Should we value our volunteers? :

By Hayes Knight – 12 April 2010

Anyone who has been involved in a charity or other not-for-profit entity will have an appreciation of the immense value that volunteers bring to these organisations. Yet interestingly when you look at a set of charity or not-for-profit annual financial statements you are seldom able to see the volunteers input.

The mums running the PTA’s many fundraising activities, the fathers and sons washing cars for the rugby club, the ladies working in the hospice shop, even the countless hours put in by the honorary, Institute member, treasurer trying to keep the finances in order and well reported. All are essential to the continued success, and in many cases, continued existence, of these worthy organisations. Yet interestingly when you look at a set of charity or not-for-profit annual financial statements you are seldom able to see the volunteers input.

Why is it that the financial statements will report often immaterial items like bank fees and telephone expense with great accuracy but provide no clue as to whether one volunteer or a hundred have been involved in keeping the organisation running this year?  What is the true cost of this resource to the organisation in terms of donation income and operating expense?

If we want to see the true scale of many of our not-for-profit entities then perhaps it is time we grapple with the question of measuring, valuing, and recording volunteer input in annual financial statements.

Back to basics – the principles

As with many things it is often useful to strip issues back to the bare essentials in order to see them clearly.  So what are the key principles we are concerned with here?

  1. The financial statements exist to provide useful information – they should be an accurate record of what assets and liabilities are under the entity’s control, and what income and expenses have flowed through it in the period.   They exist to give readers an understanding of what the entity controls and what resources it requires in order to operate and provide the services it does.   Better quality information generally leads to better quality decision making.
  2. Is the resource under the control of the entity? I would suggest that volunteers are under the control of the entity in their capacity as volunteers.  In most cases there will not be a formal volunteer agreement such as you would find in an employee/employer relationship.  However interestingly these are starting to appear and be used by well organised charities and not-for-profits to help clarify everyone’s understanding of the respective responsibilities and obligations.
  3. Does the resource have a value? – Absolutely!  If in any doubt; just try running most not-for-profit organisations without volunteer input. They soon fail the sustainability test.  The interesting 2nd question then becomes what that value is.  Accordingly if something is under the control of an entity, has a value, and is anything other than immaterial (or “insignificant” to use non-accountant speak) then it logically follows that it should be reflected in the annual financial statements.
  4. What gets measured gets managed – thanks to Peter Drucker for that one but he hit the nail on the head.  Until you can accurately measure something it is often hard to manage it in the most effective way.
  5. Systems are needed for accurate and reliable measurement – As no money generally changes hands, the financial measurement is not as obvious as it is with many other resources an entity requires and pays for.  However simple systems can be put in place to record the quantum of volunteer hours involved.  Such systems should aim to ensure that they record volunteer input corresponding with the actual underlying transactions and events (representational faithfulness), are capable of independent verification and are free from material error and bias (neutrality).

What is the value of a volunteer?

Other than a reliable system to record volunteer hours the main challenge is what is the appropriate value for this non-cash benefit to the entity?

How does one value time when it is being freely donated?  Let’s take an accountant in public practice who normally charges their time out at $350/hour because of their considerable experience and high level skills.  When they act as treasurer for the local scouts den is it reasonable that their donated time is valued at this rate?  From the accountant’s opportunity cost of their time perspective; a $350/hr volunteer time input valuation may be justified.  However most would argue that it is the not-for-profit entity’s perspective we should be concerned with.  They are receiving the services of a treasurer performing what one would imagine to be a relatively simple book-keeping role.  Accordingly an hourly rate more appropriate to that role would be a more accurate measure.

Similar to valuing donated goods, the cost that the entity would have to pay if it were to seek these on the open market, taking into account any discount they would be able to negotiate is generally the appropriate value.

The next conundrum is the respective values of different volunteers.  Should for example the treasurer for the scouts den’s time be valued at a higher or lower value to another volunteer who teaches the scouts rock climbing skills?   Such questions can quickly lead one down a hair pulling path of complexity.

Some entities that have grappled with this have taken a pragmatic approach of drawing their own line in the sand.  That is, they have set a single rate for all volunteer time.  Crucially they then clearly disclose their treatment of recording and valuing volunteer time in a note to their financial statements so it is transparent to all.  A common financial value used by some organisations is to value all volunteer time at the minimum hourly rate.

Possible Challenges

Cost vs benefit

A basic principle of any information is that the benefit of the exercise needs to outweigh the costs.  For many nfp organisations it may be cost prohibitive and hence simpler not to attempt to value their volunteers. 

However they could still greatly assist the readers understanding by adding some form of narrative in their financial statements about their volunteers’ input.

Comparability

This gets more difficult if some entities value their volunteers and others don’t.  However clear disclosure of what is done is the key.

Materiality

Where does the organisation draw the line?  Do they value all volunteers or is there a threshold level?

Summary

The input of volunteers plays a significant role in many charities and other nfp organisations.  While not easy, there does appear to be a valid case for measuring, valuing, and including this non-cash component in annual financial statements.

While this concept may cause some financial statement preparers to reach for the bottle, perhaps it is time to have the debate in the spirit of not-for-profit entity financial statement transparency.   After all, progress often starts with what most people think is a ridiculous idea.