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Accounting for Change

Accounting for Change
Craig Webb. Association Management. Washington: Feb 2005. Vol. 57, Iss. 2; pg. 58, 6 pgs

Abstract (Summary)
The Healthcare Financial Management Association (HFMA) had a phenomenal year in fiscal 2003, and Edwin P. Czopek will not rest until he figures out why. Czopek, VP of decision support at HFMA, Westchester IL, knows that product sales were up -- but he does not know why. His association's culture encourages program and financial managers to work together to build a system that reflects and tracks, in ever-greater detail, the health care field's fast-changing environment. Similar to the government, associations should strive to update their accounting lines to reflect changes in the wider world. Making sure that the accounts and reality are in sync requires a bit of information gathering, and the ways that associations do this are, of course, varied. To ensure an environment of accountability and well-informed decision making, you need a system that collects -- and links -- as much information as possible.

THE HEALTHCARE FINANCIAL Management Association (HFMA) had a phenomenal year in fiscal 2003, and Edwin P. Czopek won't rest until he figures out why.

Czopek, vice president of decision support at HFMA, Westchester, Illinois, knows that product sales were up-but he doesn't know why. Was the increase in purchasing driven by chief financial officers at health care institutions-HFMA's key constituency-or by a growing group of independent consultants? And given the turnover in health care jobs, what's the possibility that any surge in sales among consultants was attributable to former hospital CFOs who had previously been loyal HFMA customers?

Czopek believes that he'll answer these questions, partly because HFMA has set itself up to do so. His association's culture encourages program and financial managers to work together to build a system that reflects and tracks, in ever-greater detail, the health care field's fast-changing environment.

For example, Czopek can tell you the impact of recent innovations such as e-mail advertising because HFMA has set up accounts to distinguish it from other ad revenue. "Our belief is that product managers should get any information they want," he says. That's true, he adds, even "if the product manager for the conventions wanted to track how much we spend on coffee versus other beverages."

In Debra J. Stratton's experience, such a mind-set often doesn't exist in other groups. As president of Stratton Publishing and Marketing, Alexandria, Virginia, she organized a survey to help provide benchmarks on the revenues and expenses of association publications. Although the survey, first conducted in 1998, revealed many valuable numbers, Stratton notes that it also provided some "scary answers" from associations that had never taken the time to identify publishing-related revenues and expenses. Some groups couldn't answer even simple questions involving one vendor or one bill, such as the amount paid annually for postage on magazines.

Stratum is currently tabulating the results from an update of the publishing benchmarking survey. She suspects that, at some organizations, the rise in online publishing will make finances more muddled than ever. "I think we'll find that...people don't know where the money is coming from and going to," she says. "I'm amazed at the lack of information for people with big budgets and bottom-line responsibility."

The evolving economy

Failing to keep accounts up to date isn't restricted to the association world. Indeed, in 1986, the U.S. Commerce Department discovered that it had undercounted the gross national product (GNP) by at least $6 billion across two years because it had overlooked the birth and spectacular rise of the videocassette movie rental business.

Up to that time, videotapes had been used mainly for industrial films and thus were lumped with janitorial and maintenance expenses. Commerce Department employees might have noticed video rental stores popping up in their neighborhoods, but they overlooked the connection to their GNP-tracking systems and failed to adjust for the change.

The U.S. government learned its lesson; now a program is in place to revise benchmarks every five years to account for how America's economy has evolved. In fact, Brent R. Moulton, associate director of the government's Bureau of Economic Analysis, encourages his staff members to read the newspapers so they can identify and track the next big trend.

Similar to the government, associations should strive to update their accounting lines to reflect changes in the wider world. Take communication expenses. Ten years ago, associations disseminated information mainly via mail and meetings. Since then, we have added the Internet, e-mail newsletters, conference calls, e-commcrce, and webcasts to our arsenal.

Today, successful communication management relies, in part, on the ability to manage this media mix in the most efficient and profitable waysposting documents for download rather than express-mailing them, for instance, or using an online store to capture sales from non-U.S. customers. (See page 32 for an article on finding the right print-electronic communication mix.) But how can you find out whether these changes are really saving money unless you have taken steps to record both the expenses and the revenues from new technology?

Missed opportunities

"If you can't measure it, you can't manage it," executives in for-profit businesses like to say. But for associations there's a corollary: "If you don't bother to measure it, you'll never know what you're missing."

As an example, consider the American Hospital Association, Chicago. In 1999, AHA created a daily e-mail news service that also carried advertising; money from those ads was lumped into the "sponsorships" revenue line. Why? Because no one on staff could ever imagine advertisers giving the same value to e-newsletter advertising that they had historically shown for ads in print products. But lumping numbers together can make it hard to quickly calculate the value of an effort or to inspire staff to meet a particular business goal.

During the early 1990s, all revenues from ads on Web sites managed by AHA's various magazines were lumped into one common account. At the time, Web advertising revenues were paltry and deemed unlikely to rise. But because the revenues were in one program area and the salaries of the people creating content for the site were accounted for elsewhere, calculating the return on AHA's Web investments took some work.

In addition, the people doing the work had little incentive to spend more time on Web-related activities. Any money generated as a result of their efforts didn't show up in their accounts.

The situation began to change about two years ago. Ad salespeople noticed some clients asking to purchase advertising in the e-mail newsletter, and ad agencies started requesting information about AHA's ability to support Web ads. Today, AHA's e-mail newsletter generates more ad revenue than its newspaper. And thanks to accounting changes made last year, managers can quickly identify ad revenue by source (print, e-mail, Web, sponsorship). Then the revenue is credited to the area that created the content supporting the ad opportunity.

AHA's story exemplifies how association operations are getting more granular yet more holistic at the same time-particularly when the resource involved is shared, such as the association's Web site. How can you figure out the Web site's return on investment unless you can categorize and count all the efforts that go into it and all the rewards that go out? How do you allocate revenues, such as sponsorships, when the relationship spans a variety of projects-none of which was the principal reason for closing the deal?

Worth measuring

Wrestling with such questions may prompt your association to reconsider what merits counting. And when you do, you may find out-of-date notions serving as the foundation for your accounting system.

Of course, some numbers are required. The Internal Revenue Service's Form 990 for tax-exempt organizations mandates that a group identify its unrelated business income as well as track expenses such as legal fees, office supplies, and telephone charges. Quasiregulatory bodies, including the Financial Accounting Standards Board and the International Accounting Standards Board, offer (occasionally conflicting) guidance. But, experts say, following generally accepted accounting rules should be just the start.

"Don't think about accounting just from a financial standpoint," says Gary M. Bolinger, CAE, president and CEO of the Indiana Certified Public Accountant Society, Indianapolis. "If [a project is] important enough to do, it's important enough to measure."

Nathaniel T. Bartholomew points out that the United States has no legal minimum for tracking revenue by separate account but, in general, the sooner you can do it, the better. Batholomew, a partner at Langan Associates, Arlington, Virginia, an accounting firm that does 85 percent of its business with associations, offers this rule of thumb: "If [the project is] 1 percent of total revenue, reporting it [now] could be justified based on your belief that it's a growing part of your revenue picture."

If the project's revenue tops 5 percent of total revenue, he adds, it should definitely be identified separately.

John Evans, AHA's chief financial officer, typically applies two general standards when deciding whether to break out a new account. He advocates separation if the project will be cash-positive from day one or if the association believes the account will be an important or large number someday.

Of course, reason also must apply lest your staff get cross-eyed coding every little receipt. According to the 2003 ASAE Operating Ratio Report, the average association reported that Web advertising accounted for only 0.1 percent of all revenues in 2002-2003. Web ads certainly matter more today, but only recently have they likely cracked the 1 percent "notice me" threshold at the largest associations. And for smaller associations, they may never get there.

Take Maury Astley, CAE, executive director of the Nevada Dental Association, Las Vegas, as an example. He heads a staff of three. And an association member handles the accounts as part of the treasurer's duties, managing the finances with Quickbooks software. Astley doesn't track e-mail advertising revenue nor does he formally track the association's sales by categories-such as members registering online for meetings versus via the mail. But like many small-staff executives, he knows where to get the information should he need it. And this occasional back-of-the-envelope calculation may be all some associations require.

Need-to-know basis

Making sure that the accounts and reality are in sync requires a bit of information gathering, and the ways that associations do this are, of course, varied. At the Healthcare Financial Management Association, for example, product managers typically sit down with the controller to discuss each product's accounting needs.

At the Society of Competitive Intelligence Professionals, Alexandria, Virginia, Paul Brecht examines the monthly financial reports for unexpected bulges in revenue, in part to determine if new breakouts are needed. "It's when you lump things together that you take the chance of missing something," believes Brecht, SCIP's chief financial officer and chief operating officer.

On the other hand, John Evans counts on AHA's product managers to tell him what they need to know. "If there's a return on investment [attached to the product] and somebody's job depends on it, we'll get a call right away," he says.

Evans can't spare the time to monitor hundreds of accounts because he also tracks key nonfinancial indicators. With many associations moving toward the "dashboard" or "balanced scorecard" approaches to management, their focus has broadened to include both cash and nonmonetary measures, such as renewal rates and Web visits.

Attention to details

The current trend of linking finances to strategy underscores the importance of adjusting accounts to keep up with the times. Some say that switching to project-based budgeting has forced them to look more closely at the factors that contribute to each project's income and outgo. Because new projects receive the same treatment as existing ones, innovative types of revenues and expenses get noticed. (To learn more about project-based budgeting, see ASSOCIATION MANAGEMENT, February 2003.)

Albert Sunseri, for one, says moving to project-based budgeting was a revelation for his group. "I'm getting better results with relation to the marginswhich projects are costing more and which are costing less than expected," says Sunseri, executive director of the American Society for Healthcare Engineering, Chicago. Just as important, he adds, "we no longer have these red her-rings in our budget" that look like money-makers but instead wipe out profits because income hasn't been matched up with expenses.

Project-based budgeting also tends to cast more light on what often is an association's biggest expenditure: its payroll. When the Regulatory Affairs Professionals Society, Rockville, Maryland, switched to a project-based format, it installed a program through which staff post timesheets listing how many hours they spent on particular projects. As a result, RAPS has a better idea of how much each activity costs, says Iris M. Rush, CAE, vice president of administration at RAPS and past chair of the ASAE Finance and Business Operations Section.

Even so, the revolution is incomplete: All of RAPS's Web operations arc tossed into the general administrative budget rather than being allocated by category. The moral: Project-based budgeting won't always provide the insight you need if you're lumping together several functions.

The American Society for Healthcare Engineering, for example, considers its magazine, Web site, and e-mail communications as separate products. But within each product area, all types of revenue are lumped together. That ultimately could cause a problem because when you don't distinguish between different types of revenue-such as space advertising and classified advertising-you aren't able to easily compare and contrast across projects. Should ASHE launch another magazine or e-newsletter, Sunseri will have to backtrack and review reams of data to pull out the appropriate numbers for budgeting, benchmarking, or evaluation.

In contrast, when the American Hospital Association wants to see how well a publication is doing, it categorizes and counts up the print display ads, classified ads, e-mail newsletter ads, Web ads, and Web classified ads. Not only can staff see the fruits of their various labors but the association can also compare revenues (and individual performance) across its suite of products.

The National Association of Children's Hospitals and Related Institutions, Alexandria, Virginia, takes a mixed approach. NACHRI's Web site doesn't receive any sponsorship revenue, even when most of the deliverables that led to the sponsorship deal occur through Web ads and links. On the other hand, revenue for want ads that appear on the Web site stays with the Web operation.

A smaller window

In the October 2004 ASSOCIATION MANAGEMENT article "Monitoring Return on Strategy," Andrew S. Lang and Glenn H. Tecker argue that 12 months is too long a stretch between updates to your strategy or your asset allocation. They suggest that controllers can't wait for product managers to realize, after the fact, that something needs measuring.

Charles F. Tate, managing partner of Tate and Try on, a CPA and consulting firm in Washington, D.C., sees this push for timely, accurate, and relevant data as one result of an Enron-inspired demand for corporate accountability. He also thinks it's happening simply because associations want to know more about their businesses.

To ensure an environment of accountability and well-informed decision making, you need a system that collects-and links-as much information as possible. Good news can wait the old saying goes. But for curious executives like Czopek, who wants to know what's driving HFMA's increase in sales, that attitude is something else which needs to change.
When deciding what financial information to track, "our belief is that product managers should get any information they want," says Edwin Czopek of the Healthcare Financial Management Association.

Similar to the government, associations should strive to update then accounting lines to reflect changes in the wider world.

How much can your account books tell you about new technology-based initiatives? These are the projects, such as an online bookstore, that could change-and probably have already changed-the way your association operates.
If your accounts are up to speed, you should be able to answer questions such as these fairly quickly:
* How much (in both dollars and percent) of your advertising revenues come from e-mail or Web advertising?
* What's the return on investment for your Web site?
* What tech-related data can you use to help forecast staffing needs for the coming year? (For example, are staff members answering more inquiries via e-mail or the Web rather than by phone or mail?)
* What percentage of sponsorship money is parceled out to the departments that made the sponsorship possible?
* What percentage of publication sales comes from your online store?
* What's the cost of fulfilling orders for online sales versus other types of sales (such as phone, fax, or e-mail)?
* How has the cost of delivering documents to your members changed as you began making documents available for download on your site?
* What's the return on investment for your online store compared to other sales methods?

* If tomorrow a board member suggested eliminating your association's print catalog, magazine, or newsletter, would you have the income and expense numbers necessary to make a well-informed decision?
* What percentage of your membership renewals and information updates occur online?
* How many tech-related numbers do you include in the "dashboard" report prepared for the association's CEO or board of directors?

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