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A key fiduciary duty of a non-profit’s Board of Directors is to oversee and monitor the organization’s financial health. Some financial matters may jump out at Board members, such as the loss of a major funder or a successful fundraising event. But other financial factors are less flashy. Here are some to consider.
Certain budget-related issues, for example, hint at rocky financial times to come. A non-profit with no budget is a flashing red light — the lack of an annual operating budget suggests an undisciplined approach to fiscal matters.
Larger non-profits should draft budgets for each program or department. Ideally, Board members will see that management-proposed budgets are in line with board-developed and approved strategies.
Once a budget has been okayed, the Board should compare it to actual results for unexplained variances. Some discrepancies are bound to happen, but staff must explain significant differences. There may be a reasonable explanation, such as program expansion, funding changes or economic factors beyond the organization’s control. Where necessary, the Board should direct management to modify activities to mitigate negative variances. Instituting cost-saving measures may be in order.
Board members should also beware of overspending in one program that’s funded by another. Also watch for dips into the organization’s “rainy day” fund (its “reserves”), the raiding of an endowment or unplanned borrowing. Such moves might mark the beginning of a financially unsustainable cycle.
Untimely, inconsistent financial statements — or statements not prepared using U.S. Generally Accepted Accounting Principles (GAAP) — can lead to poor decision-making and undermine a non-profit’s reputation. They also can make it difficult to obtain funding or financing if deemed necessary.
Financial statements not prepared monthly and in accordance with GAAP, or another comprehensive basis of accounting, can be unreliable. They could signal understaffing, poor internal controls, an indifference to proper accounting practices, or efforts to conceal mismanagement or fraud. And the statements are likely difficult to compare to other non-profits in the same niche. The board generally should receive the non-profit’s financial statements within 30 days of the close of a period.
For larger non-profits, the Board or Audit Committee should also insist on annual audits and expect to select the audit firm. Members of the responsible group, such as an Audit Committee, should communicate directly with auditors before and during the process. All Board members should have the opportunity to review and question the audit report.
If the Board starts to hear from long-standing, passionate supporters who are harboring doubts about the organization’s finances, that’s a very bad sign. What are they seeing or hearing that prompts their concerns?
The Board should also note when development staff begin reaching out to historically major donors outside of the usual fundraising cycle. These contacts could mean the organization is scrambling for cash, and hoping its most dependable donors can fill the gaps.
It’s understandable that Board members who have full-time jobs and other responsibilities might cede some of their responsibilities to a trusted executive director. However, it may be risky.
So, what are the signs of an executive director who wields too much power? The Board should think about changes if the executive director:
Additionally, an executive director shouldn’t be allowed to ignore expense limits. Going outside of the budget or policy guidelines should require Board approval.
Board members have a special role to play when it comes to an organization’s well-being. Make sure you understand the financial information you’re given from month-to-month. Don’t be afraid to ask questions. And check “facts” and figures that don’t make sense to you. Doeren Mayhew’s non-profit advisors are here to help you gain a better understanding of your organization’s financial health. Contact us today!
This publication is distributed for informational purposes only, with the understanding that Doeren Mayhew is not rendering legal, accounting, or other professional opinions on specific facts for matters, and, accordingly, assumes no liability whatsoever in connection with its use. Should the reader have any questions regarding any of the news articles, it is recommended that a Doeren Mayhew representative be contacted.
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