Nonprofit Cash Flow Management: Day-to-Day Liquidity

In recent years, the concept of the “business model” has gained a great deal of currency within the nonprofit sector, with nonprofit leaders as well as grantmakers and other stakeholders focused on understanding and improving the business and financial underpinnings of how organizations deliver on their missions. Discussions of the nonprofit business model often include considerations of things like cost to deliver services, mix of sources of funding, and key drivers of financial results.  Discussions of financial stability and sustainability often focus on the overall health of the balance sheet and (accrual-based) operating results. While these are all essential elements to understanding an organization’s finances and business model, such conversations sometimes miss one critical component of any business—namely, day-to-day liquidity. This article will discuss ways in which cash flow impacts—and is impacted by—the way a nonprofit organization does its business.

Cash flow is simply the mix—and timing—of cash receipts into and cash payments out of an organization’s accounts. It is where the numbers on budget spreadsheets and financial reports translate into the reality of money changing hands. And as such, it is a very specific lens on the reality of a business model—one that takes into account not just what an organization’s revenues and expenses look like, but when they come and go.

Managing cash flow, therefore, is primarily a question of when—when we pay our staff, when this bill is due, when the grant payment will come in. And as there are many varieties of nonprofit business models, each one has a particular bearing on many of those whens.

Nonprofit business models have two main components: what kinds of programs and services nonprofits deliver, and how they are funded.  For nonprofits, the latter component is a bit more complicated than for our colleagues in the for-profit world, for whom the answer is (nearly) always “by selling them to customers.” Of course, this isn’t to say that cash flow is perfectly smooth or friction less even in the for-profit sector, only that the range and variety of funding models for nonprofits (including not just “customers” but also third-party funders such as foundations, governments, and even individual donors) adds additional complexity.

Each component of the nonprofit business model—the delivery model and the funding model—has implications for organizational cash flow that should be understood for effective financial planning. We’ll look at each one in turn before discussing some strategies for addressing the almost inevitable occasions when the cash flowing in doesn’t match the cash flowing out.

What Do We Do?

 “What do we do?”—what kinds of programs and services an organization delivers (and how it delivers them)—is really a more high-minded way of asking, “What do we spend our money on?” (Granted, some services may be delivered by volunteers or use donated goods, but money is still necessary to pay managers and fund operations.) Really understanding “what we spend money on” will also generally give us a good idea of “when we spend it.” For example, a performing arts company that does four productions a year will have a fairly steady base of ongoing expenses, with spikes during the periods when productions are being prepared and staged. An emergency relief organization may have its baseline of operating expenses, with sudden (and unpredictable) surges of cash needs in response to a local hardship or disaster. A social service organization may have very predictable and consistent monthly cash outlays: payroll every two weeks, rent on the first of the month, invoices on the fifteenth and thirtieth. In each case, the cash flow demands are inherent in the business model.

Job one for cash flow management, then, is to understand the timing of cash needs—the magnitude and due dates of an organization’s bills.    Again, the “what do we do” side of the business model is the guide. If what you do is relatively stable, consistent, and predictable (as in the social service organization example), your cash needs likely will be as well. If what you do is predictable but not consistent (as in the performing arts company with productions at various points throughout the year), you know to plan for the surge in cash needs when the programming picks up. If what you do is unpredictable (as in the disaster relief agency), you will need cash available to deploy at a moment’s notice.

The examples above only take into account normal operations—businesses also need cash at certain points for longer-term investments like moving to a new space or buying a building. And while a major investment like that wouldn’t happen without a solid plan, there are also the occasional random but significant expenses like facility repairs. Again, the business model tells the story of the cash needs: while the social service organization may not be making capital purchases beyond a new set of computers, a housing development organization may need enough cash for major real estate purchases or construction of buildings. However large or small the investment, at the end of the day it means cash flowing out of your account.

How Are We Funded?

 Wouldn’t it be nice if the biggest task were simply thinking through one’s program delivery model to identify when the cash will be needed, and then turning on the tap to make it flow? Unfortunately, cash doesn’t work like a tap (and in fact, we have to have cash to keep water flowing). While the ideal case scenario is that cash comes into an organization at a similar volume and velocity to how it goes out, in reality nonprofit funding streams very often don’t work like that. In fact, an organization with a balanced (or even surplus) budget can still end up running out of cash due to timing mismatches. Looking at the “how are we funded” side of the business model can give us a better sense of what to expect in terms of cash inflows and of what to do if they don’t line up with the “what do we do” side. Each type of income stream tends to have particular implications and challenges for cash flow, so a business model built primarily around one type of funding will need to understand and plan for those implications and challenges.

A revenue-side business model that we see posing one of the biggest challenges for cash flow management is funding from government (particularly state and local) sources. In general, contracts with government entities pay for services only after the services are delivered, forcing the service-providing nonprofit to cover the initial outlay of cash to deliver those services. This is actually fairly typical of any business (for example, a retailer has to front the cash for inventory before generating income from sales; a professional services firm delivers services to clients prior to invoicing and collecting cash), but it is often compounded in the case of government funding by bureaucratic delays in registering contracts or processing invoices and payments. In some extreme cases, we have seen gaps of several months or more between an organization’s disbursement of cash to deliver contract services and collection of cash under the terms of the contract. In the absence of other revenue streams or other ways of accessing cash (about which more later), nonprofits in situations like this can face true cash flow crises.

Earned income from nongovernment sources—for instance, ticket sales for a performing arts organization—brings some of the same challenges, although (ideally) without the additional bureaucratic delays sometimes inherent in working with government. Even so, cash outlays typically happen in advance of cash collection—performances are rehearsed and sets are built before the audience buys tickets. This means that an organization needs cash to finance those costs that will later generate revenue back into the organization. (Any sort of prepayment on earned income—for example, advance ticket sales for performances or advance payments or retainers for service delivery—can help to fund the initial cash outlays.)

Cash from contributions and donations doesn’t come with the bureaucratic delays of government funding or the up-front outlays required to generate earned income. But organizations whose revenue model is primarily driven by voluntary contributions often face another reality of managing cash, which is that cash inflow can be very concentrated at a particular point (or points) within the year. For example, an organization that generates a significant portion of its income from an annual gala-type fundraiser may have an event in spring whose receipts may have to carry it much of the way until the next spring. Another may see much of its cash come in from an annual campaign timed to take advantage of end- of-year holiday (and tax write-off) giving. Nonprofits with highly concentrated cash inflow can exist in something of a “feast or famine” mode— flush when the money is rolling in but concerned that it will have to carry all the way until next year, or at least the next campaign.

Support from foundations and institutional philanthropy has its own implications for cash flow. On the positive side, grants are generally paid at the start of a funding period rather than following the delivery (and costs) of programs and services. On the negative side, grantmaking calendars can vary considerably from a nonprofit’s own programming calendar, so there can still be periods when ongoing program or operating costs have to be financed from other sources. Another relatively common characteristic of foundation support (and a cash flow consideration unique to the nonprofit sector) is its restriction to particular programs or activities, meaning that a condition of a grant is that its funds be used only for a specified purpose. So, what may look like readily available cash to meet current needs could technically be a set-aside for expenses weeks or months down the road.

Each side of the nonprofit business model—what and how we deliver, and how we fund it—helps set expectations about the timing of cash into and out of the organization’s accounts. But, particularly given the fact of nonprofit life that our “customers” and “payers” are often different entities, there’s only so much we can do to line up that timing to smooth out cash flow. If it does happen to line up perfectly, it’s probably due more to coincidence (or miracle) than conscious effort. So, once we establish solid expectations for what our business model means in terms of the timing of cash going out and coming in, the task is how to manage the many and inevitable instances when the timing doesn’t line up.

Balancing Cash In and Out

Regardless of the nature of our business model, or of how well we plan, there will inevitably be periods in which more cash is going out of an organization than is coming into it. This is most obvious during a start-up phase, when the initial investments made in (or loans made to) a new organization are essential to meeting cash needs before income generation kicks in. But even for an established organization in a relatively steady state, “you have to spend money to make money” (and generally in that order) is a rule of business. So, how do we meet our cash needs in those times when there is not enough coming in from operations?

Before discussing that question, one critical point: It’s true that in almost any business, there will be times when cash coming in doesn’t cover the full need for cash going out. That may be because of certain timing issues inherent in the organization’s business model—slow payments for services delivered under a government contract, say. But it may also be because there’s simply not enough revenue in the business model to cover the expenses of operating the business. If the issue is a temporary cash shortage, then an organization’s leaders will know (or have a reasonable sense of) when the situation will be back in balance, with sufficient cash coming in to cover expenses. If the issue is a more permanent imbalance, what may be presenting as a cash flow problem (i.e., a matter of timing) is in reality a broader business model problem—not just a disconnect between when money is coming in versus going out, but between how much money is coming in versus going out. If an organization’s overall business model is in deficit and out of balance, cash flow problems will certainly exist, but not ones that can be resolved by the methods discussed further down. In those cases, cash flow problems are just a symptom of the bigger challenge of overall revenues not being enough to cover expenses; treating that situation as a matter of cash flow timing will only delay and intensify the necessity to address the deeper need to increase revenues and/or decrease expenses.

On the flip side, an apparently healthy cash balance doesn’t necessarily translate to cash fluidity. For instance, particularly in organizations that have multiple streams of funding for individual programs (where, as alluded to earlier, some money is restricted to certain activities), it is easy to lose track of the purposes for which each stream may be used. You may have enough money to run the program, but the money may end up being spent in ways other than what each funder requires. To make a bad situation worse, such mistakes can be punishable by a requirement to repay, making future cash even harder to come by. Thus, in nonprofit finance, cash is not fungible like it is in most for-profits: you cannot necessarily take it from one overfunded function and devote it to another that is underfunded. This can be confusing to boards—and also, too often, to unschooled executives. Such mistakes with government contracts and other forms of restricted funding can have serious high-profile repercussions for your long-term financial health and cash flow.

With that major caveat out of the way, let’s turn back to the question of how to address timing issues when last month’s collections are lower than this month’s bills. The most basic (and important) solution is drawing on an organization’s own cash reserves, which supply the working capital to keep current on payroll, rent, and other expenses. Having a cushion of a few months’ worth of expenses built up in the bank account provides the liquidity necessary to avoid being at the mercy of each day’s cash receipts to determine which bills to pay. Cash reserves are a good indicator of a nonprofit’s overall financial health and sustainability, but from an even more practical perspective they are an essential resource for managing cash flow and payment schedules.

Unfortunately, development of a robust cash reserve can be a significant challenge for many organizations. While financial surpluses and accumulations of reserves should always be a goal of budgeting and financial management, some organizations’ business models make this particularly challenging. For instance, heavily government-funded social service providers face a Catch-22, in that expense reimbursement contracts cannot by definition operate at a surplus, yet the typically slow pace of cash receipts makes it particularly important to maintain a significant cash reserve. What options exist in such cases?

For any business unable to meet cash needs with its own resources, it must meet them by borrowing from someone else’s resources (that is, taking on debt). To meet operating cash needs in the absence of adequate cash reserves, a nonprofit can turn to a line of credit as a “floatation device” to meet the temporary imbalance between available cash and expenses due. We stress the word temporary here to echo the important point made a few paragraphs back: that lines of credit should be used only to address a timing discrepancy between payment of expenses and receipt of cash.

Without a reasonable and relatively specific understanding of when the cash will be available to repay the line of credit, an organization is at risk of using credit to fund an operating deficit—and, of course, exacerbating the deficit with the interest expense associated with the debt!

That said, credit lines used responsibly can be a useful and vital tool for cash flow management, particularly for those organizations whose business models entail slow collection of major receivables or long gaps between cash infusions. We typically recommend that organizations in those situations secure a credit line at least as a safety net, since using credit is generally a better course of action than delaying payment of expenses that are critical to the functioning of the organization. And, as a general rule, it’s much easier to secure a line of credit before it’s needed than it will be when and if the situation becomes urgent. Of course, credit doesn’t come free, and organizations using lines of credit must also plan and budget for interest expenses and any other transaction costs associated with taking on debt.

If neither reserves nor credit are options in a cash crunch, nonprofits may be forced to resort to less appealing means of riding out the storm. These may include measures such as approaching funders for accelerated or advanced payments (here again, it would be critical to show that the problem is only one of timing mismatch in order to avoid raising a huge red flag to a funder) or delaying payment of certain noncritical vendors. An even less appealing option would be a loan from a staff or board member, which could raise conflict-of-interest concerns. Probably the worst-case scenario is delaying payroll for some or all staff, which could jeopardize the organization’s programs as well as potentially raise legal issues. Far better to understand your business model and budget, and plan in such a way as to establish a solid cash cushion for the lean times.

Cash Management across an Organization

The challenges and consequences nonprofit organizations face with respect to cash flow are to a large extent inherent in the business models those organizations operate with—what kinds of programs and services they deliver and the way(s) they are funded. But this isn’t to say that nonprofit leaders are purely at the mercy of the business model; understanding the way the model impacts cash flow is the first step toward planning for and managing it. While it may be impossible to ensure that cash is coming into the organization exactly on time and on target to keep things on automatic pilot, it is certainly possible to plan for those times when it isn’t, and to take advance measures to be sure that bills (and staff) are paid on time.

In this effort, it helps to take a team approach. While one person or department (finance) will be in charge of the central cash flow projection tool, effectively planning and managing cash requires input from across an organization. Program and human resources staff have the most insight into the timing of expenses. The fundraising team knows the most about timing of grant payments and donor gifts. Contract managers can set expectations about reimbursement schedules. Team members working on earned income projects can estimate billing and collections. Ultimately, all of this information should flow to the CFO to project and plan for any potential shortfalls (or, in the happy event of significantly more cash than necessary, to park it in safe short-term investments). Staff across the organization may also be asked to help manage challenges as well—perhaps by rethinking timing of certain expenses or working on accelerating collection of cash from donors or customers. Being informed, strategic, and collaborative in cash flow management can help to ensure that a nonprofit’s long-term strategy isn’t derailed by avoidable—if inevitable—short- term obstacles.

Source: Cash Flow in the Nonprofit Business Model: A Question of Whats and Whens by Hilda H Polanco and John Summers, Nonprofit Quarterly, February 13, 2019

5 Tips for Nonprofit Internal Financial Reports

When it comes time to present internal reports to the board, more likely than not we have grown to expect a few yawns, complimented by blank stares. This article has the ability to engage, enhance, and provide useful information to the board during these internal report presentations.

A not-for-profit should consider the following best practices to ensure that internal financial reports prepared for its board of directors and other governance committees are accurate, timely, and decision-useful.

The following 5 Tips are provided to make your Nonprofit Internal Financial Reports more effective and useful.

Make it easy to read. Internal financial statements that include management’s discussion and analysis of the results presented can be helpful to board members as they carry out their oversight responsibilities. A brief overview of the period presented and highlights of the results that are meaningful to the organization will assist the governing bodies in their decision-making processes. The analysis should be easy to read, avoiding overly technical language while conveying the organization’s financial story. In addition, the accompanying financial statements should include, at a minimum, comparative statements of financial position (balance sheet), statements of activities (income statement), and budget-to-actual report.

Describe profit and loss by program. Not-for-profits operating multiple programs (especially those relying on governmental funding) should also consider, as a best practice, producing a profit and loss statement for each program on at least a quarterly basis. The surplus or loss on each program should be compared with the surplus or loss of the corresponding period in the previous year with significant variances explained. As an additional best practice, on an annual basis, a reconciliation should be prepared between the budgeted surplus (or loss) to the surplus (or loss) from the audited financial statements. If a program is regularly operating at a loss, management and the board can evaluate whether the organization should continue to subsidize the program.

Use ratio analysis. Ratio analysis is an effective tool for assessing an organization’s financial viability. When produced on at least a semiannual basis, internal reports on key ratios can help organizations monitor their liquidity, performance, activity, and leverage. The ratios can also be used for benchmarking purposes. Each organization should identify which key ratios and metrics are the most meaningful to their business model.

Present cash flow and liquidity data. Periodically throughout the year, organizations should assess their liquidity and availability of resources to meet their cash flow needs for a specified time. These assessments should be shared with the board on a quarterly or semiannual basis. For organizations struggling with cash flow or liquidity issues, reporting may need to be more frequent.

Keep it simple. Avoid lengthy reporting and choose a format that is easy to follow. Provide training to board and senior staff members on how to read and understand the reports so they can ask appropriate questions and make effective decisions. In some cases, dashboard reporting, using visuals to highlight key metrics and indicators, is very effective. Having accounting software that can produce internal financial statements with minimal edits outside of the system is important, providing data integrity while maximizing efficiency.

Source: “Tips for NFP Internal Reports”. Journal of Accountancy. November 2018.

7 steps to planning a successful not-for-profit audit

Year-end financial statement audits serve a valuable purpose in helping maintain the financial integrity of not-for-profit organizations so they can successfully complete their missions. These audits can be more effective and less challenging with a little bit of preparation and planning on the part of the not-for-profit management and finance team.

This preparation starts with your accounting system, because everything you do on a monthly basis will pay dividends as you gear up for your year-end close and the audit. Chances are your accounting system is very good for everyday things, such as processing customer/donor billings, receiving payments, paying bills, and making payroll. And you probably do other things every month in the normal course of your monthly closing cycle, such as review and reconcile various accounts.

Having these processes in place provides a good start in preparation for your year-end audit.  There are 7 planning steps to help your year-end audit be successful:

Analyze, review, and reconcile significant balance sheet accounts. Use a roll forward schedule to capture all the account activity. You and your auditor can agree as to the exact form and layout of the schedules to ensure they serve the dual purposes of the year-end close worksheet and audit schedule:

Beginning balance + additions – reductions +/- adjustments = Ending balance

Completing the schedule ensures that the account balances roll forward from the prior year end to the current year end, which provides assurance that the income statement effects of the changes have been properly recorded.

The following balance sheet accounts (and related income statement accounts) that you will want to reconcile and roll forward. Be sure to add other accounts to meet your organization’s unique needs.

Balance Sheet to reconcile and roll forward include Cash, Investments, Account Receivable, Pledge Receivable, Prepaids, Property and Equipment and related accumulated depreciation, Accounts Payable, Accrued Expenses, Deferred Revenue, Debt including capital lease obligations, and Net Assets.

Meet with your auditor to confirm the audit plan and timeline. Be sure you both come away with a clear understanding of the who, what, when, where, how, and why for each step of the audit process all the way to delivery of the final reports. The result of these efforts will be a matrix of roles, responsibilities, and dates that you both agree to uphold. Review all the audit confirmations, schedules to be prepared, documents to be pulled, and other support functions your organization will provide to the auditor. Ask for items that can help reduce your work in preparing for the audit.

Talk to your internal accounting team. Discuss the expectations, concessions, adjustments, and accommodations needed to make the year-end closing plan work. Build some contingency time into your planning, as the unexpected has an uncanny way of sneaking into even the best of plans.

Inform others in your organization about what to expect. Share your plan outside of the accounting department. Talk about what to expect from your team and the auditors when they arrive on-site. Now is a good time to reserve space for the auditors and ensure that adequate electrical outlets, internet service, photocopying/scanning, and other resources needed by the audit team will be ready and waiting when they arrive.

Finish recording all the activity for the year. Before closing your fiscal year, post the accruals and adjustments necessary to put your books fully on GAAP basis of accounting. The objective at the finish is to have a closed general ledger that will need no adjustments by your auditor. As part of the closing process, you will be completing all the roll forward schedules and account reconciliations, adjusting depreciation, recording all payables and receivables, adjusting bad debt allowances, and so on. Be sure to perform a final check of roll forward schedules to be sure they agree with final general ledger balances.

Have everything ready for the audit team when they arrive on-site. If possible, try providing items as they are completed, which will give your auditor a chance to review them in advance, potentially saving time for you and your auditor.

Don’t forget to communicate. Kindness and communication throughout the year-end closing process will produce the best results, minimize stress, and make life more pleasant for all. Be sure to build in breaks and a little downtime to help everyone maintain a healthy balance and perspective as you work together through what can be a bit overwhelming at times

Source: “7 steps to planning a successful not-for-profit audit”  AICPA CPA Insider, April 24, 2017, Tim McCutcheon, CPA

Abila MIP Fund Accounting and MIP Cloud Version 2020 Available including access to user guides, knowledge base articles, and video to assist with Year End Processing

As your local business partner and reseller for Abila MIP, we wanted to let you know that Abila has released a software update.  You will need to upgrade to Version 2020 to do your year end tax forms including your 1099’s and W-2’s from Aatrix.  Please contact us for help with your annual software upgrades or assistance to produce your year end tax forms.  Keep in mind you may need to upgrade your SQL Server 2008 as Abila will stop supporting this SQL Server Version March 31, 2019.  Our firm recommends that you upgrade to SQL Server 2014 or SQL Server 2016.


This release includes key updates to the Federal Tax tab and W-4 information screens in Payroll, HR and EWS enabling employees to keep their pre-2020 withholding on file or submit updated 2020 W-4 information. New employees and existing employees updating their Federal Tax withholding will be required to use the 2020 W-4 method. More details are available in the Payroll, HR and EWS online help.  Additionally, this release includes changes to federal tax withholding tables and FICA withholding updates necessary for the 2020 tax year.

  • State Tax Updates:
    • California
    • Colorado
    • Illinois
    • Iowa
    • Kentucky
    • Maine
    • Maryland
    • Michigan
    • Missouri
    • New Mexico
    • New York
    • North Carolina
    • North Dakota
    • Ohio
    • Oregon
    • Rhode Island
    • South Carolina
    • Vermont

Form more information on processing W2s and 1099s, please reference the following guides:

1099 User Guide
W2 User Guide

Product Help Files
Our documentation team maintains in-product help for all modules, including several
checklists around year-end processes.
Help > Checklists > Payroll > Tax Reporting and Tax Worksheet Reports

1099 Processing Checklist
Prior to completing this checklist:
Upgrade to version 2020.1
Order forms from Abila Checks and Forms or your forms vendor.
Confirm Organization Information.
Confirm User Security.
Prepare Vendor reports
Confirm Vendor 1099 information
Make 1099 Adjustments as needed
Aatrix Wizard & Preparer Grid
Run Aatrix Forms Update
Complete 1099 Setup Wizard
Process 1099s in 1099 Preparer Grid
Print or E-File 1099’s
Make copies as needed for your records

W-2 Processing Checklist
Prior to completing this checklist:
Upgrade to version 2020.1
Order forms from Abila Checks and Forms or your forms vendor.
Confirm Organization Information.
Confirm User Security.
Prepare Employee Information reports
Confirm W-2 Information
Setup/Adjust employee balances as needed
Aatrix Wizard & Preparer Grid
Run Aatrix Forms Update
Complete W-2 Setup Wizard
Process W-2s in W-2 Preparer Grid
Print or E-File W-2’s
Make copies as needed for your records

Trending Support Topics

Below is a list of current trending support topics. You can use the links below to quickly access the associated Abila Knowledgebase Article or how-to video. You must be logged in to the Abila Knowledgebase to view KB Articles.

1099 and W-2 Articles

Year-End Topics


Aatrix has a support team available Monday-Friday for technical or e-Filing issues.
Support (Phone): 701-746-6017
Chat support is also available from their website.

Download / Installation / Technical

  • Download: Abila MIP Fund Accounting version 2020.x – (Article)

If you have any questions, please contact Abila Support or Financial Technologies & Management.  You might want to contact Abila support first especially if you have an active maintenance and support agreement as we will need to charge you for our time.  However, we process quite a few W-2’s and 1099’s for our clients so you can contact us if we can provide assistance or if you would like for us to do the year end processing on your behalf.

An Executive Director’s Guide to Financial Leadership-Includes ED Finance Cheat Sheet

There is an important distinction between financial management and financial leadership. Financial management is the collecting of financial data, production of financial reports, and solution of near-term financial issues. Financial leadership, on the other hand, is guiding a nonprofit organization to sustainability. This is the job of an executive director. He or she is responsible for developing and maintaining a business model that produces exceptional mission impact and sustained financial health. To do that successfully, the executive director has to be ever mindful of essential nonprofit business concepts and realities. The following is a guide to this way of thinking for an executive —a summary of what we see as the eight key business principles that should guide financial leadership practice.

1.   Activate Your Annual Budget

Strong annual budgeting is an essential element of financial leadership. The best annual budgets align to an annual plan—a written narrative that all staff and board understand about the core activities the organization will undertake in the coming year and how they will be financed. If the budget includes as-yet-unidentified income, which is standard for many organizations, that amount should be clear to all board and staff along with the plan to raise the funds during the year.

Achieve a net financial result. A classic mistake executives make is allowing staff to spend all year on budget when income is not coming in as expected. In fact, it is critical to emphasize to your staff that an annual budget is a plan to reach a net financial result—to yield a specific surplus or to invest a specific amount of the organization’s reserves through a planned deficit.  Whichever the financial goal for the year, if the organization is not running on pace to achieve that net financial result, then even budgeted expenses should be questioned and reconsidered. The budget is never permission to spend when income is not coming in as planned.

Anticipate the future. Given that many organizations raise funds and encounter new risks and opportunities throughout the fiscal year, it is important not to stay overly focused on budget variance analysis to the exclusion of rolling analysis of your anticipated financial position.  Budget variance is the difference between budgeted and actual results for a given period. While it is useful to understand why predictions were off, it is just as important to be actively anticipating the future. We see too many executives and boards focused on “hitting the budget” rather than anticipating and intentionally shaping their financial futures beyond the current fiscal year. Fiscal years are arbitrary units of time; in reality, the decisions we make—and the consequences of deferred decisions— live on well beyond the fiscal year. For this reason, we recommend that organizations build the habit of rolling financial projection.

Commit to financial projection. At least quarterly, the management team should evaluate what they are learning about current and possible revenue streams, shifts in programming, and strategic opportunities, and there should be a means to capture that up-to-the moment thinking in a financial projection. Midway through the fiscal year, we recommend adding a projection column to the income statement, so that for the rest of the year it includes year-to-date actuals, year-to-date budget, and a column for management’s current projection of where the organization is likely to end the year. Even better, the projection can roll into the “fifth quarter”—that is, across the arbitrary finish line of the fiscal year and into the first quarter of next year.

2.   Income Diversification . . . or Not

Income diversification is often touted as a tenet of sustainability—the idea being that having all of your eggs in one basket is by definition riskier than having them in multiple baskets—or in this case, multiple revenue streams. In fact, nonprofit business models vary considerably by field or service type.

Determine the degree of diversification you  need. Income diversification is more possible and more necessary in some models than in others. For instance, community mental health services are likely to be heavily government funded, and once a nonprofit has established a successful track record of providing these services, that government funding may remain in place for years. Even though the organization is technically dependent on one set of government contracts, it may not be in a riskier position than another kind of nonprofit struggling to raise small amounts of money from individuals, corporations, and foundations, for instance. The reliability and competitiveness of your revenue streams dictate the degree of diversification that you need.

Determine risk. Income diversification carries some real risks. Evidence shows that more revenue streams don’t necessarily mean greater annual surpluses or organizational scale. To attract new revenue streams, an organization has to develop and sustain new capacities. As nonprofit finance expert Clara Miller has noted, “Maintaining multiple, highly diverse revenue streams can be problematic when each requires, in essence, a separate business. Each calls for specific skills, market connections, capital investment, and management capacity. Only then will each product attract reliable operating revenue, pay the full cost of operations, and deliver results.”  And a recent analysis of high-growth nonprofits by the consulting firm Bridgespan Group found that 90 percent had a single, dominant source of funding. Bridgespan concluded that organizations get to scale by specializing in a certain type of funding, and that diversification, and thus risk management, happens by “securing multiple payers of the same type to support their work.”

3.   Make Cash Flow Your Priority

Most financial reports are historical documents, useful to verify what has already happened and compare to budgets and plans.

Develop a cash flow projection. For looking forward, one of the most important tools is a cash flow projection. Executive directors need to know how the organization’s cash flows, and what to do if the cash doesn’t flow. Unless your organization has built up a substantial base of operating cash, any nonprofit can run into cash flow problems. What causes them? A variety of factors, including seasonal fundraising, annual grant payments, reimbursement-based contracts, and start-up costs for new programs.

Anticipate—and resolve—cash flow issues. Cash flow projections require knowledge and judgment that the accounting department may not have. Because of this, executive directors need to have a direct role in developing useful cash flow projections, agreeing on the assumptions to use, and reviewing the projections carefully. The earlier you anticipate cash flow issues, the easier it is to address them. As a first step, assess whether the cash flow shortfall is a problem with timing or is an indication of a deficit. The strategies used to solve the cash flow problem should match the cause of the shortfall.

Manage your shortfalls. Timing problems can be prevented by managing the timing of payments and receipts, improving internal systems, or arranging for a line of credit. Shortfalls caused by deficits need to be solved by budget adjustments or strategic choices to absorb a near-term shortfall. All of these options need the input and support of senior management. Managing cash flow is not a one-time activity. Insist that projecting and discussing cash flow every month or quarter become routine practice.

4.  Don’t Wish for Reserves—Plan Them

 “Building a reserve” is on the top of the financial wish list of just about every executive director. It’s an understandable goal—just read the preceding section about cash flow and you’ll understand why. Having a cushion of cash that can absorb an unexpected delay in receiving funds, a shortfall in revenue for a special event, or unbudgeted expenses can stabilize an organization. Nonprofits that have built up a good cash cushion have had options and opportunities during the recession that have allowed them to respond to reduced income and increased demand more strategically and carefully than those organizations with few extra dollars in the bank.

Achieve a surplus. Wishing you had reserves is not the same as planning for reserves. But where do reserves come from? For most nonprofits, reserves are built up over time by generating unrestricted surpluses and intentionally designating a portion of the excess cash as a reserve fund. On rare occasions a nonprofit will receive a grant to create an operating reserve fund. So step one in planning for reserves is to develop realistic income and expense budgets that are likely to result in a surplus. Step two is to make sure that achieving a surplus is a priority that is understood and supported by staff and board members.  For some organizations, there is an earlier step, too. They have to stop operating with deficits before they can even dream of having a reserve.

Determine your reserve goal. How much should you have? While there are some rules of thumb, generic target amounts don’t take some important variables into account, such as the stability of ongoing cash receipts. A commonly used reserve goal is three to six months’ expenses. At the low end, reserves should be enough to cover at least one payroll, including taxes.

Manage your cushion. Once a nonprofit has been able to build a reserve, using it must be intentional and strategic. Using reserves to fill a long-term income gap is dangerous. A cash cushion allows you to weather serious bumps in the road by buying time to implement new strategies, but reserves should be prudently used to solve temporary problems, not structural financial problems. To maintain reliable reserves, it’s also important to have a realistic plan to replenish them from future surpluses.

5.  Rethink Restricted Funding

 There is an ongoing debate among grantmakers about whether general operating funds are a better investment strategy than programmatically restricted grants. And frustration with funding restrictions is a common refrain among nonprofit executives. But at times this debate gets oversimplified to a notion that all restricted money is bad and inherently compromising of organizational sustainability, when this is not the case. As an executive, what you need to be concerned with is not whether a grant is restricted but what it is restricted to. A restricted grant for a program central to your desired impact and that covers a robust portion of that program’s cost is functionally the same thing as general operating support— it is funding a core piece of the work that you do. The two qualifiers are key, though: you are doing something that the organization would do anyway, and you are getting paid fairly to do it. What you need to avoid is chronic reliance on grants and contracts that pull the organization in unaligned directions or that refuse to pay fairly for the promised outcomes.

Develop effective grant proposals. Your development of sophisticated grant proposals is essential to incorporating restricted funding in your business model effectively. Take a very broad view of any program you are proposing for funding by including as direct costs such elements as hiring program staff, marketing and outreach to clients, staff professional development, and program evaluation. These are the kinds of organizational expenses that directly benefit programs but for which we too rarely charge our investors. If you believe that program evaluation is essential to monitoring effectiveness of outcomes, it’s your obligation to force the issue with funders who classify the cost as “overhead.” Incorporating sophisticated language in your proposal narratives that links staff development to program design to strong program outcomes sets the stage for a budget that includes these critical expenses. Restricted funding from foundations and corporations that genuinely understand and value your organization’s work can be a very sustainable revenue stream if you are very selective about which funders to pursue, and if you pursue them with well- conceived programs and accompanying budgets.

6.  Staff Your Finance Function

Put simply, too many executives have not staffed their finance function properly, and they pay the price with chronically underdeveloped financial systems, low-grade financial reporting, and the lack of a trusted partner with whom to do analysis and projection. In Financial Leadership: Guiding Your Organization to Long-Term Success, co-authors Jeanne Bell and Elizabeth Schaffer describe three functional aspects of the finance function: transactional, operational, and strategic. The transactional are the clerical tasks that support the accounting function, such as copying, filing, and making bank deposits; they require someone with excellent attention to detail and exposure to basic accounting principles. The operational are the range of accounting functions, such as paying bills and producing monthly financial statements; they require someone with strong nonprofit accounting knowledge, including managing grants and contracts. And the strategic are the systems development, financial analysis, planning, and communication about the organization’s financial position; they require what we think of as CFO-level knowledge and skills.

Determine your optimal staffing approach. Every organization needs all three functions, but organizational size and complexity will determine how much time each requires and the optimal staffing approach. In general, it is income that makes nonprofits more or less complex. A $10,000,000 organization that gets all of its money from individual donors requires a very basic accounting system, while a $2,000,000 organization with government contracts and restricted foundation grants requires a very robust accounting system. As an executive, you seriously jeopardize your organization’s funding and reputation if you maintain inadequate systems for tracking contract and grant dollars—it’s a true nonnegotiable. If you have these funds in your business model, you should assume that you will need to fund a very experienced, senior finance staff role.

Invest in contract consultants. So how does an organization with limited resources adequately attend to all three finance functions? Increasingly, we are seeing executives pair contract consultants with staff in the finance function. For instance, a small or midsize nonprofit might invest in an excellent full-time staff accountant who can handle the operational functions expertly and provide oversight to an administrative generalist—such as an office manager, who handles the transactional functions during the 50 percent of her workweek that is directed to the accounting function. Then the executive contracts with a CFO-level consultant who spends fifteen hours per month answering any questions the staff accountant may encounter, doing financial analysis for the management team and board finance committee, developing budgets and projections, and so forth. This way, the executive has a strategic financial partner without creating a fixed staffing cost that she can’t afford. Board members, including the treasurer, have a role that is distinct from the staff finance team. The executive needs an uncomplicated relationship to her finance team so that she can direct them in developing the analysis and reporting she needs as the organization’s financial leader.

7.  Help Your Board to Help You

Boards have a governing role in assessing and planning an organization’s finances. In too many cases, though, executive directors expect their boards to stay high-level and strategic without equipping them for the role. It is the executive director’s responsibility to provide the board with information that is appropriate to members’ roles and responsibilities.

Design your financial reports thoughtfully. The board is responsible for short- and long-term planning of the organization, and its members must ensure that systems are in place for effectively using resources and guarding against misuse. The board has legal responsibility for financial integrity but board members are not the accountants, so don’t inundate the board with pages of detailed accounting records and then wonder why the board can’t see the “big picture.” Boards need analysis and interpretation more than they need the numbers.  There is no one-size-fits-all financial report. Reports must be designed to communicate information specific to the organization’s size, complexity, and program structure in a format that matches the knowledge level and role of board members.

Understand how boards use financial

information. The format and content of reports for the board should be determined by their intended purpose. Boards actually use financial information for four distinct purposes: compliance with financial standards, evaluation of effectiveness, planning, and immediate action.

Compliance. Most nonprofits do pretty well with providing the board with financial reports that comply with the board’s legal fiduciary role to know how much the organization has received and expended. Historical financial reports, audits, and 990s are the common reports.

Evaluation. For the board to evaluate how well the organization has used financial resources, different information is needed. Comparisons are needed to measure progress toward goals, assess the financial aspect of programs, and consider financial strategies.

Planning. When the board is engaged in planning to project future needs and changes or to develop budget guidelines, they need a big-picture understanding of the organization’s history and of the external environment and financial drivers.

Taking Action. Sometimes the board needs to make a key financial decision to implement a strategic plan, react to a sudden change, or respond to an opportunity. In order to make a wise but timely decision, the board needs to understand the background and situation and scenarios based on one or two possible actions. And form should follow function: before developing financial reports for the board, ask what type of actions or decisions the board will need to make, and provide them with the right amount of information and analysis in a format that fits the purpose. Don’t ask your board to maintain a top-level focus on strategy while submitting financial reports better suited to the auditors.

8.   Manage the Right Risks

 To reduce and manage risks, most nonprofits develop policies and procedures for each area of the organization. The facilities manager maintains controls over keys, access, and insurance coverage. The finance director assures appropriate segregation of duties, internal controls, and checks and balances. Program managers compile information and data to run background checks, keep licenses up to date, and maintain required reporting. If we put them all together in a binder, these policies make up the organization’s risk management process.

Assess your organization’s risks holistically. If each area assesses and formulates its own risks, who is responsible for deciding which risks have the most magnitude and impact on the organization? Put another way, if a nonprofit decided that at least one of its policies had to be eliminated for some reason, how would you decide which one the organization could do without? For example, which of these possible events pose the greatest risk to the organization’s ability to achieve its mission, programmatic, and financial goals: theft of a laptop computer, loss of confidential client data on that computer, or damage to the organization’s reputation if client data were made public?


Consider enterprise risk management. Many nonprofits do a better job of managing the risk of a small theft than they do of identifying and reducing these other two, much greater, risks. Enterprise risk management (ERM) is a term that your auditors may have brought up recently. ERM is essentially the process of assessing all of the risks that the organization faces with a comprehensive, enterprise-wide view and making decisions about managing risk in the same way. An ERM process considers both risks that are evident today and those that are will emerge as operational and strategic plans are implemented. Some organizations need to complete a formal, extensive internal assessment with a staff team and outside consultants. Smaller organizations can complete their own organization-wide review of risks through brainstorming and discussions. The most important step is to start thinking about all the parts as a whole. In the case of the stolen laptop, for example, too much emphasis on limiting access to the office on weekends might have led a program staff member to store confidential data to take home to complete a needed report. Balanced together, these risks would probably have been managed differently than if looked at separately.

With the big-picture view of the organization always in mind, the executive director is the right person to advocate ERM by asking members of his or her team to think beyond their own area to the wider enterprise.

What’s old is new again. These principles are both longstanding practices and emerging trends for nonprofits. Some of these business principles are undoubtedly familiar to you. Others may run counter to what you may believe to be a “best practice.” Executive directors learn that leading a nonprofit requires a constant balancing of current needs, external demands, and long-term vision. Financial leadership is fundamental to the role and cannot be fully delegated. These principles will help executive directors adapt to the demands of the changing environment and maintain the balance needed for mission impact and sustained financial health.

The Executive Director’s Finance Cheat Sheet


  1. Develop your annual budget with a commitment to its net financial result—whether surplus or planned deficit—and then adjust spending during the year if income is not coming in on pace to yield that net Then, complement your annual budget with rolling financial projections that incorporate your most current information about probable future financial results.
  1. Diversify your income cautiously, ensuring you have the capacity to develop and sustain the programmatic and operational requirements of attracting each new resource type
  1. Develop cash flow projections along with the budget and rolling projections so that you can anticipate any cash flow problems well in advance, when you have more
  1. Plan goals for financial reserves based on your typical cash flow cycles and risks and incorporate reserves into all financial plans and Be sure to foster a financial culture for staff and board that promotes the importance of a regular operating profit or surplus.
  1. Pursue restricted funding from those foundations and corporations that understand and value your organization’s mission and particular strategies for achieving impact. When pursuing restricted funding, develop proposal narratives and accompanying budgets that link staff development to program design to superior outcomes, including all related costs as direct.
  1. Ensure that your finance function is always properly staffed; if necessary, use a mix of staff and expert contract consultants to achieve this.
  1. Discuss expectations for financial roles and responsibilities with board leadership to create accountability and information flow that matches the size and life stage of the Make sure to invest time in developing meaningful financial report formats for the board that reinforce organizational strategies and goals and support the board in fulfilling their responsibilities.
  1. Introduce the concept of enterprise risk management to your team and initiate an internal assessment of a full range of risks.

Source: “An Executive Director’s Guide to Financial Leadership”.  Nonprofit Quarterly

What’s your nonprofit tax IQ?

What should your organization know about Nonprofit Taxes?  Aren’t nonprofit organizations exempt from nonprofit tax issues except employment related taxes?   The answer is no, but many organization’s make this assumption.  With limited accounting and finance staff, there is a tendency to rely too much on other professionals for this knowledge.   It is also important to develop internal capacity to deal with nonprofit tax issues as the board and management are ultimately responsible.  If these nonprofit tax issues aren’t dealt with proactively, they can take significant effort and resources to resolve later, reducing your ability to serve others.   Keep in mind that just because an organization has received tax-exempt status from the federal government does not mean it is exempt from state and local taxes, property taxes, sales taxes, payroll taxes, or other taxes.

The following is some basic nonprofit tax knowledge:

  • Form 990 – The Internal Revenue Service Form 990.
  • Independent Contractors – Make sure they are issued an IRS Form 1099-MISC at year end. More information on the Form 1099’s can be found on the IRS website:  IRS.GOV     You must issue Form 1099-MISC to each person who you have paid at least $600 for services and rents and Corporations are generally exempt from this requirement which is why you need to obtain a W9 from each vendor before you pay them.
  • Health Care Tax Credit – There has been a health care tax credit available for smaller nonprofits with 25 or fewer employees starting in 2010.
  • Property and Utility Taxes – If your organization owns a building, are you sure you are exempt from property and utility taxes?
  • Sales and Innkeeper Taxes – If your organization purchases items, are you sure you are exempt from sales and innkeeper taxes.
  • Federal Payroll Taxes – Nonprofits must comply with both federal and state payroll reporting requirements. Federal Tax Withholding, Social Security Taxes, and Medicare Taxes must be deposited through the Electronic Federal Tax Payment System (EFTPS).  The frequency with which deposits must be made depends on the size of the payroll, and may be semi-weekly, weekly, semi-monthly or monthly.  In addition, the organization must file a Form 941 on a quarterly basis.  Keep in mind that Board members should be especially aware of potential personal liability for payroll taxes.  Federal law requires someone is the “responsible party” and is personally liable for payroll taxes which could be the board member.
  • Unemployment Taxes – In Indiana, a nonprofit employer of 3 employees are less should be exempt from State Unemployment and most are exempt from Federal Unemployment
  • Other – For Charitable Gaming, do you follow these laws and have systems to be in compliance. For fundraising events, what steps are you taking to minimize facility fees?  For merchandise or publication sales, what are you doing to minimize any fees or taxes?  Did we file our annual report with the secretary of state office?  Are we providing written acknowledgement for gifts over $250 and provide the fair value of any goods or services in exchange for a $75 or larger donation?

More Information – At the end of the article will go into more detail about how to stay in compliance and avoid taxes and penalties.  What are you doing to make sure you are paying no penalties and taxes and staying in compliance.   If this nonprofit tax issues aren’t dealt with proactively, they can take significant effort to resolve with significant resources allocated to compliance.  Additionally, these taxes and penalties increase your cost and ability to serve others.

The Internal Revenue Service Form 990-Keep in mind the different filing thresholds which include Form 990-N Electronic Notice (e-Postcard) for organizations with gross receipts of $50,000 or less.  Form 990-EZ threshold is gross receipts of $200,000 or less and Total Assets at the end of the tax year less than $500,000.  Organizations with $200,000 or more in revenue or $500,000 of assets will file the full Form 990.  Form 8868 (extension) may be filed electronically or in paper form.  The IRS Annual Report noted the following common issues:  private benefit and inurement, no filers, political activities, employment tax issues, and organization’s not operating as required by exempt status.

The health care tax credit is a great contribution to smaller nonprofit to offset increasing health insurance costs.  It maybe difficult to qualify if the employer contributions to health insurance are not enough or the average salary of your employees exceeds $50,000.

For property, utility, innkeeper, and sales tax exemptions, you need to make sure that you meet the proper filing requirements.     A nonprofit organization must register for a sales tax exemption by filing Form NP-20A, available online at  Form ST-105 is used by nonprofits for sales tax exemptions including the 10 digit state tax ID.   The Sales Tax Information Bulletin #10 lists out the nonprofit sales tax exemption.  Form ST-200 is used for each account to exempt sales taxes from utilities.  GA-110L can be filed to claim a sales tax refund relating to utilities for the current and prior 3 years.  For property exemptions, you need to file Form 136 on the even years along with Form 103 and Form 104

For IN state unemployment, you are no longer exempt once you employ four or more individuals for a day for 20 weeks during the calendar year. There is no minimum dollar amount associated with this qualification.  You may opt to become a reimbursable employer, as opposed to an employer paying premiums.

Our firm provides tax preparation and consulting services so please contact us if we can help your organization.

Finance for Every Board Member

Finance for Every Board Member
As a Board member for a not-for-profit organization, you wear many hats – some fun, and some very serious. Overseeing the finances of your organization is one of the more serious roles because it ties so directly to your agency’s long-term existence, reputation, and ability to provide services.

Finances Are Means To an End

While every Board member must take personal responsibility for understanding the financial condition of the organization, you must also keep in mind that the organization does not exist merely for its finances. You exist in order to accomplish a mission – some critical benefit to society. So – don’t let finances dominate your meetings. Many boards struggle with having too much information yet not feeling they know what is happening with the organization. Decide what you need to know and the best way to appropriately oversee financial operations and move on to what really matters.

But We Have a CPA On the Board

Having financial professionals on your Board is a great asset and advantage. However, far too many not-for-profits utilize the skills of their financially astute board members while letting everyone else “off the hook”.

If you have a CPA (Certified Public Accountant) on your Board, I would suggest they may be looking for a more people or program-oriented opportunity to participate.  If they are excited about supporting your financial function, then connect them on a team with others including some non-finance professionals.

In addition to continuity through board member terms, these lay people may be more effective at presenting the numbers to the board in understandable terms plus bringing insights about the “programs and activities behind the numbers”. You may also find that CPAs are not very available during certain times of the year, making your “one-person finance committee” less effective or highly stressed.

Key Differences Between Businesses and Not-for-Profits
Different Sources of Income & Expense
Why is a Budget so Important?
What to Look for in Our Financial Reports?
What are Clues to Poor Financial Management?
Why Do We Need an Audit?
What is “Conflict of Interest”?
What Does the Finance Committee Do?
What is the IRS Form 990?
What is Accrual versus Cash-basis Accounting?
Restricted versus Unrestricted Gifts
What’s The Big Deal About Fund Accounting?
We Have to Show Pledges as Income?
How Do We Reduce the Likelihood of Theft or Fraud?
Will We Lose our Not-for-Profit Status If We Run A Business?
Is It Appropriate to Have a Financial Reserve?
Managing Risks and Disaster Recovery
Staffing the Accounting or Financial Office
Sharing Services or Outsourcing
Buying Nonprofit Financial Software
Glossary of Terms
Key Differences Between Business and Not-for-Profit

Businesses and charitable not-for-profit organizations have much in common. They both have mission statements and employ people, own and lease facilities or office space, and provide a service or product that meets a need. The key difference is that a business exists to make money for its investors and owners while the not-for-profit is focused on fulfilling a need in the community that cannot typically be supported by a business – harnessing donations of time and money to fulfill its obligations, and enriching no one but the community. As a Board member, it is your job to effectively steward the organization on behalf of your local community.

Question Business Not-for-Profit
What defines Success? Profits Mission Results
Who owns the organization? Investors Community
Where does the organization get operating funds? Sales Revenue


Foundation Grants, Government Contracts, Donations, Fundraising, and Fees for Services
When revenues exceed expenses, what happens to the surplus? To owners to invest in business Expand Program Services
Who performs the work of the organization? Paid Employees Volunteers, Paid Employees, Contract Employees
What is the primary basis for decision making? Profitability Mission
How is accounting organized? Cost of Goods and Services Expenses by Funding Source/Program

Different Sources of Income and Expense
If you are new to the nor-for-profit sector, you may not have noticed that different
types of organizations receive their funding from very different sources.
• Membership organizations usually receive their income from dues,
conferences, and services sold to members.
• Churches rely primarily on donations from individuals.
• Colleges and Universities receive tuition from students (fees for
service) plus additional funding from individual and corporate
donations, sports events and licensing revenues, and often government
•Arts organizations look co ticket sales, sponsorships from businesses,
and individual donations. Foundations will often support
the education and outreach efforts of arcs organizations.
• Finally, human services organizations commonly look to foundations,
individuals, United Way, and the government for support.
• Many organizations are now exploring businesses to further their
missions or make money for programs. Goodwill is an example of a
nor-for-profit chat runs retail stores to provide financial support for
programs and to create job training opportunities. The YMCA runs
fitness centers to subsidize work with youth and urban families.

On the expense side, there is more commonality between not-for-profits. As service providers, nor-for-profits look similar to service businesses. The largest expense item is almost always staffing costs, sometimes running as high as 80% of the budget. Other major line items can include facilities, transportation, insurance, and contracted services.

The focus of this booklet is on the boards of charitable 50 I (c)3 not-for-profit organizations – organizations that are able to accept tax-deductible gifts from donors.  The advice will also apply to organizations that are on their way to forming a charitable not-for-profit.

Why is a Budget So Important?

The Board of Directors has three primary avenues to oversee and direct the organization, all very important:
1) Confirm the Mission and Establish the Strategic Plan
2) Hire, supervise and evaluate a capable Executive Director or Chief Executive
3) Review and approve an Annual Budget that ties to the current year’s implementation
of the Strategic Plan, then monitor expenditures and manpower to that budget. The budget should serve as the financial blueprint and prioritize
the organization’s objectives for the coming year.

Working With The Budget
The entire Board should look at the actual financials compared to budget at least quarterly with the finance committee or treasurer examining monthly reporting.

Keep in mind that finances are a lagging indicator, so even when you are reviewing current financials, the information is at least a month old. Don’t allow this to become casual or “take a couple months off”. You cannot expect to identify problems or spot trends in time to correct them if you are not catching chem immediately. In addition, staff should intentionally keep the Board informed of any factors that might cause funding sources or donors to increase or decrease funds. The budget should be updated, with Board review and approval, for major changes that
occur during the year in order to keep reporting relevant.

What to Look For in Financial Reports
It is easy to gee overwhelmed by Board reports that give you lots of numbers but
very little information. The financial detail that the whole board sees is driven by
several factors:
1) The size of the Board
2) The complexity and size of the organization
3) The existence of a finance or audit sub-committee
4) The financial expertise of the board “as a whole”
5) The financial expertise of the staff
Every Board will have different information needs, and it is important that overall Board reporting focus first on what the organization is accomplishing and then financials – often reported in terms of progress against the goals of the Strategic Plan.
Typical Financial Reports (Revenue/Expenses)
• Revenue/Expenses vs. Budget for month and year to date
• Revenue/Expenses vs. Prior Year for month and year to date
• Projected Year-end Revenue/Expenses vs. Budget

Questions you might ask about these reports include:
• Did we have significant unexpected income or expenses during this period?
•Why are we way over or way under budget and/or prior year income or expenses in a major category?
• Is the amount of the expense budget remaining in each category sufficient to complete the year?
• Do we have any one time or seasonal expenses in the next period?
• Do we have any open staff positions and what was their financial and programmatic impact?
• Have we changed any of the basic assumptions that we used in assembling our budget? If so, what is the impact?

Typical Financial Reports (Assets/Liabilities)
• Assets and Liabilities – Shows what we own and what we owe
• Assets and Liabilities vs Prior Year – How we compare to last year
• Cash Flow Forecast – Shows timing of anticipated cash income and expenses, identifying when shortfalls will occur and when excess funds may be available for short-term investment.

Questions you might ask about these reports include:
•What is our balance of restricted and unrestricted funds?
• Do we have cash to cover current expenses in the months ahead?
• Do we have relationships with banks or other funders to cover shortfalls?
• Has our unrestricted reserve balance increased or decreased during the past 3 months, 6 months, or year?

What Are Clues to Poor Financial Management?
Whether you are a new Board member or a long-rime Board member who has not
had much participation in the finances of the organization, here are a few things to
look for:
• Financial reports are not timely and accuracy is often questioned.
• No one seems to know the current financial condition.
• One person controls all financial information and does not share it openly.
• Finance personnel seem to work long hours for limited results.
• The annual audit report and management letter have many comments.
• The issues from prior years audit report have nor been addressed.
• The auditor or accounting staff people turn over frequently.
• Board members routinely use their position to do business with the
organization or to get favors for family or friends.

Do We Really Need an Audit?
Yes and No. From your perspective as a Board member, an audit has several desired
1) To provide some assurance that the financial records of the organization are appropriately organized and that revenues and expenses are being tracked and recorded according to Generally Accepted Accounting Principles (GAAP).
2) To have an outside, independent party regularly examine your records to decrease the likelihood of financial mismanagement or fraud.
3) To increase the credibility of your organization to the board, donors, and other funders.

An audit is not designed to detect fraud, but all auditors must review your internal control systems and make recommendations on how they can be improved .  The audit is best performed by a Certified Public Accounting firm who is trained both in the process of auditing your financial records and is familiar with not-for-profit operations and accounting. A “free” or low-cost audit provided by a CPA “friend of your organization” who is not a not-for-profit accounting specialist may not provide the guidance and credibility you seek from this process. One test of
credibility is whether the accountant is familiar with Office of Management and Budget (OMB) Circulars.  Unfortunately, audits by well-qualified firms typically start at $5-7,000 and quickly move past $ 10,000 based on your size and if you have any complex program reporting requirements from funders. The audit is considered an indirect expense, so few funders are interested in funding it, though they expect it of well run agencies.

Alternatives – There are two less expensive alternatives to a full audit, but they also bring less credibility. If you are a small or start up organization and your financials are quite limited, they may be suitable until you have a specific requirement expressed by a foundation, government funder, or major donor.
• A “compilation” puts your records in the hands of an experienced outside party to assemble financial reporting and offer insights on improving accounting operations.
• A “review” is more thorough and looks deeper into your financial records and the way you process transactions, but falls short of the
assurances that come with an audit.

What is “Conflict of Interest”?

In terms of not-for-profit board service, a conflict of interest question arises when a board member uses their access to the organization to derive a direct benefit for themselves, their business, or their family or friends. This can be a sensitive legal issue and different organizations will have more or less lenient policies.

In general terms, as a board member, you are expected to act in the best interests of the organization – not your personal interests. This means that you encourage and respect the procedures established in the organization to solicit bids before purchasing products or services and that you do not ask special favors of the staff in hiring relatives or friends. And you respectfully open discussions around issues or transactions that could be perceived as conflicts of interest for board or staff members.

You should never join a board with the expectation that you can sell your services to the organization. To the contrary, I would suggest that you join the board expecting to give your services to the organization.

Some organizations will allow board members to submit bids to provide services along with other vendors. General practice would be for that board member to leave the meeting during the discussion and vote. If it is believed by the board that the board member’s business can provide the best value to the organization, they may choose to contract – keeping in mind the uncomfortable situation with your
board member if service is unsatisfactory.

What Does the Finance Committee Do?
The Finance Committee is typically chaired by the Board Treasurer and staffed by the lead Accounting staff member or Executive Director. A typical list of responsibilities and expectations of the Finance Committee would include:
• Regularly review financial reports with the agency staff.
• Regularly present the financials and report to the Board on the financial condition of the organization, including variances to budget.
• Report to the board any financial irregularities, concerns, or opportunities.
• Recommend financial guidelines, financial policies, and procedures to the board (such as expenditure authority or appropriate financial
reserves to maintain).
• Work with staff to design financial reports and ensure that reports are accurate and available in a timely manner.
• Recommend selection of the auditor and work with the auditor, unless there is a separate audit committee.
• Establish budget assumptions with the staff and outline the annual budgeting process.
• Review budgets drafted by staff and ensure appropriate links between the budget and the organization’s plans.
• Serve as advisors to the Executive Director and staff on other financial priorities, such as insurance or investments, depending on committee member expertise.

What is the IRS Form 990?
The 990 is the informational tax return that essentially every 50 I (c)3 nonprofits files annually with the IRS. The 990 is initially drafted by either your organization’s audit firm, accounting firm or by the organization.    Every board member is asked to review the form prior to submission.

In addition, your Form 990 is a public record and muse be made available upon request to anyone who wants to know more about your organization. Take the extra time to ensure it is accurate, conveys what your organization does, and looks neat and professional. Go to and look up your organization’s latest 990.

What is Accrual versus Cash-basis Accounting?
This is less confusing than it sounds. Accrual accounting works the same way in the not-for-profit environment as is does in business. While small agencies may run on a cash basis for several years, eventually they will grow tired of financial reports rarely matching budgets as large expenses throw off a different category each month.  The Accrual Accounting method shows what the organization owns and owes based
on when the organization earned or incurred the financial obligation not based on when the cash was received or disbursed.

An example is when three bi-weekly pay periods are paid in one month – a twice a year happening. On a cash basis, you would see three pay periods or six weeks pay in the month (overstating) with 4 weeks pay in the months surrounding it (understating).  The accrual method would show payment for the number of accrual workdays in the month – usually 21 -23.

Restricted versus Unrestricted Gifts
When a foundation, government, or a donor gives money to your organization, they have the option to designate it to be used in specific way or for a specific program.

Whats the Big Deal About Fund Accounting?
The accounting principles that have been established for not-for-profits require that revenues and expenses be classified by restriction, funding source and program.

Fund Accounting necessitates that you have:
• A separate set of books for each grant, with its own balance sheet and net asset balances to ensure that your funding resources can be
reported separately and are not commingled.
• The ability to track and report budget and actual financial information to satisfy each funding source’s unique reporting requirements
including cross or multi fiscal year reporting.
• The ability to allocate the expenses you incur across multiple grants or programs including indirect cost pools for administration and facilities.

The fact that records need to be maintained by funding source does not mean that the financial reporting for the Board must be in that format. The Board may prefer to have reporting set up by account, department, program, location, or grant. If your accountant is not able to provide reports in that format consider seeking assistance from a consultant who is expert in your accounting software package.  You may need not be using the proper accounting software and may need to switch to a Nonprofit Accounting Software that can handle fund accounting.   Our firm can help you through this evaluation.

We Have to Show Pledges as Income?
This is one of the most confusing pans of not-for-profit accounting because it defies the intuitive logic of either recognizing income when it is received or matching it to the expenses incurred to perform the agreed program. In the mid- l 990’s, the Federal Accounting Standards Board (FASB) determined that nor-for-profits were not accurately representing their financial status when they had received commitments from donors or funders to provide sizeable donations or grants, but had not yet received those funds.

In simple terms, any firm commitment for funds (not just large ones) is to be presented as income received in the year committed – even if it will be paid to the organization the following year or in installments over several years. This means that you may show big income in one year and the big expenses associated with it the next year, making financial reports very difficult to understand. Cash Row reporting can be helpful in keeping a proper understanding of when the money is actually coming in. Look to your accountant or auditor for a full explanation and reporting that is understandable for management purposes.

How Do We Reduce the Likelihood of Theft or Fraud?
Experts say that there is nothing that businesses or not-for-profits can do to eliminate the risk of theft or fraud, bur there are steps that can reduce the likelihood.
• Have an annual audit by an outside accounting firm. If you are not doing that yet, consider having a couple skilled volunteers conduct
an internal audit.
• Review your internal control practices annually with your auditor. Internal controls separate the responsibilities of people receiving
money from chose recording receipts and the people dispersing money from chose approving disbursements.
• Ensure that the bank and investment statements are mailed, unopened, to someone disconnected from the hands-on accounting
function – in a large organization, this is the CFO or Chief Executive; in a very small organization, this could be the Board Treasurer
(or the Board Chair, if the Treasurer writes the checks).
• Consider outsourcing a portion of the accounting function so that a non-employee is reconciling bank statements or executing the transactions.
• Do credit and criminal history checks on prospective accounting employees.
• Look for unexplained changes in the standard of living of accounting employees.
• Consider doing annual credit checks on accounting/financial employees to identify personal crises that could impact their judgment
• Consider using an accounting system that has auditor controls built into the system to minimize the capability to commit and conceal fraud.
• Require your accounting staff members to take of at least one full week of vacation per year and rotate staff occasionally between
• Provide adequate professional training to your accounting staff.
• Purchase Fidelity Bonds and other insurance on staff that handle funds.

Can We Lose Our Not-for-Profit Status if We Run a Business?
Yes, but it is very uncommon.
Not-for-Profits are given some very special privileges by the IRS – to accept tax deductible donations, nor pay property or income taxes, etc. It is not the intent of the IRS that a nor-for-profit would use their advantages to create unfair competition for the local business community.  The first adaptation that the IRS created was that not-for-profits must pay taxes on Unrelated Business Income (UBI) – they essentially put the not-for-profit on a level playing field with the business community.
Generally, income is considered unrelated if it is:
I) A Trade or Business,
2) Not Substantially Related to the Mission, and
3) Regularly Carried on – nor a weekend bazaar or once a year cookie sale.
Unrelated business income typically excludes Investment Income

Many people are afraid of paying UBI, bur it can be viewed as a good thing since you are making enough money to have taxes to pay. In reality, few organizations pay much UBI because indirect expenses of the organization can be appropriately allocated to absorb much of the “profit”.
Too much of a good thing? – If you have a successful business within your not-for-profit, at some point the IRS will begin to question whether you are a not-for-profit with a business on the side, or really a business under the cover of a not-for-profit.

Is It Appropriate to Have a Financial Reserve?
A common question presented by and to Boards of Directors relates to financial reserves.
“What about the people who will want or need your services five years from now, twenty years from now?”
Reserves can shield the organization from reductions or delays in funding or provide the flexibility to pursue a new opportunity. It is generally considered prudent to have at least several months of unrestricted funding in operating reserves to allow focus on services instead of extreme cash management.  One more factor is to define the expectations of your financial supporters. It is common wisdom that sizeable funding goes first to well-established and financially stable organizations – nor to organizations that will close if they don’t get it. If you are fortunate and your organization begins to accumulate a sizable reserve or even endowment, are your supporters the type to give more or to steer their support to
other organizations with lesser resources?  In uncertain economic rimes, organizations cannot sit on the edge of financial insolvency for very long. All it rakes is a couple grants or major donors that change plans, the loss of a critical staff person, a negative article in the newspaper – and the organization is history. And what will be the impact of your closure on the community and the people you serve?
Managing Risk and Disaster Recovery
So many activities fall into the Executive Director’s and financial staff’s “miscellaneous
duties” that important items can be overlooked. Some of these things can substantially impact the solvency or credibility of the organization.
T he Board might find it helpful to put together a reminder list that can be checked off each year to keep the Board apprised.
Some items will require more discussion and can be charged to a committee to explore. Ir might be wise to make risk management the topic for one board meeting, each year, especially if you are a hands-on service organization – invite your insurance
agent and attorney to join you.

Some finance and risk management issues to spend time on or include on your list:
• Directors and Officers Insurance
•Executive or key staff turnover, or serious illness/injury
•General Liability insurance – premises, vehicles, staff actions
•Property insurance – facility, vehicles, furniture, equipment, computers and software
• Special Liability Coverages – such as Professional, Improper Sexual Conduct, Volunteers, Volunteers/Staff use of own automobiles,
employee dishonesty or fraud.
• Workers Compensation
• Legal – HR, contracts and agreements
• Staff training on established risk reduction policies and procedures
• IRS and state paperwork to maintain nonprofit and corporate statuses
• Payroll tax payments
• Internal controls reviewed and updated
• Facility reviews with fire dept, insurance rep, etc
• Record keeping, retention, and backup – HR, Accounting, Funder, legal, insurance docs
• Emergency communications – staff, clients, media, funders – to prepare for an unfortunate program circumstance and also in case of disaster.
•Response to Natural Disaster
• Backup strategies for computer systems
• Resuming operations after a loss of facilities or computer systems
Most organizations find it helpful to identify a point person to lead the assembly of a disaster recovery strategy.
Staffing the Accounting or Financial Office
Several factors will determine the necessary staffing of the accounting and finance function of your organization.
Volume Total income is not a good measure if you have a large volume of transactions to process, even if much is “automated”, you will need staff to do the work, and to oversee and verify its accuracy.
Complexity Are you in a field that uses complex contracts and grant requirements or where specialized knowledge in real estate, financing, Medicare/Medicaid or risk management is routinely needed in day to day operations?

Variety Are all of your transactions similar, allowing you to train someone in a standard procedure or are you constantly faced with new questions and the need to create new ways of handling relationships, contracts, or transactions?
Partners What other organizations do you work with and what level of expertise do they have or expect of you? Can you expect your bookkeeper to keep up with their CFO? Or can your bookkeeper use their CFO as a resource?
Funders and Donors Do your funders or major donors expect access to a “financial professional” when they have questions about your organization? Though some of the rules are a little different, most of the functions of a not-for-profit accounting office parallel those of a business – payroll, payables, receivables, financial reporting, forecasting, cash management, etc.

Think of Staff in Six Groupings
Administrative Support Staff These are people who can follow well-defined procedures, such as processing payables or updating an accounting system, but do not have accounting training or a true understanding of how their work ties into the overall finance and accounting function.
Accounting and Data Entry Support Staff These people may have extensive accounting experience, but it may be in a limited area – such as payroll or accounts payable.
Bookkeepers These people usually have some accounting training and/or extensive experience. Often, there is overlap between the duties of a full charge bookkeeper in one organization and an accountant or controller in another.
Accounting or Financial Analyst This position often appears in larger accounting departments where they need a degreed or well-trained professional to handle particular reconciliations or provide forecasting or reporting support to the controller or CFO.
Accountant or Controller This is the in-charge accounting position that either pulls the books together every month or makes sure they come together. Most accounting department staff would report to this person.
Controller or CFO In larger organizations, this person will typically oversee the accounting area plus other areas like office management technology, facilities or human resources.

Because of the differences in operations and reporting needs of various organizations, it is difficult to suggest any “standard” staffing tied co revenue. At the same time, I would offer that it is unusual to see an experienced accountant in an organization smaller than $500,000 unless they also have other professional duties. It would also be unusual to see an organization with a budget over $1 million without
an experienced accountant or an outsourcing relationship that provides access to a qualified accountant on a regular basis.
Sharing Services or Outsourcing
As you might conclude from the information above, it is often difficult for small organizations to hire the people they really need to provide the level of financial support and expertise required to serve the organization, funders, and the board.
There are two alternatives to hiring full-time staff that organizations use with varying levels of success – Sharing Staff with other not-for-profits, and Outsourcing Services to a person or business with expertise in not-for-profit accounting. Both of these offer the possibility of improving internal controls and bringing more qualified staff.
Sharing Staff The advantages of sharing a staff person are that you get significant hours of a person, on-site, who brings the specialized skills that you need. The downside is that you must find another organization or two with compatible needs, a trusting relationship, and adequate budget/timing to bring the person on when you want them. You are also subject to staff turnover and retraining issues.
Outsourcing The advantages of outsourcing include gaining a higher level of expertise and more flexible capacity from the provider, a defined cost per month, the ability to start on your schedule, and a reduced likelihood of vendor turnover.
The disadvantages could include not having another person in the office to fill in for absence or work overflow from others, and a higher hourly rate than a typical employee.
Buying Nonprofit Financial Software
Most small not-for-profits begin their lives using one of the common small business accounting packages, looking for clever ways to change labels to make things work.  Quicken, QuickBooks, and Peachtree are three common packages and some now offer nonprofit editions that reduce the compromises involved.
For many not-for-profits, these packages can meet the routine recording and reporting needs. But as you begin to get grants from multiple sources, grants that cross your accounting year boundaries, or you get pledges or multi-year commitments – life starts to get more difficult and staff find themselves spending a lot of time exporting data to spreadsheets and telling the board that “our system won’t do reports that way”.
Often, when an organization reaches $500,000 or more in revenue, it starts to make sense to explore a specialized not-for-profit software package that has been designed to handle the challenges above plus ease your audit preparation and even prepare certain tax schedules.
Some of the most commonly used and best regarded packages are Abila MIP , AccuFund , and Araize.  Please contact us for help with your software evaluation.

Glossary of Terms – Finance and Accounting
Annual Audit – Nonprofit organizations should have an audit performed annually by a CPA firm familiar with not-for-profit accounting practices. This audit is not intended to identify fraud but to ensure that revenues and expenses are accounted for by accepted methods. Most funding organizations and major donors require audited financial statements.
Audit Committee-May be a separate committee or often performed by the finance committee. Selects the auditor and receives the report from the auditor.  The staff is usually involved but the committee needs a direct link to the auditor to ensure that all information is communicated directly to the Board.
Check Signers – In smaller organizations, it is common for board members to act as the check signers as a part of the internal controls process. This provides an opportunity to review expenditures as they are made.
Director’s and Officer’s Insurance – Liability insurance to protect the board in case of a lawsuit. Policies should be reviewed regularly and explained to board members. Lawsuits are becoming more frequent and often involve issues related to employee termination, accidents on premises, insufficient financial oversight, or inappropriate actions of employees or volunteers.
Endowment – Contributions that are permanently set aside in compliance with donor restrictions to provide perpetual income to the organization. Once funds are established as an endowment, the organization is limited to withdrawing only a small share of the funds – usually a % or a formula based on investment earnings. Planned gifts from donors are often designated to endowment funds.
Fees for Service – Many not-for-profits structure their services in a way that clients or the government pays $X per treatment/visit/session, etc.
Finance Committee – Reviews financial reports, annual audit results, creates financial policies, and supports staff in assembling the annual budget. Reports to the board at each meeting on the financial status of the organization. Commonly chaired by the board treasurer.
Fiscal year – The accounting or financial year that the organization uses. Most organizations are on either a January 1 – December 31 or July 1 – June 30 year. The decision is commonly based on matching the fiscal year to significant funders or the organization’s peak service delivery season.
Fund Accounting – A fundamental difference between not-for-profits and businesses. When a foundation, or the government provides funds for a program, those funds must be tracked for assets and liabilities with the related expenses and revenues reported back to the funder.
Grant Tracking or Reporting – When a foundation or the government provides a grant, there is regular reporting due back to the granting organization detailing how the funding is being used and the program is progressing.

Are you Considering Moving MIP to the Cloud? Contact FTM for help

Did you know within MIP there is more than one cloud option available?

We continue to see more of our MIP users migrate to the cloud so contact us for our help.

Some of the primary reasons our clients have moved to the cloud include the following:

  • Secure access to information and data from anywhere
  • Software updates are performed automatically
  • Fewer expenses for hardware and IT related costs.  Also, no large capital expenditures
  • SSAE 16 compliant data centers that are typically more secure and reliable than  on-premise installations
  • Data that is easily available in case of a natural disaster or emergency
  • More timely backups to avoid and minimize data loss

For more information about the MIP cloud or hosting options, please contact Jim Simpson at or 317.819.0780 for a FREE review and quote.

Common Form 990 errors for Nonprofit Organizations

Many Forms 990 are prepared incorrectly or incompletely.

Because the Form 990 is a public document — nearly all are posted on and many organizations post them on their websites — it is important that the Form 990 be prepared completely, correctly and consistently.

An incorrect Form 990 could reflect negatively on the organization when reviewed by possible donors, the community or even the media. More importantly, an incorrect Form 990 might be viewed as an incomplete filing by the IRS, subjecting the organization to late filing and other penalties even though a Form 990 was filed.

Here are some of the most common errors we have encountered.

Missing the deadline. The 990 is due on the 15th day of the 5th month after the organization’s year-end.  That means May 15th for calendar year organizations and November 15th for organizations with a June 30th year-end.  There is a 6-month extensions available but this has to be filed by the deadline.  Final deadline after all extensions is November 15th for calendar year-end organizations and May 15th for June 30th organizations.  Late filing fees can be as high as $50,000.  Failure to file for 3 consecutive years results in loss of exempt status.  If the organization has unrelated business income, it must file an extension for the 990 and a separate extension for the 990-T.

Filing an incomplete return.  The IRS can consider an incomplete return as never filed in which case late filing penalties up to $50,000 can apply.  Missing schedules is one of the most common reasons for incomplete returns.  Listed below are some of the most common schedules.  Keep in mind that some schedules only apply to organizations filing a 990 and some schedules apply to both the 990 and the 990-EZ.

  • Schedule A – Required of all public charities
  • Schedule B – Required of organizations that received donations of $5,000 or more from a donor
  • Schedule C – Lobbying activities are reported in this schedule
  • Schedule D – Most common reasons for filing this schedule are fixed assets, endowment funds, escrow funds, and/or audited financial statements.  Endowment funds includes those administered by someone else such as a community foundation.  An example of escrow funds is security deposits from building tenants.
  • Schedule G – Required if the organization had over $15,000 in expenses for professional fundraisers (not employees) or if it had over $15,000 in gross income from either fundraising events or gaming activities.
  • Schedule I – Required if the organization gave more than $5,000 in grants and contributions to other organizations or individuals in the United States.  Schedule F is completed if the grants were given to organizations or individuals located outside of the United States.
  • Schedule M – Required if the organization received over $25,000 in donated non-cash contributions.  Common mistake is not realizing that donated stock is considered a non-cash contribution.
  • Schedule R – Required if the organization was related to any other organizations or if it owns 100% of a disregarded entity.

Voting members of the governing body.

Line 3 of Part I asks for the number of voting members of the governing body.  This should be the number as of the end of the organization’s year end.  For a calendar year organization, this is the number of voting board members at December 31.  This number should never be more than the number of board members listed in Part VII.  Part VII should include the name of any individual that served on the organization’s board at any time during the fiscal year.  There may be individuals listed in Part VII that were not board members as of the last day of the organization’s year but served earlier in the year.

New significant programs.

Line 2 of Part III asks if the organization took on any significant program services during the year which were not listed on the prior form.  Nonprofits need to check this box yes and provide a description for any new programs that began during the year.  When an organization applies for tax-exempt status, it must describe its program services in its application for exemption.  It is important the nonprofit notify the IRS of any new programs so that the IRS can ensure that these new programs coincide with the organization’s exempt purpose.  The IRS may be able to challenge any new programs as unrelated which could result in unrelated business income taxes.


Part VI asks if the organization has various policies in place.  Nonprofits will not lose their exempt status simply because they do not have these policies in place; however, it is best practices to have them.  Two of the questions address provisions of the 2002 Sarbanes-Oxley Act.  Although most provisions of the Sarbanes-Oxley Act apply to public companies, two provisions apply to nonprofit organizations – a whistle-blower policy and document retention and destruction policy.  In addition, if a nonprofit is required to file Schedule L, Transactions with Interested Persons which reports financial transactions or arrangements between the organization and disqualified persons, there should be a conflict of interest policy in place.


Donated services and facilities should not be recorded in Part VIII as revenue or in Part IX as expenses.  Items such as donated advertising or the use of materials, equipment or facilities are recorded in the organization’s financial statements prepared using generally accepted accounting principles but they are excluded from Form 990.


Page 1 of Form 990 includes summary information relating to the organization and creates a first impression for the reader.

Organizations should consider a concise description that fits in the allotted space on the first page, so the reader can gain a clear idea of the organization’s most significant activity without searching through the voluminous disclosures in Schedule O.

Part I of Page 1 also includes summary information regarding the number of voting board members, employees and volunteers. Unpaid board members are considered volunteers for purposes of reporting the number of volunteers on Page 1.

Organizations with unpaid board members often fail to count them as volunteers on Form 990.


Total members of the governing body and total independent members of the governing body are often counted incorrectly on Form 990.

The IRS instructions ask for the total number of voting members of the governing body, which may not be the same number listed in Part VII of Form 990.

In addition, the concept of independent members of the governing body is defined differently for purposes of Form 990 completion. Often, members of the governing body who are compensated for services performed outside their service as a board member, as well as members of the governing body who have interested person transactions reported on Schedule L, are counted as independent board members in error.

Business and family relationships often are not disclosed as required in question 2. Exempt organizations that have large numbers of board members — more than 20 — or are located in rural areas are likely to have a business or family relationship with fellow board members. This question is often answered “no” in error.


While reporting revenue and expenses of an exempt organization should be routine, many times items of revenue or expense are not properly reported. Common reporting issues include:

  • Reporting fees paid for services rendered (contract services) incorrectly.
  • Contributions and revenue reported in the incorrect column.
  • Security sales, fundraising and/or gaming events not reported properly.
  • Incorrect or lacking allocations of a reasonable amount of expense to either management G&A or fundraising expense.


Schedule A reports the public charity status of an organization. Many times, organizations select the wrong public charity type in Part I. For organizations classified as publicly supported, one of the public support tests included in Part I or Part II must be completed.

These computations often are completed inaccurately with incorrect amounts reported throughout. A common error is the omission or incorrect computation of excluded support on Line 5 of Part II or Line 7 of Part III.


Schedule L reports a variety of transactions with interested persons. Many organizations define interested persons too narrowly and only inquire as to possible transactions with board members.

Interested persons are defined differently depending on the type of transaction reported on Schedule L, and inquiries regarding these transactions should include not only officers, directors and trustees but also key employees, highest-paid employees and, in some cases, certain donors.

Organizations should take care to inquire about interested-person transactions regarding all interested persons.

Once a transaction with an interested person is identified, the organization reports certain information in Schedule L. Business transactions tend to be the most often reported transaction on Schedule L. Part IV requests the name of the interested person (and not the ODTKE), the relationship and amount of the transaction. In many cases, the ODTKE of the organization is reported in error as the interested person.


Schedule O is used to provide required disclosures based on the answers to certain questions contained in the core form of Form 990. The disclosures range from expanded program service descriptions and internal Form 990 review processes to availability of certain documents for public access and compensation-setting processes.

Often the disclosures are incomplete, not updated for current reporting information or so lengthy the purpose of the disclosure is lost to the reader.

Care should be taken to read each disclosure to ensure it answers the question or describes the issue completely, correctly and concisely.

Please contact us to review your current Form 990 for any errors or let us prepare your Form 990 and we will make sure you comply with the IRS requirements.  Also, we work with our clients on a daily basis so we typically know the organization very well which also contributes to a better prepared return with little effort from our busy clients.



Common Financial Statement Errors for Not-for-Profit Entities

The top 4 categories of common financial reporting and disclosures errors include the following:

  • Revenue recognition (ASU 2018-08) as more government grants will be treated as conditional contributions rather than previously recognized as an exchange transaction.  This is based on the fact that both parties must receive value for it to be an exchange transaction under the new revenue recognition standards.
  • Net asset classifications for the new accounting standards
  • Financial Statement presentation as listed for each financial statement
  • Disclosure errors as listed in the notes to the financial statements

The following series is a listing of some of the financial statement errors found in Not-for-Profit organizations.   I have broken it down by the different financial reports.

The Statement of Financial Position which is commonly referred to as a Balance Sheet may have the following financial statement errors:

  • Display of current/noncurrent assets without displaying current/noncurrent liabilities when a classified statement is used.
  • Improperly including items in cash and cash equivalents, such as cash held or other assets that are restricted or not available for current use.
  • Failure to report cash, contributions receivable, and other assets that are restricted for a long-term purpose separately from unrestricted cash and cash equivalents, contributions receivable or other assets.
  • Recording deferred revenue for amounts received under a “grant” instead of recording temporarily restricted revenue in circumstances where the “grant” is, in substance, a temporarily restricted contribution and not a true cost-reimbursement arrangement.
  • Improper reporting of beneficial interests in assets or net assets held by others, such as in the instance of an entity transferring assets to a community foundation and naming itself beneficiary.
  • Failure to distinguish between operating leases and capital leases and apply the proper accounting under the circumstances. A capital lease is recorded as both an asset and a liability on the statement of financial position. An operating lease is not reported on the statement of financial position and is expensed as incurred.
  • Missing one or more of the required totals: total assets, total liabilities, total net assets, permanently restricted net assets, temporarily restricted net assets, and unrestricted net assets.
  • Include Cash and Cash equivalents items that are board designated or donor designated and not available for current use.
  • Failure to capitalize certain costs of internal use software: ASC 350-40.
  • Failure to account for operating lease liability when cash outlay doesn’t match up with lease.

The Statement of Activities which is commonly referred to as an income statement or statement of revenues and expenses may have the following financial statement errors:

  • Improperly releasing temporarily restricted net assets that are subject to both a time and purpose restriction when one, but not the other, restriction is met.
  • Reporting revenues from exchange transactions as increases in restricted net assets. Only those revenues related to contributions with donor-imposed restrictions can result in restricted net assets.
  • Reporting amounts receivable under a cost-reimbursement contract/grant as temporarily restricted (may be legally limited as to use, but it is an unrestricted activity for which unrestricted costs have been incurred).
  • Recording amounts as a receivable under cost-reimbursement contract/grant for which costs have not been incurred.
  • Failing to properly classify revenue transactions (or portions thereof) as contribution or exchange transactions.  Improperly including expenses in temporarily or permanently restricted net assets. Expenses should decrease unrestricted net assets.
  • Erroneously reporting just one program service function when the NFP has more than one major class of program services. For example, an NFP may have programs for health or family services, research, disaster relief, and public education, among others.  One program service activity could be fine for private foundations, supporting organizations, or potentially a smaller organization.
  • Failure to recognize contributions of services that meet the recognition criteria or recognizing
    contributed services that do not meet the criteria as discussed in paragraphs 16-17 of FASB ASC 958- 605-25.
  • Not reporting contribution revenue for gifts-in-kind (free or below-market rent, services provided by another organization, donated supplies, donated media, food, facilities, entertainment and so on.)  Would nonprofit purchase this service if it was not donated?
  • Not reporting costs of soliciting contributions, including costs of soliciting contributed services that do not meet the recognition criteria, as fundraising costs.  Generally, an organization that reports contributions will have fundraising expenses.  Remember, the costs of recruiting volunteers is fundraising
  • Management and general expenses include Business management, General recordkeeping, Payroll, and Human resources, and administering grant and contract financial reporting, annual report, and all other management and administration except for the direct conduct or direct supervision of program services or fundraising activities.

The Statement of Cash Flows may have the following financial statement errors:

  • Failing to display donor restricted capital-type contributions (permanently restricted gifts, gifts restricted for acquisition of property) as a financing activity.
  • Failing to display information about noncash gifts for endowment or property, plant and equipment purposes.
  • Failing to disclose indebtedness incurred for the acquisition of assets as a noncash activity.
  • Netting amounts for purchases and sales of property, plant and equipment.  This should be reported at gross.
  • Improperly reporting unrestricted contributions that were subsequently designated by the governing board for long-term purposes as a financing activity rather than an operating activity.
  • Failure to report as investing activities the cash flows from purchases, sales, and insurance recoveries of unrecognized, noncapitalized collection items.
  • Reporting net cash flows for purchasing and sales of investments, purchases and sales of property and equipment, and borrowings and repayments on long term debt.

The Statement of Functional Expenses may have the following financial statement errors:

  • Failing to include certain expenses in the statement (for example, expenses netted against revenues or non-operating expenses).
  • Failing to include the statement when one is required (voluntary health and welfare entities).
  • Management and general expenses are inappropriately or completely reallocated to other functional categories. For example, costs associated with soliciting funds other than contributions, including applications for and administering certain grants and contracts, are allocated to program services or fundraising activities.
  • Within the listing of natural expenses in a Statement of Functional Expenses, including a function or program line item. For example, within the listing of natural expenses listing the line item “grant expenses” which might have already been allocated such items as payroll, occupancy and supplies.
  • Commonly excluded items include expenses netted against the revenues:
    • Special event expenses
    • Costs of Goods Sold
    • Costs of Rental Activities

The Notes to the Financial Statements may have the financial statement errors:

  • Failing to include the required disclosure for summarized financial information.
  • Failing to disclose an adequate description of the organization’s activities, including each major class of programs
  • Failing to disclose the capitalization policy for property, plant and equipment.
  • Failing to disclose discount rates used in present value measurements, such as in measuring unconditional promises to give or split-interest agreements.
  • Failing to disclose information about the nature of permanent restrictions include the following:
    • Donations to be invested in perpetuity
    • Collections items or other assets to be held in perpetuity
    • Endowment disclosures
  • Failing to disclose information about the nature of temporary restrictions include the following:
    • Support for specific programs
    • Use in future periods
    • Acquisition of long term assets
    • Unappropriated endowment earnings
  • Failing to disclose information about the programs or activities for which contributed services were used.
  • Failing to present reclassifications which are in effect corrections of errors as restatements. However when reclassifications are not corrections or errors, failing to describe the nature of reclassifications made to prior-year amounts to conform to current year presentation when such reclassifications are significant, even if such reclassifications had no effect on the prior year’s change in net assets.
  • Failing to disclose total fundraising costs. When a statement of functional expenses is presented and certain fundraising costs have been netted against revenue, such netted costs need to be included in total fundraising costs.
  • Failing to disclose total program expenses if the components of total program expenses are not evident from the details provided on the face of the statement of activities (for example, if cost of sales is not identified as either program or supporting services).
  • Consider whether information disclosed is consistent with or compliments: annual report, website, Form 990, or strategic plan.
  • Failure to disclose material related party transactions as set forth in FASB ASC 850-10. Related parties include, but are not limited to, the following: officers, board members, founders, substantial contributors, and their immediate family members; members of any related party’s immediate family; parties providing concentrations in revenues and receivables; supporting organizations; financially interrelated entities; or other entities whose officers, governing board members, owners, or employees are members of the NFP’s governing board or senior management, if those individuals have significant influence to an extent that one or more of the transacting parties might be prevented from fully pursuing its own separate interests.

We hope you find this list helpful as your review and evaluate your current financial statements.   The notes to the financial statements are typically only included in the audited financial statements which means the organization is typically unaware of these disclosures.  We work with our clients on a daily basis to review and update the financial statements on a regular basis so let us know if you would like us to review and update your financial reports.

We have found the following types of errors in the Net Asset Classifications:

  • Errors in endowment calculations and related reporting (beware of large spreadsheets)
  • Debit balances in net assets with donor restrictions (except for underwater endowment funds) and released net assets without donor restrictions
  • Recording board designated net assets in net assets with donor restrictions instead of net assets without donor restrictions
  • Reporting pledges receivable without donor restrictions due in future years as without restrictions
  • Reporting reclassifications of amounts between net asset categories when the reason is other than changes in donor designation
  • Improperly presenting expenses as net assets with donor restrictions
  • Not releasing restrictions with first dollar spent

We can help you to present your net asset classification properly so please contact us to help you review your reports and make suggestions for improvements and proper reporting.