Nonprofit Forum

Should Your Nonprofit Build an Endowment?

Wait a minute—the first question should be, “What’s an endowment?” Unless you work under a rock, you probably have a common-sense understanding of the term, but if you are going to bandy it about with accountants or regulators, you need to understand that the word has a technical meaning that doesn’t always square up with common usage.

In everyday use, people talk about an endowment as money in the bank that earns interest and dividends they can use for operations. But technically, the term refers only to that portion of your investment pot that is “permanently restricted” because the donors said that they do not want you to spend the money, or because you collected it with the understanding that it was a permanent investment reserve. Management or a board of directors can set aside additional reserves for the purpose of investment, but technically this money is not endowment—accountants sometimes call this “quasi-endowment.” Now, this distinction often doesn’t matter, especially if you’re just interested in how interest and dividends help your cash flow. But it does matter when you’re doing your accounting, and it also matters when a cash-strapped organization starts thinking about paying for operations from those cash reserves.

Should you build an endowment? Well, there is little debate that you should set aside money for a rainy day—a cash reserve that can help to smooth out the ups and downs in your operations. Just as investment advisors recommend that individuals have six months of emergency funds tucked away in a savings account, nonprofits should also strive to have cash on hand to hedge against uncertainty. This isn’t endowment, or even quasi- endowment—it’s just operating slack that you might need when, say, your donations take a hit one year, or you have an unexpected expense.

An endowment is established when you and your donors consciously build a reserve for the purpose of creating a financial bedrock for the organization. You can’t spend the principal unless the donor or a court says so, but the income from that principal is usually fair game. This investment income is golden, because you don’t have to earn or solicit it. Some gift agreements specify how interest income should be spent, but it typically comes with no strings attached. There is no magic figure at which your pot is large enough to call it an endowment, but it isn’t a serious asset unless it is roughly twice as large as a typical year’s operating expenses.

Organizations that are in the endowment game, however, reap the benefits of solidity and unrestricted income. An endowment can also be a very positive symbol that shows the community and potential donors that your organization is not a fly-by-night operation. It signals that yours is a flush organization that plans to be around for a very long time—this alone can bring in large donations.

So, then, why do donors give to endowments? We know that many donors cringe at the idea that their donations are going to anything besides delivery of services, so why would somebody give money that purposely is not going to be spent? Well, we should not overlook the generic “power of the ask”—endowment campaigns are visible community events that give donors a new reason to contribute to an organization that seems to be serious about planning for the future. But there are two other reasons about “the future” that motivate some donors to contribute to endowment.

The first is the idea of perpetuity. This is the same motivation that causes some patrons to create private foundations. In addition to whatever philanthropic motivations drive them, many people who spend a lifetime building an empire and a reputation for beneficence want that empire and reputation to live forever. The impulse for some part of us to live on forever isn’t a negative one—some say it is the same deeply seated psychological impulse that drives humans to have children. When we give contributions to operations, we get a warm glow from knowing that the money is going to be used soon to further a charitable mission. When we give contributions to endowment, we experience the glow of perpetuity. Our money will undergird a community institution long after we’re gone. That’s a powerful motivator, and one that has generated billions of dollars in investable assets in the nonprofit  sector.

The second motivator is similar, and that’s the drive for elites to control community institutions.  This doesn’t apply to the average donor, but there are a few people in every city who both have money and are prominent movers in the community. Transferring money and property across generations is one thing, but transferring standing in the community is another. Making big contributions to endowments of elite institutions (like museums or private schools) is one way families seek to transfer status to their children. Heirs can gain standing in community institutions based on the contributions their family has made to these institutions. If you are one of these institutions, this is another motivation you can tap into to generate endowment.

So, endowments are built through the union of an organizational commitment to building an investment reserve and a relationship with donors who believe that this is a good investment in the future, for their community, and for themselves. When the union is a healthy one, the result can be an endowment large enough to generate investment income that can be used for a variety of organizational and community purposes. Who wouldn’t want to be sitting on a big pot of money?

Before you run out and start cultivating your endowment, though, you should know that there’s a flip side. Endowments are not good for all organizations, and not everyone loves them. The biggest argument against endowments—and the one that comes up in almost every deliberation about whether to start one—is that having to do with addressing current needs, and the other having to do with the declining value of money.

Current needs is the one that at least one of your board members will bring up, and is very possibly the reason why your board will vote not to have an endowment. “Why should we put a million dollars in a bank account when we can use that to serve a million more lunches?” Or buy a hundred thousand more books. Or facilitate a thousand more adoptions. Or renovate the façade of the theater. Many nonprofits are in dire need of more money, and most can at least think of an immediate way to use more. Therefore, it isn’t surprising that some people will value the use of contributions to meet current needs rather than build an endowment. And it isn’t just your board members who might feel this way—it might well also be your patrons, clients, elected officials, and local newspaper. Some people go so far as to say it’s not ethical to lock money in the bank when there are so many necessary ways to spend it now. Before you know it, you have bad press and declining donations—and you wish you’d never thought of raising an endowment.

The issue of the declining value of money has to do with the growth of the economy over time. When a charity spends my $100 contribution now, it gets $100 worth of good out of my money, whether that’s in operations, administration, or future fundraising. But just like $100 was worth more in 1960 than it is today, that $100 in 50 years (or even next year) will be worth less than it is today. Contributions to an endowment have less and less real dollar value over time. Endowments might keep up with inflation if they reinvest some of their earnings, but most nonprofits value their endowments because they get to spend those earnings. Consequently, nonprofit endowments face a never-ending battle against time.

There are a few other issues to consider, too. Endowment building is a strategic decision that requires management attention and a relationship with donors. As such, organizations need to be prepared to commit resources for managing both money and people. Organizations with the largest endowments (private universities, usually) have staff members whose only job is to manage the endowment and maximize its investment potential. Large endowments also open the potential for more sophisticated investment strategies and greater diversification, both of which tend to help large endowments perform better than small ones. You can stick your endowment in a money market account, but you’ll do better when you actively manage your money, or pay a professional to do it. That takes time, money, and commitment that nonprofits without endowments don’t have to worry about. Management and fundraising expenses can be huge.

Another concern to consider when you’re thinking about building an endowment goes back to that technical definition we started with. “Permanently restricted” is a phrase that should trouble managers who understand the value of staying flexible in an ever-changing environment. “Permanently” means forever beholden to the wishes of the donor. The donor cannot exert direct control over the money (or you), but you promise not to raid that money—even if you can no longer make budget. That’s the “restricted” part. An endowment-rich organization can be cash poor, with big assets and not enough additional money to run its programs. Just as too many suburban homeowners have hefty mortgage payments that leave them short on their food and clothing budget at the end of the month, too many nonprofits have hefty endowments that throw off money to keep on the lights but don’t relieve the need to raise funds to run programs at full speed. “Permanently restricted” can be a noose around the neck.

Without putting too fine a point on it, nonprofits with and without endowments are different animals. A big endowment can open up your financial options, but it might also limit your ability to change with the times. Some have suggested that privation feeds the nonprofit soul—organizations without endowments are more frugal, more innovative, and more responsive to their communities.

That brings us to the flip side of the endowment serving as a symbol of solidity and permanence in your community. While this reputation can inspire some donors to dedicate their contributions to your permanent future, it can cause others to shy away. When the local museum solicits my $100 for renovations, I might be inclined to think, “Why do they need my money? They have $50 million sitting in the bank that they aren’t using.” It’s hard for a well-endowed nonprofit to make the case to average donors that the organization still needs regular donations to maintain operations. If endowment income can’t keep pace with a decline in donations, it might end up being a drag on your operations rather than the cure-all you expected.

There are good reasons to have an endowment, and good reasons to not have one. The only way for a nonprofit to decide whether to pursue an endowment strategy is to fully educate your board of directors and have them hash it out. There is no obviously correct decision. Best wishes in making the one that is right for you.

Author:  Mark A Hager, Associate Professor of Philanthropic Studies in the School of Community Resources & Development, Arizona State University

What you should know about preparing your Schedule of Expenditures of Federal Awards (SEFA)?

Not-for-profit organizations often seek out grants and other awards in order to provide the necessary funding for their programs. It is important to know the source of all grants and awards as well as the requirements of the U.S. Office of Management and Budget’s (OMB) Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards, Final Rule (Uniform Guidance). In this article we will explore a small but very important part of the Uniform Guidance requirements: The Schedule of Expenditures of Federal Awards (SEFA).

What is the SEFA and How is it Used?

In its simplest form, the SEFA is a financial statement schedule that lists an organization’s expenditures of federal assistance for the fiscal year by federal agency, grant number and amount. It is the organization’s (auditee’s) responsibility to prepare a complete and accurate SEFA, which is a key component of the reporting package required under the Uniform Guidance. The SEFA is also used by external auditors to determine the required procedures and test work under the Uniform Guidance.

How to Accumulate the Data for the SEFA

Every grant and award received needs to be evaluated in order to determine the funding source.  A checklist or standard intake form should be used to document every individual grant/award (even those that do not appear to be federally sourced). This process may involve some research, as the funding source may not be obvious in the grant/award paperwork.

  • All grants/awards should be reviewed in detail to determine if they contain any special provisions (for example, some awards require they be treated as major programs, even though they might not otherwise qualify as such).
  • If the grant/award contains federal funding, the organization will obtain the following: name of the federal agency, award period, Catalog of Federal Domestic Assistance (CFDA) number.
  • The grant/award should also be researched to determine if it is part of a cluster (including research and development) or a federal loan program.
  • If the grant/award is passed through to/ from a subrecipient, the organization will obtain the pass-through entity identifying number.

Gathering this information is time consuming, and obtaining the name and contact information of the program manager can be invaluable.

Prior to the grant/award becoming operational, the organization should review the OMB Compliance Supplement’s Matrix of Compliance Requirements. For every federally funded grant/award, personnel should be assigned for each area of compliance. Expenditures must be tracked for each individual grant/award. The accounting system must be set up to capture this information, and individuals must be established to assign expenses to each grant/award.

How to Prepare a Complete and Accurate SEFA         

If the organization has a good system of accumulating data for grants/awards, preparation of the SEFA should not be difficult. It is simply a matter or organizing the data in the appropriate format. The draft SEFA should be reviewed for the following:

  1. Are all awards sorted by federal program and agency?
  2. If received through a subrecipient, is the name and number of pass-through entity included?
  3. Review Uniform Guidance for clusters of awards. Are the federal programs within that cluster all separately identified within the cluster?
  4. Are Research and Development awards totaled by federal award?
  5. Are total federal awards excluded for loan or are loan guarantee programs included?
  6. Are total federal awards provided to subrecipients by program totaled?
  7. Are the required footnotes to the SEFA prepared?
  8. If any non-federal awards are included in the SEFA, are they clearly segregated and designated as non-federal awards?

Where are Some Useful Resources?

Organizations are encouraged to review the 2017 and 2018 Uniform Guidance Compliance Supplements located at The AICPA’s Government Audit Quality Center provides a free resource center for auditees.

Please contact us to help you with the requirements of the Uniform Guidance. We can assist you early in the process at an organizational level. This will help assure a smooth and successful process to manage your federal funds and the related compliance requirements.

12 Characteristics of Financially Healthy Nonprofits

12 Characteristics of Financially Healthy Nonprofits

Every director and board member of a nonprofit would like to have a large endowment, reserve cash in the bank, and a surplus at the end of every year. Unfortunately, most of us know that this might be a dream instead of reality. Without these tangible signs of financial strength, how can you know if your organization is financially healthy?

Financial health is about more than just reserves and endowment balances. Having a large budget or complex accounting system doesn’t always result in good management and longterm success. Just as our personal health depends on our behavior, so the financial health of a nonprofit depends on management behavior – policies and practices.

Even though there may be occasional deficits, or periods of tight cash flow, the following character- istics are good signs that your organization will be financially healthy over the long-term.

  1. Board of directors and management hold themselves responsible for long-term stability in both programs and financial performance.
  2. Board members understand their roles and responsibilities in financial matters.
  3. A realistic and well-considered budget is prepared and approved by the board.
  4. Budgets are prepared in tandem with planning for programs and operating needs.
  5. Management and board are committed to managing with the goal of an operating surplus each year.
  6. Consistent, accurate, and timely financial reports are prepared and analyzed by qualified individuals.
  7. Management and board monitor financial results as compared to the budget and modify programs and activities in response to variances.
  8. Management realistically plans and monitors cash flow so as to be able to meet obligations.
  9. Financial policies are in place that establish, or have specific plans to establish, an operating reserve to finance cash shortfalls and program growth.
  10. Policies are established for major financial decisions and adequate and appropriate internal controls.
  11. Management is committed to compliance with all required legal and funder reporting.
  12. The board and management regularly review short-term and long-term plans and develop goals and strategies for the future.

It is important that you strive to achieve each of these characteristics to insure your organization’s financial health and long-term sustainability.

Please let us know if we can help you improve in any of these areas.

Is Diversification of Revenue Good for Nonprofit Financial Health?


This article comes from the spring 2019 edition of the Nonprofit Quarterly.

As in any field, nonprofit management has its little truisms: Boards make policy and staff members carry it out. Hire an independent facilitator for strategic planning. Always thank your volunteers. One of the most often-quoted truisms is that nonprofits should seek as much diversity in their revenue streams as possible. Turns out that some truisms are truer than others, and anybody handing out absolute rules is probably trying to sell you something. There’s no substitute for understanding the ins and outs of an issue and then smartly applying them to your own situation. What blossoms in one situation might crater in the next.

The basic principle sounds good: depending on one primary source of income can be risky, especially if that source begins to head south, so it makes sense to hedge your bets—right? Indeed, the decree that more types of revenue—or more revenue streams—is always good has been around for a long time. Each revenue type (and source) comes with its own levels of reliability, constraints, and costs, and all may not align appropriately with the organization or its stakeholders or other revenue sources. Many types of revenue streams may need a runway where they may cost more than they bring in for a period of time. Some need a different kind of organizational capacity than what exists. Some may draw you off course or create reputational issues. Some revenue streams might soften with the economy, while others do not.

Examples of this kind of complexity are everywhere. Picture a thrift shop that lives and dies purely on individual contributions, which we might call a concentrated portfolio. In contrast, the homeless shelter across the street may also rely substantially on individual contributions but also benefit from a foundation grant, county government sponsorship, and earnings from a social enterprise (a café staffed by shelter residents). We might say that the shelter has a diversified portfolio. And that’s always good, right?

Not always, no. Perhaps the government grant does not pay full costs of the service required to fulfill it, and therefore requires otherwise precious unrestricted money to supplement a specific contract. And perhaps the social enterprise demands more than its fair share of staff attention— producing more angst than cash. The fact is that every revenue source requires some transaction costs: money, time, and attention. Every revenue source has its own level of restriction, from complete to none at all, and this affects autonomy and adaptability. The thrift store can do what it wishes with the money it makes within the confines of the nondistribution constraint—unless, of course, it loses money or operates on a very thin margin. Its revenue is not likely to decline with the economy—in fact, the opposite is true. All of these details about the nature and behavior of various revenue streams matter to the health of the overall operation, complicating the question of whether or not diversification is needed.

The decision to pursue additional revenue streams is a vital question of strategy for any nonprofit. So, you might not be surprised to learn that dozens of university faculty members who study nonprofit organizations have been studying the value of revenue diversification for decades. But how useful has this been for practitioners? We reviewed all this research for a paper recently published in Nonprofit and Voluntary Sector Quarterly, and you might not be surprised to learn that the findings are messy and conflicting.1 When we say that revenue diversification matters, what exactly are we saying it matters for? “Financial health” might mean revenues, or revenue growth, or volatility. It might mean assets, or asset growth. It might mean operating margin, or fundraising spending, or program spending, or even survival. Different researchers study different outcomes among different types of nonprofits in different places with different research methods, and *boom* they get different results and draw different conclusions. Sometimes revenue diversification is helpful to financial health, sometimes it makes no difference, and sometimes it is harmful. Given these conflicting results, it falls to you to figure out your situation for yourself.

Luckily, this rich thread of research has spawned a number of arguments about why revenue diversification might be helpful or harmful. That’s what we want to present for you here, so that you have what you need to make your own strategic decisions in your nonprofit organization. An important starting point is to dispel the notion that revenue diversification is uniformly (always, every time) a good thing. Sometimes it’s not. Turns out the pros and cons are about even on the revenue diversification question. Let’s dig in.

Pro: Flexibility

If you know anything about the revenue diversification arguments, you might call this the standard textbook declaration on the pro side. Maybe the future is going to be stable and predictable, and your one revenue stream will provide the resources you need to pursue your mission. But the
future is unknown! Two kinds of uncertainty threaten to upset the applecart at any time. One is large-scale environmental change: a hurricane, or a recession, or civil unrest could radically shift what you need or what you have coming in. The other is more personal: your revenue line could just dry up. Shifts in tax policy make people think twice about their charitable gifts, foundations change their giving priorities, governments move their contracts to your competitors, and social enterprises fail. We know these things happen, and it’s not hard to imagine them happening to us.

The argument, then, is that more (and ideally unrelated) revenue streams give us the flexibility to weather shifts of all kinds. If you get all your money from government contracts and that contract is terminated, you may be sunk. If you get half your money from government contracts and half from private grants, loss of the contracts is serious but not necessarily fatal. Revenue diversification can give you options when the ground shifts beneath you. We say it allows you to “hedge against uncertainty.”

Con: Risk and Vulnerability

Hager saves a little money each month: It grows in his savings account—not much, but it grows. Hung saves a little money each month: He invests it in mutual funds—sometimes the market produces big returns, and sometimes it cuts into his principal. Maybe Hung will end up with more savings than Hager after a few years, but Hager sleeps better at night.

Modern portfolio theory helps us think about how to balance our tolerance for risk with our desire for greater returns. The investment choices with the greatest potential for gains are the same ones with the greatest potential for loss. These same ideas apply pretty well when making decisions about whether to pursue new revenue streams or not. Some revenue streams are more volatile or harder to maintain than others. Every time we pursue a new revenue option, we increase the complexity of our portfolio. We introduce risks that might cost us money in the long run—or at least a few nights of sleep.

Single-revenue streams, especially when the future is going to look much like the past, are safe and stable, just like savings accounts. However, the future is looking less and less like the past. Most of us now understand that we have to be prepared to adapt. Many read reliance on one revenue source as vulnerability, and, therefore, risk, and that makes good sense. But adding revenue streams adds complexity and new risks—ones that we often cannot fully calculate or appreciate as we enter into them.

Thus, diversifying requires at the very least a sober look at all the pros and cons of that particular income stream, including assessments of start-up costs, capital needs, and risks and consequences of worst possible scenarios. You may also need a special dashboard—or additions to your dashboard—so that the board can measure the costs-versus-benefits proposition. Without this forethought, you might end up in a worse financial position than if you chose not to diversify. The competence of your management team plays a big role here, and only you can gauge the likelihood that you will end up ahead.

Pro: Autonomy

The great advantage here is the freedom to call your own shots. Having money above what is needed for subsistence provides a lot of freedom, and needing money is a source of “constraint.” You have certainly seen examples of this: Private foundations do what they want, while their grantees have to toe the line.

Read any of the scholarship on revenue diversification, and there’s a fair chance you will see references to “resource dependence,” which means that money (or the ways to procure it) influences how organizations behave. Nonprofits that get all their money from government contracts—say, to provide mental health services for some part of their state—do not have much autonomy. The American Civil Liberties Union, with its recent huge influx of donor dollars, has a great deal of autonomy. The difference, again, is in the type of restrictions written into the type of revenue.

Revenue diversification has the potential to provide autonomy and all the advantages that come with that, since the nonprofit is not beholden to a single master. Whether many masters is better than one master is an open question, but diversification can provide freedom when one or another revenue stream places constraints on operations. The ability to call your own shots is essential; otherwise, nonprofits just vend services for the people holding the purse strings, and might stop representing their missions, boards, and broader stakeholder communities.

Con: Crowd-out of Private Donations

Crowd-out is one of those unanticipated problems that might come with—or might complicate—diversification of income streams. Put simply, crowd-out means that donors or purchasers might adjust their decisions due to their views on your other resource acquisition efforts. An example is the art museum attendee who declines to respond to a fundraising appeal because he believes his support obligation was met when he purchased the coffee-table book as he passed through the gift shop. Consequence: the museum cleared $15 profit on the book purchase, but lost out on a $150 donation.

Most of the research on crowd-out focuses on the statistical relationship between government contracts and private donations. A mental health agency might strategize that a public fundraising campaign would provide it more latitude and autonomy, and even the ability to innovate.
However, people may not be willing to contribute because they perceive the agency to be amply funded (by the government contracts) and therefore not in need of their contribution. Right or wrong, you can’t blame the donor for making that leap.

Blind revenue diversification carries these kinds of unanticipated problems. Because the revenue streams are part of a portfolio, they can interact with and influence each other. In isolation, a given revenue stream has a certain potential for revenue gains. Taken together, those potentials may be lowered. If they are lowered enough, they may well not be worth pursuing or will need to be pursued in a more limited, experimental way.

Pro: Community Embeddedness

Community embeddedness refers to your street credibility. Do potential clients or patrons know about you? Do they see you as legitimate? Do potential collaborators think about you when opportunities arise? Embeddedness is one part visibility, one part credibility, and one part networking. Some people call it social capital—the more that key stakeholders see you as a player, the more embedded you are in the community. Not every nonprofit needs this kind of embeddedness in order to serve its mission, but many crave it nonetheless.

One important way that organizations interface with community is through their efforts to acquire resources. An organization with a prominent fundraising campaign might be well known among the part of the public that cares about its mission but invisible to foundations, other nonprofits, government, local businesses, or the more general public. While diversifying revenue streams can have unanticipated downsides, a potential “extra” upside is exposure to new dimensions of the community. An organization well known to local grant makers might gain unique connections and increased reputation through the development of a social enterprise. Community connectedness might increase your penetration of mission, but community embeddedness might pay other benefits as well. For one, nonprofits with greater community embeddedness tend to live longer than more isolated nonprofits. Social capital pays, and revenue diversification can be a pathway to such embeddedness.

Con: Increased Administrative Costs

We mention risk and the potentials for crowd-out above, but the costs associated with (and capital required for) competently pursuing new revenue streams is too often overlooked by decision makers. If your organization has put time and effort into really good fundraising, that doesn’t instantly translate into expertise in grantwriting, or investments, or sales. Expertise is one thing, but sunk and ongoing administrative costs in management systems are another. Contracting often carries the highest such costs, with administrative time required for application, monitoring, and reporting. A good fundraising program requires pricey software and a sustained effort. Earned-income ventures require products and physical spaces and bear the risk of market failure.

A nonprofit with a concentrated revenue portfolio can streamline its spending and maximize the resources it passes to programs. In contrast, diversification requires specializations and different administrative apparatuses across the various approaches. If administrative costs stray onto the sensibilities of donors, those donors might even reduce their commitments to the organization. The increase in administrative outlays and the signals this may send to stakeholders are complexities that board members and other top managers do not always fully appreciate. Don’t get us wrong: we think nonprofits should spend more on vital administration, including information technology, human resource management, and resource development. But the problem is that your patrons may not agree with that. As always, nonprofits have to balance their progress with the demands of those who hold the purse strings.

Can decades of academic research tell you whether you should diversify your revenue streams or not? Sadly, no: the results are mixed and difficult to sort out. However, what it can do is outline the issues you and your board should consider when the question arises. Strategy, expertise, history, commitment, cause, and revenue mix differ from case to case, with a million different permutations. It depends. Study your own case, think through the ramifications, talk to everyone involved, and make your best calls without paying undue attention to an overly simplified prescription. Hopefully, flexibility, autonomy, and community embeddedness are around the corner.

1. ChiaKo Hung and Mark A. Hager, “The Impact of Revenue Diversification on Nonprofit Financial Health: A Meta-analysis,” Nonprofit and Voluntary Sector Quarterly 48, no. 1 (February 2019).

“Is Diversification of Revenue Good for Nonprofit Financial Health?” draws on the NVSQ article, with permission



Beyond the Debits and Credits: A Management and Governance Checklist for Implementing FASB ASU 2016-14

Beyond the Debits and Credits: A Management and Governance Checklist for Implementing FASB ASU 2016-14

 The time has come to dive into the details of how to implement FASB Accounting Standards Update (ASU) 2016-14, Presentation of Financial Statements of Not-for-Profit Entities. For that purpose, you can’t beat a good checklist. While there are several checklists available online to assist you with the financial-statement-presentation aspects of ASU 2016-14 implementation, this checklist addresses the governance side of implementation. What needs to be considered from a process perspective; what needs to be communicated and to whom?

The checklist is divided into the five key areas:

  • Classifying net assets
  • Reporting investment returns
  • Reporting expenses by function and nature
  • Preparing the statement of cash flows
  • Preparing disclosures about liquidity and availability of financial assets

Each section contains a high-level overview of the requirements, followed by questions that management should consider when implementing the standard as well as steps that may be taken to ensure that your board understands the implications.

Net Asset Classification

ASU 2016-14 replaces the three classes of net assets – permanently restricted, temporarily restricted and unrestricted –with two classes – net assets with donor-imposed restrictions and net assets without donor restrictions. To ensure that there is no loss of information, the standard requires not-for-profits to provide information about the nature and amounts of donor restrictions on net assets, as well as the amounts and purposes of net assets that have been designated by the governing board.

Amounts by which endowment funds are underwater will now be reported within net assets with donor restrictions rather than in unrestricted net assets. In addition, organizations will be required to disclose their policy for spending from underwater endowments and the aggregate original gift amounts of underwater funds, along with the fair value of those funds.

The policy option to imply a time restriction that expires over the useful life of donated long- lived assets will no longer be available. Instead, absent specific donor stipulations, restrictions on capital assets will be released when the asset is placed in service.


Considerations Yes/No Actions Required
1. Should current classifications be reviewed to ensure accuracy?    
a) Are processes in place to ensure that donor restrictions have been released appropriately?    
b) Are there unidentified balances in temporarily restricted net assets that should be examined?    
2. Does the organization have board designated net assets?    
a) Are the purposes for which the net assets are designated still appropriate?    
b) Has the board’s approval of designated amounts been adequately documented?    
3. Does the organization have endowment funds that are underwater?    
a) Are systems and processes in place that enable identification of underwater funds?    
b) Will the transfer to net assets with donor restrictions adversely affect ratios or covenants?    
c) Is the organization’s policy for spending from underwater endowments still appropriate and adequately documented?    
4. Does the organization have a policy to imply a time restriction that expires over the useful life of donated long-lived assets?    
a) What is the potential effect of releasing from restriction net assets to which that policy has been applied?    
5. Does the organization’s chart of accounts need revisions to support the net asset changes?    
Considerations for Board Communication
1. Explain the new net asset categories.    
a) Review terminology changes.    
b) Illustrate how the changes will affect statement presentation.    
2. Describe any impact of underwater endowments on net asset balances.    
3. Describe any impact on net asset balances if policy to imply a time restriction on donated long-lived assets is currently being used.    
4. Reaffirm prior board decisions.    
a) Review existing board designations.    


b) Ensure policy for spending from underwater endowments is still appropriate.    
5. Discuss additional costs associated with changes.    
a) Additional audit fees    
b) Necessary system and/or process changes    

Reporting Investment Returns

Under ASU 2016-14, investment returns will be presented net of external and direct internal expenses in the statement of activities. The current requirement to disclose the amount of netted investment expenses has been eliminated. In addition, NFPs will no longer be required to display the investment return components (income earned and net realized and unrealized gains or losses) in the rollforward of endowment net assets.


Considerations Yes/No Actions Required
1. Identify the costs, if any, that are being netted today.    
a) Do costs currently being netted meet the definition in the standard?    
b) Will any additional costs need to be netted?    
2. Consider how to communicate any significant changes in net investment revenue reported in the financial statements.    
a) Who needs to communicated with?    
b) What is the best means of communicating (i.e., in person, by email, other)?    
3. Will a change in net investment return have any adverse consequences that should be addressed prior to implementation?    
a) Debt covenants    
b) Regulatory requirements    
c) Other    
4. Does the organization produce other reports that should be revised to provide consistent information?    
Considerations for Board Communication
1. Explain the new requirement for netting investment expenses.    
2. Identify any changes to the current amounts, if any, being netted.    
3. Describe any impact on net investment return to be reported in the financial statements and any adverse consequences of the change.    

Reporting Expenses by Function and Nature

ASU 2016-14 requires an analysis of total expenses by both their function and nature in a single location either on the face of the statement of activities, as a schedule in the notes to financial statements, or in a separate financial statement. To the extent that expenses are reported by other than their natural classification (such as salaries included in cost of goods sold or facility rental costs of special events reported as direct benefits to donors), they must be reported by their natural classification in the functional expense analysis. For example, salaries, wages, and fringe benefits that are included as part of the cost of goods sold on the statement of activities should be included with other salaries, wages, and fringe benefits in the expense analysis. External and direct internal investment expenses that have been netted against investment return may not be included in the functional expense analysis. Enhanced disclosures about how costs are allocated among functions are also required.


Considerations Yes/No Actions Required
1. Determine the best format for presenting the expense analysis:    
a) On the face of the statement of activities?    
b) In the notes to the financial statements?    
c) As a separate statement (i.e., a statement of functional expenses)?    
2. Are the current functional expense classifications still appropriate?    
a) Are there too many?    
b) Are there too few?    
c) Is any renaming necessary to accurately depict what is included in a specific function?    
3. Ensure functional classifications are being accurately captured in the financial statements.    
a) What processes are in place to ensure that expenses are properly classified?    
b) Is a review of the classification necessary to ensure accuracy?    
4. Are expenses by natural classification being properly captured?    
a) What processes are in place to ensure expenses are properly recorded?    
b) Are employee reimbursements in accordance with the organization’s policy?    
5. Are the current natural expense classifications still appropriate?    
a) Are there too many?    
b) Are there too few?    


6. Are current allocation methodologies appropriate?    
7. If comparative years are presented, should the expense analysis be presented for the current year only or for all years presented? (Note: NFPs that previously were required to present a statement of functional expenses do not have the option to omit prior-period information.)    
Considerations for Board Communication
1. Discuss how this analysis may differ from the similar analysis required on the IRS Form 990.    
2. Identify any additional costs anticipated in preparing the disclosure (i.e., costs to review existing functional expenses).    

Statement of Cash Flows

ASU 2016-14 allows an organization to present cash flows from operating activities using either the direct or indirect method. If the direct method is chosen, the indirect reconciliation is not required, but may still be provided if desired.

Considerations Yes/No Actions Required
1. Determine which presentation method is best for the organization.    
2. If contemplating a change:    
a) Consider recasting current statement into the new format.    
b) Identify any system changes needed to support the new format.    
c) Determine if any process changes will be necessary.    
d) Decide whether to include the indirect reconciliation in the financial statements.    
Considerations for Board Communication
1. Discuss the pros and cons of each format and get input on the board’s preference.    
2. Consider preparing statements in each format and highlight differences.    
3. Identify any additional costs associated with making a change.    

Disclosures about Liquidity and Availability of Financial Assets

The new standard requires not-for-profits to disclose both qualitative and quantitative information about liquidity and availability of resources as follows:

  • Qualitative information that communicates how the organization manages its liquid resources available to meet cash needs for general expenditures within one year of the balance sheet
  • Quantitative information that communicates the availability of the organization’s financial assets at the balance sheet date to meet cash needs for general expenditures within one year of the balance sheet The availability of a financial asset may be affected by its nature; external limits imposed by donors, laws, and contracts with others; and internal limits imposed by governing boards.

These disclosures can take many forms depending on the relative liquidity of an organization’s resources, donor-imposed restrictions on those resources, internal board designation of resources, and so on.

Considerations Yes/No Actions Required
1. What is the message the organization wants to convey?    
a) Does the organization have ample resources to fund activities over the next 12 months?    
b) Are there significant restrictions or internal designations limiting the use of resources?    
c) What additional sources of liquidity are available?    
2. Identify the best way to present the message:    
a) Text only?    
b) Tables and text?    
3. Identify current procedures around board designations.    
a) Are procedures formally documented?    
b) Does the board delegate authority for designation of net assets?    
i.   Is the delegation documented?    
ii. Are the levels of delegation still appropriate?    
4. Review current policies.    
a) Will any new policies be required?    
i.   Net asset designation policy?    
ii. Operating reserve policy?    
b) Do existing policies need updating or formalizing?    
5. Are system changes needed to easily capture information for disclosure?    
6. Does the organization’s chart of accounts need revisions to support the disclosure?    


7. Do current processes need to be modified?    
8. Are any new processes necessary?    
9. If comparative years are presented, should the liquidity disclosures be presented for the current year only or for all years presented?    
Considerations for Board Communication
1. Explain the disclosure requirements.    
2. Discuss the best presentation for achieving desired transparency.    
3. Recommend any policy changes or additions.    
4. Discuss any additional costs anticipated for preparing the disclosures.    

Source: “Beyond the Debits and Credits: A Management and Governance Checklist for Implementing FASB ASU 2016-14,” American Institute of Certified Public Accountants, Not-for-Profit Section.

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

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

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.  Nonprofit Organizations that have four or more individuals employed in the current or preceding calendar year are required to provide State Unemployment to its employees.
  • 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


Accounts payable

The amount owed to others for services or merchandise received by the organization.

Accounts receivable

The amount owed to the organization for services or merchandise provided to others. Referred to as grants receivable when the amount is related to a grant agreement.

Accrual-basis accounting

A system of financial recordkeeping in which transactions are recorded as expenses when they are incurred (i.e. when a bill is received for merchandise or services provided to the organization) and as income when it is earned (i.e. when services or merchandise is provided by the organization, or the organization receives a commitment of a contribution) rather than when cash is paid or received. The alternative is cash-basis accounting.

Accrued expense

Costs for services received by the organization that have accumulated, but are not yet due or payable.

Accrued interest

Interest costs that have accumulated, but are not yet due or payable.


A method of accounting that divides expenses among different program, administrative, and fundraising categories based on a formula that recognizes the use of the resources such as use of the facility or staff time.

Allowance for doubtful accounts

An amount reflecting the portion of the accounts receivable which the organization reasonably believes it may not collect. The amount is often an estimate based on experience or trends in the industry.


The repayment schedule for a loan or other obligation, usually as a constant amount each month that is paid first to the interest calculated on the principal balance, and then to reduce the principal balance.


What is owned by the organization.


A financial report that has been tested and verified for accuracy by a Certified Public Accountant (CPA) and prepared in accordance with Generally Accepted Accounting Principles. The most rigorous level of external financial statement preparation. An essential component of the audit is the Opinion Letter.


Balance sheet

A report showing the financial condition – Assets, Liabilities, and Net Assets – of the organization at a particu- lar moment in time. Also referred to as a Statement of Financial Position.

Balloon payment

The final payment of a loan when the amortization is longer than the maturity of the underlying note. This payment is usually larger than the regular periodic payment.

Board-designated funds

A condition stipulated by an organization’s board of directors on how an amount of money is to be used. A common type of board designation is for Operating Reserves. For accounting purposes, these funds are considered unrestricted because the condition was not specified by a donor.

Bridge loan

A short-term loan with a specific repayment source.

Building reserve

Funds set aside to pay for facility upkeep, upgrades, unexpected repairs that exceed money available through the regular budget, and replacement of fixtures and facility systems. Also known as a replacement reserve. Typically, these are unrestricted, but board-designated funds.


Capital campaign

A fundraising effort with a specific purpose and goals that is above and beyond the ongoing fundraising to support programs and operations for an organization. The purpose of the campaign is usually for a building project, special program, endowment, or reserves.

Capital expenditure

Payment of money to acquire fixed assets, such as a building or equipment

Capital improvement

A facility or equipment upgrade or enhancement that will have a life of more than one year, and that increas- es the value of an Asset. The cost of the improvement increases the value of an Asset rather than recognized as an expenses. See Capitalizing an asset.

Capitalizing an asset

Recording the cost of land, a building or equipment as fixed assets rather than as an expense when purchased.

Cash equivalents

Funds which can be quickly and easily converted to cash, such as bank accounts, money market funds or other investments which mature within 90 days.

Cash flow

The movement of cash into and out of an organization; or the difference between cash receipts and cash disbursements during a period of time.

Cash flow projection

A management tool used to predict incoming and outgoing cash during a specified period of time. Used to anticipate and plan for times of low and high cash balances.

Cash-basis accounting

A system of financial recordkeeping in which transactions are recorded when cash is received or spent. The advantage over accrual-basis accounting is its simplicity.

Change in net assets

The net results of total income minus total expenses for a period of time, which may be Positive or Negative. Also referred to as surplus or deficit. Commonly called profit or loss in the for-profit sector.

Chart of accounts

A list of all accounts used in accounting system, including assets, liabilities, income and expenses.


An asset which is pledged to a lender until a loan is repaid. In case of default, the lender has the legal right to obtain or sell the collateral to repay the loan.

Committed grant

A contribution for which the organization has received a formal notification from the donor that an award will be made at a future date.


A financial report that has been prepared by, but not reviewed or audited, by a Certified Public Accountant (CPA). The financial reports have not been tested or verified and the CPA states no opinion about the accura- cy of the statements. See audit and review.

Conditional promise to give

A commitment by a donor to make a contribution to the organization if a specific requirement is met. The agreement becomes binding once the requirement is met.


A donation, gift or transfer of cash or other assets.

Current assets

Cash, investments, receivables, and other assets that can be expected to be available as cash within twelve months.

Current liabilities

Those liabilities due to be paid now or within the next twelve months.

Current portion of long term debt

The amount of the principal payments due and payable on loans within the next twelve months, if the original term of the loan is longer than one year.


Days Cash on Hand

A calculation of the number of days that an organization could continue to pay its operating expenses with current cash balances. It serves as a simple measure of the short-term financial stability of an organization.


An amount owed to a person or organization for money borrowed. Common types are Loans, Promissory Notes, Bonds, or borrowed funds.

Deferred revenue

Income for which payment has been received before it has been earned. It is reflected as a liability on the Balance Sheet until it is earned and can be recognized as income in a future accounting period.


Expenses in excess of income; an operating loss or a negative Change in Net Assets.


The recognition, by recording an expense, of the decrease in value of a fixed asset over its expected physical

or economic life.

Direct costs

Those expenses which are used for a program area or cost center. Costs may be exclusively for that purpose or may be allocated between several uses.


Earned revenue

Income received for providing services or goods, rather than as a voluntary contribution.


An amount of Assets owned by an organization that is invested with the intention to be held in perpetuity. The income and increases in value of the investments are available as income for program use and organizational purposes. Endowment funds received from a donor are Funds With Donor Restrictions and cannot be re-directed for other purposes. Endowment funds that are created by internal policy, they are Board-designated, or Quasi-Endowment. Endowments are subject to multiple accounting and legal rules.


Fiduciary duties

A legal obligation to act in the best interest of another entity or person. In the nonprofit sector, members of  the board of directors have a fiduciary duty to act in the best interest of the organization including in activities related to the funds and other assets owned by the nonprofit.

Financial Accounting Standards Board (FASB)

The national governing board which sets the accounting standards known as Generally Accepted Accounting Principles (GAAP).

Fiscal sponsor

The relationship created when a nonprofit, tax-exempt organization accepts grants and other contributions on behalf of a project or group that does not have its own tax-exempt status, and accepts the responsibility to oversee the use of funds.

Fixed assets

An asset that has a relatively long useful life, usually several years or more, such as equipment, furniture, buildings and land.

Functional expenses

Categories of expense delineated by the type of expense: program services, management & general, and fundraising. Required for IRS form 990 and audited financial statements. Often reflect the use of allocations.

Fund accounting

A system of accounting based on separating information into groups which reflect organizational divisions or donor-imposed restrictions.

Funds with donor restrictions (formerly Permanently or Temporarily restricted funds)

Funds with donor-imposed restrictions that can be satisfied by the passage of a defined period of time or by performing defined activities. These funds may be invested to produce a stream of income that can be spent. See Endowment.

Funds without donor restrictions (formerly Unrestricted funds)

Contributions given without the donor placing any restrictions or limitations as to their use.


General ledger

Accounting system tool for recording all transactions

Generally Accepted Accounting Principles (GAAP)

The set of norms and standards of nonprofit accounting practices established by the Financial Accounting Standards Board (FASB) to help ensure the accuracy and consistency of financial records and reports. Used for internal and external financial reporting, including audits.


Contributed assets given by an individual or another organization with no reciprocal receipt of services of goods. Sometimes are given with a legal restriction imposed upon its use.


In-kind contribution

A contribution made of goods or services rather than cash.

Income statement

A financial report that summarizes income and expenses and resulting surplus or deficit for a given period of time. Also known as the statement of activities.

Internal controls

The system of practices, procedures and policies intended to safeguard the assets of the organization from fraud or error and ensure accurate recordkeeping.


The cost of finished goods held for sale by an organization, or the raw materials and works-in-process that will become finished goods. Recorded as an asset until the item is sold.


A general term to describe financial Assets owned by an organization. The category is broad and may include stocks, bonds, and other financial instruments. Investments are subject to numerous accounting rules and standards.

IRS 990

The standard federal reporting requirement for nonprofit organizations and private foundations. The majority of nonprofits are required to submit an annual information return to the Internal Revenue Service. The specific version is determined by the type of nonprofit, organization size, and activities.


Leasehold improvements

Remodeling, renovation, and upgrades to leased space to suit the tenants’ needs. The cost of improvements may be paid for by the landlord or by the tenant. When paid by the nonprofit tenant, the cost of improvements becomes an asset and is depreciated over the term of the lease


What the organization owes to others, including accounts payable, debts, mortgages and other obligations to pay.

Liquid net assets

The amount of unrestricted net assets that is not invested in property and equipment. This amount is the true amount of unrestricted net assets available as a cushion for unexpected problems or opportunities and to support operations. See net assets.


A measure of how much cash and assets that can be easily converted to cash (such as short-term investments) an organization has available for use in the immediate or near future.

Long-term debt/liabilities

An obligation to pay a loan or other obligation with a maturity or due date of more than one year.


Management and general expenses

Expenses that are used for the purpose of planning and managing the organization as a whole rather than for programs or fundraising. Expenses may include all or part of the cost of executive staff , finance, human resources, board of directors, and general promotion and communications. A type of functional expense that frequently reflects the use of allocations.


Legal agreement entered into by a borrower granting a lender a lien on a real estate asset collateral for the repayment of a loan.


Net assets

The difference between the organization’s total assets and its total liabilities on the balance sheet indicating the net financial worth for the organization. Net assets is the accumulation of the difference between cumulative income less cumulative expenses over the life of the organization. Divided into net assets with donor restrictions and net assets without donor restrictions.

Net assets released from restrictions

The accounting transaction for the transfer of funds from net assets with donor restrictions to net assets without donor restrictions after satisfying donor-imposed stipulations for the use of the funds.

Net fixed assets

The value of land, buildings, equipment and other fixed assets owned by the organization after the deduction of the accumulated depreciation of those assets.

Notes payable

The amount an organization owes to others for loans.

Notes receivable

The amount an organization is owed for loans made to others.


Occupancy expense

All costs relating to the rent, utilities, insurance, assessments, and maintenance of the organization’s locations for programs and offices.

Operating expense

General term for expenses incurred for all the activities of the organization.

Operating reserve

An unrestricted fund balance set aside by the organization’s board to stabilize an organization’s finances by providing cash as a cushion for planned or unplanned future expense or losses.


The costs that cannot be identified with a program activity but are needed for the general administration of the organization. This expense is often distributed among programs based on a formula.


Pass-through funds

Funds received by an organization that must be spent on behalf of, or passed through to a secondary recipient. Examples include re-granted funds and direct payments to beneficiaries.


A formal commitment, generally in writing, to make a contribution of a specific amount.

Prepaid expense

An expense that is paid before use of the good or service, such as insurance paid in advance.


The amount of money that is borrowed and that the borrower must pay back to the lender. The interest, or price of borrowing, is added to the principal.

Profit and loss statement

See Income Statement or Statement of Activities.

Program service revenue

Income earned from providing one or more program services. It may be paid by the direct user of the service or through a contract with a third party such as an insurance company or government agency.

Promissory note

See Note Payable.

Property and equipment

The Asset value of the physical items an organization owns such as buildings and improvements, equipment, and furniture that will be used for more than one year. Often called fixed assets.



A tool to analyze and assess the financial condition of an organization by converting financial information into standard ratios. By using standard calculations, financial information can be compared more easily to historical or industry information.


See accounts receivable or notes receivable.


To replace one loan with another, usually in order to extend the maturity, change the payment amount, or to consolidate several loans.


Release from restrictions

The accounting transaction used to transfer funds with donor restrictions into an organization’s unrestricted accounts when the restriction has been satisfied (such as when a special project is initiated).


An amount set aside by the Board to be used for needs that are outside of the regular annual budget. Re- serves may be designated for operating, building, opportunity, or other purposes.

Restricted funds

Contributions which are designated by the donor for a specific use. See also funds with donor restrictions.


Income earned from services performed or merchandise sold (as distinct from support, or contributed income).


A financial report that has been prepared by a Certified Public Accountant (CPA) that has been subject to some testing and verification. A Review is not prepared with the same rigor and standards as an Audit and does not include an opinion letter. See audit and compilation.


A payment made to an organization by another party for the use of an asset, often an Intellectual Property Asset such as a creative or scientific work. A form of Income for the owner of the asset, and an expense for the user.


Secured loan

A loan for which something of value is pledged in the case that repayment cannot be made.

Security agreement

A legal document executed by a borrower granting a lender the right to take a specified asset in case the borrower defaults on a loan.

Short term debt/liability

A loan which is issued with a final payment date of one year or less.

Statement of activities

One of the primary financial reports for an organizations, reporting the income, expenses, and change in net assets for a period of time. See income statement.

Statement of cash flows

A financial report component summarizing the sources and uses of cash for a period of time. The Statement of Cash Flows is a historical report and is different in form and use from a cash flow projections. See cash flow.

Statement of financial position

One of the primary financial reports for an organization, reporting the assets, liabilities, and net assets as of a specific date. See Balance Sheet.


Income from voluntary contributions and grants (as distinct from revenue, or earned income).


Income in excess of expenses; an operating profit or a positive Change in Net Assets.


Technical assistance

Help and advice provided on a specialized subject matter.


Unconditional promise to give

A pledge to make a contribution of cash or another asset without requiring the organization to meet any condition prior to receiving the contribution.

Unrealized gain or loss

The increase or decrease in value of an investment asset held by an organization but which has not been received through the sale of the asset.

Unsecured loan

A loan made without collateral.


Working capital

The portion of an organization’s assets which is not invested in fixed assets or obligated to pay current liabili- ties, but is available to fund day to day working needs.