Archive for the ‘Financials’ Category

Eliminating a program: what not to do

February 26, 2010

Photo by neys

An organization that I am familiar with has been dealing with pretty difficult times financially for the past five years or so. Years of operating at a deficit without cutting back on anything have finally caught up with this organization, and they recently cut a popular, but underfunded program. In difficult times, many organizations have had to make similar decisions, but in this organization’s case they did several things wrong. I decided to use them as an example of what not to do when your organization decides to cut a program:

1. Plan ahead and plan wisely
A decision to end a program should be well-planned. It should have taken a lot of thought, and careful preparation- particularly when there are donors in the community that are strong supporters of the program. It also should include discussions with prominent supporters of the program. There should be a transition plan that includes an end of program summary that discusses and highlights what the program has accomplished while it was in existence.
and don’t eliminate a program a week before a site visit – while that grant may not be enough to run the program for a year, it may be enough to keep it going for a few months which buys more time to find additional funding.

2. Involve program staff
Make sure to involve program staff in this decision. Many times they can work with you to prevent the elimination of a program by reducing their hours, fundraising, etc. In this organization’s case, the staff offered to work reduced hours to keep the program going, and that offer was accepted with a promise that the reduced salary would keep the program going at least a few more months. They had even discussed a transition plan if no new funding was found that would include an end of program summary, but before the two months were up the staff were laid off with zero notice. The staff still offered to write up an end of program summary, but that offer was declined! When ending a program, I think it is extremely important to work with that program’s staff to do everything possible to keep it going, but if no funding can be found then the staff are extremely important allies in ensuring that the decision is communicated accurately and the program comes to a smooth end.

3. Communicate the decision effectively
The communication should be one of the most important aspects of the process to eliminate a program. Not only does communication need to go out to your volunteers and staff, but your funders need to be told as well – particularly ones that have given your organization general operating grants or program specific grants for that program. If those grants included the eliminated program, those funders need to know, and should be (if possible) involved in the decision. Also, don’t leave the program up on your website so it appears at first glance like your organization still has the program.

4. Don’t make it personal
This is about the program – not the staff. Don’t make this decision be about the staff and don’t burn important bridges. A few other strange things that happened with this organization, were that the laid off staff were removed from all e-mail newsletters and general public communication (even though the laid off staff are current donors) and they were not included on the email that announced the elimination of the program (and recipients of the email were told not to forward it to the laid off staff) – strange huh? While laid off staff are no longer employees, they probably have given a lot of time and money over the years, plus they probably brought your organization many new supporters. Respect them and their commitment.

Hopefully your organization never finds itself in such a position, but if you do, I hope this example helps show you what not to do.


Twitter Question: What is that one thing you think nonprofits need, but can’t afford?

February 26, 2010

Photo by Matt Hamm

I posed this question: “What is that one thing you think nonprofits need, but can’t afford?” to the twitter community and received some interesting answers:

philanthropissd: @nonprofitsos my answer to what #nonprofit orgs need – MANAGEMENT TRAINING.

bettina27: @nonprofitsos Vehicles for cross-systems collaborative planning.

smeneguzzo: @nonprofitsos Nps need but don’t think they can afford: integrated technology. Underestimate the cost of using hobbled together systems.

ddtdc: @nonprofitsos a Human Resources professional

mjfrombuffalo: Ditto what philanthropissd said: RT @philanthropissd: @nonprofitsos my answer to what #nonprofit orgs need – MANAGEMENT TRAINING.

urbantastic: @nonprofitsos every np needs in-house online donation capability, but most a)go 3rd party or b)completely miss out.

DCVito: @nonprofitsos I’d say we can’t afford clout.

BBBSHR: @nonprofitsos Current technology (both hardware and software). It’s essential for efficiency, but can be quite costly.

baovie: @nonprofitsos Training and staff development dollars

trina_willard: @nonprofitsos I agree completely – program evaluation. However, what’s the cost of NOT doing it? Potentially significant…

My answer (@nonprofitsos) was program evaluation

Want to know how your nonprofit is doing financially?

February 26, 2010

Photo by Segozyme

Have you ever wondered whether your nonprofit is financially healthy? Here are a few quick, easy ways to gain some insight into the financial situation:

  • Defensive Interval

The Defensive Interval is a ratio that will show you how long your organization could survive with its cash on hand. Organizations should have at least 90 days worth. To calculate the defensive interval:

(Cash + Marketable Securities)/(Operating Expenses/365 days)

  • Debt Ratio

This ratio will tell you if your organization is relying too much on funding from others (loans, etc). This should be .05 or less, which means you have sufficient cushion.

Total Liabilities/Total Unrestricted Assets

  • Program Expense Ratio

The program expense ratio is one that most people are familiar with, it is used to answer the question “what percentage of our donation goes towards programming?” The Charities Review Council recommends this number be higher than 70%, but the “gold” standard is considered to be above 90%. To calculate this ratio:

Program Expenses/Total Expenses

  • Working Capital Ratio

This indicates the organization’s ability to pay its bills in a timely matter. This should be somewhere between 1 and 2. If it is under 1 then the organization may not be able to meet its financial obligations, if it is over 2, then the organization may need to invest more of its money. To calculate the working capital ratio:

Current Assets/Current Liabilities

To find the numbers for these calculations, you can look at an organization’s annual report or audited financials. If you want to have some more fun with ratios, check out the Nonprofit Assistance Fund’s ratio chart and info sheet.

A few FAQs about the IRS 990 & Audits

February 26, 2010

Photo by alykat

  • What is the 990?

GuideStar explains that the 990 is “Form 990 is an annual reporting return that certain federally tax-exempt organizations must file with the IRS. It provides information on the filing organization’s mission, programs, and finances.”

  • Do nonprofits have to fill out a 990?

Yes, all nonprofits have to fill out a 990. There are only a couple exceptions: nonprofits that have less than $25,000 in revenue, nonprofits that are not 501c3 exempt, and most faith-based organizations.

  • Do nonprofits have to have their financials audited?

This varies state to state. Most states have threshold amounts. For example, in Minnesota a nonprofit organization has revenue greater than $350,000 then they are required to have their financials audited.

  • Can a nonprofit fill out their own 990?

Yes, they can. Nonprofits are not required to hire an outside consultant to do their 990, they can have internal staff complete their 990. Although, if the organization is large or has complex financials, it is usually best to hire an accountant to do this.

  • Does a nonprofit have to make their 990 public?

Yes, nonprofits are required to have their 990s available to the public. So, if someone requests a copy of it, you need to give it to them. Many nonprofits like Pro-Choice Resources publish their 990s online to make it easier for their donors and be more transparent.

Why can’t a nonprofit get its own credit card?

February 26, 2010

Photo by Andreas Rueda

I recently had a conversation with a NonprofitSOS reader that has been asked to be the holder of the credit card for the nonprofit where they work. What does this mean? Well, it means that a new credit card is issued for the nonprofit with both the employee’s and the nonprofits name on it. It also means that their social security number is used for the card, and their credit could be affected. This also happens a lot in the business world- employees have company cards- but with businesses the likelihood of losing funding is much smaller. I recently discovered that credit card companies won’t let you get a card just for the business- you have to use your social security number (I discovered this when getting a company card for The Advancement Company).

My question is, why can’t a nonprofit (or a business for that matter) get a credit card with just the nonprofit or business name on it? Why does an employee have to put their credit on the line? Both nonprofits and businesses have EIN numbers (social security numbers for organizations), so those could be used to get the card. I think the main reason this happens is because the credit card company wants an actual person to put the ultimate blame on if something happens. But, I think that this should be changed- a company or nonprofit should be able to have its own credit score, which in turn would affect their rates and the amount of credit available to them.

Budget Preparation Schedule

February 26, 2010

Photo by Joe Lanman

Now that the new year has started and you are about a month into your budget, it is time to start thinking about next years budget schedule. Here is a great suggested schedule from Jay Kiedrowski at the Humphrey Institute of Public Affairs and the Nonprofit Assistance Fund:

July/August Step 1: Planning the Process – Executive Director meets with financial staff and finance committee to plan budgeting process and set timelines.

September Step 2: Communicating about the Process – Staff meeting held to communicate process, responsibilities and deadlines to all participants.

Step 3: Programmatic Goal Setting – Board and committees review strategic goals and identify priorities; Staff meet within programs/departments to brainstorm and plan for programmatic goals for next year.

September/October Step 4: Information Gathering – Managers draft program or department budgets based on plans and assumptions.

November Step 5: Compilation and Revision – Coordinator compiles information to prepare an organizational budget draft. Managers review and revise initial draft.

Step 6: Committee Review – Finance committee meets to review budget draft and assumptions and make recommendations.

December Step 7: Final Approval – Board meeting held and budget proposal and programmatic and fundraising assumptions are presented for approval.

December/January Step 8: Implementation and Management – Staff meeting held to discuss budget, program goals and timelines for new year.

3 tips to reduce expenses

February 19, 2010

Photo by Leo Reynolds

When times are tough, nonprofits often need to cut expenses to match their declined revenue. It is important to be strategic when cutting expenses, and to avoid a knee-jerk reaction to the financial climate. Here are a few tips for reducing expenses:

1. Take a close look at what you are paying right now for everything.

There are savings to be had in almost any area of spending. For example, you can change your payroll service or negotiate a lower monthly fee. I know several nonprofits that use PressGold Payroll, a small local firm and they only charge $22.50 as a base fee and $1.75 per employee. You can also bring your nonprofit’s communications into the 21st century by switching your phone service to VoIP (voice over internet telephony) based services like Skype, and take advantage of this website for free conference calls. Speaking of conference calls, schedule more of them! We all have been in meetings where a meeting wasn’t really necessary. In those cases suggest a conference call which can save in mileage and parking. Also, take a look at your printing and office supplies costs. Businesses like Office Max offer special discounted prices for nonprofits, and don’t be afraid of negotiating with them for a better deal.

2. Take advantage of free help.

Make sure to take advantage of your volunteers, and continuously recruit new ones. Volunteers can do amazing things, and to illustrate that is Pet Haven, a nonprofit organization in Minnesota. Pet Haven is run solely by volunteers. Volunteers plan their annual event that raises $20,000+, volunteers manage their 100+ other volunteers, volunteers run their website, and more. This is a great example of how volunteers can make a huge difference in your organization- in fact they could even run it. Also, don’t forget about interns. Students are always looking for opportunities to gain knowledge and skills (and a good recommendation), and will work for little or nothing. If you have had to cut staff hours or lay staff off, don’t let their work do undone, give it to a volunteer or intern.

3. Outsource some of the work.

Many nonprofit organizations have to make the difficult decision to lay off staff due to lack of revenue. In those cases, a viable option is often hiring an independent contractor to do some of the work of that employee. For example, if your organization had to let go of your communications coordinator, you can often find an independent contractor that can manage your e-newsletter and design your collateral for less than half of the cost of that employee. Now, this is rarely the recommended route because having staff in these important roles will affect an organization’s long-term success, but in times of financial crisis it can be a short-term solution. If your organization decides to do this, you need to be very careful. You need to make sure that the IRS wouldn’t classify this person as an employee, which will only get your organization fined and responsible for back taxes.

Finally, make sure you stay on top of your budget. A budget should not be made, approved by the board, and then set aside never to be looked at again. You should review it monthly to make sure you are on track. It should be a road map for your organization’s spending.

Samples Week- Finances

February 19, 2010

Sample financial procedures/policies here, here, and here.

Procurement policy here.

Sample fiscal sponsorship agreement here, here, and here.

Sample request for bid letter for an auditor here, here, here, and here.

Sample nonprofit audit here, here, here, here, here, and here.

Sample budget here, here, and here.

Sample profit & loss statement here, here, and here.

Nonprofit Financial Management Self-Assessment Worksheet here.

Financial ratios worksheet here.

Cash flow template here.

To see any nonprofit organization’s 990, you can go to GuideStar.

If you have some spare time, this is a good read. It is a paper on Financial Statements, includes their background, talks about accounting methods, and includes samples of a cash flow worksheet and statement, balance sheet, and operating statement. It also includes several sample budgets, including a performance-based budget and a flexible budget.

If there are any other samples related to finances that I didn’t include, please leave a comment and I will add the sample.

Check out all of the other samples discussed this week!

How will the federal government change the tax deduction for donations?

February 19, 2010

Photo by brianjmatis

Could donors lose the incentive of a tax-deductible donation? The Chronicle of Philanthropy published an article this week, Paying It Forward — and Back, that looks at upcoming changes that may occur in the tax code for nonprofit organizations.

With an estimated $44 billion in lost federal revenue due to tax deductions, legislators are taking a look at ways to get that back. This combined with increasing complaints of large universities and hospitals that are “business-like” with “lofty executive compensation”, and with only 5 percent of $1 million gifts from 2001-2003 going to social service organizations, many are calling for something to be done. Some potential tactics that will be explored in 2009 include: going after large universities that “hoard” billion dollar endowments and do not have required payouts, creating a new tax category for universities and hospitals, changing the current deduction for donations to incentize people to donate to social service charities and taking a second look at the classification for who receives 501 (c) (3) status.

This could have enormous ramifications for nonprofit organizations, depending on what happens. Fortunately, the likelihood of the tax deduction for nonprofit donations being taken away is slim to none. This is certainly an issue all in the nonprofit world should keep an eye on.

You have to be a subscriber of the Chronicle to read the full article, if you are not a subscriber please email me for a PDF of the article.

Nonprofit Accounting: Cash vs. Accrual

February 19, 2010

Photo by pfala

It is very important to make sure you are using the right accounting system for your organization. Using the wrong accounting system can hurt your financial sustainability and cash flow. There are two principal types of accounting systems, cash basis and accrual basis:

Cash: With cash basis of accounting, you only record income when you actually receive it in the door. So, if you receive a pledge letter from a donor or foundation, you only count the money when you actually receive the check. The same thing with expenses. You only record expenses when you actually write the check to the vendor- not when you receive the bill. It sounds like common sense right? Why wouldn’t everyone use this method? Well, not all nonprofits use this method because it can distort your revenue and expenses. For example, you may show that you had a hugely successful month but in reality it was a slow month and you just had several donors and foundations pay out their pledges. It also can make it difficult to match income and expenses to get an idea of net revenue. There are some positives though. The cash method shows a better picture of how much cash you have and helps ensure good cash flow (you have enough income coming in to pay the expenses you have at any given time). Most smaller nonprofit organizations use cash basis accounting because of it’s simplicity.

Accrual: With the accrual method, you record revenue when you receive the commitment. So, for example, if you receive a letter from a foundation saying that they have awarded you a $50,000 grant, you would count that $50,000 on the day that you received the letter- even if you don’t actually receive the money for several months. The same thing for expenses. You record an expense as soon as you receive the bill. For example, if you purchase a new printer on credit in December and you don’t have to pay for it until May. You would count that as an expense in December, even though the money isn’t leaving your bank account for several months. This method provides you with a clearer picture of the financial status of your organization. Although, it can hurt your cash flow because it is often difficult to tell how much exactly you have in reserves. You make think you have thousands in the bank because you received several commitment letters, but in reality you have no money in the bank because you haven’t actually received the checks yet. There are also issues with counting restricted money in one year, when the money was actually intended for another year.

Overall, the accrual method is the preferred standard because it shows the relationship between income and expenses most accurately.

To read more, Beverly Goodman at The Non-profit Times wrote an excellent article about selecting the correct accounting method.