Restricted gifts — or donations with conditions attached — can be difficult for not-for-profits to manage. Unlike unrestricted gifts, these donations can’t be poured into your general operating fund and be used where they’re most needed. Instead, restricted gifts generally are designated to fund a specific program or initiative, such as a building or scholarship fund.
It’s not only unethical, but dangerous, not to comply with a donor’s restrictions. If donors learn you’ve ignored their wishes, they can demand the money back and sue your organization. And your reputation will almost certainly take a hit. Rather than take that risk, try to encourage your donors to give with no strings attached.
Some donors simply don’t realize how restricted gifts can prevent their favorite charity from achieving its objectives. So when speaking with potential donors about their giving plans, praise the benefits of unrestricted gifts. Explain how donations are used at your organization, offering hard numbers and examples where needed. Be as upfront as possible and give them as much information as you can about your organization.
To make unrestricted giving as easy as possible, give donors (and their advisors) sample bequest clauses that refer to the general mission and purpose of your organization. Also encourage them to include wording that shows “suggestions” or “preferences” for their donations, as opposed to binding restrictions. Prepare documents that give wording samples for these cases.
Words of intent
Unless you’re holding a fundraiser to benefit a specific program, include general giving statements in your fundraising materials. For example, you might say: “All gifts will be used to further the organization’s general charitable purposes,” or “Your donations to this year’s fundraiser will be used toward the continued goal of fulfilling our organization’s mission.”
Reinforce this message in your donor thank-you letters. They should state your nonprofit’s understanding of how the gift is intended to be used. For example, if a donor stipulated no restrictions, explain that the money will be used for general operating purposes.
Obviously, you’ll need to be respectful if a donor is determined to attach strings to a gift. (Before accepting it, just make certain you’ll be able to carry out the donor’s wishes.) But if you can persuade contributors that their gifts will be used in a responsible and mission-enhancing way, many are likely to remove restrictions.
Contact us for more information on using restricted and unrestricted funds.
Signs of financial distress in a not-for-profit can be subtle. But board members have a responsibility to recognize them and do everything in their power to avert potential disaster. Pay particular attention to:
1. Budget bellwethers.
Confirm that proposed budgets are in line with strategies already developed and approved. Once your board has signed off on the budget, monitor it for unexplained variances. Some variances are to be expected, but staff must provide reasonable explanations — such as funding changes or macroeconomic factors — for significant discrepancies. Where necessary, direct management to mitigate negative variances by, for example, implementing cost-saving measures. Also make sure management isn’t overspending in one program and funding it by another, dipping into operational reserves, raiding an endowment or engaging in unplanned borrowing. Such moves might mark the beginning of a financially unsustainable cycle.
2. Financial statement flaws.
Untimely, inconsistent financial statements or statements that aren’t prepared using U.S. Generally Accepted Accounting Principles (GAAP) can lead to poor decision-making and undermine your nonprofit’s reputation. They also can make it difficult to obtain funding or financing if deemed necessary. Insist on professionally prepared statements as well as annual audits. Members of your audit committee should communicate directly with auditors before and during the process, and all board members should have the opportunity to review and question the audit report. Require management to provide your board with financial statements within 30 days of the close of a period. Late or inconsistent financials could signal understaffing, poor internal controls, an indifference to proper accounting practices or efforts to conceal.
3. Donor doubts.
If you start hearing from long-standing supporters that they’re losing confidence in your organization’s finances, investigate. Ask supporters what they’re seeing or hearing that prompts their concerns. Also note when development staff hits up major donors outside of the usual fundraising cycle. These contacts could mean the organization is scrambling for cash.
4. Excessive executive power.
Even if you have complete faith in your nonprofit’s executive director, don’t cede too many responsibilities to him or her. Step in if this executive tries to:
• Choose a new auditor,
• Add board members,
• Ignore expense limits, or
• Make strategic decisions without board input and guidance.
Proceed with caution
The mere existence of a financial warning sign doesn’t necessarily merit a dramatic response from your nonprofit’s board. Some problems are correctable by, for example, outsourcing accounting functions if the staff is overworked. But multiple or chronic issues could call for significant changes. Contact us for advice. © 2019
Is your not-for-profit overpaying unemployment tax? Many employers are and don’t know it. Here’s how to find out and possibly reduce unemployment costs.
The burden is on employers to ensure unemployment charges are accurate and to seek repayment if they believe they’ve been overcharged due to errors.
First, make sure you’ve kept the state up-to-date on new hires and other employment events. Then perform periodic audits of benefit statements to uncover possible instances of overcharging, such as:
• Duplicate charges for the same period,
• Charges assessed during a waiting period, or
• Sums in excess of the approved benefit amount.
Although your state agency may be responsible for inaccuracies, it’s also possible that former workers are falsifying claims. For example, claimants may not report that they have other sources of income or that they’ve found a new job. If you suspect this type of fraud, notify your state agency so it can investigate. By monitoring unemployment costs as closely and regularly as you would other expenses, you may be able to rein in — or at least better estimate — payouts.
It’s also critical to participate in your state agency’s decisions about awarding or denying benefits to claimants. If you disagree with decisions, appeal them.
Become a reimbursing employer
Many 501(c)(3) organizations have the option of becoming a “reimbursing employer.” This means that, instead of paying periodic unemployment taxes to the state, you reimburse the state only for actual claims paid out to former employees. The advantage is that the actual benefits you pay often will be lower than state unemployment tax rates.
However, there are risks. States generally mandate dollar-for-dollar payment from reimbursing employers as soon as unemployment benefit claims are made. Your organization could face a temporary cash crunch or even more serious financial hardship if it needs to pay out more in claims than it budgeted for.
If your nonprofit chooses to become a reimbursing employer, you can handle the reimbursement process yourself or use a third-party reimburser, such as a membership association. Third-party reimbursers can save your nonprofit significant time and effort by handling administrative work and monitoring claims for accuracy. Also, they usually offer trust accounts to help with cash management.
By monitoring statements for accuracy and ensuring all claims are legitimate, you may be able to reduce unemployment tax costs. Also be sure to weigh the pros and cons of becoming a reimbursing employer. Contact us for more information. © 2019
An operating reserve is an unrestricted and relatively liquid portion of a not-for-profit’s net assets. Securing this reserve for use in emergencies or simply when your budget falls short is critical to your organization’s security and long-term survival.
Building an adequate operating reserve takes time and should be regarded as a continuous project. Your board of directors needs to determine your nonprofit’s policy on building an operating reserve, the desired fund amount and the circumstances under which it can be drawn down. Reserve funds can come from unrestricted contributions, investment income and planned surpluses. Many boards designate a portion of their organizations’ unrestricted net assets as an operating reserve.
On the other hand, funds that shouldn’t be considered part of an operating reserve include endowments and temporarily restricted funds. Net assets tied up in illiquid fixed assets used in operations, such as your buildings and equipment, generally don’t qualify either.
The right amount
Determining how much should be in your operating reserve depends on your organization and its operations. Generally, if you depend heavily on only a few funders or government grants, your nonprofit would benefit from a larger reserve. Likewise, if personnel costs make up a significant part of your expense budget, your organization could use the cushion a healthy operating reserve provides.
On the other hand, there are nonprofits that need less in reserve — for example, those with diverse funding. Three months of reserves is typically considered a minimum accumulation. Six months of reserves provides greater security. A three-to-six month reserve would enable your organization to continue its operations for a relatively brief transition in operations or funding. Or, in the worst-case scenario, it would allow for an orderly winding up of affairs.
An operating reserve of more than six months provides greater flexibility. For example, it might give your nonprofit funds to pursue a new program initiative that’s not fully funded, or to leverage debt funding for needed facilities or equipment.
Note, however, that it may be a mistake to accumulate more than a year’s worth of expenses in reserve, unless it’s designated by your board for specific purposes. Donors and community members want to see nonprofits put funds to work, not hoard them.
Consider all factors
As your nonprofit establishes its operating reserve, it’s important to consider all factors that affect your organization’s finances. What’s right for one organization might not be right for another. Contact us for help calculating the appropriate reserve amount for your nonprofit. © 2019
Not-for-profits that direct and benefit from the actions of their volunteers can be held accountable if those individuals are harmed or harm others on the job. Lawsuits involving volunteers often arise from allegations of negligence or intentional misconduct, even when volunteers act outside the scope of their prescribed duties. Your organization needs to take steps to limit risk associated with unpaid workers.
Volunteers as employees
Your volunteer recruitment process should be almost as formal and structured as your paid employee hiring process. Develop job descriptions for open positions that outline the nature of the work, any required skills or experience, and possible risks the job presents to the volunteer or your nonprofit. Once you have volunteer candidates, screen them according to the risks that might be involved based on your nonprofit’s mission, programs and likely volunteer activities.
Some positions will pose few risks. For those, ask candidates to fill out an application and submit to an interview, and then check their work and character references. Positions that carry greater risks — such as work involving children, the elderly and other vulnerable populations, or direct access to cash donations — should involve more rigorous screening. This might include criminal history and credit report checks and verification of driver’s licenses, certifications or degrees.
Training and performance plans
Once volunteers are on board, provide training, supervision and, if necessary, discipline. Hold an orientation session to explain your nonprofit’s mission and policies. After volunteers have begun working for you, continue active supervision to verify that they understand expectations.
To encourage professionalism and responsibility in your volunteers, consider devising performance plans that include goals — and rewards for achieving them. Such plans can also provide you with a framework to evaluate and dismiss volunteers who may be putting your nonprofit at risk by, for example, failing to follow safety procedures.
Role of insurance
No risk reduction plan is complete without insurance coverage. In addition to general liability, consider supplemental policies that address specific types of exposure such as medical malpractice or sexual misconduct.
It’s also a good idea to have legal advisors periodically review policies and procedures pertaining to volunteers. Attorneys and financial advisors can help you determine whether your organization is doing all it can to reduce risks. © 2018
When a donor promises to make a contribution at a later date, your not-for-profit likely welcomes it. But such pledges can come with complicated accounting issues.
Conditional vs. unconditional
Let’s say a donor makes a pledge in April 2018 to contribute $10,000 in January 2019. You generally will create a pledge receivable and recognize the revenue for the April 2018 financial period. When the payment is received in January 2019, you’ll apply it to the receivable. No new revenue will result in January because the revenue already was recorded.
Of course, you can’t recognize the revenue unless the donor has made a firm commitment and the pledge is unconditional. Several factors might indicate an unconditional pledge. For example:
• The promise includes a fixed payment schedule.
• The promise includes words such as “pledge,” “binding” and “agree.”
• The amount of the promise can be determined.
Conditional promises, on the other hand, could include a requirement that your organization complete a particular project before receiving the contribution or that you send a representative to an event to receive the check in person. Matching pledges are conditional until the matching requirement is satisfied, and bequests are conditional until after the donor’s death.
You generally shouldn’t recognize revenue on conditional promises until the conditions have been met. Your accounting department will require written documentation to support a pledge before recording it, such as a signed agreement that clearly details all of the terms of the pledge, including the amount and timing.
Pledges must be recognized at their present value, as opposed to the amount you expect to receive in the future. For a pledge that you’ll receive within a year, you can recognize the pledged amount as the present value.
If the pledge will be received further in the future, though, your accounting department will need to calculate present value by applying a discount rate to the amount you expect to receive. The discount rate is usually the market interest rate, or the interest rate a bank would charge you to borrow the amount of the pledge. Additional entries will be required to remove the discount as time elapses.
Word of caution
Proper accounting for pledge receivables can be tricky. But if you don’t record them in the right financial period, you could run into audit issues and even put your funding in jeopardy. Contact us for help. © 2018
Communication breakdowns between a not-for-profit’s development and accounting departments can lead to confusion, embarrassment, and even financial problems. Here are three ways your organization can facilitate cooperation between these two critical functions:
1. Recognize differences
Accounting and development typically record their financial information differently, which is why they can produce numbers that vary but nonetheless are both correct. Development may use a cash basis of accounting, while accounting records contributions, grants, donations and pledges in accordance with Generally Accepted Accounting Principles (GAAP).
Let’s say a donor makes a payment in March 2018 on a pledge made in December 2017. The development department will enter the amount of the payment as a receipt in its donor database in March. But accounting will record the payment against the pledge receivable that was recorded as revenue when the pledge was made in December. Receipt of the check won’t result in any new revenue in March because the accounting department recorded the revenue in December. Both departments’ figures for March 2018 (and for December 2017) will be accurate, but they’ll disagree with each other.
2. Establish policies and procedures
Your nonprofit should try to reconcile its accounting and development schedules at least monthly. It also needs clear protocols for communicating important activity — or both departments, and your organization, could experience negative consequences.
If, for example, development fails to inform accounting about grants on a timely basis, the latter won’t be aware of the grants’ financial reporting requirements and could forfeit funds for noncompliance. If the accounting department doesn’t record grants or pledges in the proper financial period according to GAAP, your organization could run into significant issues during an audit — which could jeopardize funding.
3. Require regular communication
Schedule meetings so that accounting representatives can educate development staff about the information it needs, when it needs it, and the consequences of not receiving that information. For its part, development should provide accounting with ample notice about prospective activity such as pending grant applications and proposed capital campaigns. Development should also present status reports on different types of giving — including gifts, grants and pledges. This is especially important for those items received in multiple payments, because accounting may need to discount them when recording them on the financial statements.
The activities of your accounting and development departments directly affect each other, so careful coordination is essential. Contact us for more information. © 2018
Do you prepare internal financial statements for your board of directors on a monthly, quarterly or other periodic basis? Later, at year end, do your auditors always propose adjustments? What’s going on? Most likely, the differences are due to cash basis vs. accrual basis financial statements, as well as reasonable estimates proposed by your auditors during the year-end audit.
Simplicity of cash
Under cash basis accounting, you recognize income when you receive payments and you recognize expenses when you pay them. The cash “ins” and “outs” are totaled by your accounting software to produce the internal financial statements and trial balance you use to prepare periodic statements.
Cash basis financial statements are useful because they’re quick and easy to prepare and they can alert you to any immediate cash flow problems. The simplicity of this accounting method comes at a price, however: Accounts receivable (income you’re owed but haven’t yet received, such as pledges) and accounts payable and accrued expenses (expenses you’ve incurred but haven’t yet paid) don’t exist.
Value of accruals
With accrual accounting, accounts receivable, accounts payable and other accrued expenses are recognized, allowing your financial statements to be a truer picture of your organization at any point in time. If a donor pledges money to you this fiscal year, you recognize it when it is pledged rather than waiting until you receive the money. Generally Accepted Accounting Principles (GAAP) require the use of accrual accounting and recognition of contributions as income when promised. Often, year-end audited financial statements are prepared on the GAAP basis.
Need for estimates
Internal and year end statements also may differ because your auditors proposed adjusting certain entries for reasonable estimates. This could include a reserve for accounts receivable that may be ultimately uncollectible. Another common estimate is for litigation settlement. Your organization may be the party or counterparty to a lawsuit for which there is a reasonable estimate of the amount to be received or paid.
Ultimately, you want to try to minimize the differences between internal and year-end audited financial statements. We can help you do this by, for example, maximizing your accounting software’s capabilities and improving the accuracy of estimates. © 2018
When done well, delegation allows not-for-profit executives to focus on their most important tasks, helps to build bench strength and gets staffers out of the office before midnight. But done poorly, it can create more burdens than it eases.
Here are five practices all nonprofit leaders should adopt:
1. Choose tasks wisely
Always try to devote your time to the projects that are the most valuable to your organization and can best benefit from your talents. On the other hand, delegate tasks that frequently reoccur, such as sending membership renewal notices, or tasks that require a specific skill in which you have minimal or no expertise, such as reconciling bank accounts.
2. Pick the right person
Before you delegate a task, consider the person’s main job responsibilities and experience and how those correlate with the project. However, keep in mind that employees may welcome opportunities to test their wings in a new area or take on greater responsibility. Be sure to consider staffers’ schedules and whether they actually have time to do the job well.
3. Perfect the handoff
When handing off a task, be clear about the goals, expectations, deadlines and details. Explain why you chose the individual and what the project means to the organization as a whole. Also let the employee know if he or she has any latitude to bring his or her own methods and processes to the task. A fresh pair of eyes might see a new and better way of accomplishing it.
4. Keep in touch — to an extent
Delegation doesn’t mean dumping a project on someone else and then washing your hands of it. Ultimately, you’re responsible for the task’s completion, even if you assign it to someone else. So stay involved by monitoring the employee’s progress and providing coaching and feedback as necessary. Remember, however, there’s a fine line between remaining available for questions and micromanaging.
5. Acknowledge the help
A good delegator never takes credit for someone else’s work. Be sure you generously — and publicly — give credit where credit is due. This could mean verbal praise in a meeting, a note of thanks in a newsletter or a letter to the person’s manager. If the project’s size and scope warrant it, consider offering extra time off or a special gift. © 2018
A fiscal sponsorship occurs when an established charity provides a kind of legal and financial umbrella to a charitable project that lacks 501(c)(3) status. This type of arrangement can benefit both groups. But before agreeing to be a sponsor, be sure you understand how these arrangements work and the risks involved.
In a fiscal sponsorship, the 501(c)(3) sponsor is legally responsible for the charitable project. It acts as employer to the project’s paid workers and manages all of its funds. Donations and grants are made directly to the fiscal sponsor, thus qualifying their donors for a charitable deduction (if the donors itemize deductions and other applicable requirements are met). It’s easy to see why small charitable projects seek fiscal sponsorships. Such relationships can provide much-needed infrastructure and fiscal management to a project. By making it possible to receive charitable donations, sponsorships can make more funds available. Plus, associating with an established charity can enhance the project’s credibility.
These arrangements benefit sponsors, too. A sponsorship can provide greater exposure for the 501(c)(3) organization, possibly resulting in new donors for established programs. When you choose a project that shares your mission and basic objectives, it can enhance your own program offerings with minimal monetary outlay. Although a sponsorship isn’t intended to be a source of income for the sponsor, nonprofits often charge a nominal fee to offset their overhead costs.
Projects that can best benefit from a fiscal sponsorship generally include those that are:
• Too small to have staff or much infrastructure,
• Temporary or periodic,
• Waiting to secure 501(c)(3) status, but that want to operate sooner, or
• Based outside the United States.
When you find a good candidate, make sure you thoroughly discuss each partner’s expectations and roles. Mutually agree on start and termination dates and decide which group will make decisions about what. Because nothing causes conflict like money issues, be sure to decide on the sponsorship charge (up to 10% is typical), how disbursements will be handled and who will handle audit and reporting requirements. Both parties must understand the key responsibilities in the relationship. First and foremost, the fiscal sponsor is responsible because the project and its sponsoring nonprofit are legally one entity.
Keep in mind that any fiscal sponsorship involves some risk to your organization’s finances and reputation. So it’s important to discuss your plans with legal and financial advisors before entering into one of these arrangements. Contact us for more information.