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Nonprofit Finance: A Practical Guide is available now as a kindle book on Amazon:

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Is Your Nonprofit Well-Organized?

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.

  • Fundraising

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
 

Quick Tips on Nonprofit Financial Planning

Each organization is different, but every one of them is likely to face  challenges when planning for the future. Cash flow is crucial –no business, including a nonprofit, can survive without proper funding. However, many times people are concerned about the day-to-day activities of an organization and don’t pay attention to planning ahead. This issue has become even more important now that FASB released a new guideline requiring nonprofits to show how they can pay their bills in the next 12 months.

Check out 5 ideas that nonprofit managers may consider when conducting financial planning for an organization:

1- Use a budget

Budgets should be prepared before the year starts. Small organizations could use the prior year’s income and expense numbers as budget numbers for the following year. Once a budget is set up, then income and expenses should be compared to the numbers to be sure the organization is on target financially. Running a nonprofit without a budget is like shooting in the dark. It’s too easy to forget details and to end up with no money at the end of the year.

2- Pay attention to the timing of your cash flow

Cash is king in the nonprofit world. Without cash, an organization cannot pay its bills and must close or merge with another nonprofit. Timing is crucial, not just the amount of funding. For example, if an organization has a big bill to pay in August, but the money to cover this expense will be received in November, the nonprofit must deal with this shortage and start planning for it months in advance.

3- Consider getting a line of credit BEFORE you need it

Since funding can be cut or reduced with not much prior notice, nonprofits should get a line of credit from its bank. The best time to apply and get such line of credit is before the nonprofit needs it. This money could be used if funding is delayed or to cover a planned short-term cash shortage. Inquire about special lines of credit for nonprofits, which may have a lower interest rate and more favorable terms.

4- Educate your board of directors on financial literacy

Many organizations have very involved directors and officers, but they may not have the financial knowledge required to run a nonprofit. Therefore, such leaders should get a basic understanding of finance to evaluate reports and to hire and staff the accounting department properly. Some boards hire an outside consultant to come in a few hours a month or a week to supervise staff and resolve any problems before they become major. It’s an option, but the board must understand what is going on.

5- Allow for surplus

When planning, be sure to consider a cushion for the unexpected. This could be 2-10% of the total budget for a year, or an amount or percentage agreed by the board. This surplus, also known as “reserve,” is to be used for emergencies or unexpected costs, and is usually replenished once used up. The plan should be NOT to use these funds, but to have them, “just in case.”

Financial planning for a nonprofit can be a bit of a challenge, but it should be done to maximize the chances for survival and growth of a nonprofit. Without planning, small organizations may get by, but may not be ready for unexpected funding cuts. Making financial planning a priority can help your nonprofit to go in the right direction and make a difference in the community.

See more:

Nonprofit Finance: A Practical Guide – Second Edition– First edition was nominated for the 2016 McAdam Book Award

What you need to organize a nonprofit well – Article-Blog

What You Need to Know to Organize Your Nonprofit

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.

As in any business sector, there is a need for an effective infrastructure working behind the scenes to keep things running smoothly. This is especially true in the nonprofit sector where operations support the organization in a number of functional areas, including:

·   office management,

·   accounting and finance,

·   administration,

·    human resources,

·   information technology,

·   marketing and development.

Across all of these functional areas, there is one objective: to make sure the organization is operating efficiently at its full potential in providing goods and services to a community.  If a bill needs to be paid, people within the organization will know where the bill should go to, not just into a pile that once in awhile someone looks at.  Having a well and clear organization where functions are performed in accordance with a plan is a must for any nonprofit to survive and flourish.

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 could have an executive director to manage the daily operations.

  • Programs/ Services — MOST IMPORTANT 
  • Management and General — usually overhead
  • Fundraising

Identification of the three main areas of nonprofit operations is crucial in having proper accounting systems, internal controls, reporting, and management.  If you have an area of operations, it must follow this setup. 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.

BEWARE>>> Note that tax returns and most financial reports are classified by these three areas.

 

Check out the book “Nonprofit Finance: A Practical Guide” –– Nominated for the McAdam Book Award

 

Nonprofits – Mind Your Programs

The program area is the most important facet of a nonprofit organization. It defines the organization and it justifies its existence.  Without programs, the nonprofit has no reason to exist.  It doesn’t mean that all programs should be the same since nonprofits have different goals. For instance, if the purpose of an organization is to help the homeless, the nonprofit will offer programs in accordance with this goal. Most likely programs would involve temporary housing, food distribution, and job training.

Identification

This seems to be a no-brainer, but sometimes it can be a challenge. A program in one place may be fundraising in another organization. For instance, a nonprofit could sell used clothes in a thrift shop. The thrift shop is most likely part of the fundraising area and not the program. However, if the organization provides job training for teens, the thrift shop may be part of a program, especially if it has teens working there, being trained in the shop’s operations and selling techniques.

The first step in identifying programs is to look at the organization’s mission statement. A good, clear mission statement is critical. The clearer and simpler the mission statement, the easier it is to identify major programs–the reasons for the organization to exist. Suppose a nonprofit’s mission statement is to “provide temporary shelter to the homeless.” It is simple and focused. If the organization hosts a car race, then it is not part of a program–most likely it’s fundraising.

On the other hand, an organization with the mission statement “helping people to become self-sufficient” is too general, increasing the chances of confusion about what is a program and what is not. The more focused the mission statement, the easier it is to identify programs versus other operational areas. It makes it easier for the organization to stay on track, as well.

It’s worth noting that the IRS is also interested in this area, as both program information and mission statement are required on the tax form 990. If programs don’t connect well to the mission statement, the organization tax-exempt status may be at risk.

>>> Beware

“Mission creep” is an important item that should be reviewed often.  This creep usually happens when certain stakeholders want to take the nonprofit in directions not really related to its mission statement.  Donors and grantors may also contribute to this creep by offering funds for programs outside the scope of the organization’s mission. It’s management responsibility to identify and avoid mission creep. Or the nonprofit will be all over the place without a real path or strategy. Depending on the case, it may jeopardize its tax exemption as well.

Check out the book d“Nonprofit Finance: A Practical Guide- Second Edition” –– First edition was nominated for the 2016 McAdam Book Award.