An Executive Director's point of view
May 14, 2013: Always budget a profit
Well, there is no prohibition against not-for-profits earning a profit. In fact, they always should and it should be budgeted at the beginning of the year, and not merely consist of whatever might be left over at the end of the year.
The only legal requirement is that the profit (or "surplus," as it is usually called) not be distributed to the Board, employees, or members. The profit stays in the organization (but bonuses can still be paid).
A profit provides a cushion in the event of a drop in dues, program registrations, or anything else, and it provides start-up funds for new projects. It's an association's way of saving money - building a reserve - which is not only prudent but may be necessary to maintain the organization over a long period of time.
Many Board leaders, though, work in government, where they are given an appropriation (which they don't have to raise) and must spend it during that fiscal year. Others work in charitable organizations that are accustomed to grant directives mandating expenditures during a particular time frame.
So, they naturally assume that not-for-profits must operate under those same conditions.
You may have to be forceful when educating Board members about the need to earn a profit and build a reserve. When unexpected income is received, they may want to spend it.
Remind them that it's a bad idea to go out and blow a bonus check.
April 15, 2013: Should free lunch be taxed?
January 23, 2013: Stolen event receipts
The next morning, he found the door unlocked and the box empty. Nothing else had been stolen from his office - not even the contents of the petty cash box.
More than a year has passed and the crime has still not been solved.
Message for associations: Always store cash receipts in a secure place.
Not in a box, or a drawer, or a cabinet in your office (not even in a locked drawer or cabinet). Not in a hotel room safe or an office safe that can be picked up and carried away. Not in a container transported with your meeting or expo materials. Not in your briefcase or purse, or coat pocket.
Make arrangements to have cash stored and shipped securely. It not only enables you to comply with legal and insurance regulations - it's just common sense.
August 14, 2012: Obsessive record-keeping
June 01, 2012: Credit card security
May 10, 2012: Who's watching the store?
Many, many organizational leaders don't know how to read financial statements. And a lot of them would rather not learn how.
Their eyes may turn glassy and their brains freeze when confronted with financial information. They often leave printed financials on conference tables when they leave Board meetings.
But they have to read this stuff. So, here are a few ways you can help them fulfill their fiduciary responsibilities as Board members:
1. Ask Board members what they want to know about the association's finances. Even those with little financial knowledge or interest are likely to have something to say.
2. Craft a financial statement that is easy for them to read and to understand.
3. Highlight the most important information on the statement - literally. Use a highlighter, print different color fonts, use bold lettering, underline, circle, draw arrows, or do whatever is necessary to make it easier for people with little financial education to focus on important data.
4. Patiently explain why accrual accounting is better than cash accounting; how the balance sheet, not the income and expense statement, displays the true financial picture of the organization; and why program expenses are more important than functional expenses. Use everyday language, not accounting lingo.
5. Define terms - at every meeting, if necessary - including deferred revenue, net equity, and amortization. Tell them why membership dues are not considered income in the month they are received but have to be spread equally over all the months for which they apply.
6. Gather together the Board members who understand financial information (if there are any on your Board) and enlist them to help educate their peers. They may be more trusted and respected than staff. Hopefully, the Treasurer will possess a reasonably high level of financial literacy and can lead that effort.
Be aware that associations that file IRS Form 990 are required to share copies of the group's tax return with all Board members. That requirement does not exist for organizations that file form 990-EZ.
January 22, 2012: Avoid government money
While membership associations derive most of their income from member and customer payments (dues, program registration fees, subscriptions) or from entities that want to market to members and customers (exhibitors, corporate sponsors), many other not-for-profits count on government grants and contracts for significant portions of their budgets.
Social service agencies, in particular, whose customers cannot afford to pay for services, often depend upon government support for a majority of their income. They become, effectively, extensions of the governments that fund them.
But that's a risky policy, since government support is not a "sure thing." Political changes lead to funding changes, the defeat of program patrons, shifting of policy priorities, and late payment or cutbacks from cash-strapped public treasuries.
And government funds often come with strings attached. Not-for-profit leaders may be expected to donate to the candidates who control their funding, be asked to employ relatives of those officials, or even follow political dictates when hiring an Executive Director.
They frequently trade their independence for the financial resources necessary to serve people who otherwise would not be served.
Not-for-profits would be wiser to steer clear of government money and develop more sustainable financial structures. Donations, corporate sponsorships, sales, and other types of support would enable the groups to make their own fiscal decisions and be less likely to succumb to outside forces or dictates.
Some organizations, however, think they have no choice. Without government grants and contracts they would not be able to provide essential social services to people who really need them. That's what Hull House thought.
December 22, 2011: When does the offer expire?
When I called the restaurant that issued them, I was told that, although the coupons were old, they would still be accepted. I wonder how some other coupons I have would be treated.
ALWAYS print an expiration date on gift cards, registration inducements, membership offers, and any other deals that provide a discount to users.
November 01, 2011: Thieves
How can you know if it's happening in your organization?
Don't assume that people with credit problems are thieves. Even those who are financially secure can commit fraud.
Instead, look for the signs. Here are some fraud clues detected by an association accountant.
October 04, 2011: Accrual, not cash
Accrual is definitely better. Here's why:
1. Accrual reflects the true financial picture of the organization. Cash accounting can be used to cheat.
2. With accrual, expenses are recognized when they are obligated to be paid, not when they are actually paid. So, income and expenses for specific events will be recorded in the same time frame. Financial reports could not be manipulated by simply paying bills late.
For example, if a meeting is held at the end of the year, cash accounting would allow an association to book income for this year but expenses for next year, to make the year-end financial report look better (but it will make next year look worse). Accrual does not allow that.
3. Accrual spreads annual membership dues over a twelve-month period, since members have pre-paid for an entire year of services. Only one-twelfth of each dues payment would be booked as income each month. The remainder would be recorded as a liability, since the association owes services to those who paid.
With cash accounting, dues payments would be booked as income when they were received, exaggerating the association's income for that time period.
4. Accrual allows the association to more accurately report its financial situation, not just its cash situation. The financial situation is based on assets minus liabilities - not by how much money is in the bank.
Yes, accrual accounting requires more work, and data from membership amortization tables will need to be incorporated into budget preparation. But that will result in a more accurate report of the association's true financial status.