Dollars and Sense

One of the most fundamental legal responsibilities of all board members is prudent fiscal management. This has become even more important due to a climate of increased scrutiny precipitated by numerous public scandals revolving around fiscal mismanagement by nonprofit Executive Directors, hand in hand with lack of board oversight. Yet more often than not, nonprofit boards fail to pay attention to their organizational dollars.

So: here are some guidelines about what you need to know:

• Do your board members receive, read, and understand the organization's fiscal reports? Boards should be looking at financial statements on a quarterly basis at minimum. If you find these statements confusing, know that you are not alone - accounting is a foreign language to most people. Your job is to make sure the information is presented such that everyone fully understands the numbers and their implications.

• Are your program costs aligned with your stated mission? It is the board's responsibility to ensure that your money is being spent on programs that directly further your mission.

• Does your nonprofit have cash-management policies in place? Every organization should have basic financial controls in place to maintain the integrity of its bookkeeping process. The bottom line here is to have checks and balances, with more than one person handling fiscal responsibilities, plus secure storage of cash/checks.

• Does your agency have a diversity of funding sources? Reliance on one single source of funds, whether an individual donor or a foundation, is dangerous. Ideally, you want a healthy mix of earned income, donor contributions, and grants.
  

• Does your agency have a program reserve? A designated reserve fund that covers 3-6 months of operating expenses in case of a dire emergency is an essential.

• Are you required to do audits? If your budget is $2 million or more, you are required by the IRS to have annual audits. If not, whether you do an audit is dependent on many factors including grant requirements, significant organizational change, and the size of your nonprofit.
  

• Does the board maintain proper oversight of wages and benefits? Be sure your board reviews all employee compensation and benefits annually in conjunction with performance reviews. The Northern California Wage and Benefit Survey, available at http:www.nonprofitcomp.com/index.html, is a great resource for comparative data. Note that all nonprofits are now required by the IRS to have a written policy on Executive Director compensation.
  

• Do you have the appropriate kind and amount of insurance? Every nonprofit should review insurance policies on a regular basis to ascertain whether the organization is properly covered.

The ongoing economic downturn has placed added stress on all nonprofits, and along with it, the need to truly understand your organization's financial situation as you make difficult decisions in regard to program and operating expenses. Don't be afraid to ask questions about your organization's budget and fiscal policies; in fact, it is your responsibility to do so.

Five Tools for Better Boards

Whether you are an Executive Director struggling with a combative Board of Directors, or a Board member secretly wondering why you made the commitment to monthly meetings that often waste your time, working effectively with a nonprofit board can be challenging.

When so many people know what a good board should look like, why are there still so many boards that are contentious and unproductive? Here are some reasons:

• Board members are volunteers with jobs and lives that take precedence over their nonprofit commitments.
• Dysfunction is frequently the norm when groups of people get together.
• On any given board, you are likely to have one person who is a flake, one person having a personal crisis, and one person convinced he/she is always right.
• Most board members haven't a clue about their actual legal and fiscal responsibilities.
  
• Despite all the written materials, there really is no one model for board structure and procedures - because every board is different.

Nonetheless, here are five tools that can help you oil the waters and facilitate a dynamic, creative, and cooperative working environment for your nonprofit board:

1. Focused recruitment: Expand your search beyond the standard categories of lawyer, banker, donor - consider geography, age, family circumstances, community connections, special skills, ability to work with others. Be absolutely honest about what the job entails when you talk to potential recruits.
2. Thorough orientation: Put together a complete orientation package that includes a detailed job description, fiscal and program information, annual calendar, policy manual, by-laws, and personnel policies. Meet individually with each new board member to review the materials, find out particular interests, and answer questions. Make sure every board member actually understands the organization's fiscal reports.
3. Creative culture: Aim for less reporting and more problem-solving. Tackle big issues first, before the minutiae. Evaluate your board agenda; change it if it's not working. Provide snacks and refreshments. Allow some time for fun - nothing improves a meeting more than a good laugh.
4. Clearly articulated procedures: Create a set of guidelines for board conduct that emphasizes civil discourse and consensus (and leave Robert's Rules of Order behind). Review and update your policy manual annually. Never schedule a meeting you don't really need. Always summarize, make work assignments, and designate the person who will nag everyone about deadlines before the meeting concludes.
5. Regular renewal: Once a year, read the organization's mission out loud and re-affirm your commitment to that mission; do the same for the board job description. Conduct an annual assessment of board strengths and weaknesses; create a work plan to follow up. Do an annual review of basic board roles and responsibilities.

Above all, stay open to change. Every board is different, and every year in the organizational life cycle is different. Budgets get bigger, staff turns over, the dynamics of the group shifts, client demographics change, and the balance of power between board and staff fluctuates. Be willing to see the change and make the adjustments that will further sustain your organization in accomplishing its mission.

Nuts and Bolts: Maintaining Nonprofit Infrastructure

Salaries and benefits, facility costs and maintenance, fundraising expenses, technology upgrades - these are the nuts and bolts of running a nonprofit organization.

Nonetheless, most nonprofits fail to consistently plan for and fund basic overhead costs - for these reasons:

• Government contracts generally allow grantees to use no more than 15% for operations, finances, human resources, fundraising, and facility costs.
• Foundations are just as rigid, allowing on average 10-15% for overhead.
• Nonprofits must prove, based on IRS Form 990 information, that overhead and fundraising costs are low in order to receive funds through United Way.
• Most available grant funding focuses on time-specific projects, rather than ongoing operating expenses.
• According to the Better Business Bureau's Wise Giving Alliance, more than half of adults feel nonprofits should spend less than 20% on infrastructure - and the majority often makes choices based on this assumption.

On top of this, the current recession has forced many organizations to cut back even further in order to maintain programs. A survey of 100 executive directors across the country by the Bridgespan Group found that 56% were planning to reduce overhead spending.

There's nothing sexy about ongoing operating expenses yet no organization can exist without the funds to pay for them. And failing to designate money for overhead can be devastating:

• Your key staff people become stressed out, overworked, and underpaid
• Staff salaries lag behind the market, leading to sticker shock when someone leaves
• Your staff is not trained in up-to-date procedures and technology
• Your buildings, fixtures, and furniture deteriorate
• Your essential technology - computer hardware and software, copy machines, phone systems - dates from the dark ages

But faced with pressure to meet the demands and expectations of funders and donors, nonprofits consistently make do with less, in fact making a point of how little they spend on basics - while under-reporting administrative expenses on 990's and fundraising materials. Thus, supporters and funders don't know what it truly costs to run a successful organization (note that overhead rates in the for-profit world average around 25%). It all becomes a self-perpetuating cycle.

How can nonprofits buck this trend? To begin with, start speaking the truth about the actual costs of doing your good work. Advocate with funders and donors about the importance of basic expenses as the foundation for accomplishing your mission. Evaluate if it even makes sense to apply for a grant, especially given potential reporting and audit costs attached. See if you can negotiate with foundations about their expectations. Factor in realistic overhead expenses in any grant application and all budget projections. Be sure to include line items for technology, facility, and salary upgrades in your annual budget and strategic plan. And work towards developing relationships and strategies with individual donors to encourage and value unrestricted giving. Educating your donors about how investment in infrastructure benefits the organization's clients could be the most important thing you can do to further your good work.