Seven Nonprofit Finance Tips to Keep Your Board Out of Trouble

You’ve just joined a nonprofit board and are ready to get started making an impact.  Terrific!  One of the most impactful things you may accomplish as a board member is helping your nonprofit with their finances.  Nonprofit finance pro Paul Konigstein, who wrote this week’s gust post, has some great advice on how to do just that.  Thanks Paul!

Seven Nonprofit Finance Tips to Keep Your Board Out of Trouble

When P.T. Barnum said: “there’s no such thing as bad publicity,” he was talking about circuses, not nonprofits. Negative publicity can have a chilling effect on donations to a nonprofit! To keep your donations flowing, here are seven nonprofit finance tips to help Board members avoid trouble and bad publicity for their organization.

1)      BUDGET

i)        Adopt a transparent budget before the start of the fiscal year. Transparent means documenting the individual items that comprise each budget line.

ii)       Monitor actual financial activity against the budget. Monitoring assures that your nonprofit continues to have adequate resources to meet its obligations and achieve   its goals. Understand the reason for significant variations from budget and require corrective action when necessary.

iii)     Most mismanagement and fraud can be detected with transparent budget construction and regular budget monitoring.

2)      AUDIT

i)        Undergo an annual financial audit.

ii)       Hire the audit firm at the Board level rather than delegating the decision to staff.

iii)     Communicate with your auditors before and after the audit. Before the audit, discuss the engagement letter to understand what the audit is designed to accomplish. Afterward, meet the auditors without management present to discuss any audit findings in a management letter or audit communication letter.

3)      FINANCIAL CONTROLS

i)        Financial controls are policies and procedures designed to protect your organization’s assets.

ii)       The most basic financial control is the involvement of at least two people in every transaction or activity.

iii)     Make sure all the financial controls are in writing and distributed throughout the organization.

4)      IRS FORM 990

i)        Review IRS Form 990, your nonprofit’s annual public information disclosure, with the preparer before it is filed. Ask questions about anything you don’t understand.

ii)       Learn about Unrelated Business Income Tax (UBIT). If your nonprofit has any activities that are subject to UBIT, make sure IRS Form 990-T is filed and the tax, if any, is paid.

iii)     Set program goals and report your organization’s progress toward achieving them in Part III to easily demonstrate fulfillment of your exempt purpose.

5)      FUNDRAISING

i)        Comply with donor restrictions on gifts. Permanently restricted gifts (more commonly called endowment) can never be spent. Only the earnings on the gift may be spent when certain criteria are met. Temporarily restricted gifts may be spent only for certain activities or only at a certain time. Unrestricted gifts may be spent however your organization chooses.

ii)       Make sure your financial statements clearly distinguish temporarily and permanently restricted gifts from unrestricted ones.

iii)     Most states require nonprofits to register before fundraising. If you solicit contributions by mail, phone, or website, register your organization in every required state.

6)      LEGAL

i)        The Federal government and most local governments regulate lobbying. If your organization lobbies, register this activity with the appropriate governmental body. Review Form 990 Schedule C to learn about Federal lobbying oversight.

ii)       The Nonprofit Revitalization Act requires New York nonprofits to have a conflict of interest policy and a whistleblower policy. If your nonprofit is located in New York, learn what policy provisions the act requires.

7)      BEST PRACTICES

i)        Have financial Key Performance Indicators and employ a dashboard to monitor them.

ii)       Have a finance committee of the Board that meets regularly.

Woody Allen said: 80% of success is showing up. 80% of Board governance is showing up mentally and critically listening to what’s going on. If you pay attention, you’re smart enough to recognize something that could land you or your organization in trouble.

Paul Konigstein is the CFO of Alcoholics Anonymous with nearly 30 years of experience as a nonprofit finance leader.