Collaboration of Financial Systems for Nonprofits
A nonprofit is typically established by an individual or a group of individuals who see a need and
have a vision and passion for meeting that need. For well over a century, this passion and drive
to fulfill a societal need has created nonprofit colleges, hospitals, museums, and a myriad of
social service organizations. Today, the nonprofit sector has been expanding rapidly, expanding
by almost 25% in the ten years prior to 2011, faster than either the corporate or government
sectors1. In addition, 60% of nonprofits have budgets of $50,000 or less2, indicating that they
are either run by a robust team of volunteers or have very limited resources. Given this climate,
there may be opportunities for nonprofit organizations to work more efficiently by collaborating
with others. This topic of the month will focus on how nonprofits can collaborate by creating and
supporting fiscal sponsorships as well as back office functions.
Spectrum of Collaborations
As the nonprofit market grows, so does the competition for resources. In addition to competing
for donated funds, nonprofits are also increasingly competing for staff, volunteers, and even
program participants or customers. When organizations share a similar mission, there are a
number of ways that they can collaborate with each other to decrease the amount of resources
used by each organization. Collaboration runs from informal, such as inviting another nonprofit
to create a special event with you, to formal, wherein two organizations would merge. The
spectrum in the exhibit below.
Informal collabora,on Joint Program Management Services Organiza,on Joint Venture Merge Please refer to our Topic of the Month on Collaboration and Merger Options for a more in-depth
discussion of each section of this spectrum.
1
Roeger, K.L., Blackwood, A.S., & Pettijohn, S.L. (2012). The nonprofit almanac. [e-book]. Retrieved from
http://nccsdataweb.urban.org/NCCS/extracts/ nonprofitalmanacflyerpdf.pdf
2
ibid.
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Informal Collaboration
The less formal collaborations can be used to strengthen the infrastructure and administrative
processes within both nonprofits. Typically the result of proximity and mutual need, nonprofits
come together to join in mutual beneficial informal arrangements. While collaborations are
usually most effective when the missions or the collaborating organizations are aligned, an
informal collaboration is a good way to engage nonprofits that are aligned around a specific
issue or demographic, such as serving a specific neighborhood or working with youth.
Examples of these collaborations include:
•
Hosting events where two or more nonprofits provide a different service but both appeal
to the same customer/need base. For example, at the beginning of the school year, a
variety of nonprofit organizations that serve youth can host a Fall festival and invite the
students and their parents to learn about the different activities that each organization
offers. This can include nonprofits with a focus on serving youth through sports, arts,
cultural opportunities, as well as traditional after-school or homework help programs. All
organizations could split any expenses, and together they could likely draw more parents
and potential program participants than if they hosted an event on their own.
•
Sharing office space and supplies to cut down on administrative costs.
•
Partnering with organizations that provide complementary programs. For example, an
after-school program that meet from 3:00 – 4:00 could partner with a youth sports
program that meets across the street from 4:00 – 6:00, thereby providing safe and
engaging activities for children whose parents work longer hours.
While these types of collaborations are more informal in nature, it is a good idea to have a
simple written agreement in place that stipulates the form of partnership. For example, if four
nonprofits are hosting a Fall Festival, a short agreement should be developed that outlines what
each nonprofit will contribute (both financially and in the form of programming), guidelines of
when nonprofits are expected to help set up and take down decorations and displays, and how
and when any expenses will be paid.
Fiscal Agent
As outlined earlier, over 60 percent of nonprofits have annual revenue of $50,000 a year or less.
At the same time, an unprecedented number of nonprofits are being created each year.
Because nonprofits are often started because someone has a passion to fulfill a need,
Cathedral often recommends that a person who wants to start a nonprofit begin by seeking a
fiscal agent.
In short, a fiscal agent is an established 501(c)(3) organization that accepts on behalf of another
organization that is in the process of seeking 501(c)(3) status. The process of starting a
nonprofit involves a number of applications and fees at both the state and federal level. Please
review our Topic of the Month on Starting a Nonprofit for additional information.
One of the main appeals of a nonprofit is its ability to solicit funds from donors who, in many
circumstances, can then claim a tax deduction on their donation. However, it can take up to six
months for a nonprofit to receive 501(c)(3) status from the Federal government, and a nonprofit
cannot legally solicit donations and provide a receipt that a donor could use to claim a tax
deduction until their 501(c)(3) status has been approved.
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During this waiting period, another nonprofit can accept donations on behalf of the start-up
nonprofit, thus establishing a fiscal agent relationship. The fiscal agent nonprofit accepts funds
for the start-up program, deposits donations into a separate bank account, provides receipts for
donors that they can use for any appropriate tax deductions, and provides the start-up nonprofit
with reports of donations.
If you are a new nonprofit, there are a few practical issues to consider if you choose to find a
fiscal agent.
First, the fiscal agent should ideally have a mission and corresponding values that are closely
aligned to the mission and values of your organization. Donors need to understand the fiscal
agent relationship when they give to your nonprofit, and having a close alignment between the
two organizations makes it easier for donors to inherently understand the connection. For
example, if you were a pre-school program and asked a senior living center to be your fiscal
agent, donors to your pre-school program may have questions about why you are partnering
with an organization that, at face level, has nothing in common with your program.
Second, because each organization has specific responsibilities, the fiscal agent should
establish a contract that specifies exactly what specific services the sponsoring organization will
provide and what the start-up organization will provide. At a minimum, the fiscal agent needs to
accept donations of cash/checks, deposit them into a separate bank account, promptly provide
receipts to donors, and provide a report to the start-up. For its part, the start-up must commit to
solicit funds only for the purposes stated in its mission.
Third, because the fiscal agent is providing a real service to the start-up, the start-up should
consider paying a nominal fee to the fiscal agent. It is important to realize that the receipt and
deposit of funds as well as the receipting of donors and generation of reports takes time and the
organization’s resources. While some fiscal agents have the capacity to absorb these costs and
do not charge start-up nonprofits, most fiscal agents will charge either a flat fee (e.g. $50 per
month) or a small percentage of the funds that are donated, with a cap on the total amount (e.g.
1% of all funds raised, up to $100 per donation).
Fourth, as a start-up nonprofit, it is important to realize that not every nonprofit is willing or able
to be a fiscal agent. In fact, nonprofits that have been a fiscal agent before are typically better
candidates for your fiscal agency, as they most likely have already developed a process for
accepting donations on behalf of other organizations.
If you are start-up that does not have its 501(c)(3) status and think that a fiscal agent might be a
good solution for you, there are two main resources for finding a fiscal agent. First, review The
Fiscal Sponsor Directory. This webpage is a search engine for fiscal sponsors in 33 states while
listing eligibility requirements for entering into a fiscal sponsorship.
Second, if your nonprofit has an emphasis on the arts, Fractured Atlas may be a good option.
They provide a number of resources, including serving as the fiscal agent of approved
organizations.
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Management Services Organization
If you are an organization that has already achieved its 501(c)(3) status but are seeking to find
ways to become more efficient and streamline administrative systems, a Management Service
Organization (MSO) may be a good opportunity. An MSO is a separate entity that provides
back-office functions to multiple organizations. For example, a senior living center has a number
of administrative functions, including billing for services, applying for and receiving funds from
Social Security and insurance companies, and running payroll. It may be beneficial for the
senior living center to work together with one or two other senior centers in the community to
share back-office functions.
As anyone who has tried to outsource payroll for a three-person office knows, it is difficult to
negotiate with vendors and service providers when you are a small organization. By joining
forces with other nonprofits, the group now has the ability to negotiate better pricing with service
providers, such as payroll, accounting, and bookkeeping services. In addition, an MSO allows a
nonprofit to tap into an existing system of services that are likely to be more cost-effective and
efficient than their existing services.
For example, Cathedral recently worked with three healthcare facilities that each had separate
billing and insurance reimbursement departments. Bringing these three organizations together
and outsourcing the billing and insurance reimbursement to an MSO resulted in the following:
1. The organizations were able to redeploy several administrative staff into program
positions.
2. The MSO turned around insurance claims more quickly, resulting in a more dependable
cash flow and fewer long-term liabilities.
3. The MSO was able to negotiate lower costs for payroll processing, and those savings
were passed on to the nonprofit organizations.
From a logistical standpoint, an MSO can be an entity that is created by several nonprofit
organizations, or it can be an existing entity that provides the needed services to nonprofits.
Because this an MSO involves several organizations and fees for service, Cathedral
recommends that the participating organizations consult an attorney to develop a contract for
services.
Conclusion
Nonprofits are facing increasing pressure from funders and stakeholders to operate more
efficiently. Collaboration, whether it is informal or formal, can be an effective way for
organizations to share access to resources, technical expertise, or even program participants.
Articles for Further Reading
1. The Foundation Center hosts an excellent library of articles, sample agreements and
other resources that pertain to various forms of collaboration:
http://foundationcenter.org/gainknowledge/collaboration/
2. The Center for Nonprofit Excellence also lists several resources, including templates for
collaborative agreements: http://www.thecne.org/tools-collaboration
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3. The Nonprofit Finance Fund® (NFF®) offers a structured process to assess and manage
collaborations that help two or more nonprofit organizations work together to improve
quality of services, strengthen financial stability, upgrade systems, save money, and
expand staff opportunities: http://nonprofitfinancefund.org/collaboration-planningservices
Kimberly Reeve is a Director, and Jessie Schnoebelen is a former Intern in the New York
Office. This article was written for our Topic of the Month in 2015 as part of our General
Executive Counsel program.
For more information, please visit Cathedral Consulting Group LLC online at
www.cathedralconsulting.com
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