Author: kathy-beck

It’s safe to say that they majority of nonprofit organizations do not run on a substantial amount of money. In fact, three-quarters of the nation’s nonprofit organizations operate on less than one million dollars each year, and most operate on an even smaller amount. Where these nonprofit organizations lack large funds, they make up for in impact. These nonprofits not only respond to their community’s needs and desires, but they are also staffed by members of the community who care about their community and strive to make it a better place.

We’ve worked with numerous nonprofit organizations over the years and have discovered that smaller organizations often struggle with the financial challenges unique to their size and structure. While the directors and leaders of these organizations generally have substantial knowledge in the area of nonprofit programs, they often lack the financial knowledge that larger nonprofit organizations possess. In addition to this, smaller nonprofits with limited budgets often have difficulty bringing someone with financial expertise in-house. As a result, the executive director ends up handling the nonprofit’s finances, often relying on the aid of a part-time bookkeeper who is not as committed to the organization’s strategic goals. Without the right financial guidance, nonprofit organizations struggle through audits and have difficulty making financial-based and data-driven decisions for the organization.

Due to the lack of funds, smaller nonprofit organizations are forced to run as lean as possible. Many nonprofits cannot invest in infrastructure or software systems to help them better manage their finances and programs, pay their employees competitive wages, or operate in their desired building location. Executives often work at all-hours trying to deliver the organization’s programs, run the organization effectively, raise funds, and pay the bills.

The reality of an overworked staff, limited funds, basic technology, and minimum financial training leaves nonprofits vulnerable, particularly in the time of economic uncertainty. However, with the right steps, nonprofits can improve their financial health and chances of success.

1. Remember that your financial practices are just as important as your organization’s mission statement. If your organization lacks the adequate resources to develop sufficient financial tools, look to other nonprofits in your area for guidance. See if you can borrow a template from a peer organization, or bring in board or staff members with expertise in the financial field.
2. Make smart decisions about facilities. Don’t jump at the chance to secure a cheap facility only to drown in the price of up-keep. Look at the whole picture when selecting the facilities for your nonprofit organization and keep in mind that depreciation is a very real thing. If you are unsure about the lasting value of your facilities, bring in outside help.
3. Recruit your board members based on your organization’s needs. Smaller nonprofit organizations typically need more from their boards than just governance and fundraising support. Put the desired functions of your board members in writing, revise your expectations as your organization evolves, and work toward specific goals for your organization’s board and purpose.
4. Remember that growth comes with a price. As your organization grows and adds new programs, keep in mind that these changes cost money. Be wary of the mission creep and imbalances that can result from adding new programs. Added revenue – as beneficial as it may be – also means added expenses.
5. Embrace in-kind donations, but have a plan for their replacement. The donation of time and work is invaluable to small nonprofit organizations; however, your organization cannot rely on these in-kind donations all of the time. Make sure that you have a concrete plan for replacing volunteer labor and worn-out equipment as necessary. Remember that it’s ok to turn down donations that you don’t need or want. Added donations often add responsibility that small nonprofits have a hard time keeping up with.

The above tips –when put into effect – can help improve your organization’s overall financial health. By making smart decisions now, your organization’s finances will be better off later. In addition to these financial tips, your organization should consult a financial advisor or CPA. A financial advisor can help guide your organization to a greater level of financial success and keep your organization running smoothly and effectively, as well as help you understand the various financial requirements you must adhere to.

Stay tuned for next week’s blog on finding the right CPA for your nonprofit organization.

A few months ago, we posted an article about the proposed A-133 audit changes and the ultimate goals of the Federal grant policy reforms. Currently, any state or local government and nonprofit organization that receives money from the government may be  required to obtain an A-133 audit (also known as an Office of Management and Budget or “OMB” A-133 audit). These audits ensure that government and nonprofit organizations are spending the money received from grants according to the various program requirements.

As we discussed a few months ago, the Office of Management and Budget has proposed some changes to the A-133 audit structure that could potentially impact nonprofit organizations. While the proposed changes could decrease the number of organizations required to undertake an A-133 audit, nonprofit organizations need to be prepared to determine what their specific funders will require in terms of any changes or additional procedures in response to the A-133 audit reforms.

What are the proposed changes?
As of February 2013, the Office of Management and Budget proposed that the annual spending threshold for federal funds that require nonprofit organizations to undergo an A-133 audit be raised from $500,000 to $750,000. Once an organization determines that they must undertake an A-133 audit, major programs over a certain threshold must undergo a compliance audit. . The proposed changes raise this threshold from $300,000 to $500,000.

In addition to these changes, the coverage rules for high risk and low risk audits are also changing. The “coverage” means the program dollars covered in the compliance audit as a major program. The proposal suggests reducing the coverage rules to 40% for high risk audits (down from 50%) and 20% for low risk audits (down from 25%). The Office of Management and Budget has also proposed to streamline the compliance testing areas from fourteen to six. This will help them focus on the areas of greatest risk and put a number of costs and administrative principle guides into one cohesive document.

When will these proposed changes take effect?
These changes are currently still in the proposal form. The comment period has been extended to June 2^nd, meaning the earliest changes would be in effect staring June 1, 2014. This will give nonprofit and government organizations time to prepare for the upcoming changes.

What steps should my nonprofit take to prepare for these upcoming changes?
First of all, if your nonprofit organization has anything to say regarding these proposed changes, take advantage of the extended comment period. Then follow up with your major funders (including state, local and county agencies) to discuss the upcoming changes so there are no surprises. Ask your funders how they think they are going to respond to these changes and how that will affect your organization. Ask funders if they are planning to add additional requirements are part of their oversight. Getting all of the answers you can beforehand will help your organization in the future.

While your nonprofits costs may go down as a result of these changes, those costs may need to be reallocated. If your nonprofit organization is subject to an A-133 audit, the costs can be allocated to the federal portion of your budget. If those audit costs are coming from another source, you will need to talk to that organization and see where the allocation will be allowable. If a particular state is requiring any additions, the audit ought to be paid with state money.

Remember, these proposed changes do not mean that auditors will no longer be looking at your organization. Your organization will still have to comply with federal regulations, and there is always a chance that someone, at some time, will be looking at your organization’s financial accounts.

Stay tuned to our blog for more information about these proposed changes and how your organization can prepare for what is coming.

Nonprofit organizations – like their for-profit counterparts – have experienced many changes in the past few years. From the recession to the slow economic recovery, nonprofits have experienced cuts in funding, loss of programs and resources, and staff reductions. Many nonprofit organizations have worked to streamline their processes and have been forced to rely on their reserves just to survive the economic challenges.

With so many nonprofit organizations struggling to simply maintain, many organizations have become lax in their routine efforts, putting them at great risk for fraud. Nonprofit organizations need to operate smoothly and efficiently, and part of that effectiveness must include having sufficient safeguards so that organizations have the proper internal controls to prevent fraud. Nonprofit management and the Board must be aware of the vulnerabilities in a nonprofit organization’s structure so that the proper measures can be taken to fill those gaps. Nonprofit staff members should also be educated about the threat for fraud and trained on ways to go about preventing fraud (such as whistle blower policies, the appropriate ethical behavior, and conflicts of interest). Regular communication about the topic heightens awareness of fraudulent activity within the organization and even discourages potential perpetrators from acting.

Staff reductions can also put your organization at risk for fraud. When an organization’s staff is reduced, the internal controls that were once sufficient  may be weakened, putting the organization at great risk. In order to safeguard the organization, nonprofits need to re-evaluate their internal controls every time a large-scale change has been made.

Regular check-ups and evaluations of an organization’s processes and documents is critical in fraud prevention. Schedule routine evaluations of your organizations processes and procedures, including the routine reconciliation of asset and liability accounts and their review and approval. Train employees on organizational policies regarding document submissions (such as requirements to submit receipts and disbursements to upper management). Nonprofit organizations should also develop strict credit policies and ensure that employees are adhering to those policies. Supervisors should regularly review employees’ credit card statements, and board members should be responsible for reviewing the charges submitted by nonprofit executives.

Finally, it is important for nonprofit organizations to not forget back-end vulnerabilities that can occur in their technology systems. Organizations need to maintain internal controls in their IT departments and ensure that their computers and network are secure. Software should always be up-to-date, passwords should be changed regularly.  Proper security policies and procedures should be followed by all employees. To further prevent fraud, nonprofit organizations should invest in virus and malware protection to safeguard their most valuable data and information.

Identifying all potential areas of risk for fraud should be part of a nonprofit organization’s risk assessment program. Fraud is not limited to financial loss; it can cause damage to an organization’s public image that could last for years (long after the financial impact has been absolved). Misappropriated assets can be publicly disclosed on the IRS Form 990, causing potential embarrassment to the organization if irregularities are discovered. Upper management needs to fully understand their protection under the organization’s insurance policies so that in the event of fraud, the full extent of financial damage may be covered.

While thinking about fraud may not be appealing, it is a necessary to safeguarding your organization. When there is a breach in your organization’s financials or when fraud is discovered, upper management must take immediate action. Knowing the vulnerabilities of your organization and responding to those vulnerabilities as best as you can will make all the difference. Your organization will be protected from financial loss, and your reputation will be upheld in the eyes of your supporters and contributors.

Nonprofit organizations require more than the desire to make a change in the community; they require business sense. In addition to raising funds and fulfilling their missions, nonprofit organizations are required to comply with strict financial reporting requirements. While the actual execution of these reports is fairly simple, staying current with these reports can prove to be quite challenging in the business that comes with running a nonprofit organization. There are a variety of financial reporting tools available to help nonprofits create insightful financial reports according to industry standards.

Gain a clearer understanding of your organization’s reporting cycle and maintain your financial reports accordingly.  Like a for-profit business, most of the reporting will be due following the close of the organization’s fiscal year. However, many reporting tasks need to be performed on a much more regular basis (such as monthly or weekly).

Creating effective financial reports is not hard. In most cases, a nonprofit organization’s financial reports can be generated using Microsoft Excel and other basic programs. Take the time to discover the financial reporting requirements for your organization. These requirements will determine what type of reports you produce and when. Here are a few nonprofit financial reporting basics to keep in mind:

Financials

While the purpose of your organization is not to earn a profit, you still need to document and report on every piece of financial information. The most common financial reports for nonprofits are the statement of activities (income and expense) and the balance sheet (assets, liabilities and net assets). Many organizations also find cash flow statements to be helpful. Financial reports are typically prepared on a monthly or quarterly basis for board members, donors, and others who have a stake in the organization’s financial condition. Fortunately, there are many software solutions that will make generating these reports easy.

Annual Report

Most nonprofit organizations are also expected to prepare an Annual Report. Completed at the end of the fiscal year, the Annual Report focuses on describing the activities and accomplishments of the organization over the reporting period. If you do not include financial information in your Annual Report (the decision is entirely up to you), you will need to have the financial information readily available for donors. Many of nonprofits use the Annual Report as a marketing tool to highlight the organization’s achievements and generate enthusiasm for its mission. However you choose to use the Annual Report, you will find it to be a valuable resource as you plan ahead for the organization’s future.

Form 990

Nonprofits are not required to pay federal income tax, but they are required to file an annual form (Form 990) with the IRS. Form 990, Return of Organization Exempt from Income Tax, is due on the 15th day of the 5th month following the close of the organization’s fiscal year. If needed, organizations can receive a three-month extension by filing Form 8868 before the due date. Form 990 is lengthy and is fairly comprehensive including requests for information about contributions, expenses, assets, and the organization’s board of directors. While these are just the basic financial reporting responsibilities of nonprofit organizations, they are crucial in nonprofit management. Over time, you may also find it necessary to fulfill other reporting requirements for your organization. Reports such as payroll withholdings and insurance reports are standard reports for many organizations and do not involve any special requirements for nonprofits. In fact, they usually fall under the same reporting procedures as for-profit businesses.

Stay tuned to our blog for upcoming changes regarding nonprofit financial reporting requirements.