Not all nonprofit board members are financial experts, but every board member owes the stakeholders of their nonprofit, the duty to help steer their nonprofit in the right direction. For help in doing that, we turned to finance pro Paul Konigstein, in this week’s terrific guest post, including a checklist for the less financially inclined on the board that Paul developed. Thanks Paul!
Governance, Governance, Governance
In real estate the mantra is location, location, location. The governance issues Cooper Union have recently faced have provided the latest reminder that in nonprofits the mantra should be governance, governance, governance. An investigation by New York State Attorney General Eric Schneiderman is focusing on the Cooper Union board’s management of its endowment and decision to borrow at unfavorable terms to finance its new building while running operating deficits.
According to the Times article, Cooper Union failed to diversify its endowment, resulting in significantly below average returns. Furthermore, it financed the new building using an above market interest rate loan with a steep prepayment penalty that effectively prevents refinancing at a lower rate.
CU’s actions may have little resonance with the average nonprofit, which has neither an endowment nor a $175 million building. Yet, any nonprofit, no matter its size, risks making poor financial choices. As the individuals charged with governance, the board is responsible for monitoring financial decisions and intervening when a decision is not in the nonprofit’s best interest. Since not all Board members are financial experts, here is a handy checklist for the less financially inclined on the Board to fulfill their governance responsibility.
Balance the budget – Don’t plan to have a deficit unless you already have money set aside to pay for it. Relying on hope that revenue improves in the future is too risky. If you can’t balance the budget without crippling core programs, think about partnering with another nonprofit. Partnering could be anything from sharing facilities to jointly managing a program to merger.
Know your key performance indicators (KPIs) – What activity makes or breaks your nonprofit? It may be number of performance tickets sold, number of gala tickets sold, enrollment, government reimbursement rate, foundation grant renewal rate, conference attendance, milestones achieved, or any of an infinite number of other possible performance indicators. The actual value of your KPIs compared to the numbers needed for a surplus should be examined at each board meeting. Many organizations use a simple traffic light dashboard characterizing each KPI as red (danger), yellow (caution), or green (safe).
Plan ahead with cash – Most nonprofits are not fortunate enough to enjoy a steady stream of cash receipts. For most of us, cash comes in big lumps like a gala or a major foundation grant separated by fallow periods of perhaps a few small gifts. You need a plan to make each lump last until the next lump arrives. Before the year begins, plot on a calendar grid the month each lump is expected to arrive and assign your major payments (such as payroll) to the appropriate month. Calculate how much cash you will have on hand at the end of each month. If you expect a negative balance at the end of any month, make arrangements now for a loan. Securing a line of credit before the bank account runs dry is much easier than borrowing when the bank account is empty.
Embrace competitive bidding – Have you bought a house or a car lately? How many did you look at before you decided which one to buy? Would you buy the first house or car you saw? If you bought the first, you have no context to know that you bought the best one for the money. The same is true for a loan, insurance, audit services, or any other major nonprofit purchase. The rule of thumb is to compare at least three providers. How much money is major depends on the size of your nonprofit and your risk tolerance, but for most is somewhere between $1,000 and $10,000 per item.
Know the Ten Signs of Financial Trouble – Click here to learn the ten signs the information you receive may not be of sufficient quality for you to take proper governance actions.
The preceding is a guest post by Paul Konigstein, Senior Consultant at Accounting Management Solutions, helping nonprofits improve their finance, accounting, and governance. To read the original post, click here. Paul is equally comfortable as an interim Chief Financial Officer or as an adviser for a specific project. Before joining AMS, Paul spent over twenty years as a nonprofit financial executive with arts and culture, education, and international development organizations including Helen Keller International, the New York Hall of Science, and the Metropolitan Opera. Outside the office, Paul is the former Board Treasurer for The Animation Project, which transforms the lives of at risk youth using digital art technology as a therapeutic medium and a workforce development tool. BoardAssist brought Paul and The Animation Project together.