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5 Audit Threats You Can Solve for Non-profits

Posted by Kit Dickinson on Jan 13, 2020 1:30:00 PM
Kit Dickinson
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non-profit audit risk

More than one-third of non-profit organizations are audited multiple times per year. Most of them spend up to a month preparing for each audit. These organizations spend a lot of time, energy, and money dealing with the fear of audits because an audit that goes south can mean lost funding, lawsuits, and even the future of the organization.

When a non-profit faces multiple audits in a year, it's usually because their funding agencies saw red flags that made them nervous about how their funds were being used.

HCM companies can help non-profits pass their audits and avoid potential lawsuits. Let's look at five key audit threats that non-profit organizations struggle with most. The better prepared you are to talk about them, the more you'll prove to be a trusted resource. You can help prospects feel more secure and more confident about their audits — and their HCM provider.

Handpicked related content: How One HCM Sales Rep Wins More Deals with Nonprofits

Timesheets for Hourly & Salaried Employees

While most nonprofits have salaried employees, many hire hourly workers, making them subject to FLSA overtime rules. In the past, non-profits had little to be concerned about when it came to FLSA regulations. But with the recent overtime changes that just went into effect, these organizations need to be on top of their overtime policies and practices (unless they provide a raise to their employees above the new salary threshold). A DOL audit can be traumatic for your customers.

In addition to tracking overtime for hourly employees, many funding sources want to make sure they aren't bearing the full overtime burden just because an employee worked on their grant at the end of the week when they crossed 40 hours. You want to make sure your time system can manage distributing overtime proportionately to grants worked to ensure you are paying the employee correctly AND allocating the OT earnings to the right grants.

To prove compliance and be ready for an audit, non-profits need to keep track of their salaried employees' time spent across grants or programs. Although they may already have a basic time-and-attendance system to keep track of hours worked, they'll need a solution that can allocate salaried employees' actual time to specific grants so the financials and reports to funding sources are correct.

Most non-profit organizations rely on one of three solutions:

  • Guesstimating time through fixed allocations
  • Using spreadsheets
  • Manually calculating time and effort

These are all unreliable and time-consuming solutions, and none of them put your customers in a better position during an audit.

Restricted Funds

Funds can be either restricted or unrestricted. When a funding source provides restricted funds, they must be used for a particular purpose or project (e.g., to support counseling services for at-risk kids). When the funding source provides unrestricted funds, the non-profit can use the money however they see fit (e.g., operating expenses, or to a program of their choosing).

When it comes to government contracts and restricted funds, non-profits have to carefully track how those funds are being used to show compliance. Every penny needs to be accounted for — estimates and round numbers won't cut it.

And because funding sources may perform scheduled or unscheduled audits to ensure compliance, your customers need to be ready at a moment's notice. The specter of a potential audit is always looming over their heads, and low-level anxiety is often buzzing in the background.

Discover more: 5 Questions to Qualify High-value Non-profits, Fast

Charging Costs to Grants

Your customers will usually have allowable and unallowable costs to deal with. Often, a grant or fund will allow certain costs to be charged toward the grant, but not other costs. This is similar to restricted funds, but it's more granular — which means every penny must be accounted for every line item.

In general, a cost is allowable if it's used for work activities that are necessary for producing the outcomes described in the agreement — for example, labor costs for the grant/program/contract. Award guidelines specify what percentage of these costs can be charged to a particular grant, program, or contract.

On top of that, there are direct costs and indirect costs. Direct costs are the activities or items that are associated entirely with the grant, such as salaries, benefits, and items like project materials.

Indirect costs are associated with running the organization as a whole, such as administrative staff salaries, rent, utilities, and office supplies. Award guidelines specify how much, if any, percentage of these costs can be charged to a particular grant.

Outcomes Tracking

To show funders that they're meeting their goals, non-profits need to measure outcomes. This helps to forecast future funds needed to accomplish further goals. Under-spending an award can be just as problematic as being over-budget. If they use less money than planned to produce an outcome, they may not receive the same amount in the next award period.

It's critical for your customers to know exactly how much they're spending toward their outcomes, throughout the lifetime of the project. This empowers them to stay on target and avoid unpleasant surprises at the end of the award period.

Most accounting systems only take into account all operating expenses, without breaking them out by funds. Some organizations compensate by using spreadsheets to keep track of all costs across grants, using fixed allocations through their time-and-attendance system, and pulling together data from separate time, payroll, or accounting systems. It's an unreliable, painful, and time-consuming process to manage.

Be the Hero Non-profits Are Looking For

Imagine living with those kinds of accountabilities day-in and day-out — and multiplying them with every additional fund you're awarded. No wonder grant managers are under constant stress!

You can be the hero to help your non-profit prospects pass their audits and avoid lawsuits. The more you understand your non-profit customers' grant challenges, the better positioned you'll be to offer the relief they're seeking. The first step is to educate yourself — read more about these five struggles, and find out how you can provide the right solution for each challenge.

IDI's Resource Center is the ideal place to start learning. There, you'll discover everything you need to know about the unique challenges non-profit organizations face. You'll also learn about the best solutions that HCM sales reps can offer. All in one convenient spot!

The IDI Resource Center is your greatest asset to win more contracts with non-profits — and to win larger contracts than the competition.

IDI Resource Center

Topics: Nonprofit Industry Solutions

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