Nonprofit Stewardship Requires Good Processes

Stewardship is a promise to engage in responsible planning and management of resources. The stewardship concept can be applied to nature, economics, health, property, and information. For nonprofits, stewardship usually means the responsibility to make sure that the organization spends donations cost-effectively in support of the mission.

 

Nonprofits need to have good processes and systems to fulfill their stewardship role. Nonprofit Board members and management each have roles and responsibilities to implement and manage the processes needed to fulfill the promise to spent donations wisely and sustain the organization.

 

Nonprofits need to have good processes in three important areas to manage donations and make sure they are spent effectively:

 

  1. Verification – Collecting financial information and verifying that it is complete and accurate sounds basic, sure, but it’s so important! Capture donation information from all sources, like credit cards, checks and third parties. Reconcile deposits to donation reports. Confirm that all donor restrictions are documented so that promises to use funds for a specific purpose can be fulfilled.

 

  1. Anomaly Management – Identifying and following-up on occurrences that shouldn’t happen, or anomalies, helps nonprofits correct issues. Managing anomalies early in the process helps people work more efficiently and saves time researching issues. This approach can also help to identify the root causes that cause anomalies so they can be corrected to avoid recurrences.

 

  1. Independent Oversight – An important role of nonprofit Boards is to perform independent reviews of the organization’s financial performance and to take remedial action to address any issues. The Board is also tasked with assuring that financial accounting and standards of practice for nonprofits are followed and that financial functions are performed by qualified staff or consultants.

 

Nonprofits have a stewardship responsibility to use donations effectively to support their mission. By focusing on three important areas to manage donations and make sure they are spent effectively, the Board and management can fulfill those stewardship responsibilities.

 

What’s Your Nonprofit’s ROI?

The tough job of nonprofit fundraising just got tougher. The 2017 Tax Cuts and Jobs Act doubles the standard deduction for individual taxpayers. That change is anticipated to slash the number of taxpayers who itemize their deductions because the standard deduction will be higher for them. One itemized deduction those folks won’t be taking is the one for charitable contributions.

 

Not getting a tax incentive in the form of a deduction means that many taxpayers will donate less to charity. That will be quite a blow to nonprofits that depend on smaller individual gifts that add up to a significant portion of total income. Fundraisers will have to change their strategies.

 

With competition for contributions getter fiercer all the time, it’s more important than ever to make a convincing case that funds donated to your nonprofit will achieve results. Donating to a nonprofit is just like making an investment – return on investment (ROI) attracts investors. Nonprofits need to “market” their ROI, or program results, so donors are attracted to “invest”.

 

In a recent episode of With Good Reason on NPR, best-selling business writer Jim Collins discussed the special factors that make for the most successful organizations in the non-profit world. Those organizations are poised to get results. Listen to his reasoning here.

 

Collins posits that a commitment to excellence in nonprofits results in outcomes beyond measure. That starts with hiring qualified people who are working for more than their paycheck. No matter their role in the organization, they are passionate about the mission and the effective use of donations. It makes sense – professionals collaborating to serve the community within a clear mission and established practices are positioned to achieve a higher ROI.

 

If a high ROI on donations isn’t compelling enough, Collins presents his case in another very impactful way. He points out that when for-profit organizations have bad financial results or a product failure, they lose money. Sure, that’s bad; but the overall cost to society when nonprofits fall on hard times is immense – homeless citizens whose children do not have a childhood; formerly incarcerated men and women who cannot get re-entry services for support when they come home; working families who have no money for groceries the last week of each month.

 

We don’t know exactly what taxpayers will do after losing the income tax deduction for charitable contributions. But no matter what, it’s fair to say that nonprofits with a higher ROI on their program results will attract more contributions from taxpayers who keep donating to charity after the tax law change.

 

Tips for Nonprofits during Giving Season

Thanksgiving is the traditional start of Giving Season. To mark the date, I blogged a couple of weeks ago about “Which, Who, What, and How” individuals can deduct charitable donations. Nonprofits receive a large portion of their total donations in the last few weeks of the year. Large donation volumes require protections to prevent some of those funds from “disappearing”.

 

Nonprofits work hard to raise funds. Plus, they have fiduciary responsibility for donor funds, starting when they are received. So, in the spirit of equal time, this week’s blog gives some tips to nonprofits, similar to tips that I gave in November to taxpayers planning to make year-end donations.

 

Four best practices for nonprofits to protect their donations:

 

  1. Segregate Duties

Separate tasks to ensure that funds are protected at all times, and nothing “falls through the cracks”. For example, separate the tasks for receiving and depositing funds. Bank account reconciliations and other verification procedures should be performed by someone who is not involved in receiving or depositing funds.

 

  1. Standardize and Automate

Establish and follow a routine process for each donation method. Define non-routine activity, how to detect it, and how to address it. Investing in automation generally reduces overall cost through efficiency and cost-effective controls. Automation facilitates reporting to track activity and detect/address issues and anomalies.

 

  1. Verify and Reconcile

Independent and regular donation verification is one of the most important protections for your donations. Automated tools are available for bank account and credit card reconciliations. Up-front technology investments generally pay for themselves quickly. Donations that are restricted by the donor for a specific purpose should be verified separately.

 

  1. Manage Donation Channels

All donations should be protected. Priority should be given to donation channels that bring in the largest dollar amounts. Identify your donation channels, such as direct mail, online, events, or walk-ins. Determine the dollar amount and donation volume from each channel. Prioritize protection activities on donation channels that bring in the larger percentages of total dollars. Encourage donors to use less expensive, well-protected donation channels.

 

Following these best practices is not everything nonprofits should do to protect donations, but it’s a start.  What is your nonprofit doing to make sure that your donations are protected?

Monitoring Nonprofit Finances

Nonprofit Boards have a big job. One of the biggest parts of that job is fiduciary responsibility — making sure that the organization is funded, and that funds go to supporting the mission. Reviewing organization’s financial condition is one way that Boards fulfill their fiduciary responsibility.

 

How do Boards review the organization’s financial condition? It all starts with receiving and reviewing periodic financial statements, and analyzing financial performance in relation to the budget and financial ratios.

 

Nonprofit Boards should monitor financial performance and take action in four areas:

 

  1. Budget vs. Actual Performance

The year-to-date budget should be compared to actual performance. Analyze variances between budget and actual performance, especially for key income and program or administrative expense categories. Identify why variance from plan are occurring for significant differences and line items.

 

  1. Liquidity

Periodically assess four financial ratios to identify trends and their impact on fundraising and other plans:

  1. Days Cash on Hand – days of operation with no funds received and no investments liquidated
  2. Days Cash and Investments on Hand – days of operation after liquidating investments and before borrowing funds
  3. Current Ratio – divide current assets by current liabilities to assess overall financial health
  4. Debt Ratio – divide total liabilities by total unrestricted net assets to assess the need to reduce leverage

 

  1. Fund Raising

Assess the potential for overreliance on one individual funding source, indicating the need to diversify. Benchmark fundraising expenses in relation to funds raised against Charity Navigator or another metric to determine the return-on-investment of individual fund raising events and activities.

 

  1. Program Expenses

Measuring the relationship of each program’s expenses to overall expenses helps the Board to prioritize their attention on programs where more organizational resources are invested.

 

Nonprofit Boards fulfill fiduciary responsibility by monitoring the organization’s financial condition and making prudent decisions to maintain financial stewardship. By focusing on the four financial areas above, Boards can assess and act appropriately on financial performance.

 

The “Overhead Myth” Starves Nonprofits

Last week, a Tweet I saw really grabbed me – “Underinvesting is expensive! Starving nonprofits leads to inefficient systems.” It was from The Bridgespan Group, a global nonprofit that helps other nonprofits in the hard work of developing strategies.

 

Working with less means you get less.

 

For some reason, non-profits are expected to run on a shoestring. Starving nonprofits limits investments in the necessary people and systems to perform effectively.

 

GuideStar USA, Inc., used the nonprofit data they collect and report to form a business case to help break the “overhead myth” about limiting overhead costs. They offered steps to debunk the myth and shift the conversation from overhead to the need to invest in people and systems.

 

Five Steps to Debunk the “Overhead Myth”:

 

  1. Clearly document objectives and the intended impact of meeting those objectives. This informs donors about your mission and community, and sets the framework for measuring impact.

 

  1. Describe the strategies employed to achieve stated objectives and impacts. Donors are more inclined to support nonprofits that connect strategic goals with action plans and expected results.

 

  1. Discuss the capacity to deliver the programs and services to meet stated objectives. Describe capacity investments needed to establish and sustain the necessary infrastructure to support programs.

 

  1. Tell donors how you measure progress. This communicates that you are monitoring the achievement of your organization’s goals and helps donors trace the impact of their gift.

 

  1. Share results from recent work and describe additional results that you want to achieve. Highlighting successful projects illustrates how goals are achieved and helps donors visualize their gift in action.

 

Charting your non-profit’s objectives and impact, and the investment needed to deliver effective programs debunks the overhead myth. Helping donors understand infrastructure needs will compel them to give.

 

More tools and information to help non-profits to re-direct donor conversations from the “overhead myth” to performance and results are found at www.overheadmyth.com.

Nonprofit Board Treasurer Duties

A few weeks ago, I blogged about nonprofit Board duties required to fulfill the financial stewardship and oversight role. This legally-defined role is known as “Fiduciary Responsibility.” This week, I provide more details about the Board Treasurer’s important financial oversight role.

 

The Treasurer is the primary financial officer of the organization. As such, she or he should have the experience and background to be knowledgeable about financial policies and functions necessary effectively manage and understand nonprofit finances. Some professions that make good Board Treasurers were described in another previous blog post.

 

Four important Treasurer Duties and Responsibilities are to:

 

  1. Assure that the organization is following appropriate financial policies and that qualified individuals perform financial functions. The right policies and people are more likely to provide the desired results, such as reliable and complete financial information.
  2. Understand regulatory and legal requirements for financial accounting and standards of practice for nonprofit organizations and assist other Board members in understanding and fulfilling their oversight and fiduciary responsibilities.
  3. Assure that accurate financial records are being kept, monitored, and used to take necessary action to sustain and protect the organization’s finances. Regularly provide the Board Chair and the Board with an accounting of the organization’s financial condition.
  4. Assist in preparing the annual budget and presenting the budget to the Board for approval, and in selecting an independent auditor, reviewing the annual audit results, and answering Board members’ questions about the audit.

 

Nonprofits with Treasurers who fulfill these four fiduciary duties are more likely to make appropriate financial decisions, meet donor expectations to protect and preserve financial assets, and ensure that regulatory and legal requirements are addressed.