Nonprofit organizations are responsible for providing multiple community services, including access to shelters, clothing, food and clean water, as well as educational and mental health resources. These groups also face a common small- to medium-sized business (SMB) challenge — needing to track every transaction to prove fiscal responsibility to donors and regulators.
There are approximately 1.56 million tax-exempt groups active in the U.S., according to the latest figures from the IRS, which monitors and regulates such organizations. The agency found these nonprofits generated $2.5 trillion in revenues and $2.4 trillion in expenses in 2015.
Monitoring trillions of dollars in spending is no small task, and it is particularly challenging for nonprofits with limited resources that must be diligent with fund reinvestment. These organizations need to demonstrate to donors and community members that donations were spent appropriately to retain tax-exempt statuses and encourage future donations.
The following Deep Dive analyzes the spend management challenges these charitable and humanitarian groups face, as well as how workforce spend management and electronic procurement tools could help them more effectively manage their expenses.
Spend Control Challenges And Solutions
Tax-exempt organizations must carefully follow the legal regulations that enable them to operate as 501(c)(3) charities. Tax-exempt groups’ spending falls into three categories outlined by IRS Form 990: administrative costs, fundraising efforts and program expenses. Two of these — administrative and fundraising expenses — typically fall under a nonprofit’s overhead or operating activities and can include expenses related to day-to-day operations.
Expense management solutions ease groups’ compliance by streamlining expense categorization and providing greater data-based spending insights. Data access is among the essential benefits such solutions provide, informing leadership teams’ decisions about past and future spending. They also help nonprofits organize expenses into appropriate categories.
The solutions can also enforce existing expense policies, pinpointing opportunities to cut costs, tracking how well employees and volunteers follow their organizations’ established spending rules and even offering real-time spending checks that can immediately alert employees about whether expenses fall within approved guidelines. The latter prevents these groups and their employees from spending funds inappropriately.
Data-based products can demonstrate nonprofits’ fiscal responsibilities, too. Expense management solutions use automated tools to generate reports that showcase how donors’ funds are being spent. That transparency could encourage future donations and open the doors for these groups to implement electronic procurement solutions.
Nonprofits' eProcurement Picture
Strict and dated procurement practices may dictate how an organization’s funds are spent and what vendors with which it can partner. Strictly abiding by procurement policy is especially crucial for any group that accepts federal funds or grants.
Automated solutions can help nonprofits remain compliant and shift away from outdated practices. Recent data shows these groups are less likely than other U.S. companies to use eProcurement offerings, as a Levvel Research survey of 400 organizations found that 74 percent of nonprofits did not have such solutions in place. The U.S. average is 66 percent, by comparison.
The same report found that many organizations are still using manual procurement practices. Forty-eight percent reported using email to send most of their purchase orders to suppliers, 16 percent call suppliers on the phone and only 7 percent order from online sources. Manual processes can lead to requisition approval times longer than other businesses, and many nonprofits lack the automated eProcurement solutions that can quickly process requests and approve expenses.
The 1.56 million active nonprofits in the U.S. must continually demonstrate accountability to continue serving their respective missions. This transparency can be aided by implementing automated solutions that free workers to focus on service rather than manual data reports that outline their spending patterns. The right workforce spend and eProcurement solutions can thus empower nonprofits to meet their fiscal responsibility requirements and prove their trustworthiness to donors and regulators alike.