Nonprofit organizations continue to face more challenges in an ever-changing economic environment. Many nonprofits are seeing a decline in funding and an increased demand for services. A common concern among nonprofits as they navigate these obstacles is how to set themselves up for financial sustainability.
Like most trials in life and business, overcoming challenges while setting yourself up for success isn’t determined in one giant leap, but is built on consistent best practices. Organizations that are set up with a strong foundation of policies and processes are better positioned to weather the storms. The basic principles for building sustainability are outlined below.
Alicia Manning, CPAAudit & Assurance Services Senior Manager[email protected]
Establish A Strong Fiscal Team
Financial sustainability requires a strong fiscal team. The Organization should have a Chief Financial Officer, or equivalent, with nonprofit accounting experience. Ideally, this individual would be a certified public accountant with knowledge of generally accepted accounting principles in the United States (U.S. GAAP). It can be difficult for nonprofit organizations to obtain and retain this talent, so outsourcing these roles to reputable accounting firms is also an option. Your CPA can recommend firms that provide high-quality fiscal oversight for nonprofit organizations. The accounting software used by the fiscal team should be sophisticated enough to handle the daily transactions and reporting needs of the Organization. The fiscal team should be supported by appropriate human resources, operations, and information technology management and oversight. The fiscal team should also be involved in reviewing grant and contract budgets. Program managers should actively work with the fiscal team to establish program budgets.Accounting Practices
The finance and accounting team should ensure that all financial reporting is done in compliance with U.S. GAAP, particularly ensuring revenue is recognized in accordance with U.S. GAAP. The department should have written policies and procedures for fiscal operations, including payroll, purchases, accounts receivable, and accounts payable. This should also include clear procedures for approving and paying invoices. The timeliness of payroll and accounts payable payments should also be considered. These policies should be reviewed by the department and the Board regularly. The policies should include as much segregation of duties as feasible, given the size of the team. The team should also have a detailed and evolving financial close process, which should include monthly bank reconciliations and all balance sheet account reconciliations. Bank reconciliations should be performed by someone other than the individual responsible for issuing, reviewing, and signing checks. The close process should be designed to allow for financial reporting preparation 10-15 days after month-end. These financial reports should include standard financials, such as a statement of financial position (balance sheet), statement of activities (income statement), and other financial dashboards and KPIs.Board Oversight
Board oversight is integral to a strong nonprofit organization. The Board should be knowledgeable and strategic. An organization’s board, or assigned board committee, should meet and review a variety of financial reports on a monthly basis. This includes:- Statement of activities at the program or department level, including a review of profitability at this level
- Statement of activities clearly defining restricted and unrestricted revenues and releases in those restrictions
- Budget to actual statements of activities with insights from management, both operations and financial
- A cash flow forecast for the next six months
- A monthly review of accounts receivable and accounts payable
Other Considerations
Organizations may also want to consider having a line of credit or other financing options available in times of need. It is generally most beneficial to have one bank that can provide multiple products for the Organization’s needs. If the Organization does not currently have a strong relationship with its bank, the Organization’s CPA can recommend bankers who are known to provide excellent service to nonprofits. Nonprofits should also have an operating reserve, which is monitored regularly and measured against benchmarks. There should also be a capital budget in place with a multi-year plan for major maintenance and replacement of facilities and equipment that is regularly monitored. Organizations should also consider an annual audit, as an audit can provide valuable outside perspectives. An annual risk assessment should also be performed by management and reviewed with the Board. The risk assessment should include a review of general liability, professional liability, product liability, fire, theft, casualty, workers’ compensation, occupational safety, board and officer liability, vehicle operations, fraud, and dishonest acts. Insurance coverage related to these risks should also be reviewed and considered. In summary, nonprofit organizations that have established a basis for strong risk assessment practices will be better situated to take on future challenges as they come. For more information or questions about this article or to find out how Windes can assist, please contact our Nonprofit Team at [email protected].This article was written by Windes Audit & Assurance Services Senior Manager Alicia Manning. Alicia Manning, CPAAudit & Assurance Services Senior Manager[email protected]