00:01:00] over 26 years. She's held multiple positions within within them, including the leadership team, executive director, and the board president. The knowledge and expertise she brings to the subject is truly impressive. So, Catherine, welcome to the show.

Catherine Demes Maydew: Glenn.

Glenn Dunlap: Yeah. We're excited. Yeah. Excited to have you here. Well, before we jump into maybe some of the specific metrics here, let's let's take a little bit of, uh, time to talk about creative planning and, and, uh, you know, just kind of the set the stage from that perspective. So, [00:01:30] um, you know, creative planning is, um, fairly new to the accounting space, I would say. But let's talk a little bit about kind of what, um, you know, its history and, and how did how did we get here. Right.

Catherine Demes Maydew: So Sure, sure. So we're really work for. I really work for creative planning, business services. And that was born out of an acquisition by Creative Planning, which is one of the nations or the United States's largest wealth management or company. And they purchased and acquired Bergen KTV, which was a midwest regional [00:02:00] accounting firm, professional services firm, on July 1st of 2023. So really, we've just been with Creative Planning just a year now, and we operate now with what it has done for Bergen KTV, as it gives us the access to 50 states and we can continue to provide our B2B services with the same strength and bench strength that we had before. And it just gives us just a little bit more access to a few more companies and a few more organizations.

Glenn Dunlap: That's fantastic. So Creative Planning [00:02:30] is headquartered in Kansas City.

Catherine Demes Maydew: Yeah, but with offices in all 50 states.

Glenn Dunlap: So offices. Wow. I didn't realize that. Um, where were the Virgin CDV offices?

Catherine Demes Maydew: So bird and CDV had a great presence in Minnesota, Iowa, Nebraska and Missouri. Okay. And then right before the acquisition, we were we had we were trying to branch out into some of the other Midwestern states. But with the acquisition by Creative Planning, I just put us in all the states that we wanted to be in. So it's kind of nice.

Glenn Dunlap: Yeah. That's fantastic. [00:03:00] So, yeah. Um, so and then give us a sense of the sort of that core, what you call it, business advisory services. Um, you know, what's what's inside that with traditional sort of tax audit, um, client accounting services. What's, uh, what does that look like?

Catherine Demes Maydew: Sure. So prior to our acquisition from Creative Planning, uh, Bergen KTV provided, um, uh, I think we say between 28 and 72 different services to our clients. Everything from, [00:03:30] like you said, our regular, um, accounting and auditing, uh, tax services that we provided to our clients all the way through to accounting, accounting services, payroll, uh, outsourced accounting. Um, uh, we do a lot with implementation of, of ERP systems. We provide it, we provide security for it. We provide back office services on the on the IT platform. Our services are [00:04:00] very, um, uh, streamlined to what our clients need. But we grew with what our clients need. So I have a client needed this. It was like, oh, yeah, we could acquire that and bring that on board to provide the services to. Yeah, sure. Um, I'm not doing it justice, the amount of services that we provide. But when I joined, uh, Bergen KTV. So four years ago, it was to have the subject matter experts and the depth of bench to provide to my public service clients that I was working with and, and the ability to be able to say, okay, I've got [00:04:30] somebody who could do that for you and bring them on. I've got somebody who can work in strategy. I got somebody who can think about the succession planning. That's the, the, um, beauty of having the depth of bench and the and the bench strength that we have at Creative planning business services, as we call it. So.

Glenn Dunlap: Yeah, it's it's tough as an independent, um, you know, either as a, you know, sole proprietor or one person shop or, you know, as you're even as you're building out a small shop and continue to build, it's still tough to to be able to provide that [00:05:00] depth of service. So it's it's great to have that bench strength like you're talking about. Yes, yes. So specifically in the in the government and nonprofit practice. Tell us a little bit about that. You know how many how many people do you have how many clients. You know, that kind of thing. Sure.

Catherine Demes Maydew: So, um, I have always been interested in the, the field that we call public services. So inside that public services, you get your governments, your non-profits, your schools, your educations, your hospitals. Everybody really touches the public and provides a service falls into that public services, um, line [00:05:30] of business or silo, whatever you want to call it. And so I've always been interested in that. I've always had a passion for it started as an auditor in that area, then realized that I wanted to provide more to my clients, more forward looking through the front windshield. So providing that accounting service, excuse me, the consulting services that that that come with the forward looking, um, view versus the audit, which is backwards looking. Um, I've always been interested in that. And so when I started my own consulting firm, those were my immediate [00:06:00] clients, right? Governments, nonprofits, being able to bring them, fill a seat. Right. So they they lost somebody in their finance department. It looks like. Catherine, can you come over and help me fill this accounting seat? Catherine, can you come over and help me figure out what's wrong with my accounting system? Can you come over? Can you come over and tell me you know how to get from this data over here to to this wonderful financial report over here that we need to give to our auditors. And so that's where I found my my strength came in, was helping them drive forward and, and really, [00:06:30] really drive the mission forward. And so I say, I have the luckiest job in the world. I get to work every day with clients in the public services realm where they need something, and I help connect them. Either I find somebody on my team within creative planning or somebody on the outside that I've worked with really well, and I trust connecting them with the services and the what they need, right. Whether it's a service or whether it's just a product connecting them so that they have [00:07:00] it. And then I get to work with a really smart group of people here at Creative Planning that that makes me feel smarter every day. So that's.

Glenn Dunlap: Awesome. Yeah. And I think working with people that are so close to a mission and driven by a mission that it seems like that that's, um, there can be some things that are really fun. I, you know, the thing that comes to mind is that the difference between us playing an on the worship band on Sunday and a in a jazz club on a, on a Friday is that, you know, it's a little more, um, uh, fulfilling [00:07:30] when they're there holding a communion glass rather than their fifth martini, you know, that kind of thing. So you're close, sort of closer to the mission of, uh, you know, you know what this is all about. So. Yeah. That's great. Um, well, so let's turn our attention to talking about best metrics for this financials. And, and you'll have to excuse me because I know that I'm going to probably use for profit terms as a throughout our conversation today, even though I'm prepped for this, I'm still thinking that it's it's old habits are going to be hard for me to shake. But, um, one of the first things [00:08:00] I always ask is, you know, when you're looking at a set of financials for a client, you get you get a, you know, PNL and a balance sheet and already have probably blown that. Okay. Yeah. But when you get what what, uh, what we would think of in the for profit world as a PNL and a balance sheet, um, what is it that, um, what are your eyes drawn to right away? Especially in this space? This is this is really. This would be a different conversation I was expecting from from most that we've had. So, um. Yeah. What [00:08:30] what are the most telling things to you on a, you know, on those two statements?

Catherine Demes Maydew: Sure, sure. I pulled one over just so that so that I. Yeah, just only because it's it's something you do naturally, but it's like, okay, I need to look at a financial report. So for starters I always go to the statement of financial position, which is really what your balance sheet is. So it shows your assets your liabilities and your net asset which we call our net asset balance. Right. So that's that's what, uh, in for profits is our retained earnings. It's what's left [00:09:00] over at the end of the year. It rolls over year after year. A not for profit has to keep track of restricted net assets and unrestricted net assets. Obviously, unrestricted net assets are what you used to pay the light bulb bill with and the phone bill and things like that. And the restricted net assets come from our from our donors. They've restricted them for a purpose, for a specific purpose or time. And so I always look at the bottom of the statement of, of financial position, where you would be looking at your equity section, [00:09:30] and we call it the net asset section. And I look to see was there a deficit for the year. How are those net assets broken out. How much is restricted for for the organization. So they can't use or it's restricted by purpose and how much is unrestricted. So then I look at how much is unrestricted, and then I scroll to the top of the financial report and I look to see, okay, how are those unrestricted net assets available for use? Are they liquid? Are they tied up in something in other assets that that are not liquid.

Catherine Demes Maydew: And so those are the those are the statements. That's that's where I gravitate first on [00:10:00] your your traditional balance sheet. The other statement I love to look at is the statement of functional expense. And that is something that's very specific and unique to not for profit organization, and is basically taking all of your expenses and allocating them across, um, their categories. So general and administration. So your general administration, what does it take to keep an organization running your general and admin, your fundraising expenses? What is it? What does it take to raise a dollar of of of contributions. And [00:10:30] then your program expenses. And so that statement of functional expense really tells a story. It just lays out how a dollar that comes into the organization is spent across management in general fundraising and programs. How much is going to mission, how much is going to overhead, how much is going to fundraising. And those are three very different buckets. Very important though obviously you can't have programs if you can't keep the lights on. So you do have to have some, some um, dollars that are going to your management in general, which we call our operating [00:11:00] expenses. So those are the two statements that I really pay attention to. Now, there are there are, um, various other statements within the, uh, financial reports that you look at, but those are the two that I gravitate towards. First, how are they spending their money? How is how is it, uh, is it available?

Glenn Dunlap: Okay. Well, that sounds good. So let me let me back up to, um, to the statement of financial position. So we're looking at the you're scrolling down what we would might call or reference as an equity section, but we're looking at net assets here and restricted and [00:11:30] unrestricted. What what do you like to see there. What do you expect. Do you want to see most of that to be in the unrestricted category or does it matter to you. Um, uh, you know, what's, uh, you know, I assuming you want to see that as a positive number, right?

Catherine Demes Maydew: Well, you want to see it. You want to see it as a healthy balance because you you're you're restricted assets sometimes are restricted for time. So they can't can't be spent into a certain time happens sometimes they're restricted. For example in this report that I'm looking at here, [00:12:00] they're restricted because their pledges receivable. So this is an organization that's going through a capital campaign okay. They're raising money to to do a renovation. So most of their restricted assets are showing up as pledges receivable. Okay. As those pledges come in then, and as the money then is spent on the capital campaign or the capital, uh, renovation, then they will be released. Okay. Um, which means they're going to be spent. So they're not going to be there tomorrow to be used as a surplus. Okay. So you do want to have that healthy balance of [00:12:30] unrestricted net assets because that's going to be your surplus should you have a bad year this year, we may have some to to dig into our surplus, our reserves, so to speak.

Glenn Dunlap: Okay. Are you looking for those two combined, those net assets? Are you looking for those to be combined as a representative of a certain percentage of their operating expenses? Or is there some number when you're looking at that that tells you that this is a this is good, this is right. This is healthy or is it just um, or what what is how do you gauge [00:13:00] that?

Catherine Demes Maydew: Sure. So one of the if you want to talk about a little bit about some of the ratios. So one of the ratios that I do like to look at I know maybe I'm jumping ahead here. No it's okay. But one of the ratios that I do like to look at is called um net margin ratio. And then that gives you the ability that you have some surplus so that you're not a one with the fear that we are going concern. Right. There's always that fear when we get our audit report that we're all going concern that we don't have enough surplus to continue to keep us going. Right. We're operating in a deficit on a continual [00:13:30] basis, and we may have not enough surplus leftover. So in order to get to that surplus, right, you're going to be looking at your, what we call the income statement. Then to see total revenue minus total expenses divided by total revenue. So we want some surplus. So yes. Um, all all organizations, whether for profit or not for profit, are struggling with that proverbial, uh, desire. We should always come up with, you know, net profit at the end of every year. Then we have something to spend in the next year. So that's what you're looking for. [00:14:00] So, so when you're when you're looking at your statement of financial position there and you see the, um, unrestricted assets going down. So there was a deficit. Okay, then. Then it's a concern. Then it's a worry. But then you want to go back and look okay why is this happening okay. Because with a not for profit, it could be, uh, they're raising money for something else right now. So. So, uh, what happens sometimes is when you're raising money for a capital campaign operation, revenue sometimes drops [00:14:30] the contributions to the to the operation kind of drop because people are focusing in another area. Right? So you have to step back and say, okay, what happened? Here's something. Let's ask this question. What happened?

Glenn Dunlap: Okay. So the unrestricted you're looking at that as a percentage as a you're looking for the surplus to be in the unrestricted amount. And that's going to carry forward your year over year and help you understand the health of the organization then.

Catherine Demes Maydew: Correct? Correct. Okay. Yes.

Glenn Dunlap: Is there a net net margin that you're looking for that you like to see in [00:15:00] a typical I don't know if there's if you can say.

Catherine Demes Maydew: A typical rate, it would be great if okay.

Catherine Demes Maydew: So in small numbers it would be great if you had $100 in revenue and $50 as expenses every year. So that means you have 50.

Catherine Demes Maydew: 50%.

Catherine Demes Maydew: 50% left over every year. That would be great. Yeah, but sometimes our not for profits are operating on a very narrow margin. Right. The amount of revenues coming in is covering the cost of the programs and moving forward. So we do wish that they were receiving more. We do wish that the [00:15:30] funders and the foundations and the organizations that do provide the, as we call the unearned revenue, uh, stepped up and paid for more of of what we need so that we have more reserves at the end of the day.

Catherine Demes Maydew: So yeah, yeah, yeah.

Glenn Dunlap: Yeah. That's good. So year over year I suppose there are different types of nonprofits. So maybe we should break that down. Some, some may be in a different position than others. But I think that, you know, because you're working with you listed, you know, for big, big groups. But then you could sort of subdivide [00:16:00] that into a lot of other categories as well. Right? So I don't know if you see, um, consistent numbers, um, year over year that you're looking with, uh, for them. So you're looking at, you're comparing that organization to themselves or maybe other organizations within the same vein that may be educational or maybe, you know, sports oriented or, you know, there's I know you work with theaters. I mean, there could be. So you're going to know, hey, year over year, we should see, you know, kind of this percentage at the bottom line for this organization. Right.

Catherine Demes Maydew: Right, [00:16:30] right. So so um, Covid obviously put a blip in about everybody's, uh, year over year analysis. Right? So it's always like, okay, before Covid BC, right? And then after Covid. So we're always looking at that, um, because Covid came with its own, um, anomalies. Right? Sometimes we had, uh, lower percentage of expenditures because we didn't do programing, but we received a lot in funding to help support us to stay, to stay the course through Covid. So so you had a [00:17:00] change in your ratios. If you're looking at it, then you were going to have a surplus in our Covid years because we were spending less on programing. So now that we're we're back, you know, after Covid, um, um, we're looking at it and then doing that comparison. But like you just said, Glenn, um, uh, not for profits, we like to say are unicorns right there. So each one is a different one. You can't necessarily compare a a theater organization to a social services organization, and you can't even compare all your social service organizations together, because some only treat this and some take [00:17:30] care of that, and some take care of this and some take care of that. So it's really hard to to even compare, like a food bank with a not for profit social service organization that provides mental health. Food bank is not going to be, um, uh, sending out any accounts receivables or billing insurance companies. And the social service organization is going to be out there billing insurance companies and dealing with a whole different set of collectibles than the food bank is, is, is exhibiting. So so each one has to come with its own unique, um, [00:18:00] analysis if you want to say that. So you want to compare food banks to food banks and social service organizations and.Social service organizations.

Catherine Demes Maydew: Sometimes they just get lumped in though, Glenn. Sometimes we say, okay, all organizations with budgets of $5 million or more, there they are.And it's like.Well, they're all.Different. Yeah. Right.

Catherine Demes Maydew: And so you can't just group them all in together. But yes. So they they will have their own unique KPIs. They'll have their own unique, um, measurements that they want to measure, for example. [00:18:30] So maybe it's program participants. Maybe that's a bigger metric number to measure. That's not going to show up on a financial statement, but program participants, right. And so sometimes not for profit organizations are measuring things that don't run through their audited financial statement or run through their general ledger, but run through their ERP system somewhere, which is another number unto itself that this number they want to track.So and that just

Glenn Dunlap: Would.Imagine it's been a minute since I've been in [00:19:00] in the, the not for profit world myself. But that's that's definitely something that, um, that granting agencies are very interested in, right? I mean, if we're going to invest $10,000 here, you know, or $100,000 here, they want to know how many people are we reaching or touching is, you know, what's the efficiency, the effectiveness? I mean, there's a lot of things that come with the number of participants that are going to get served by an organization.

Catherine Demes Maydew: Correct, correct.

Catherine Demes Maydew: And and I can think of some foundations that are [00:19:30] truly driven by, um, um, donations that are coming in and the, the, the mission of the organization, the foundation is to, to to give out scholarships. Right. So they want to know their money's coming in and going immediately out and who's going to. So they want to know the number of participants. Right. They want to know how many scholarship applicants are coming in, how many scholarship applicants we're approving. What's the dollar amount. And so there's there's there's all kinds of of unique questions. That's why I say unicorns, unique questions that are coming in on this sort of data. So [00:20:00] what is that. And then and then there's always that. What's my ROI? Everybody wants to know what's my ROI, right. Return on investment. And then the not for profit has to sit down and figure out, okay, what is the return on investment for this specific pile of dollars that are coming through and going out to specific group of individuals? So they have to be very smart, those not for profit organizations. That's why I like them.

Catherine Demes Maydew: Yeah.

Glenn Dunlap: Well, yeah. And it, um, it forces things that a lot of times as [00:20:30] small business owners, we don't always have to think through those things. We don't necessarily, you know, sit down and think about, um, you know, the cost of, of all of these things or the investment that's required by, you know, per customer, per employee, per all of those things. A lot of the metrics that, um, that not for profits have to live with every day. Right. So.

Catherine Demes Maydew: Right, right, right. Um.

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Glenn Dunlap: Interesting. So, um, the next thing after you talked about the the, you know, the net assets, if we go back up to the assets you talked about looking at how they're allocated is [00:22:00] in, in and of that self, are you are there things that you're looking for there because I'm, you know, um, you and I've talked about this off screen and we think about, you know, things like cash or inventory, but then you also get down to pledges receivable or receivable, grants receivable, you know, prepaids and other things. So what are you looking for, a particular mix in there? Or is it again sort of the year over year comparison for this, this, uh, this organization. Like what what's changing with them or are things trending in the right directions or.

Catherine Demes Maydew: Yes, [00:22:30] yes.

Catherine Demes Maydew: Yes to all of those things. Yes. Yeah.

Catherine Demes Maydew: Yeah. Yes.

Catherine Demes Maydew: It's nice to see an upward trajectory of year over year. Right. So however though what you don't want to see is that the accounts receivable is growing and growing and growing and never being materialized into cash. So you have to you have to do an analysis on the accounts receivable and say, okay, accounts receivable is growing. Is that good or bad? Is that days in accounts receivable is growing or actually accounts receivable. Turnover is kept at a at a minimum and accounts receivable is turning over into cash. So [00:23:00] there there's the, um, smartness when you look at the balance sheet, right, or your statement position and you say, okay, this has gone up. Mm. Why has that gone up. Oh yes. Right. This is why. Because they're in the middle of a capital campaign or. Mm. Accounts receivable has gone down. What was the difference from last year to this year. Are they doing better with collecting and turning the accounts receivable into cash. Right. So therefore then you would expect that that cash would be better. We spent more. So you could go to the statement of cash flow to see what they spent [00:23:30] their cash on this year. So you can see if that's the outcome. Um, you also look for prepaids and deferrals. Um, do we did we defer, uh, grants and, and contributions that came in this year that are for next year. So we deferred them this year. So that means that when we look to compare the deferred revenues year over year. Why did it go down. Why did it go up. Did we not get that specific grant like you were saying? And then looking at the grants too. And you can't you can't you don't necessarily see this in the granular detail. But there is that question of, are [00:24:00] we are we getting, um, too much funding from one source? Um, right. So do we don't.

Catherine Demes Maydew: Want to be. Yeah.

Catherine Demes Maydew: Right. Concentration. We don't want to be funding source heavy in one spot. And then that's the the donor who says, you know what, I'm going to point my dollars in a different direction.

Catherine Demes Maydew: This year, right?

Glenn Dunlap: Right.

Catherine Demes Maydew: Oh yeah. Yeah.

Catherine Demes Maydew: And so the concentration of, of, of these accounts are spelled out in the footnotes. So that's why you should always, always look at the footnotes too, because you want to you want to see the you want to read the tea leaves. Right. So [00:24:30] here are the leaves. You want to go see what the tea leaves tell you in the footnotes to see what the concentration is.

Glenn Dunlap: Well, you brought it up with concentration. But that was going to be my next question. So I would imagine that the not for profit financial statements have more footnotes or explanations or additional tables that are. I mean, just thinking about the difference between, um, you know, the, the, the pledged receivables, the grants thinks that that could be, you know, for next year or for programs, you know, hey, we're not going to do that program till next year. So, you [00:25:00] know, it's going to sit on the books, but it's it's, um, there are things like that that, that you just you unless you're really in the thick of it, you just wouldn't know the details of that.

Catherine Demes Maydew: Right. And so that's why it's really important to look at the, the footnotes. And then it's always important when I talk to not for profits. These are your financial reports. This tells your story. So make sure that a footnote isn't just the bare bones and the bare minimum. You know, less is more sometimes, but sometimes more is better.

Catherine Demes Maydew: Yeah.

Catherine Demes Maydew: Tell the story like you just said. Okay, so this is a big grant. We [00:25:30] just got this. Yeah. $1 million grant. Right. But it's not something we're going to spend until next year. But it came in just before the end of the year. This is what we're going to spend it on. And this is the opportunity for them to tell their to tell their story about what's going to be used for. Right. Because sometimes what happens is, is then if you just looked at the state of the financials or, excuse me, the face of the financial statements, you'd say, oh, well, this organization doesn't need my money.

Glenn Dunlap: Well you're right. Yeah, it would tell a misleading picture, right? It would tell you it would give you a sense of, hey, they're fine. I'm move on. But no. Yeah, [00:26:00] it could absolutely be still in a position of need.

Catherine Demes Maydew: Right.

Catherine Demes Maydew: And and that's the, um, the uniqueness of, of not for profits is that I always say they have to eat an ice cream cone while standing on their head, um, in order to prove to people that they need the money. But they've got the money because the misconception is, well, you're not in profit. And it's like.

Catherine Demes Maydew: No, that's.

Catherine Demes Maydew: Not true, right? So we want to have the not for profit needs to be here, you know, in perpetuity and to be here [00:26:30] in perpetuity. It needs to have some sort of surplus and reserves to keep it there. So you have to make profit every year in order to plow it back into programing. So it's just this it's this ever revolving cycle of educating both your donors and and and your funders to at the same time, I mean, most, most foundations obviously understand what a not for profit does, otherwise they wouldn't be in the business. But it's just that constant, um, conversation that you're having.

Glenn Dunlap: So it's it's both a demonstration of need and, and yet a demonstration [00:27:00] of, of, uh, you know, perpetuity or that your, you know, longevity, that you've got the ability that, um.

Catherine Demes Maydew: Yeah, of course. And be there.

Glenn Dunlap: That's just, uh, such a balancing act. Right?

Catherine Demes Maydew: Um, right.

Glenn Dunlap: Yeah. I, uh, I had a very short stint of fundraising in an organization. I was leading the organization, but I can just remember that just being the constant struggle of of telling that story and and doing one from a position of strength but also [00:27:30] demonstrating need. And, uh, and, you know, you'd have some funders that would push back on, on the amounts that you're asking, and then you'd have other funders that would tell you that they didn't think you were thinking big enough. And, uh, you know, they would want you to add a zero or something on the end of, like, the request and like, yeah, okay. Yeah.

Catherine Demes Maydew: Yeah, fine. Yeah, yeah.

Glenn Dunlap: Uh, but you have to know that going into it. Otherwise you've, uh, you've made the wrong request. Yeah. Um, yeah. So let's talk about functional expenses. Uh, let's go into that a little bit more. [00:28:00] So, so we're looking at program services. We're looking at admin. We're looking at fundraising or the three, uh, three big categories that we're having in there. So do you is there again sort of a breakdown. Do you expect to see so much of the expenses going into program services versus admin versus fundraising? Is that a is that a very common like, you know, it's a 50, 25, 25 or something like 33, 33 to 30 each on on them or what? What do you expect to see there.

Catherine Demes Maydew: Well, first [00:28:30] I'm going to give you the caveat as as to if the organization truly allocated across. So if they've truly allocated some of their general expenses like salaries, truly across the programing as could be, right. So it's not what we want to have in programing expenses is including overhead, right? We don't want to just have, uh, direct expenses. We do want to have the indirect expenses. And so have they allocated the indirect expenses appropriately across [00:29:00] the the functional expense. So then you can actually then do a, you know, a okay, let's, let's, let's do a percentage here. Let's see how much is programing services to total expenses. And then how much is um fundraising expenses to total services. And how much is management in general. So, um, there's a trick. And um, when we look at, um, um, the, the, the informational return that not for profits do is called a 990. So that's the informational tax return. And I used to work with some [00:29:30] very smart people on boards who would always go to that bottom line in the in the same thing, functional expense in the 990. And they'd say, okay, our, our percentage isn't very good. We need to fix this percentage here or our percentage is showing up too high.

Catherine Demes Maydew: We need to make sure that our percentage is right. So there is that, um, uh, perception. Right. And so is the perception that, um, only 20% should go to overhead and management in general, and 80% should go to programing. It's a, it's a it's a perception. So what is it [00:30:00] that we're in the business of doing. Are we providing a lot of social services, which provides a lot of, of um, high expertise individuals, uh, doctors, therapists that are providing these things out. And so then our programing is going to be higher than when our management in general. So so yes. Are we providing are we the food bank where you know, we don't have a large number of expertise in the programing for, for, for, you know, distributing food and things like that. And [00:30:30] so our salaries are kind of equal across the board and stuff. And so again, it's a as I said, it's sort of a what are they in the business of doing kind of thing. But where you really would want to watch for is if you get to a social service organization and you look at their statement of functional expenses and you go.

Catherine Demes Maydew: Hmm.

Catherine Demes Maydew: There's nothing in programing or very little. Right, right. So then that is a question. It's like, where did where did we spend the money? And it's all in management in general, which we hope that it's not. But you know, there are those organizations [00:31:00] where they're heavily funded, they're heavily top heavy on management in general and very little on the services. So that's that would be an indication that they're not either they're not spending the dollars. Right. Or they're not allocating the dollars. Right. So that would be a flag. And you'd say, okay, let's look at this further. What is their mission here? What are they really the purpose of doing. So. Because you do have a not for profit organizations, Glenn. And I'm going to they're just providing a service to other not for profit organizations. Right. And so there's programing services is basically what Alva would be in management in general [00:31:30] only allocated over across the board. So it could be a shared pooled services organization that's providing outsourced accounting services or fundraising services to everybody else. So so you did have to step back and say, okay, what what are we in the business of doing?

Catherine Demes Maydew: Okay.

Catherine Demes Maydew: But it is an excellent opportunity to see what expense categories and what your functional is based on your classifications of expenses. So it is it is a good explanation of where we're [00:32:00] spending our money in the programs.

Glenn Dunlap: Yeah that's great. And so there again it sort of depends depends on the type of organization. But if we're looking at specific ones and we we compare them, we could start to see some trends within that and see so is this is a functional expenses report common for for non-for-profits that are not audited? Or is this something, um, you know, that, uh, every is everyone does this or only audited uh, company. You were shaking your head. So it is com this is [00:32:30] a common functional expenses report is a very common format for all non-profits.

Catherine Demes Maydew: It's required now in your in your audit.

Catherine Demes Maydew: In your.

Glenn Dunlap: Audit.

Catherine Demes Maydew: Okay. Yes.

Catherine Demes Maydew: But if you look at your 990 it is.

Catherine Demes Maydew: Sitting broken down that way.

Glenn Dunlap: Okay. Yeah. Okay. So if I'm an advisor to a not for profit and they're not doing it this way, then what needs to happen here. They need to use classes. They need to use dimensions. They need to use departments or something like that. Is that how you would keep going?

Catherine Demes Maydew: That's how you would do it. Yes. So depending on their software system or whatever [00:33:00] it is that they're using. So if they're using QuickBooks, they use classifications. If they're using Sage, they use a dimension. Yes. They need to start allocating it down into the right proper categories, whatever you want to call it, to get those expenses, expenses coded appropriately into those areas.

Catherine Demes Maydew: Okay.

Glenn Dunlap: That makes sense. That makes sense. So then then they can start to see. So instead of looking at what we might call a traditional PNL, they're going to look at the functional expenses report. And it really is going to break out everything for them. Um, so [00:33:30] there down the left hand column, they're going to have all of their accounts and then it's going to get split across there. So you could have compensation in each of those categories. You could have the overhead expenses being split across those those categories.

Catherine Demes Maydew: Right. It's a much better view for them.

Catherine Demes Maydew: Yeah. Shows the classifications or dimensions whatever your your accounting system calls it then across as you said in the columns across the page.

Glenn Dunlap: Okay.

Catherine Demes Maydew: Yep.

Glenn Dunlap: Um, yeah. That's great. That's very helpful. I suppose that, of course.

Catherine Demes Maydew: Make [00:34:00] sure those.

Catherine Demes Maydew: Expenses all tie back to your PNL.

Catherine Demes Maydew: Yeah, yeah. Something to check if something's.

Glenn Dunlap: Missing from this. Uh, the line item here. Right.

Catherine Demes Maydew: So.

Glenn Dunlap: Yeah, that makes sense. Um, uh, other stuff. I mean, are we thinking about what other are there other ratios and metrics? You mentioned some in terms of the percentage of net margin. What else are we looking at?

Catherine Demes Maydew: Sure. Well, obviously liquidity, which is your current your current ratio. Right. We always want to make sure that they have enough cash on hand to cover their liabilities. Anything over one [00:34:30] is better than anything under one. Um, so I mean, that's just kind of, I think your common sense. So how do we fix our liquidity ratio and how do we fix our current ratio. And things like that is obviously to to have more cash on hand or decrease your liability. So decrease your accounts payable, decrease what's what's sitting there in the liability section. And then sort of touch on what we were just talking about. So your program expense ratio. So this is a measure of the percentage of expenses into [00:35:00] an individual program. So you may have multiple programs listed on that schedule of of functional expense. Right. But maybe one program is just using up more of the resources than another program. So that's just a look at that. So looking at your program expense ratio. So that would be that program towards of its percentage of the total program expense. And so looking at.

Catherine Demes Maydew: That.

Glenn Dunlap: So so Catherine let me make sure I understood that. So you said you may have more than one program listed. Would that be would you typically do that as a as a separate [00:35:30] column. Or are you going to look at okay. So I.

Catherine Demes Maydew: Would.

Catherine Demes Maydew: I would so, so um, let's take a um an arts organization. Right. So they may provide music services and then they may provide, um, concerts and then they may provide rental of the property. Um, and so they may provide a variety of different things. You don't need to lump them all together. So you you could keep them separate. So you could have, uh, maybe three columns. You don't want to always list all your programs, but you do. You do want to list your major programs, right, [00:36:00] that are showing there so that they it's like again, it's your tea leaf. So that's that's what you like to show. So you can bifurcate those out. So you could bifurcate separate education from maybe your one of your core missions. Or if you have um, uh, social service organizations can have foster care, can have, uh, refugee resettlement, can have mental health services. You know, you list it. They have a whole list of them. They may want to show some of their programs separately, right. Instead of all together and saying, this is all programs.

Glenn Dunlap: So [00:36:30] there'd be a way for you to be able to edit out or break or find out, um, gosh, this this one, this one, uh, program that we're doing is taking up, uh, 30 or 40% of our resources, but we're getting such a low return on that that we could if we reallocated those resources to other, other things, we could get a higher return. We could get, you know, focus in different areas. So it's a good way to then by looking at the program expense ratio, you're looking at those, you're looking at that as a way to of what to allocate in terms of [00:37:00] time, effort and money, that kind of thing.

Catherine Demes Maydew: So that makes makes sense.

Glenn Dunlap: So yeah, that's that's another. But if you don't set it up that way it's easier to push things back together than it is to pull them apart. Right. So yeah, you have to you have to think that, think about that and pull it apart and maybe, uh, go too far with the pendulum in one sense and having too many columns and then figure out, you know, what? They're really, really 2 or 3 categories that we could push these things together with.

Catherine Demes Maydew: Right.

Glenn Dunlap: Yeah. Yeah. That makes perfect sense okay. So current ratio of program expense ratio. Are there other [00:37:30] uh metrics that you commonly use?

Catherine Demes Maydew: Um, I think that was it. And then I talked about the net margin ratio. So obviously we want to make sure we're running. We'd love to have a surplus every year. We would love to have a surplus. Right. Not just those years that we had COVID. We want we want a surplus every year. And so so we we really need to be budgeting for a surplus in some way, shape or form, um, or budgeting for zero base where you know your expenses are going to meet your, your, um, your revenue is going [00:38:00] to meet your expenses. And then if we get a little extra in revenue, then that's our surplus. Um, we really want to be budgeting in that way. Um, I really strongly not advise what's the right term there. Not advise clients to budget for deficits, because that means you're eating up your surplus. Deficits happen, but if you budget for it, then the worst case is going to happen. You're going to hit the deficit, right, and may be even bigger. And so I always try to advise that you budget for a profit and you make sure that you've got stuff covered in there. Right. So so, [00:38:30] you know, we make sure we've we've covered all the worst case possibilities with our employees. Everybody takes insurance, right? Not just the ones that we know take insurance because then you're giving yourself such a small margin on your budget to actual and so really budget with the with the end and end in end in mind, right of a surplus that way. Then you could do this net margin ratio, which is the ability to create a surplus. Right. Your revenue is going to be greater than your expenses. And that's what you want to want to operate towards. Then your net assets [00:39:00] back on the front page of the financial report is growing.

Glenn Dunlap: So yeah that's great. Have you seen, um. You've mentioned, uh, before Covid and after Covid. Have you seen, um, or what trends or what what differences have you seen in the nonprofit world for, you know, um, our, our donors more interested in investing or, you know, or, uh, you know, granting money to to not for profits. Are they less interested [00:39:30] or are there things you know, what if people become more philanthropic or less philanthropic as a as a part of this, have you noticed a trend or is it different? Um, you know, probably again, it probably depends, but I'm just kind of curious if just the general sentiment of of your client base.

Catherine Demes Maydew: Well, I think that what I'm seeing, because I'm really not um, over on the can't answer to the, the depths of how how funders are feeling about giving what you read was after Covid, some people did pull back, some people gave to other organizations, some people did help the ones that [00:40:00] needed more help. So there was that shifting. But what I'm seeing is, um, at least in the organizations I'm working with, is the earned income coming back. Sometimes stronger people are have been anxious to get out of the house. So if it's a finding performing arts organization or it's a dance company that people are more anxious to get out. So they're buying tickets and the tickets are really ah ah, excuse me. Ah earned income. So what we have been seeing post Covid is, is that earned income is coming back okay. Which is great [00:40:30] right. That means the services were providing the mission that we have is meeting the public. So if we're charging for those services then we're meeting the public. So more people are coming to the to the zoos, more people are going to the museums, more people are going to see the shows that the nonprofit, not for profit organizations are putting on. More people are doing this. And so we're reaching the broader audience, which is what our mission is. Right. So that's the earned income. So so we've kind of seen that there's there's been a trajectory of the earned income coming back sometimes stronger [00:41:00] than pre-COVID BC. And then and then sometimes just right at um, the donors are, are, are always going to be cyclical. And that's I don't want to speak to that area of expertise, but that somebody's got a, you know, a much better podcast on that than I do. But.

Catherine Demes Maydew: Um. Right.

Catherine Demes Maydew: But it's, it's that area where, um, you know, that, that, that mix and that balance. So what I have been seeing is that, um, not for profits are growing on [00:41:30] the, on the earned income, which is the important thing. Right. Because that's the you know, they charge a ticket price. People are buying the tickets. It's great. That's the mission.

Glenn Dunlap: Yeah. That's great. And it's great to hear too. I mean, it's um, uh, that both people are resilient in the sense that they've bounced back and are ready to spend those dollars, but also that the organizations are, are ready to, to serve them and do it. So that's, uh, that's great on both parts. Yeah. Um, yeah. When you're so [00:42:00] a lot of the nonprofits I think that you're working with, you're performing audits for them, gives you a chance to, to to meet with them, with their boards, with their, um, their management teams and things like that. So, um, what are some key things that, that, that you're communicating with them as you're meeting with them? And what's the, you know, besides your financial performance? Here's your audit. You had a clean audit, you know, kind of this these are the things. But what what else? What are the other topics of conversation that come up? A lot of times when you're when you're meeting with those groups, what are they [00:42:30] most interested in as you're, you know, as they're kind of, you know, going through that. So I mean, most of them especially I think maybe I'm sorry, I'm stepping on the on that question that I asked. But my perception is, is that a lot of nonprofit boards have people that are are in the for profit world. So, you know, the fact that they're involved with nonprofit, they're there for a reason, probably because they support the mission, but they don't always necessarily get the whole nonprofit world like me, like I'm asking all these questions from a position of sort of get it, you know, so what are the kinds? [00:43:00] You know, one of the things that you, you wrestle with when you have those conversations, sure, they wrestle with.

Catherine Demes Maydew: So I don't do the audits. Remember that. So I provide um, we have an audit team that does provide all the audits. So I'm providing consulting services. And exactly to what your question is, what is it? What is it that that not for profits want. We have been finding that boards are craving training. They want to know what should I be doing? How should I be a board member? What should I be looking at? Exactly the same questions you're asking when I look at a financial report. [00:43:30] Should I just accept that it's good, or should I or should I ask questions? What should I be looking at? What kind of KPIs should I be looking at? What is my role as a board member? Right? How do I help the organization drive mission and move forward? And so we're able to come in and provide a lot of those services, a lot of that education, um, where I find I drive a lot of, um, I guess I would say I love it. Right. So the other day I was presenting to, um, this was a public services client. Not necessarily [00:44:00] not for profit, but I sat down and I went page by page on their on their audit that the external auditors prepared. And I was able to talk them through what the statement said, what this statement said, what this footnote is, is this footnote good? You know, because this is your footnote. This is are these words correct? Right. And walk them through that page by page. And we spent an hour and a half doing that. And that was something that, you know, our audit firm can do, right? Um, but usually they're coming in to provide the opinion.

Catherine Demes Maydew: Um, they've they've looked at it from, from a higher [00:44:30] level than I have had. I have been because I'm down on the ground with the client and preparing the financial reports and the statements and stuff and answering those questions. But yeah. What are boards needing? Uh, succession planning? They're worried that their executive director is going to be leaving. And so they want to make sure that their house is in order before that would happen. And so everything is is their their financial house is in order. Their their employee is all understand their job descriptions and they're all working towards the same mission. So they're, you know, they're worried about a [00:45:00] variety of things. And again, how to read my financial statements is a big one. So I I've gone in and worked directly with finance committees and actually done a finance committee training. Right, and said, okay, you guys, your finance committee, you are like the front line for the rest of the board. They're relying on you to go through these financial statements like the questions that you're asking. Glenn, what does this mean? What does this mean? Ask those questions so that when you go to the board and you do your report, executive board can say, we [00:45:30] trust that you have been through the financial statements and that if you didn't have questions, then we can we can rely that that you had those questions answered and that they're they're good. So that's what I'm hearing from clients. And that's where, um, we provide a lot of services so that that ability to walk the walk and walk them down the road with their, with their reports.

Glenn Dunlap: So and that can be a real challenge. I mean, if, uh, if, if the directors aren't versed in the financials themselves and maybe don't [00:46:00] have a lot of depth there, that could be really tough. If the board is not really sure what questions to ask. I mean, it's a that's a tough spot to be in. And, uh, when you're talking about things that aren't just, um, you know, cash on the financials might in one sense be, you know, feel good. But if it's something that's restricted to something next year and you've got nine months to get there or something like that, there's there could be a lot of things that are just overlooked or missed if you don't really dig in and understand those things.

Catherine Demes Maydew: So correct.

Catherine Demes Maydew: Exactly, exactly. And that's why I think all CPAs, [00:46:30] whether you're, you're, you're presenting, uh, the financial reports as, as the auditors. Right. Have a due diligence to, to take a step back and do more than just say, oh, here's your report. You got to clean opinion. We worked well with everybody. See you next year to step back and actually be an educator, to be a cherished advisor. Um, it's, you know, obviously it's it's, uh, a great thing for the consultants to do and come in, but but I really think that auditors can step up and be those cherished advisors [00:47:00] and, and, and spend the time answering the questions or, or even just spend the time giving a snapshot in a, in a, in a in the reports. And so I have seen where I've represented the, the firm the organization to the external auditors. I have seen great external auditors step up and do a presentation that says, this is where you were last year, this is where you are this year. These are places you should be watching. And I'm like, that's great. That's really good because you guys are looking at it too, right? And you're saying you know things and it it always it never hurts for a client to hear it from both their consultant, [00:47:30] from their outsourced accounting team, my team and from their external auditors. You know, sometimes you have to hear things a couple of times before you where it really clicks.

Glenn Dunlap: So yeah, for sure. And it's just it's that second opinion. It's the right the opportunity for for the, you know, somebody here and, and may, may hear it in a different way. Right. There could be somebody said it one way and somebody says a totally different way. Or it might just all of a sudden resonate and um, you know, differently. So yeah, that's great. Uh, any [00:48:00] sort of, you know, thoughts as, uh, if somebody that's a, um, gets just getting started in the non-for-profit world. Any thoughts about that? You just sort of advice that you'd give to them as a, as an advisor in this space?

Catherine Demes Maydew: Sure. So there's a, there's a plethora of books out there. You can go online and you can Google just about anything, especially about what is my job as a board member for a not for profit organization. But I highly, strongly recommend that before you sign up with a board or an organization that [00:48:30] you ask those questions directly of the organization. What's my job description for the board member? What are you expecting of me? How much? How much training will I get? Um, what do you know? Is it, um, um, what time of the year am I joining? Right. Am I joining during the audit time of the year? Am I joining during the budget time of the year? Am I joining during a low point of the year, you know, or is it time for the annual event, all of those things. And then and then ask to be educated because you as a board member [00:49:00] have such fiduciary responsibility that you can't just join and wait for a year to get up to speed, right? Join and hit the ground running. And so a lot of times not, um, board members are joining when there's a crisis going on. Okay. The executive director is leaving, and we need to right the ship. Well, let's bring in a bunch of new board members. Right. You would want to ask, why am I coming in at this time? And what's my job description? What do you need me to help me with so that I can hit the ground running? And so that's what I would advise [00:49:30] them because it is such a it's a, it's a if you if you believe in the mission and you feel very strongly about what the organization is doing, you can bring so much to the table. If you're prepared and ready to be the board member that they need you to be. And then if you ask those questions and they're not there, you could think you could take a step back and say, does this board really need me to step in here to help put these in place? Is that my.

Catherine Demes Maydew: Job?

Catherine Demes Maydew: Is that where I can do my best service for this not for profit organization? [00:50:00] Is it? Can I come in and actually say we need to put strategies and procedures in place for the board. We need charters for the for the committees. We need job descriptions for the board members. They need to know, you know, this is what term limit three years. This is what you got. These are these are you know I'm saying so the the all of the board documents that should be there. If they're not there, you can ask that question and say, am I doing this board? And this is what my job is going to be, and I'm going to take this on and I'm going to run with it, because that's also [00:50:30] a positive thing too.

Glenn Dunlap: Yeah. If that's your.

Catherine Demes Maydew: That's your job.

Glenn Dunlap: Yeah yeah yeah yeah. If you. Yeah. Well that's uh that sounds great. Well that's some, some great advice. Uh, uh, I think a lot of times the CPAs are listening are also asked to be on boards for non-profits. Yeah, because they're always looking for somebody with some financial expertise to to serve in some capacity to help out there. So that's fantastic. Well, Catherine, unless you've [00:51:00] got something, how would, um, how would somebody get a hold of you or or creative planning?

Catherine Demes Maydew: Sure.

Catherine Demes Maydew: So you can reach out to me. I'm at Catherine Mayhew at Creative Planning comm, and you can always go to the Creative planning website. There is a basic form there on the creative planning website to to ask for additional information. And in there you could specifically say, I'm looking for information from that crazy lady that was on the podcast that talked about not for profit, [00:51:30] talked about not for profits ad nauseam. Um, or, uh, I need this specifically. Um, somebody needs to come in and help me with x, and and then it'll get routed to the, to the, to the right department and to the right people. So that's how they can find me.

Glenn Dunlap: Well it's fantastic. There's there was a lot of great information in here, a lot of great, um, you know, ideas for somebody that's serving in the not for profit world to better understand how to take their metrics and, and use those to, to, to guide their clients. And we really appreciate [00:52:00] you, uh, spending an hour with us here and and imparting your advice in your wisdom. So thank you very much for that. And, uh, we'll look forward to catching up with you here again soon.

Catherine Demes Maydew: Thanks, Glenn. Thank you so much. It's a pleasure to be here. Thank you.