Finance & Strategy

Real world nonprofit finance matters, and real world thinking about strategies for financial, programmatic, and leadership sustainability. This column is written by Steve Zimmerman, principal of Spectrum Nonprofit Services.

photo of Steve Zimmerman

Five Internal Controls for the Very Small Nonprofit

Segregation of duties, checks & balances . . . difficult to implement in the organization that has perhaps three or fewer staff, or only a few active board members in an all-volunteer organization. We asked CPA Carl Ho, who works with dozens of small nonprofits, what would be the five most important, most do-able controls for small groups:

1. The first and most important consideration is to set the control environment, that is, to let everyone know, from the top down, that there are policies in place and everyone has to follow the policies. In so many organizations the top person makes exceptions for himself or herself about policies, which sets a sloppy or even unethical tone. Then other people don't think they have to follow procedures, either, and they start cutting corners. The top person can't ask for reimbursement for anything for . . .

Attorney Recommends Review Instead of Audit

When one nonprofit considered moving away from having an annual audit to having a review, the board wanted a legal opinion before making a decision. They sought out nationally-recognized nonprofit attorney Tom Silk, who has generously shared his letter with Blue Avocado readers:

Dear _____ [CEO]:

You have asked me to advise you and the board of _______ whether it should obtain an audit or review of its financial records for FYE June 30, 2009.


There is currently no federal requirement mandating financial audits of charitable organizations, with one exception: OMB Circular A-133 requires . . .

An Agreed-Upon-Procedures (AUP) Success Story

An Agreed-Upon-Procedures Engagement is one where an auditor performs tests on only a portion of the organization's finances, and can therefore be done at much lower cost. CPA Dennis Walsh discusses how this little-used process could be utilized more for nonprofit benefit:

In Southeast Alaska, the United Way coordinates the federal government's Combined Federal Campaign (CFC). In 1998, the CFC required an audit when program revenues exceeded $100,000. Southeast Alaska had many nonprofits with revenues over $100,000 but less than the federal single audit theshold (currently $500,000), above which a financial statement audit is mandatory for entities receiving federal funds.

"Given that many of these organizations were only receiving a few thousand dollars or so from the United Way/CFC, it hardly made sense for them to . . .

Seven Ways to Reduce Your Audit Costs

Too many of us think of audit costs as an expense to suffer, not to manage. CPA Dennis Walsh tells us differently:

Executive Director Blair Benson of the Mental Health Association of Greensboro, North Carolina, was hoping her audit costs wouldn't go up much. With a budget of $340,000, there isn't a lot to spare. But although she had expected an increase, she was stunned when her auditor said he would be increasing his fee by 40%. "An increase like this is something you just can't build into your budget," said Benson.

Audits are getting more expensive -- have you noticed?

A survey of 160 community-based nonprofits in Guilford County, North Carolina, showed recent average audit fee increases of 9%, and noted that audit costs remain a significant burden to organizations.

Under the new risk-based audit standards (Statements on Auditing Standards (SAS) Nos. 104-111), effective since 2007, your auditors must obtain a deeper understanding of your organization, its environment, and your internal control systems. "The burden for documentation, combined with . . .

Focus on the Destination, Not the Route (Budget)!

It's time to stop looking at budgets, argues Jeanne Bell in this provocative finance column, and pay attention instead to projections and financial goals:

In this precarious era, annual budgets have become like new cars: they lose value even as you drive them off the lot.

How many of us could predict even a few months ago what might take place to affect our donations, our foundation grants, or our government contracts? The entrenched practice in many nonprofits of using the approved budget as the primary financial reference point just isn't suited to effective financial leadership anymore.

Focusing on the annual budget -- adopted months ago -- is like setting a course on the high seas and staying with it even when unexpected rocks suddenly appear, or a more favorable, alternative route opens up ahead. Instead of being locked into . . .

A Nonprofit Dashboard and Signal Light for Boards

(If you have trouble seeing the graphics in this article, you can download a PDF free here.)

The dashboard in a car gives an instant update on many important factors: speed, gas left in the tank, engine temperature, whether the air conditioner is on. If your dashboard isn't working, it's unnerving and upsetting. But at the same time, when it IS working, you glance at it from time to time but you don't look at it constantly.

A nonprofit dashboard is similar: it gives important information to decision makers such as executives and boards in a quick-read way. But a dashboard has limitations: it doesn't tell you if you're taking the right road to Chicago, or more importantly, whether you should be going to Chicago at all!

The idea of making data -- especially financial data -- easily readable for board members is not a new one. Building on that basic idea, we've added two critical features:

Sidebar: More on the Old and New Versions of 990 Online Software

The current version of 990 Online walks the preparer through the Form and schedules in a sequential way, in contrast to the questionnaire-type interface typical of consumer tax preparation software such as Turbo TaxA(r).A As a past tax professional, I found the 2007 program very easy to navigate in a test evaluation.

But the redesigned 990 is anything but a sequential, aEU~top to bottom' form. The preparer needs to carefully sequence input according to the circuitous steps in the new instructions.

New 990 Software Release on July 20: Is It Enough?

A Blue Avocado Reader OpEd: The new 990 Online software comes out next week on July 20, 2009. This release will help as we face the challenges of filing the redesigned IRS Form 990 (for fiscal years starting in 2008). But 990 Online needs better support to make it the resource we need it to be. Reader Dennis Walsh discusses the software development issue and points to the modest investment that would ease the implementation burden for hundreds of thousands of nonprofits nationwide.

When my wife Debbie was executive director of a North Carolina senior center, she remembers "plowing through the 990 paper forms and instructions, trying to figure out what went where. We couldn't afford to hire a preparer and even though we had a CPA on the board, he didn't provide any help. I wondered if I could go to jail if I did this wrong!"

Sadly, this experience is mirrored in many community nonprofits.

The IRS estimates that it would take a novice preparer 158 hours to learn the regulations and complete the new Form 990: equivalent to dedicating a full-time employee to this task for a month.

It's likely that by 2010 more than 300,000 small nonprofits will have to struggle . . .

Survival Strategies for the Arts

John Killacky, artist and arts funder, not only knows that we need the arts now more than ever, but gives us ten survival strategies for arts organizations and one for audience members -- and reminds us that all of us are audience members.

The arts are where hope lives. And right now, as the very tenets of civil society are being re-written, and as health and human service needs rise, there is legitimate concern about whether the arts will survive, how the arts can thrive.

The arts, like every other nonprofit sub-sector, are being challenged by significant contribution losses from government, corporations, foundations, and private donors. Box office and gallery admissions are also eroding as discretionary dollars evaporate. Almost everyone agrees funding problems will become more acute in the upcoming three to five years. Adaptability is replacing growth as a barometer of success. There's no question to me but that the arts organizations that have dynamic, interactive, authentic relationships with their constituents, audiences, and neighbors are the ones that will come out of this maelstrom stronger. Here are ten . . .

Finance Fear Factor Ratios

At even the most solid nonprofit organizations some board members and executive directors are beginning to wonder and worry, "Are we okay? Should we be worried?" Watching the traditional indicators of financial health -- like performance-to-budget or reserve size are important, but they may not give you the immediacy of knowing whether you need to worry today.

One of the main problems is that they don't necessarily address cash availability. For example, you may have a large payment due to you from a government agency, but if they won't be paying it for another two months, you may not be able to meet next week's payroll.


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