Are you confused about what to look for when reviewing financial statements? Maybe a bit intimidated by all the numbers? Well, you are not alone. Many board members don't really have a framework to evaluate financial reports and may miss important details. You don't need to have an accounting background or to understand debits and credits to be able to focus on relevant areas. Below are four important areas to look for:

1 - Be sure to approve budgets that spend most of the funds in programs.

Programs are the most important part of a nonprofit and should be the main focus on any budget. If most of the expenses are allocated to administration or fundraising, it may mean that the organization will be launching a new program, or it could mean that the nonprofit lost its focus and needs to re-think its budgets as it relates to programs. If the focus in not on programs, there is something wrong.

2 - Always look at the cash on the Balance Sheet/ Statement of Financial Position.

Many boards only look at revenues and expenses, but not at the cash account balances. Cash is indeed king and should be evaluated carefully as revenues and expenses may or may not show cash transactions, depending on the accounting basis used. If you see $10,000 in income and $1,000 in expenses, but only $100 in the cash balance, you should start questioning how the nonprofit is paying its bills.  

3 - Pay attention at variances between actual and budget numbers cumulatively.

As budget vs. actual reports are presented, you should look for small variances in revenues and expenses that may end up being a large difference after a few months. If revenues, for instance, are below budget by 5% every month, at the end of three months, the cumulative difference could be 15%, and the nonprofit may not have the resources to pay for its expenses as time passes. So, be sure to review cumulative variances as well as monthly ones.

4 - Review tax returns before they are filed.

The IRS promotes the idea of boards of directors to review the tax returns before they are filed. The 990, nonprofit tax form, specifically asks if the board reviewed the returns. The point here is to make the board accountable and not just a detached government body. As board members review the tax returns, they may get ideas about internal controls and verify the information presented --whether they like it or not, they are responsible for the 990 information filed.

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Nonprofits, like any other business, need to deal with taxes. Even though a nonprofit may be tax-exempt, it still has to file and sometimes, even pay taxes. Let's not forget that tax compliance can be required at local, country, state and federal levels, so nonprofits cannot just ignore this issue. Below are some important tax considerations:

1- File the 990-N online

The 990-N is an Internet-based filing available to small organizations, requesting basic information, such as name and address. Nonprofits may lose their tax-exempt status after the organization fails to file the 990-N for three years. Note that the Internet system can be used only for the current year, therefore if you're late, you cannot file the 990-N, and must file the 990 or the 990-EZ in paper-form. The eligibility for the online form varies each year, so check with the IRS website often to see if your organization can use the 990-N online.

2- Sales/Use taxes

Many vendors don't charge nonprofits sales taxes because they are under the wrong assumption that these organizations don't pay sales/use taxes on purchases. This may seem like a good deal at first, but can create problems later if the vendor is audited and found that it should have charged taxes. The audit may spread to the nonprofit, and overall, it's not a pretty picture. This situation happens often because some states indeed don't charge sales taxes on nonprofit purchases, but this is not the case with every state. California, for example, requires most nonprofits to pay sales/use taxes on many types of purchases.

3- Payroll taxes

Nonprofits must follow the laws like any other business. Failure to pay proper taxes can create a huge burden on the nonprofit, which may be hit with large penalties and interest. The Treasury Inspector General for Tax Administration issued a report in 2014 regarding nonprofit delinquency and noncompliance with payroll taxes, so this seems to be a common issue within this sector. Be sure that your payroll department and/or processing service is aware of all payroll obligations, including proper payments for state and federal taxes.

4- Unrelated Business Income Tax

The idea here is to prevent nonprofits to compete unfairly with other firms, providing similar goods and services. Proceeds classified as unrelated are carried on regularly and are substantially independent to the exempt goal of the organization. Nonprofits file and pay this tax using form 990-T. However, note that the IRS provides many exceptions to this rule, giving nonprofits breaks on what is taxable. Income from volunteer work is one such exception.

Read article  Nonprofits: Tips on Managing Consultants
Read also Nonprofit fraud issues
Check out  the book 'Nonprofit Finance: A Practical Guide" -- Nominated for the McAdam Book Award
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Planning your next fundraising event? Now it's the time to consider pesky financial issues that can derail your best efforts. Many fundraisers, focused on the tasks to make the event a success, end up forgetting some crucial activities and costs, such as the items discussed next.

1- Create a Budget for the Event

Be sure to create a budget with all costs way before the event takes place. I have seen an event budget for a gala where the cost of drinks was forgotten. So, it's easy to miss important items and underestimate the event expenses. A way to avoid this problem is to have someone from accounting or finance department look at the budget numbers. Another way to prevent this issue is for development people to use a pre-set budget form that contain common line items. Not every event is the same, but they usually have many expenses in common.

2- Consider Insurance Issues

Oftentimes events happen that involve certain activities, such as a petting zoo may require an insurance rider to be sure the event is covered. These riders are usually not expensive, but they are part of the overall costs of an event. Nonprofits can also ask insurance documents from the third-party to be sure all is covered and a rider is not necessary.

3- Look out for Sales Taxes

Many states, such as California, tax specific items within a fundraising event, such as certain auction items. Check your state and other government agencies to verify what is taxed in your jurisdiction. Tax rates may vary by state, county and city, so double-check this issue and consider it in your budget because it can take an unexpected bite of your proceedings. In California, the sales tax rate can be as high as 9.00% of gross sales.  This tax may change, so double check with your state to make sure you're OK.  Ask about sales tax wavers, if available.

4- Don't Forget Overhead

Overhead costs are those that are not directly associated with the event. For example, an event carried on at the premises may involve rent or mortgage, fire insurance, maintenance,utilities and other administrative costs. These expenses are easily ignored because the event organizers don't have to pay for those; they are often considered to be costs of the organization in general. To account for this "hidden: cost, some nonprofits charge a rent fee to the event, while others charge a percentage of direct costs. The point is to note all costs associated with the fund-raising event.

5- Don't Leave Wages out

Wages paid, including any overtime, to employees involved with the event should be part of the event budget, especially when dealing with large events where a lot of time is spent on planning and organizing. For instance, if someone is paid $30K in wages and works three months on an event, about $7,500 ($30,000 x 3/12) should be considered an event cost. Usually, a percentage, such as 20% is added to the gross wages to account for payroll taxes and benefits.

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If program is the heart of a nonprofit, overhead is its backbone. Overhead is known as general and administration costs and, in some circles, it includes fundraising as well. Since the definition of overhead may vary, you should be clear on what it means. For example, in government agencies, fundraising is usually not part of overhead, while Charity Watch considers anything besides program costs, overhead.

Significance of overhead

Overhead rate on grants --Many grantors use “overhead rates” to reimburse nonprofits for administrative costs. This rate, a percentage, is usually calculated based on prior financial numbers and negotiated with grantors. The calculations can be complicated and detailed.

To decrease this complexity, the Federal government pays nonprofits a standard 10% overhead rate on their grants. This means that after reimbursing direct costs, it adds a 10% for overhead. If direct costs are $100, the reimbursement will be $110. This setup   may be fine for smaller organizations, but not for larger ones that may negotiate a higher rate. The idea is for the overhead rate to cover costs that cannot be allocated easily to a program, like an electric bill for a building that houses many programs.

This rate should be reviewed every year to make sure that indeed the overhead rate is at least equal to actual overhead costs. If the rate of 10% reflects $100,000, but the actual overhead costs are $120,000, then the organization may need to negotiate a higher rate with the grantor for the next fiscal year.

Overhead requirement on grants and gifts--Another reason overhead is important is that it must be part of every grant proposal or gift. Some nonprofits have funds restricted for certain programs only with nothing much left over for overhead, forcing many to fundraise for overhead mostly. It’s a strange situation where an organization may have money to fund research programs, but cannot pay its phone bill and other basic needs. Quite real and disconcerting situation.

To avoid this issue, nonprofits have started to require a percentage for overhead to be included in the gift or grant or they cannot accept it. I have seen a large nonprofit say no to a large gift because of this issue.

Overhead should NOT be zero –Overhead exists for a reason and if it shows as zero on financial statements or tax forms, you have a problem.  It could be an accounting error in classification or not understanding what overhead is. Whether fundraising is included or not, there should be something allocated to overhead in items like insurance policies, salaries or supplies. Even if all employees are unpaid, there are expenses that cannot be specifically assigned to a certain program and are part of overhead. While it’s understandable the wish to keep overhead costs low, it’s not realistic to keep it at zero.

The first thing to think about when someone mentions overhead is to understand what it means. That is very important to make sure everyone is talking about the same thing. The overhead definition and calculation may vary among grantors and even government agencies. So, ask questions about it, don’t assume anything and don’t forget about it in proposals.


Read about financial issues at   here

Read also No more Audit Freak out
Check out  the book 'Nonprofit Finance: A Practical Guide" -- Nominated for the McAdam Book Award
Also check out the book "15 Quick Tips on Becoming a Great Consultant" -- free on Kindle Unlimited

Nonprofit organizations must plan for the year and near future properly, especially regarding cash flows. It’s not just a good idea, but a requirement according to FASB, the organization responsible for accounting rules, effective for fiscal years beginning after December 15, 2017. The idea is to show that nonprofits are solvent and can pay all their bills the following year. This is usually not a big deal, since the budget gives information about this requirement, but it may not be enough for the auditors.

Both expenses and revenues will be scrutinized a bit by the CPA auditors to be sure they are reasonable. So, it’s good to start organizing documentation regarding cash flow, and not scramble at the last minute. Some ideas to consider:

1- Keep all notes regarding the budget preparation. Be mindful of the largest numbers on the budget, which could be related to payroll, for example. If an organization is planning to hire more people, be sure to account for salaries, payroll taxes and benefits. Same for major cash inflows – keep detail documentation about when they are expected, and the degree of certainty of such funds.

2-Be sure you have a cash-based budget, indicating when cash is to be received and paid up. Maybe you’ll have a large expense in May, but you won’t have money to cover for it until July, so it’s time to get in-between funding, such as a line of credit, which is easier to get before you really need it.

3- Disclose any board of directors restrictions on money received. Typically only funders' wishes have been "officially" considered, but in the near future, any other internal restrictions should also be presented. So, keep detailed minutes of board meetings and any other documentation showing that certain funds have been tagged to use for certain purposes.

4- Send emails or snail mails to major donors requesting confirmation that they plan to make donations as usual. This is better than just phone calls confirming the situation. The idea is to have paper or another trail that justifies the amounts you plan to get, proving that the numbers are more than a dream.

5- Document any major changes to the budget from one year to the next.  A major change usually involves amounts more than 10% from the past. For example, if you’re paying $2,000 in monthly rent, but you show only $1,500 for the future, be sure to have good documentation regarding this change.

6- Keep a cash cushion as large as possible to take care of unexpected expenses. This is very important to show that the organization is ready to move forward long term. Many nonprofits keep a cushion of about 10% of their budget.  The larger, the better, showing that the organization is ready to handle any surprise costs.

Nonprofit organizations oftentimes don’t have good controls to prevent losses and fraud in the accounts payable area. We know that bills need to be paid, but accounting staff must be aware that NOT all bills are to be paid right away without questions. I have worked at a nonprofit that the accounts payable person was concerned about paying all bills on time, so that she won’t be blamed for late payments. As it turned out, a few bills paid were for items that were not received or were damaged. Such invoices shouldn’t have been paid. 

Speed is important in paying bills -- no organization wants to pay a late fee or interest, or be known as a slow payer in the community. However, this must be balanced with a good approach in processing bills, making sure all bills to be paid are valid and make sense. Doing one thing can help you in controlling bill paying better :

Establish a system where bills are approved by management before they are paid

Many organizations have a schedule to pay bills that works very well. Depending on the volume of bills, accounting staff pay bills at least once a week. As invoices arrive, they are entered in the system and filed away by department. On a specific day, these invoices are forwarded to the departments in special envelopes or online. They are usually approved quickly and sent back to accounting. This setup gives management a specific time to do the bill approval weekly. If a bill is not returned as approved, it’s not paid. To avoid delays, some organizations have an accounting person visit every dept. once a week with invoices to be approved, just to get this process done.

An accounts payable system may take a bit of time to set up, but it’s standard in many organizations. I witnessed a fraud case at a nonprofit where printer cartridges were received and a bill was mailed to accounting for payment. The fraud was caught when the IT manager refused to approve the bill and had no idea what the cartridges were about. However, this ruse worked before with the scammer being paid the year before… because nobody had approved the bills formally then.

Just having a systematic way of paying bills provides some control in this area. It can get cumbersome, but it’s a must for all nonprofits, large or small, to maintain some checks and balances in this process. The idea is for accounting to be responsible for processing payments after proper approvals. Paying quickly is good, but must take second place to authorizations. More blogs about this issue to follow….

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Starting on December 15, 2017, nonprofits financial statements will look a bit different.  The changes may not be that noticeable to the untrained eye, but some people may note a difference and be concerned. The change is due to  a new update from FASB, Financial Accounting Standards Board, trying to make financial reporting easier  to understand.  Even though current reporting rules have been in place for over 20 years, many people have complained that the financial statements of nonprofits are confusing with not enough information to assess their liquidity, their ability to pay their bills. This update has focused in resolving these concerns.

"Not-for-profit organizations that will be affected include charities, foundations, colleges and universities, health care providers, religious organizations, trade associations, and cultural institutions, among others" (  Since the update will take place towards the end of 2017, organizations have enough time to make changes to be able to comply with the new rules.  A few highlights those changes are:

Only two classes of net assets

As you may know, net assets hold information about nonprofits, accumulating increases and decreases in revenues and expenses throughout the years. A nonprofit account always belongs to a net asset, traditionally classified as unrestricted, temporarily and permanently restricted. No more. After this update, we will have only two classifications of net assets:

1-Net Assets Without Donor Restrictions, comparable to the "old" unrestricted net asset
2-Net Assets With Donor Restrictions, combining the "old" temporarily restricted and permanently restricted net assets.

So, instead of reporting on three net assets, as has been the case now, with statements showing three columns or lines, there will be only two areas.  It doesn't mean necessarily that the accounting of temporarily and permanent restricted net assets need to change internally, but these are now combined in the "official" financial statements.  Most likely, the reporting on the accounting software will need to be changed to accommodate the update requirements.

Underwater value of endowments 

Organizations may receive endowment funds that are held for long term or perpetuity.  When the fair market value of such funds is lower than the original value of the gift,  they are said to be "underwater."   Unfortunately, that has been the case with the volatility of the stock market and other losses.  Currently, such losses were reported on the unrestricted net assets area. However, after this update, accumulated losses are reported within the endowment fund -- net assets with donor restrictions.

Detailed information about endowments is also required as disclosures on the official financial statements, such as the current fair market value of the endowment, any amount required to be maintained, and the amount of any deficiencies of the underwater endowment fund.  


Liquidity is about the ability of a nonprofit to pay its bills, a valid concern to many donors and grantors.  As many donors  restrict the amounts they give, it can be hard to determine if an organization has the money necessary to pay its current bills.  Financial flexibility is a must for any nonprofit to be viable long term, so this update requires disclosures about how an organization will be able to meet its  financial obligations for the next 12 months.  Specific resources available should be disclosed, such as prior year's reserves and any emergency money restricted by the board.

Anyway It's good  for boards to see the analysis of cash and resources available to cover upcoming bills, since many boards only see revenues and expense reports, not really paying attention to the cash balance and management. Sometimes cash is available, but there are so many bills yet to be paid, that the board may be misled into assuming that all is well when it's not.

The overall idea here is to make financial statements more useful to others, such as donors, helping them understand the fiscal health of a nonprofit better.  Since it will be effective towards the end of 2017, organizations have  the time to get ready for this change in reporting.  Accountants will be certainly busy next months making sure accounts are properly set up to reflect the new reporting and disclosure requirements.

Read about board issues here
Read also No more Audit Freak out
Check out  the book 'Nonprofit Finance: A Practical Guide" -- Nominated for the McAdam Book Award
Also check out the book "15 Quick Tips on Becoming a Great Consultant" -- free on Kindle Unlimited

Does your board need a little pep to get going?  Directors may be out of focus and not that energetic about the organization as they were a couple of years ago. People are finding more and more ways to avoid coming to meetings or to focus on programs. The problem is that if the board is down in energy, it's likely to trickle down to others within the organization.  So, what can one do to keep the board of directors engaged and enthusiastic?  

Pay attention to the changing mood in meetings and start talking to people individually. Issues that may be hard to bring to a group can be taken care of privately.  Try to see what is happening to the people.  Are they overwhelmed?  Are only a couple of people working hard, while others are basically coasting? The few who do most of the work are likely to feel the work is not evenly spread and may feel resentful and under appreciated.  This starts slowly with a few directors taking on many tasks over time and the board assuming that all is well and "normal." until these people start to "flake out" or to refuse to do any other work and distance themselves slowly. Some people may just be too eager to take on more and not notice themselves that the work at the board has become full time and that wasn't really the plan. Don't take the "worker bees" for granted and offer to take away some of the work and give to someone else, even if not asked.

Another way to correct this problem is to be sure that everyone in the board has a role and if it's too much for one person, have the role shared by two or three people. Some  organizations use two co-presidents, for instance. The point is to share the workload and responsibilities fairly.

A second problem facing a disengaged board is that only certain people are heard and others are shut down most of the time. So, make sure that everyone is heard because those shut down will go away and that may not be for the best interests of the organization. If bullying is part of this scenario, don't let it go unchecked.  Those who are bullied will be out fast, to the detriment of the organization. It does happen.

A third issue is that directors may just lose interest in the board and the organization. To prevent this problem, make sure your directors are getting something out of the organization's activities. Some people may be in for social interactions and networking, while others are passionate about the mission statement and yet others are there to add to their resumes. If a board member doesn't get much back in terms of an exchange for the voluntary work, he/she will lose interest after a while. So, it's important to figure out why people are part of the board to begin with and keep the interest up. Maybe a member is looking for a job and putting him/her in charge of an area that directly relates to what he/she is looking for would be fabulous. Take your time to know what people really want out of their board duties.  

Too keep up the interest, you could rotate board responsibilities around. Someone working for three years at a certain program may be tired of it and may need a change, even though the person may be comfortable in that role.  But too much comfort can lead to boredom, and a change may be in order before the person's interest wanes.  Maybe that person can work on a different program or area within the organization. Maybe he or she want to learn a new skill or meet different people. Offer suggestions to the person and see how he or she reacts. 

Overall, the idea here is to recognize individual board members needs, and to take an individualized approach to board disengagement Oftentimes, people are just feeling under appreciated and not getting much out of the board as they expected. Since the board's lack of energy and commitment trickle down throughout the organization, this is a serious issue that must be addressed as soon as possible. 

Read about risks working with volunteers here 
Read also No more Audit Freak out
Check out  the book 'Nonprofit Finance: A Practical Guide" -- Nominated for the McAdam Book Award
Also check out the book "15 Quick Tips on Becoming a Great Consultant" -- free on Kindle Unlimited

If you’re around nonprofits, you know that many rely on volunteers for operations, special events and programs.  According to the U.S. Bureau of Statistics, “about 62.6 million people volunteered through or for an organization at least once between September 2014 and September 2015.”

Usually, these people are good-hearted and do very good jobs.  However, we also have bad apples and those who misbehave or have accidents  in the name of the organization. This creates a huge liability for the nonprofit that is counting all pennies to provide goods and services to the community.  It doesn’t matter that volunteers are not paid, they still can do damage that the nonprofit may be held liable for. 

Actually,  “Good Samaritan” laws exist for volunteers in the case of personal liability, such as the Volunteer Protection Act of 1997.  However, that doesn’t mean that the nonprofit is also covered under this act automatically.  Better be safe than sorry. It's interesting to note that when things go wrong, the issue of proper training and oversight of volunteers is often questioned. 

So, proper supervision is a must in any volunteer situation, including making sure they get appropriate training and are placed in situations where they are qualified to be.  For example, if you run a swimming class, make sure the life guards are properly certified and are trained to identify problems and take care of them.  Swimming instructors should also have minimum qualifications for the job.  Just because it's a volunteer situation doesn't mean that standards need to be lowered. 

 Helping to maintain such standards, many nonprofits use manuals to clarify policies and procedures and as training material, very similar to those created for employees.  Be sure that manuals include sections about prevention of sexual harassment, safety and proper behavior in the workplace.  Also, add text about disciplinary actions if warranted. 

A tool to avoid unpleasant surprises is to do a background check on all volunteers, even if they cost a bit. It doesn't mean that everybody should be perfect, but if someone has a riskier background with problems with the law, they may need to be more closely supervised and placed in jobs that don't compromise the organization.  Background checks may also be required on insurance policies that include volunteer activities. 

Indeed, nonprofits must consider getting volunteer insurance policies to protect the organization from volunteers behaving badly or accidents.  Beware that because volunteers are unpaid, they are not usually covered by worker's compensation insurance and if something happens to them, the nonprofit may be on the hook for it.  So, consider adding a rider or a separate policy to include volunteer issues while they work for the organization. 

Volunteers are often wonderful and many organizations wouldn't be able to offer their programs if it was not for them. However, they also present a liability to nonprofits that must be addressed. Since protecting nonprofits against these risks can be expensive, be sure to include these costs when preparing budgets, grant proposals or gift requests so that you have the required funds to protect the organization against any losses.

Read article  Nonprofits: Tips on Managing Consultants
Read also No more Audit Freak out
Check out  the book 'Nonprofit Finance: A Practical Guide" -- Nominated for the McAdam Book Award
Also check out the book "15 Quick Tips on Becoming a Great Consultant" -- free on Kindle Unlimited