Nonprofit Finance: A Practical Guide is available now as a kindle book on Amazon:
Nonprofit Finance: A Practical Guide is available now as a kindle book on Amazon:
Don’t let consultants run amok. Nonprofits usually have limited budgets and should use consulting services wisely to get the most of it. Remember that consultants are there temporarily to solve a problem or to create a software, create documentation for an audit, or…the possibilities are endless. These people should be managed well even though they are not regular employees and may be there short-term only. Below are some tips to keep things straight:
Identify a specific project for a consultant to work on — Select a particular area for the consultant to work on. The more specific, the better. Have a plan and don’t wait for the consultant to define his or her work. Give the consultant a place to work and all resources for the person to succeed and get the job done. If you have many goals, prioritize it and give the consultant the more important one to work on. When the consultant seems scatter-brained, he/she may be working on too many things at the same time, so clarify the primary goal and help the person focus.
Set up timelines and deliverables — Determine a reasonable schedule and get reports and updates regularly, at least once a week. Double check that the project and goals set for the consultant are being met and worked on. It’s very easy to get side-tracked and to focus on something else. Be sure the consultant is on target and not just following someone else’s ideas or requests, which is easy to do. Consultants want to be accepted and liked, and while they do that, they may be too willing to work on areas that are not that important.
Take advantage of the consultant’s “fresh eyes” — One of the main advantages of a consultant is to give nonprofits the benefit of his/her experience and background. This person is not supposed to agree with you all the time. Expect and consider ideas, processes, and recommendations made by a consultant, especially when he/she is new and hasn’t been “tainted” by group-think or politics. In addition, after a while, it gets easier to accept things that at one point seemed odd or non-functional. If you see this going on, ask about ideas from the person’s past that could be used, and remind the consultant about his/her value as “fresh eyes.”
Value your employees — Last, but not least, listen to your employees. It’s too easy to assume consultants are “all that” and forget that the employees should also be considered. Don’t take the consultant’s side right away if there is a conflict with one of the employees. Remember that employees will be there after the consultant leaves, and they need to show that you have their backs. I have seen executives lose good people because of this problem — just because someone is an outsider, doesn’t mean that he/she is a god. Get some perspective here.
Finally, consider consultants as helpers that can do a lot of good to many nonprofits when utilized properly. Beware of consulting firms that start to hire your employees — the idea may be to make you so dependent on them so that they never leave. Don’t fall for that. I have seen this happening in the IT department of a large nonprofit that slowly kept losing employees to the point that the consulting firm became the IT department and that was not a good thing. Remember — you’re the boss.
Check out the second edition of the book”Nonprofit Finance A Practical Guide”– First Edition nominated for a McAdam Book Award.
If the 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 other entities consider anything besides program costs, 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, expenses exist 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.
Check out the book”Nonprofit Finance: A Practical Guide- Second Edition First edition nominated for a McAdam Book Award.
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?
Spread the work evenly
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 underappreciated. 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 on 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 have two co-presidents, for instance. The point is to share the workload and responsibilities fairly.
Listen to all board members
Another 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. Assign someone to be the moderator during the meetings to make sure everybody is heard.
Give directors what they want
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 the people real motivations here. 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 really good. Take your time to know what people really want out of their board duties.
Rotate board members
To 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 wants 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 underappreciated 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.
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Budgets are financial guidelines to make sure the organizations are going in the right direction. Like any other business, nonprofits need to plan ahead using budgets, often based on prior financial data and expectations for the future. This process, done a few months before the new year starts, involves managers and board members, to make sure the budget is reasonable and attainable.
There are many ways to start the budgeting process. Many organizations develop budgets based on income first and then expenses, while others start with expenses and then work on the revenue — it depends on the nature of the organization. For example, when a nonprofit receives most of its income from grants, it’s easier to estimate income first and then work on expenses.
Budgeting is a group effort
In order to develop a good budget, you need to be realistic and detailed-oriented. A lot of research is required, and not just financial, but programmatic as well — is the nonprofit going to expand or shrink certain programs? Are there any plans for construction or another capital improvement? You cannot do it in a bubble –you need a lot of information from the past and from the future, and that usually involves many meetings and discussions.
Use prior financial reports
The first step to create a budget is to print out current revenue and expense detailed report by account and use that as your basis for the future. For example, if you see rent expense of $1,000 a month, then you should budget for this amount for the following year unless you know that the rent will increase or decrease in the near future. Look at each account and try to forecast the best you can about the following year. This type of work is often done during the last months of the prior year so that any trends or new information is included in the budget.
Consider major changes and grants
Although budgets are usually done once a year and then the numbers remain static, there are instances where budgets are changed and re-approved by the Board during the year. This may happen when a nonprofit loses or gains major funding by surprise, making the original budget obsolete.
Nonprofits receiving government funds incorporate grant budgets as their own. It doesn’t make sense to use multiple budgets — it creates confusion. Organizations also need to consider government cuts and how that would affect operations. As a rule, budgeting for a bit more revenue than expenses, allowing for cuts and unexpected expenses is a sensible approach. It’s always good to have a bit of a financial cushion.
Budget follow up is a must
Once budget numbers are approved by the Board and entered in the accounting system, the next step is to get actual vs. budget reports starting with the first month of the new year. Be sure to look at budget variances for the month and year-to-date. If you only look at monthly numbers, you may miss variances that may be small on a month-by-month basis, but significant for the year. For instance, if you see that your revenue is down $10,000 this month, it may not mean much, but if you compare year-to-date actual to budget numbers, you may have a $100,000 hole in the budget that needs to be corrected by using funds from prior years or by cutting down expenses.
Note that many nonprofits count on restricted funds to operate and that’s when confusion may start up. When developing an operating budget, differentiate between restricted revenues and others and be sure that donor documentation supports the decision to use restricted funds. You cannot unilaterally decide to use restricted funds — the donor must have given express permission for the money to be used a certain way.
More than one budget
Some organizations have separate budgets for capital expenditures to be used in major construction or another major project, which can be a sensible budget approach. Keep the operating budget separate and review both, looking for discrepancies and double counting. For instance, you may receive funds to construct a school and that should go towards the capital budget only — not towards operations. In some cases, the same funding may show up in two different budgets by mistake. Look out for those that can create a major problem.
Keep good documentation
As discussions are done and decisions are made regarding the budgets, keep good records that are always important when looking at budget vs. actual reports. If numbers are not going according to plan, it’s crucial to look at the reasons for the budget amounts. For example, if expenses for postage are way over budget, maybe the budget numbers didn’t account for a new campaign or for all campaign expenses. This can help budgets be more accurate in the future. Documentation can also help management in analyzing the financial reports to identify areas of real problem.
>>>BEWARE Accounting or the financial department folks should NOT prepare the budget by themselves —- they need to contact others within the organization to finalize the budget process.
Check out the book “Nonprofit Finance: A Practical Guide” –– Nominated for the 2016 McAdam Book Award
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.
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 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