Category: Nonprofit

Effective Budgeting Practices for Nonprofit Organizations

In order to create an effective budget, nonprofit organizations must establish an effective budget process. An effective process engages those responsible for adhering to and implementing the objectives created in the budget, including the financial committee and senior staff. Organizations must establish a budget timeline, leaving plenty of time for the research, review, feedback and revision of the budget. The yearly budgeting process should be thoroughly documented and clearly state the tasks, responsibility assignments and deadlines needed to create the budget. An effective process also incorporates strategic planning initiatives and requires that income be budgeted before expenses.

Once the budget has been reviewed and revised by the necessary people, it will be presented to the organization’s board. Prior to submitting it to the board, organizations need to take the following into consideration when creating a budget:

  • Budget Income First. Make sure that you base your income targets on realistic expectations and only include income in the budget if it is reliable. Never include an income projection to fill the gaps of expenses. This is not realistic and sets your organization up for a budget deficit before the year even begins.
  • Keep Expenses Lower than Income. This may seem obvious, but it is crucial when creating an effective budget. Make sure that your expenses are always lower than the total dependable income.
  • Analyze and Understand Your Revenue. Does your organization depend on a single source of revenue? In some cases, the lack of diversity in revenue sources can threaten the financial stability of an organization should the sole revenue source become unavailable. There is no “right” list of revenue sources, so in order to find the right sources, you will need to analyze your organization’s circumstances, mission and industry and find a good match for your organization.
  • Make Sure Your Budget Supports Your Mission. Before you even begin to develop your budget, you need to sit down and go over your organization’s mission and strategic plan. Make sure that all strategies that have an effect on the budget are included in the budget you create. Your budget is designed to communicate and support your organization’s mission through numbers, so make sure that your allocation of funds coincides with the mission of your nonprofit.
  • Budget for Capital. The budget should take an organization’s annual operating income and expenses into account, as well as ensure resources for long-lived or non-operational needs (the capital budget). The capital budget could cover several years and should include target amounts and fundraising strategies to achieve the organization’s financial and strategic goals.
  • Make Notes to Explain Budget Assumptions. Board and committee members will appreciate any explanations you offer to help them understanding the underlying thoughts behind the numbers in the budget. While it is best to present budgets in spreadsheet format (which does not allow for much note-taking room), you can provide the board with narrative notes in a separate document. Whether or not the notes are in a separate document, make sure that you add a key that associates each note to the related line on the spreadsheet.

As you can see, developing an effective budget takes a lot of hard work and determination. While it may not be an easy process, your organization will benefit greatly from the work you put into your budget. By maintaining an inclusive budget and well-documented policies, an organization can carry out its mission thoroughly and effectively. If you have any questions about creating your budget, please contact us today.

For more tips on creating effective budgets, read our article “Five Tips for Effective Budgeting”.

How to Prevent the Most Common Issues in Nonprofit Audits

Nonprofit organizations are as unique as their for-profit counterparts and while they have key organizational differences, auditors have noticed three common issues when performing nonprofit audits: insufficient staffing, weak internal communications and insufficient application of internal controls. These issues not only affect the reliability of the financial information provided by the organization, but they also create an environment for potential fraudulent activity. Consider the following issues that arise out of nonprofit audits and how nonprofits can prevent these issues:

Insufficient Staffing
An accounting department that is insufficiently staffed could mean that the financial information reported by the nonprofit is unreliable. As nonprofits continue to cut costs, individual employees are taking on too many roles, resulting in more reporting and data-entry errors. Because employees may not have the necessary time needed to complete a task carefully, errors may be over-looked or require many time-consuming corrections.

Insufficient staffing can also put an organization at risk for internal fraud. The limited number of accounting staff requires individuals to take on multiple roles within the organization, leading to an improper segregation of duties. The proper segregation of duties is a key in fraud prevention. The authorization of transactions, custody of assets and record-keeping functions must be separated in order to ensure that fraudulent activity does not occur.

Nonprofit organizations need to analyze their individual situations regarding the lack of staffing in their accounting departments. If the accounting staff is burdened by their responsibilities, it may be necessary to hire an additional employee (or two) to take on some of the responsibility. If an organization is short on funds, part-time help may also be considered to alleviate the burden on the accounting staff.

Weak Internal Communications
Weak or insufficient internal communications can damage an organization’s reliability, especially when the accounting department fails to receive updates on individual transactions. Communication breakdowns within an organization can increase the potential for unaccounted for transactions and non-compliance with government regulations.

Communication breakdowns can also affect an organization’s standing with granters. If the accounting staff is not aware of specific grant restrictions and requirements, the nonprofit may jeopardize its ability to obtain grants. If the organization is closely scrutinized by regulatory agencies and its financial records are found to be deficient, future grants may be at risk. Ensure that your organization remains in good standing with your granters by implementing strong internal communications within your organization.

Nonprofits with weak internal communications have an increased potential for fraudulent activity. If the accounting department is not informed of an organization’s various activities, questionable transactions may not be identified.

Nonprofits can overcome the risks associated with poor communication by ensuring that the accounting department receives copies of every contract and agreement, is notified of all oral transactions and is informed about the circumstance of all transactions. Nonprofits can also improve communication efforts by setting up frequent meetings between key accounting personnel, management and their auditors to ensure that everyone is on the same page regarding the organization’s activities.

Insufficient Internal Controls
An organization’s internal controls represent the policies and procedures established to ensure that management directives are carried out. When those policies and procedures are overridden or ignored, internal control problems result. Inadequate policies and procedures can also result in potential financial problems that may not be identified until the audit. In order to prevent any potential financial problems, nonprofits need to conduct reviews of budgets, forecasts and prior periods on a regular basis.

Nonprofit organizations need to examine their internal control structure in order to identify weaknesses and financial overseers should verify the financial information reported to them on a regular basis. As auditors discover weaknesses in an organization’s internal controls, they should focus on expanding audit testing in order to compensate for the lack of controls and offer the organization suggestions for improvement.

As auditors and nonprofits work together, they can reduce the risk of these issues and ensure that organizations are prepared for an upcoming audit. For more information about preparing your organization for an audit, click here.

How Will the Changes to the Form 990 Impact my Organization?

The role of nonprofit organizations is ever-changing. Over the years, the Form 990 has become more complex and is subject to more intense scrutiny by the IRS, funders and donors. Take a look at some of the most significant changes to Form 990 for 2012:

  • The IRS has revised the definition of “grants and other assistance” to exclude certain payments by voluntary employees’ beneficiary associations in the Form 990 glossary.
  • The IRS has also made an amendment to Appendix K, Contributions. The amendment clarifies that a donor’s phone bill for a text message meets the Sec. 170(1) (17) requirement of a reliable written record if it shows the donor organization’s name, date and amount.
  • Nonprofits that have foreign investments during the tax year valued at $100,000 or more must now complete Form 990, Part 1 of Schedule F.
  • Nonprofits that report their distributive share of assets in any joint ventures and other entities treated as partnerships for federal tax purposes according to the ending capital account in the partnership reported on Schedule K-1 must now complete the Balance Sheet in Part X.
  • Nonprofits now need to report their distributive share of investment income, royalties and rental income from joint ventures on specific lines of Part VIII, “Statement of Revenue”.

Reporting Fundraising Events in the New Form 990
Many nonprofits are unaware of the requirements for reporting received donations. Since donations are key to a nonprofit’s continuation and success, organizations need to learn how to properly report their donations on the Form 990.

Organizations can begin by reporting their fundraising events on the form’s Schedule G – Supplemental Information Regarding Fundraising or Gaming Activities. This is required to be filed with Form 990 if the organization reports more than $15,000 of fundraising event gross income and contributions for the year. In order to accurately report fundraising events on Part II of Schedule G, the gross receipts and the value provided to donors must be divided as follows:

  • Line 1: Gross receipts from the event
  • Line 2: Charitable portion of event proceeds (the portion that exceeds the value of goods and services provided to the donor)
  • Line 3: Fair market value of event proceeds

The fundraising event should also be reported on Part VIII of Form 990 – The Statement of Revenue. Nonprofits need to make sure that the information in this section agrees with Schedule G in order to avoid any unwanted questions by the IRS.

Learn more about Form 990 by reading our article, “Demystifying IRS Form 990 for Nonprofits”.

How Nonprofits Can Prepare for the Year-End

With the end of the year only a few weeks away, many nonprofits have already started focusing on closing out their books and preparing their year-end reports. Unfortunately, the holiday season makes it hard to focus on what needs to be done and many nonprofits could use a little help in preparing for the year-end. The following is a checklist that will help you prepare for the year-end and ensure that your new year starts out on the right foot.

With the end of the year only a few weeks away, many nonprofits have already started focusing on closing out their books and preparing their year-end reports. Unfortunately, the holiday season makes it hard to focus on what needs to be done and many nonprofits could use a little help in preparing for the year-end. The following is a checklist that will help you prepare for the year-end and ensure that your new year starts out on the right foot.

Strategic Planning
The current economic uncertainty has brought about many challenges for nonprofit organizations. In fact, many are having to cut back on services and programs in order to stay afloat. The end of the year is a natural time to start re-evaluating your financial processes, procedures and goals. Focus your efforts on maximizing your impact in the next year while minimizing your expenses.

Analyze and Develop a New Budget
While nobody enjoys budgeting, it is a necessary part of running a nonprofit. Take a look at this year’s budget and make note of any trends. Was your organization able to stick to the budget? What were the challenges? What could area use some improvement? Learn from this year’s mistakes and create an effective budget for the year to come.

Evaluate Your Financial Records
What is the current state of your financial records? Good, bad… or in need of some improvement? Hopefully your financial records are in good shape, but if they are not, you will need to do some work on them before the year ends. If necessary, hire a professional. While it is important to straighten out your financial records due to legalities, it is also important for properly managing your organization. Inaccurate financial records often results in poor decision making and missed opportunities, not to mention trouble from the government and other funders. Ensure that you have the documents you need by asking yourself the following questions:

  • Are last year’s operating documents (such as board meeting minutes, resolutions, loan agreements, etc.) easily accessible? If not, make sure that all of your documents are organized by the end of the year. You will need to access this information at a moment’s notice and cannot afford to waste time digging around looking for a document.
  • Are you prepared to file your organization’s IRS annual reporting requirement (Form 990)? While it may not be due until May 15th, now is a good time to make sure your financial records are in good shape. You don’t want to be scrambling right before the deadline!

Update Donor Records
Donors are extremely important to nonprofit organizations, as they make your mission possible. Make sure that your donor records are in order by the year-end, for donors will be expecting their annual contribution statements at the beginning of the year.

Payroll
If your organization has staff, you probably have some work to do in this area. Tax deadlines are on the horizon (think W2s and tax deposits), and you need to be prepared. Make sure everything is in order to ensure your employees receive their W2s in a timely manner.

Prepare for Your Annual Board Meeting
While many organizations only have board meetings once a year, nonprofits would benefit from having a year-end meeting to discuss the challenges of the past year and focus on the necessary improvements for the year to come. Prepare for your end-of-year meeting by creating the necessary financial reports.

As you can see, nonprofits need to be prepared for year-end. Many organizations also like to focus their efforts on last-minute fundraising. For more information about year-end financial reporting, click here.