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Supporting Your Faith with Fiscal Accountability

A key fiduciary duty of your not-for-profit’s board of directors is to oversee and monitor the organization’s financial health. Some financial warning signs — such as the loss of a major donor — may jump out immediately. But other red flags can be more subtle. Here are some of them.

Budget issues

Certain budget-related issues may hint at rocky financial times to come. Having no budget is a flashing red light and suggests an undisciplined approach to fiscal matters. But assuming management has submitted a budget, your board should ensure it’s in line with board-developed and approved strategies.

Once a budget has been approved, the board needs to compare it to actual results for unexplained variances. Some discrepancies are bound to happen, but staff should explain significant differences. There may be a reasonable explanation, such as program expansion, funding changes or macroeconomic factors. But your board should be wary of overspending in one program that’s funded by another. Dips into your nonprofit’s reserves, unplanned borrowing or raiding of an endowment might also mark the beginning of a financially unsustainable cycle.

Financial statement problems

Untimely, inconsistent financial statements — or statements that aren’t prepared using U.S. Generally Accepted Accounting Principles (GAAP) or another accounting basis — can lead to poor decision-making and undermine your nonprofit’s reputation. They also could signal under-staffing, poor internal controls and efforts to conceal mismanagement or fraud.

Ideally, your board should receive financial statements within 30 days of the close of a period. Larger organizations are generally expected to engage experts to perform annual audits, with the whole board or audit committee selecting the auditing firm.

Subtle signs of trouble

Not all red flags are found in a nonprofit’s numbers. For example, if long-standing, passionate supporters express doubts about an organization’s finances, board members need to take them seriously. Boards also should note if development staff begin reaching out to historically major donors outside of the usual fundraising cycle.

An overreaching executive director is further cause for concern. For instance, an executive might insist on choosing an auditor or make strategic or spending decisions without board input and guidance. Such power grabs could signal dishonesty or financial instability.

Special role

Board members have a special role to play when it comes to a nonprofit’s financial well-being. Make sure your board understands the information they receive and can spot irregularities and warning signs. If you need help understanding red flags, contact us at Lynn@Onlinestewardship.com 

© 2020


Conflict-of-interest policies are too important for nonprofits to neglect

Does your not-for-profit organization have a conflict-of-interest policy in place? Do your board members, trustees and key employees understand how the policy affects them? If you answer “no” to either (or both) of these questions, you have some work to do.

A duty

Nonprofit board officers, directors, trustees and key employees all must avoid conflicts of interest because it’s their duty to do so. Any direct or indirect financial interest in a transaction or arrangement that might benefit one of these individuals personally could result in bad publicity, the loss of donor and public support, and even the revocation of your organization’s tax-exempt status.

This is why nonprofits are required to have a written conflict-of-interest policy. To stress the importance of this requirement, the IRS asks tax-exempt organizations to acknowledge the existence of a policy on their annual Form 990s.

Define and provide procedures

In general, conflict-of-interest policies should define all potential conflicts and provide procedures for avoiding or dealing with them. For example, to prevent a board member from steering a contract to his or her own company, you might mandate that all projects are to be put out for bid, with identical specifications, to multiple vendors.

It’s critical to outline the steps you’ll take if a possible conflict of interest arises. For instance, board members with potential conflicts might be asked to present facts to the rest of the board, and then remove themselves from any further discussion of the issue. The board should keep minutes of the meetings where the conflict is discussed. You should note the members present, as well as how they vote, and indicate the final decision reached.

Making it effective

As with any policy, conflict-of-interest policies are only effective if they’re properly communicated and understood. Require board officers, directors, trustees and key employees to annually pledge to disclose interests, relationships and financial holdings that could result in a conflict of interest. Also make sure they know that they’re obliged to speak up if issues arise that could pose a possible conflict.

For help creating a policy that’s right for your company contact us at Lynn@onlinestewardship.com

© 2020

Executing your nonprofit’s capital campaign

Nonprofit capital campaigns aim to raise a specific — usually, a significant — amount of money over a limited time period. Your not-for-profit may undertake a capital campaign to acquire land, buy a new facility, expand an existing facility, purchase major equipment or seed an endowment. Whatever your goal, a capital campaign can be grueling, so you need to ensure stakeholders are on board and ready to do what it takes to reach it.

Appoint a leader

Capital campaigns generally are long-term projects — often lasting three or more years. To carry out yours, you’ll need a champion with vision and stamina. Consider board members or look to leaders in the greater community with a fundraising track record, knowledge of your community, the ability to motivate others, and time to attend meetings and fundraising events.

Your leader will require a small army to achieve capital campaign goals. Volunteers, board members and staffers will be required to raise funds through direct mail, email solicitations, direct solicitations and special events. If you need more help, look to like-minded community groups and clients who have benefited from your services.

Solicit donations

The biggest challenge of any capital campaign is securing donations. To this end, identify a large group — say 1,000 individuals — to solicit. Draw your list from past donors, area business owners, board members, volunteers and other likely prospects. Then narrow that list to the 100 largest potential donors and talk to them first.

Traditional fundraising wisdom holds that you shouldn’t go public with your campaign until you’ve secured significant “lead gifts” from major donors. The percentage varies, with an organization commonly waiting until 50% of its fundraising goal is reached before announcing a campaign. Even if you decide not to follow this model, know that it’s generally easier to solicit donations under $1,000 after you’ve already landed several large gifts.

Engage supporters

To engage key constituents and ensure that they share your strategies for reaching the campaign’s goals, break down your ultimate target into smaller objectives. Celebrate as you reach each goal. Also regularly report gifts, track your progress toward reaching your ultimate goal and measure the effectiveness of your activities.

Pay attention to how you craft your message. Potential donors must see your organization as capable and strong, but also as the same group they’ve championed for years. Instead of focusing on what donations will do for your nonprofit, show potential donors the impact on their community. And, as always, publicly recognize donors in your newsletter and thank them at public events.

Remember hidden costs

If you’re still trying to decide on your financial goal, keep in mind that it will cost money to execute the campaign. Fundraising events, marketing materials, consultant fees and other expenses can eat into donations. For help determining these and other hidden costs, contact us at Lynn@onlinestewardship.com.

© 2020

Keep your nonprofit afloat with a leadership succession plan

 

If your top executive were to step down tomorrow, would your not-for-profit know how to make a smooth leadership transition or would your boat suddenly be rudderless? Research by the nonprofit BoardSource has found that only 27% of charitable organizations have written succession plans. Most nonprofits, therefore, face an uncertain future — one that could include lost funding, program disruption and even an early demise.

Fortunately, creating a succession plan isn’t as difficult as you might think. An experienced advisor can guide you through the process. But there are several points for you and your board to keep in mind as you establish policies for replacing leaders.

Don’t make assumptions

Ideally, any succession will be planned and allow for time to identify and recruit a successor and move that person into the job. If you don’t already, start developing employees who can move up the ladder when an executive director or other senior manager leaves.

However, promoting from within can be difficult for some organizations, particularly smaller ones with limited “bench strength.” What’s more, your nonprofit may require an executive director who’s already experienced in running a nonprofit or comes with specific skills. So you can’t rule out hiring an outsider.

Indeed, don’t assume that your next executive needs to be as similar as possible to the outgoing one. Your nonprofit and its constituencies may change over time. Succession planning provides a great opportunity to reevaluate your strategies and identify new qualities that will be important going forward.

Another thing to keep in mind: Not all successions are planned. A sudden departure due to illness or death can be particularly challenging for the staff and other stakeholders left behind. Outline policies for communicating with donors, clients and the press if a leadership emergency arises, as well as steps your board should take to put in place a temporary leader and find a permanent replacement.

Start with a strong organization

Your succession plan will only be as effective as the organization that makes it. Among other things, you need a functional board, dependable funding sources, well-run programs and a dedicated staff that can handle change. Solid systems and well-documented procedures can help you leverage organizational knowledge and keep your nonprofit running smoothly during leadership transitions. Contact us for help planning for succession and to strengthen your current operations at Lynn@onlinestewardship.com
© 2019

New restructuring rules may reduce a nonprofit’s filing burden

 

Is your not-for-profit thinking about merging or otherwise restructuring? Recently, the IRS made the process easier for some organizations.

Revising old rules

Under previous IRS rules, tax-exempt organizations were required to file new exemption applications when they made certain changes to their structure. Each change was seen as creating a new legal entity that needed an exemption application.
Originally, restructuring organizations would need to file a final Form 990 under their initial Employer Identification Number (EIN), obtain a new EIN and apply for exemption for the new entity. This required changing the EIN on all bank and investment accounts. In previous guidance, the IRS had eased the rules on obtaining new EINs in many circumstances, but still required new applications for exemption. But under Revenue Procedure 2018-15, certain nonprofits need only report significant organizational changes on their Forms 990.

Meeting requirements

To avoid having to file a new application, the original organization must be 1) a U.S. corporation or unincorporated association, and 2) exempt as a 501(c) organization. It also must be in good standing in the jurisdiction where it was incorporated or, in the case of an unincorporated association, formed.
The reorganization must:

  1.  Change from an unincorporated association to a corporation,
  2. Reincorporate under the laws of another state after dissolving in the original state,
  3. File articles of domestication to transfer a corporation to a new state without dissolving in the original state, or
  4. Merge a corporation with or into another corporation.

The resulting, or “surviving,” organization needs to carry out the same exempt purposes as the original organization. If your nonprofit is a 501(c)(3) organization, your new articles of incorporation must continue to satisfy the IRS’s organizational test.

Exceptions and caveats

The new rules don’t apply if the surviving organization is a “disregarded entity” (an entity the IRS doesn’t consider to be separate from its owner for tax purposes), limited liability company, partnership or foreign business entity. Nor do the new rules include reorganizations where the surviving organization obtains a new EIN. Surviving organizations that aren’t covered by the new rules must submit a new exemption application to be recognized as exempt.

Surviving organizations have reporting obligations, too. The IRS still requires survivors to report the restructuring on any required Form 990 for the applicable tax year. In the case of a domestication or reincorporation in a different state, the surviving organization also must report its change of address on Forms 8822-B and 990.

Critical consideration

The new rules have reduced the burden for many nonprofit restructurings. But they apply only to federal income tax exemptions. Your state could require additional filings. Do you need help implementing these changes? Contact the Online Stewardship team at Lynn@onlinestewardship.com We’re here to help!

© 2019

Wishing you a healthy, happy, and prosperous 2020!

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Wishing you peace and joy!

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How to protect your nonprofit’s credit cards from misuse

A hypothetical not-for-profit staffer named Britney had maxed out her personal credit cards. So when her car needed repairs, she reached for her employer’s card. She reasoned that she would come up with the money to pay the bill before her boss ever saw a statement. Britney didn’t come up with the money. But lucky for her, her boss didn’t review the card statement that month. When Britney needed to buy holiday gifts, she reached for her work card again — and again. By the time her boss finally noticed the illicit charges, Britney had spent more than $5,000.

This kind of credit card misuse or fraud is more common in nonprofits than you may think. But if you write and enforce a strong card use policy at your organization, you can help prevent Britney’s and her boss’s mistakes.

Who needs one?

Your policy should start with who has the right to a card. Nonprofits commonly issue cards to their executive directors, program directors and office managers (or other employees responsible for buying supplies). Before issuing a card to other staffers, consider whether they really need it. Most can pay out of pocket and submit reimbursement requests. However, if employees travel or entertain donors regularly on your nonprofit’s behalf, it may make sense to give them cards.

Just ensure that cardholders understand the rules. Explicitly say (even if it seems obvious) that they can’t use the card for personal expenses, and list prohibited uses such as cash advances and electronic cash transfers, as well as charges over a specified amount. State that reimbursement for returns of goods or services must be credited directly to the card account. Employees should never accept cash or refunds directly.

What’s management’s role?

Manager involvement is essential to helping prevent credit card abuse. Require employees to seek preapproval prior to incurring any credit card charge. Stress that unauthorized purchases (and related late fees and interest) will become the employee’s responsibility. Employees should be required to provide documentation (such as itemized receipts) to their authorizing supervisor for review.

Supervisors need to indicate their approval of the charges by a signature and date on the receipts or on a standardized expense form. Your accounting department should reconcile monthly credit card statements, and the statements should be reviewed by an executive or board member.

How do you enforce it?

Make sure staffers understand the possible consequences of violating your credit card policy, including employment termination and criminal prosecution. To ensure there’s no misunderstanding, require employees to acknowledge that they’ve read the policy and agree to follow it in writing before they receive a card. Need help? Contact the Online Stewardship team at Lynn@onlinestewardship.com. 

© 2019



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