Are you starting or organizing your nonprofit? Any business needs a setup to operate effectively, and nonprofits are no different. A basic organization may be a no-brainer for some people, but may not be that obvious many as well.
One of the challenges of nonprofits is to create and manage a structure that works well. Many founders of nonprofits are not managers and do not have a background in management. They are “program” people. They created the nonprofit to fulfill a goal, a dream that they are familiar with, but management is not their expertise. Knowing the basic structure of a nonprofit can only help in setting up an organization that is functional.
It is important for founders and boards of directors to realize this issue and to find proper personnel or volunteers to fill out the needed spots. I have seen new, small organizations fail to follow their mission statements because they didn’t have a basic infrastructure, management, personnel to deal with proper insurance, and other risk factors.
A common structure is for nonprofit operations to be divided into three areas, all supervised by the board of directors that often employs an executive director to oversee operations.
- Programs/ Services — MOST IMPORTANT
With no program, the organization has no reason to exist, so this area is crucial to any nonprofit. Programs follow the mission statement of the organization. If the mission is to feed the homeless, for instance, you won’t see programs to improve antique cars. When in doubt, read the mission statement carefully. Most expenses are expected to be happening in this area.
- Management and General — usually overhead
Management and General area is the backbone of the organization, including administration and accounting. It’s also called General and Administration or G&A. Someone needs to pay the bills, select insurance, pay employees, all functions of this area. Usually, tasks cannot be assigned to a specific program and are considered to be overhead by many grantors. This area typically incurs the most expenses after programs.
This is the marketing arm of the nonprofit, dealing with grants, events, and overall fundraising activities. Also known as “development,” people in this area contact donors, write grant proposals, follow up on prospective donors, including business and foundations. Fundraising should have the least costs of a nonprofit, unless the org. is a new one or starting a new major program.
Identification of these three main areas of nonprofit operations is crucial to set up proper accounting systems, internal controls, reporting, and management. Sometimes it’s not that obvious. For example, someone working in contract compliance is most likely part of management, even though the work relates to programs as well. Cost allocation can be a challenge to many nonprofits.
BEWARE>>> Note that tax returns and most financial reports are classified by these three areas, and the IRS asks about the organization mission statement on its 990 forms to verify that indeed the programs are linked to the org. mission.
Check out the book “Nonprofit Finance: A Practical Guide” –– First edition Nominated for the McAdam Book Award