Part 1: Liability & Resource Allocation
Being part of a nonprofit board means you must be just as vigilant with the organization’s financials as you are with doing great work and fulfilling your mission.
While for-profit and nonprofit organizations run differently in terms of what KPIs to track, the accounting process needs to be run the exact same way – except with a nonprofit, you must have higher standards of reporting and internal controls.
Why? Because with a nonprofit, you’re using others’ money, and thus all funds must have a traceable origin.
Let’s go into some other important factors to be aware of for your nonprofit’s accounting:
Passion Can’t Run The System
While passion and expertise are valued in nonprofit members for the ability to motivate and drive your mission, this doesn’t mean you should give leeway on the financials!
Many nonprofit board members don’t have a financial background; in fact, a large majority are hired for their dedication to the cause, their network and ability to raise funds or volunteer efforts. However, passion for a cause can’t run the finance department.
Think of a nonprofit as if you have a board of investors, and you must let them know the status of their investments. You will be held accountable for any discrepancies or issues that may arise in the event of an audit.
For example, a community service organization Executive Director may be a social worker who’s never taken an accounting class/has no accounting experience. If they’re tasked with reviewing the check register, bank reconciliations, detailed accounting reports, they are hindered from doing their job, which is to raise money, set policy and provide governance.
If a nonprofit board is stuck micromanaging, then their primary function cannot be achieved. This is why you must have a good system of internal controls, so the board isn’t stuck spending valuable time with anything other than their mission critical tasks.
You’re Personally Liable
As a board member, first and foremost, it’s paramount to know you have personal liability for the custody of the nonprofit’s assets.
This falls into 3 main categories:
- Your errors and omissions (E&O) policy: You must always be sure your E&O policy is fully paid up. At GrowthForce, we get our Executive Director to confirm our E&O policy is fully paid up when we receive the audit financial statement. It’s a good time to ask!
- Compliance: You must be both audit ready and tax ready. While this varies from state to state, many require you to get audited if you have a million dollars of revenue, or even $500,000. The 990 tax return – the one needed for nonprofits – is considered the most difficult tax return there is for small and medium-sized organizations. Why? Because the IRS wants to ensure nonprofits aren’t tax cheats. This is exactly why you must be more stringent on your financial records; you must separate your programmatic expenses from fundraising expenses, from their general and administrative (G&A), and other administrative costs.
- Joint cost allocation: This means you’re allowed to allocate the cost of things that are done jointly for program and fundraising and administrative purposes. This is a huge part of what GrowthForce accomplishes for our clients. The best way to explain this is through an Executive Director’s pay through time – if they’re spending ⅓ of their time on fundraising, ⅓ of their time on the program itself and ⅓ of their time on administrative work, putting all of this under administrative work makes the nonprofit look bad. These costs should all be separated for the best accounting metrics.
At the end of the day, money is money, and nonprofits need to be run the same as for-profit businesses in terms of making money. You want to be sure your efforts put in match or exceed what you get out of fundraising and other initiatives.
How this works is essentially knowing where to allocate funding for the best possible outcome/output. When making these decisions on a nonprofit board, you have to start with the drivers.
Here’s an example from our previous community service organization scenario:
With a community service organization, you’d want to examine unit economics such as the cost to serve a client. Then, you can look at the costs of serving someone in a vocational training program – $100 per person – and pick another program, a day habilitation for $50 a person, and make a decision on your ROI garnered from the limited resources. If these are both equally important initiatives, but you only have $100, you must ascertain whether serving 2 people in your day habilitation program is better, or whether 1 in the vocational training program is.
This isn’t an easy call to make, but that’s the board’s job – to figure out the policy and governance; a means of allocating resources. A budget must be proven on what’s going to give the biggest bang for your nonprofit buck.
Measuring Success With Nonprofits
As a closing note, success isn’t measured for a nonprofit in dollar signs – it’s the fulfillment of your organization’s mission. The true motivation lies in helping others in need and raising money to continue doing so.
In order to propel your nonprofit’s initiatives, you need to be diligent about maintaining profits in the most actionable way, and letting the board do its central job.
Stay tuned as we continue this series with What Nonprofit Board Members Need to Know About Accounting Part 2: Reporting