Resource Directory | Nonprofit Genie (FAQs)

Are there special things I should look for when completing a Form 990?

01-16-2006

Federal Form 990 is the main document nonprofits are required to disclose to the public, and any member of the public can request a copy, so you want to make sure that what it says is not only accurate, but reflects what you want to communicate to the public. Form 990, required by the IRS for all nonprofit organizations except those with annual revenues of less than $25,000 and religious organizations, is frequently requested by donors and grantmakers, and increasingly available on the web. But sometimes boards and executive directors don't pay much attention to what's on their 990s, and you could have an unpleasant surprise if you haven't made sure you feel comfortable with the "story" the 990 tells about your organization.

Your organization's 990 is due on May 15 if your fiscal year ended on December 31 (990s are due on November 15 for organizations with fiscal years ending June 30--in other words, 4 and 1/2 months after the close of the fiscal year). 990s are often prepared by the organization's CPA auditor, but can be prepared by the staff or board as well. Take 15 minutes to review the 990 for the following common problems:

Statement of Functional Expenses (Part II): In this section the organization must classify all expenses as one of three types: Program Services, Management & General, or Fundraising. We know one organization that put almost all expenses into "Management & General" because their work was done by management-level staff; in fact, such work was more appropriately classified as "Program Services." If the percentages for either Fundraising or Management & General appear too high, go back and make sure that your organization used appropriate guidelines when classifying expenses.

Addresses of board members: Part V of the 990 asks for a "list of names and addresses of officers, directors, trustees, and key employees." It is NOT necessary to list home addresses, and many board members and staff members feel that doing so encourages invasion of privacy. It IS appropriate to use the organization's business address in this section for all board and staff members.

Let your work show your mission. In Part III, "Statement of Program Service Accomplishments," the 990 asks for a statement of the organization's purpose and a list of program activities (examples: public awareness campaign, medical research work, home meal delivery, youth training, forest trail construction). Take the time to be sure that what you say here is what you would say to the press or the public or the IRS . . . after all, that IS the audience for the 990.

Check the math. (Especially if you're an education organization!) In one study of 990s, 67% had significant arithmetic errors.

Remind staff and other board members that Section 1D of Schedule A need NOT be disclosed to the public. Schedule A (an attachment to the 990) lists the names of major donors and the amounts given. If someone asks for your organization's 990 and Schedule A, you are required by law to give it to them, but you do NOT need to give them Section 1D of Schedule A that has this information.

Make sure it's filed on time. Failure to file on time results in rapidly accruing penalties, and board members could be held individually liable for those penalties (even if you have Directors & Officers liability insurance). The board president should check to be sure it is filed on or before the due date (again, 4 and 1/2 months after the close of the fiscal year).

Are we required to file the 990 with our state government as well?

01-16-2006

State requirements vary from state to state. You should talk with your auditor or another financial advisor about the requirements for your state, or contact the appropriate state government departments.

Besides the 990, are there other federal reporting requirements for nonprofits?

01-16-2006

In addition, nonprofits that have expended $300,000 or more in federal funds must have an A-133 audit (see FAQ #19).

The Unrelated Business Income Tax (UBIT) was enacted to prevent unfair competition from nonprofit organizations using their tax-free monies to expand their businesses. Briefly, unrelated business income results from an activity that is 1) a trade or business, 2) regularly carried on, and 3) is not substantially related to the organization's tax-exempt purpose. Certain activities such as work performed by volunteers, activities for the convenience of members, etc., are among the many activities specifically excluded from this broad definition.

An organization with unrelated business income is subject to tax based on corporate income tax rates. Generally, if an organization receives more than 5% of its total income from unrelated business income, it may endanger its tax-exempt status.

Can we post our 990 on the Internet?

01-16-2006

Yes, although you are not required to do so. If you do make your documents available on the web, you are not required to respond to requests for your 990 as above. Keep in mind that whether or not YOU post your 990 on the Internet, anyone else could choose to publish it on their own site.

Do all nonprofits have to file Form 990 each year?

01-16-2006

All nonprofit organizations with total annual receipts "normally" over $25,000 must file this federal form annually (churches and government agencies do not file). If gross annual receipts are between $25,000 and $100,000, AND if your assets are less than $250,000, Form 990EZ may be filed instead.

Do we have to give a complete copy of the 990 to requestors?

01-16-2006

Yes, but you CAN omit the section of Schedule A which lists the names and addresses of contributors. You can also omit Form 990-T (which not all nonprofits are required to file).

One way to manage this process is to make a special version of "Form 990 for 1999-public disclosure copy" which omits the above information. Keep copies at your front desk that can be provided to those who request them in person. If you are charging for copies of your 990, it's convenient to make up an "order form" which shows the amount you are charging, so that this order form can be mailed to requestors or given to requestors in person.

How much can we charge for copies of our 990?

01-16-2006

You can charge a maximum of $1 for the first page and 15 cents for each additional page. Permission to charge for copies was intended in part to compensate the organization for costs in reproducing the documents, and in part to prevent harassment by a group of people who, for example, asks for thousands of copies of your 990.

If someone asks for a copy of our 990, what are we required to provide?

01-16-2006

On request, you must provide copies of the following:

• Your three most recent Form 990s. However, you are NOT required to provide one section of Schedule A-the one which contains the names and amounts of all donors-this section may be deleted when copies of the 990 and Schedule A are provided to the public.
• Form 1023, which is the original application for nonprofit corporate status (filed at the time your organization was formed), UNLESS your 1023 was filed prior to July 15, 1987 and you have not been in possession of a copy since that time
• All schedules, attachments, and other supporting documents that were filed with any of the above forms, EXCEPT the names and addresses of contributors AND Form 990-T (if you filed it, which is the Exempt Organization Business Tax Return).

Once we've completed the 990, where must it be filed?

01-16-2006

Form 990 is filed with the Internal Revenue Service. In addition, as of June 1999, there are new laws in effect on public disclosure of the 990. A summary follows, and you can also read the regulations directly at www.access.gpo.gov/su_docs/aces/aces140.html. In the "Search Terms" section, type "Form 990" and "Public Disclosure" with quotation marks around each phrase.

We think there is a campaign out to harass us by making complicated and demanding requests for our 990. Is there anything we can do?

01-16-2006

Yes. You can apply to the IRS to investigate whether a harassment campaign is going on. During the investigative period you do not have to provide copies of your 990 to the public. Organizations can ignore multiple requests from a single individual or address without seeking a determination of harassment from the IRS and may disregard requests beyond the first two within any 30-day period or the first four within any one-year period that come from the same person or same address.

What are the rules for HOW to provide copies of Form 990 and Form 1023?

01-16-2006

Requests made in person: If an individual comes to an office that has three or more employees located at the same site, and a request is made in person, the organization must provide a copy on the same business day.

Requests made in writing: Requests received by mail must be provided within 30 days of receiving the request. If you charge for copies of your 990 (see FAQ #14), you can choose to require advance payment. In that case, the copy must be made available within 30 days of receiving the payment.

What are the rules for posting our 990 on the Internet?

01-16-2006

You can post your 990 on your own website, or as part of a database of similar documents (such as the one at http://www.guidestar.org). The documents must be available for downloading at no cost. Software such as Adobe Acrobat must be used that reproduces a "graphic image" of the 990 in exactly the way it was filed with the IRS, and in such a way that someone cannot download your 990 and easily make changes to it. If you choose to post your 990s on the Internet instead of making them available on request, you must tell anyone who requests your 990 the website at which your 990 is located.

The California Attorney General's Office plans to post 990s for California nonprofits on its website in the fall of 1999. This will meet the IRS requirement for disclosure.

What if we won't be able to get our forms done on time?

01-16-2006

IF you think you're going to be late getting your forms in, apply for an Extension of Time to File. The application for extension must be submitted on or before the due date of the required forms, and must be submitted in duplicate. In most cases requests for extensions are granted for 90 days (requests for longer than 90 days must be supported with evidence of need; no extensions are granted for more than six months). This form is called "Application for Extension of Time to File," IRS Form 2758. The Form can be found online at www.irs.gov.

What is IRS Form 990, and how is it used to evaluate nonprofits?

01-16-2006

IRS Form 990 is the tax return required by the federal government of organizations exempt from income tax. When a nonprofit organization is granted tax-exempt status, Form 990 becomes its annual responsibility. The form is due each year 4 ½ months after the close of the organization's fiscal year.

Some tax-exempt organizations do not have to file Form 990 including: churches, religious schools below college level, and organizations whose annual gross receipts are normally (over past three years) $25,000 or less. Form 990-EZ can be filed by organizations with annual receipts between $25,000-$100,000 and with total assets of less than $250,000.

Form 990 is increasingly recognized as a primary accountability tool for nonprofit organizations. This is because nearly all nonprofits have to complete it, and because it's widely available to the public at large. Consider that Guidestar.org is scanning Form 990s into its online searchable database, and the California Attorney General's Office is also scanning Form 990s into a searchable database to help citizens assess nonprofits that may solicit funds from them. Moreover, nonprofit organizations are required to provide Form 990 to anyone who asks for it including staff members, clients, donors and patrons, and the press.

Given the public nature of the Form 990, it is a board and senior management responsibility that it be completed on time and accurately. The form tells the IRS and the public at large important things about a nonprofit including: its financial condition, the sources and uses of the money raised, compensation of key staff, contractors, and board members, and how much the organization spends on non-program activities (administration and fundraising).

For more information see "990 Handbook: A Line-by-Line Approach," by Jody Blazek, which is available at CompassPoint's online bookstore.

The following workshop also provides more information on this topic:

Required Reports for Nonprofit Organizations

What is Schedule A?

01-16-2006

Schedule A is a component of Form 990, and requests your sources of financial support, the salaries of your highest-paid employees, and other information. Form 990 is a public document, and members of the public can obtain copies from the IRS, or by sending a written request to a nonprofit organization. One section of Schedule A-the one which contains the names and amounts of all donors-can be deleted when copies of the 990 and Schedule A are provided to the public.

What is the penalty if we're late in filing our Form 990?

01-16-2006

The fine for filing a late or incomplete form is $20/day up to the lesser of $10,000 or 5% of gross receipts. For organizations with gross receipts of more than $1 million in the year, the penalty is increased to $100/day to a maximum of $50,000. If, however, you've filed an Application for Extension of Time to File (see FAQ #6), you won't be penalized if you file within the 90-day extension period (if your application is approved), or between the time you file the Application and the date it is rejected (if it is rejected). In other words: be safe and if there's even a possibility you'll be late, file the Application for Extension of Time to File. It takes only a few minutes to complete, and you'll have the time to be sure your 990 is accurate.

What other resources are available involving Form 990?

01-16-2006

Increasingly, Form 990 is viewed as an important instrument of accountability. Members of the press are beginning to ask for 990s when doing stories on nonprofits, and in a few cases, individuals who want to criticize a nonprofit are taking that nonprofit's 990 and posting it on the web.

It's always good to get the official word on resources and changes from the IRS. Contact your nearest federal office, or by phone (call 1-800-829-3676) or by downloading them via the Internet (go to http://www.irs.ustreas.gov, click on "Forms & Pubs," and then "Forms & Instructions.") You should obtain the following documents:

• Form 990
• Instructions for Form 990
• Schedule A
• Instructions for Schedule A
• "Application for Extension of Time to File," IRS Form 2758

Here are a few additional resources:

990 in 2000 Project
Russy Sumariwalla, Project Director
c/o CompassPoint Nonprofit Services
706 Mission St., 5th Floor
San Francisco, CA 94103
415-541-9000
990in2000@compasspoint.org

Cyber-Accountability Archives
http://www.bway.net/~hbograd/cyb-acc.html

Center on Nonprofits and Philanthropy
Linda Lampkin, Manager
The Urban Institute
2100 M Street, NW
Washington, DC 20037
202-261-5806
http://www.urbaninstitute.org

GUIDESTAR
http://www.guidestar.org

Nonprofit Coordinating Committee of New York
Peter Swords, Executive Director
1350 Broadway, Suite 1801
New York, NY 10018
212-502-4191
http://www.npccny.org

Quality 990 Website
http://www.qual990.org

California Quality Reporting project
Gale Case, Project Director
c/o California Association of Nonprofits
315 West Ninth St., Suite 705
Los Angeles, CA 90015
213-347-2070
http://www.canonprofits.org

When is Form 990 due?

01-16-2006

Form 990 is due 4 1/2 months after the close of your fiscal year. For example, if your fiscal year ends on June 30, Form 990 is due on November 15. If your fiscal year ends on December 31, Form 990 is due on May 15. Schedule A is due on the same date as Form 990 is due. (A Form 990 that has been postmarked on the due date will be accepted as having been filed on time.)

Where can I get a blank 990?

01-16-2006

The form 990 and the 990 EZ are available on-line: http://www.irs.ustreas.gov, click on "Forms & Pubs," and then "Forms & Instructions."

Where can I read more about the 990?

01-16-2006

There are several books expected to be published in the fall of 1999. One is being written by Peter Swords of the New York Nonprofit Coordinating Committee, and will be an overview of 990 regulations and uses. Another, by Russy Sumariwalla, is part of a national effort called 990 in 2000, and will be published by Jossey-Bass Publishers in 2000. This book focuses on the nitty-gritty of 990 preparation, with an eye towards reconciling the different (and often contradictory) accounting guidelines of the IRS, the AICPA (American Institute of Certified Public Accountants) and FASB (Financial Accounting Standards Board). A book by Colburn Wilbur and Barbara Kibbe of The David and Lucile Packard Foundation, to be published in the fall of 1999 by the Foundation Center, includes a chapter guiding foundation program officers in analyzing the 990 for grantmaking purposes (the book's working title is A Field Guide for Foundation Program Officers).

Board Café - FAQs

05-01-2006

Love the newsletter?  You can order the book Best of the Board Cafe, a compilation of ideas, information, opinions, and resources to give nonprofit board members just-in-time guidance to real-life demands. For more information and to order today!

What questions should I ask a prospective consultant?

01-16-2006

1. What strengths do you possess that will prove particularly helpful in connection with this project?
2. How have you worked on similar projects or consulted with other groups facing problems similar to ours? What were some of the results of that work?
3. How does your consulting work in this area come out of any particular philosophy or assumptions about how not-for-profits conduct their work?
4. How long have you been doing consulting in the not-for-profit arena?
5. Can you tell us about one of your favorite clients? Why was that? Tell us about one of your most challenging clients and why?
6. How many clients do you work with at any one time? How do you manage multiple projects?
7. How would you describe the challenges we face from the limited amount you now know about us?
8. Describe your work process. How would you work with our staff, board, and executive director?
9. Are there other members of your consulting team who would be working with you? Who are they? How would you propose to divide up the tasks among your team members? When can we interview them? Do you anticipate using any sub-contractors, if so, how do you manage that relationship?
10. What problems do you anticipate as we begin to work together? How can we best address these problems early on?
11. Talk about the responsibilities we must assume in order to make our work together successful.
12. Are you available to complete this work during the time we've specified? Are you available if the time becomes extended?
    

How should I check a consultant's references?

01-13-2006

Checking your consultant's references is absolutely essential. It's the only way you can distinguish between an accomplished professional with a track record of genuine success and somebody who merely excels at interviews.

Ask your prospective consultant for a recent, complete client list. Pick from this list rather than the two or three names the consultant might otherwise give you. You should look for at least three organizations similar to yours -- or groups that have worked with the consultant on problems related to the ones you now face.

In each case, call the person who supervised the consultant's work directly-- in most cases, the executive director or a board member. Begin your talk with an open-ended question. For example: "We're thinking about hiring Joanne Expert to train our board in fundraising. I understand she did some similar work for you. How did that work out?"

In the best case, you'll have a brief conversation covering the nature of consultant's duties, her strengths, any problems that may have arisen during the collaboration, and the palpable results of the consultant's efforts. But, you might run into somebody who's reluctant to talk. Today many managers will not comment about the performance of their former employees -- or consultants -- because they fear a law suit if their negative recommendation results in a loss of work.

If you meet resistance, ask the reference to simply verify the basics: 1.) the kind of problem that the consultant addressed; 2.) her duties; and 3.) the duration of the work. Then prod gently with another question to gain more subjective insight, such as: "Would you hire this person again?" or "Would you recommend this consultant to a colleague?'

Whether the reference is forthcoming or reserved, you should pay attention to what's not being said. If the reference talks only about the consultant's punctuality, good attitude, and pleasing manner, be sure to ask if her intervention actually achieved the desired results. Ask as well if the job was accomplished at the negotiated price -- or whether any troubling cost overruns occurred.

At some point, you may find it helpful to express your own theories. ("I have this sense that Joanne Expert may not be completely comfortable working with a large board. What was your experience?)

Finally, you should end with another open-ended question that gives the reference one last chance to expand on their previous comments. "What else you tell me about Joanne Expert?" or, "If you had it to do over again, are there any aspects of the project or of working with Joanne Expert that you would approach differently?"

How should I interview a consultant?

01-13-2006

The interview process isn't mysterious. Essentially, you'll be conducting your interviews with prospective consultants in the same spirit and format that has successfully served you in the past to fill staff positions.

Nevertheless, there are some crucial differences. Given the broad impact that the consultant can have on your organization, you may want to assemble a more diverse interview team -- including the executive director, senior staff, a board member, and other people whose working relationship with the consultant will have a direct impact on the success of the project.

You should interview at least two prospective consultants -- even if you have already identified a probable candidate for the job. Talking in depth with consultants from different backgrounds who may have different approaches or techniques will help you refine your own understanding of your organizational dilemma, while simultaneously allowing you to compare the candidates' respective merits. During the interviews, make certain that you ask each candidate the same questions so that you can establish a fair standard for comparison.

As with most evaluative tasks, your ability to gauge the consultant's skills will be informed by your own degree of organizational self-knowledge. In the best of all possible worlds, you would be able to define your group's problem, stipulate the background, expertise, and services you're seeking, and characterize the kind of relationship you want to cultivate with the consultant for a prescribed period of time. In reality, you may find that you need to hire a consultant initially to help articulate the problems you face. Indeed, this is inevitably the first step in solving them.

As you interview your candidates, pay attention not only to their answers -- but also their personal manner and professional style.

GOOD LISTENING
Does the consultant pay attention to what you're saying and respond appropriately -- or does he only talk about his own accomplishments?

PRACTICAL DISENGAGEMENT
Does it seem that this candidate will be able to provide the objectivity you need in an outside expert?

BROAD EXPERIENCE
Does your candidate have relevant experience to draw on in helping put your issues in perspective?

INSIDE INFORMATION
Does the consultant grasp your mission and organizational style? Has he bothered to learn anything about your group prior to the interview?

CULTURAL COMPETENCY
Does the consultant exhibit an understanding of the cultures that are present within your organization. Is there an awareness of ethnic traditions, social dynamics and world perspectives that come out of who staff, clients, board members and other stakeholders. In other words, does the consultant understand how WHO is in the organization might impact and influence how the agency functions, what are its challenges (and successes)?

What are some tips on database design and use?

01-13-2006

Databases can be a great tool to organize information, track statistics and generate reports. Like any tool, however, they must be used correctly. A badly designed or improperly used database will end up creating problems rather than solving them. Here are some tips to facilitate proper database design and use:

Don't Do

Create one flat file:

A flat file means that all your data goes on one data table. Flat files make it difficult to create statistical reports.

Create relational data tables:

Unless you are doing only one very simple task, such as entering a list of names and addresses, you will need more than one table of data to track your information correctly.

Create repeating fields:

If you have fields like Date1, Date2, Date3, you should look at your data table design. Repeating fields are usually the sign of a flat file design, and will make reporting difficult.

Put like data in a single field:

Create separate relational tables and you will eliminate the need for most repeating fields.

Create repeating fields:

If you have fields like Date1, Date2, Date3, you should look at your data table design. Repeating fields are usually the sign of a flat file design, and will make reporting difficult.

Put only 1 piece of data in a field:

Relational databases are set up so that the user doesn't need to put more than 1 piece of data in a field.

Use a range instead of a number:

When entering data such as income levels, set up the database so that you are entering numbers, not a range such as $10,000 - $15,000. Ranges are not very flexible should the categories change later on.

Use a number instead of a range:

If you enter a number in an income field, you will be able to generate reports that can easily be changed if the categories change.

Enter data inconsistently:

If some users enter "donor" and others enter "contributor," database queries will be hard to run accurately.

Decide on consistent rules for data entry:

The organization should make decisions about data entry consistency. Then the database designer can build in ways to enforce consistency at the user level.

Create too many address-oriented fields:

Some databases include so many fields connected to addresses, that creating labels is impossible.

Create only necessary address fields:

Keep address-oriented fields to a number that will fit on mailing labels.

Use too many Yes/No fields:

If you are using a large number of yes/no fields, you may need to re-examine the design of your database.

Create only necessary address fields:

Keep address-oriented fields to a number that will fit on mailing labels.

Enter the wrong type of data in a field:

Sometimes users cannot find the proper field for a piece of data, so they enter it into another field, such as typing a client's ethnicity in an empty Address2 field.

Enter information in the proper field:

If the data entry person cannot find the right place for a piece of data, perhaps the database needs some work. The answer is not to enter information randomly in an empty field.

Which database application should I use, Microsoft Access or FileMaker Pro?

01-13-2006

Microsoft Access and FileMaker Pro are the most popular database creation tools used by nonprofits. They are not custom applications, pre-designed to do specific tasks such as fundraising or tracking client demographics. Rather, they are database kits that give the user the tools to create his or her own database application. If you have decided to create a custom database but cannot decide which program to use, this quick overview of the differences between Access and FileMaker may help:

Are there organizations that are "in the business" of fiscal sponsorship?

01-17-2006

Do we need an attorney to work out a fiscal sponsorship agreement?

01-17-2006

Do you have an example of a fiscal sponsorship agreement between a professional fiscal sponsor and its projects?

01-17-2006

Do you have an example of a fiscal sponsorship agreement between two nonprofits?

01-17-2006

How can a new nonprofit get started right away without waiting to file all its papers and obtain tax-exempt status?

01-17-2006

How do I go about looking for a fiscal sponsor?

01-17-2006

How much do fiscal sponsors charge?

01-17-2006

If my group is operating under a fiscal sponsor, and we’ve decided to become an independent nonprofit, what are the steps we should take?

01-17-2006

If you have decided to separate from your current sponsor and don't want to affiliate with another the process to become independent begins with informing your current sponsor of your decision. Most often you will next create public benefit corporation that will file applications with both the IRS and state taxing authority asking to be exempt from income tax. From the time the applications are submitted it usually takes four to six months to receive your determination letters (notice that exemption has been granted). When you receive your notice it is retroactive to the date of your original application. While you are waiting for you letter you will need to do all those things that any new business does (open bank accounts, hire employees obtain insurance, etc.). The final step is arranging to have your sponsor transfer the project's assets and liabilities to the new nonprofit.

In what situations do groups use fiscal sponsors? What types of groups find them the most useful?

01-17-2006

Here\'s an example. In the hours immediately following the shootings in San Francisco at the 101 California office building, many people wanted to donate funds to help the families of the victims (many of whom worked for a law firm) and to educate the public about gun violence and gun control. A group of attorneys contacted a fiscal sponsor and were able immediately to begin collecting donations and conducting an educational campaign on the subject. Later, the group decided to become permanent and incorporated separately as the Legal Community Against Violence.

Sample: Fiscal Sponsorship Agreement

01-17-2006

FISCAL SPONSORSHIP AGREEMENT

This Agreement is made by and between the Fiscal Sponsor (FS), and [name of supervisory body] (Committee). FS is a California nonprofit public benefit corporation located in San Francisco, California, qualified as exempt from federal income tax under Section 501(c)(3) of the Internal Revenue Code (IRC) and classified as a public charity under IRC Sections 509(a)(1) and 170(b)(1)(A)(vi).

RECITALS

A. The FS Board of Directors has approved the establishment of a restricted fund to receive donations of cash and other property earmarked for support of the Project known as ______________________ (the Project) and to make disbursements in furtherance of the Project's mission. The Committee [choose applicable language: is the Advisory Board/Committee, an unincorporated association, established to … is expected to be the individual employee of FS with authority to … is the individual volunteer who is expected to … ] manage the affairs of the Project. Currently, the principal office of the Project is located at ________________________________________________.

B. FS desires to act as the fiscal sponsor of the Project, by receiving assets and incurring liabilities identified with the Project beginning on the effective date, and using them to pursue the objectives for which the Project is being established, which FS's Board has determined will further the charitable and educational goals of FS. The Committee desires to manage the Project under the sponsorship of FS.

NOW, THEREFORE, THE PARTIES HEREBY AGREE AS FOLLOWS:

1.Term of Agreement. On __________________, 1999 (the effective date), FS shall assume operation of the Project, which operation shall continue in effect unless and until terminated under Paragraph 5 below.

2.Project Activities and Sponsorship Policies. All community programs, public information work, fundraising events, processing and acknowledgment of cash and non-cash revenue items, accounts payable and receivable, negotiation of leases and contracts, disbursement of Project funds (including grants), and other activities planned by the Project shall be the ultimate responsibility of FS and shall be conducted in the name of FS, beginning on the effective date. Unless otherwise agreed, and subject to their consent, all personnel to be compensated for working on the Project shall become at-will employees of FS on the effective date and shall be subject to the same personnel policies and benefits as are required by law to apply to all employees of FS. Unless otherwise agreed, any tangible or intangible property, including copyrights, obtained or created in connection with the Project shall be the property of FS while this Agreement is in effect. Authority to manage the program activities of the Project is delegated to the Committee, subject at all times to the ultimate direction and control of the FS Board of Directors. The Committee shall abide by the Sponsorship Policies of FS set forth on the attached Exhibit 1, which may be amended from time to time with the consent of the Committee and which include administrative fees to be paid to the general fund of FS from the restricted fund described in Paragraphs 3 and 4 below.

3.Restricted Fund/Variance Power. Beginning on the effective date, FS shall place all gifts, grants, contributions, and other revenues received by FS and identified with the Project into a restricted fund to be used for the sole benefit of the Project's mission as that mission may be defined by the Committee from time to time with the approval of FS. FS retains the unilateral right to spend such funds so as to accomplish the purposes of the Project as nearly as possible within FS's sole judgment, subject to any donor-imposed restrictions, as to purpose, on the charitable use of such assets. The parties agree that all money, and the fair market value of all property, in the restricted fund be reported as the income of FS, for both tax purposes and for purposes of FS's financial statements. It is the intent of the parties that this Agreement be interpreted to provide FS with variance powers necessary to enable FS to treat the restricted fund as FS's asset in accordance with Interpretation No. 42 of Statement No. 116 issued by the Financial Accounting Standards Board, while this Agreement is in effect.

4.Restricted Fund Management / Performance of Charitable Purposes. All of the assets received by FS under the terms of this Agreement shall be devoted to the purposes of the Project, within the tax-exempt purposes of FS. No item of revenue shall be earmarked to be used in any attempt to influence legislation within the meaning of IRC Section 501(c)(3); no agreement, oral or written, to that effect shall be made between FS and any revenue source. FS shall not use any portion of the assets to participate or intervene in any political campaign on behalf of or in opposition to any candidate for public office, to induce or encourage violations of law or public policy, to cause any private inurnment or improper private benefit to occur, nor to take any other action inconsistent with IRC Section 501(c)(3).

5.Termination. This Agreement shall terminate when the objectives of the Project can no longer reasonably be accomplished by FS. If the objectives of the Project can still be accomplished but either the Committee or FS desires to terminate FS's fiscal sponsorship of the Project, the following understandings shall apply. Either FS or the Committee may terminate this Agreement on 60 days' written notice to the other party, so long as another nonprofit corporation which is tax-exempt under IRC Section 501(c)(3), and is not classified as a private foundation under Section 509(a) (a Successor), is willing and able to sponsor the Project and is approved in writing by both parties by the end of the 60-day period. If the parties cannot agree on a Successor to sponsor the Project, the Committee shall have an additional 60 days to find a Successor willing and able to sponsor the Project. If a Successor is found, the balance of assets in FS's restricted fund for the Project, together with any other assets held or liabilities incurred by FS in connection with the Project, shall be transferred to the Successor at the end of the notice period or any extension thereof, subject to the approval of any third parties that may be required. If the Committee has formed a new organization qualified to be a Successor as set forth in this Paragraph, such organization shall be eligible to receive all such assets and liabilities so long as such organization has received a determination letter from the Internal Revenue Service, indicating that such qualifications have been met, no later than the end of the notice period or any extension thereof. If no Successor is found, FS may dispose of the Project assets and liabilities in any manner consistent with applicable tax and charitable trust laws. Either party to this Agreement may terminate this Agreement, based upon a material breach of this Agreement by the other party, by giving 30 days' written notice to the other party.

6.Miscellaneous. In the event of any controversy, claim, or dispute between the parties arising out of or related to this Agreement, or the alleged breach thereof, the prevailing party shall, in addition to any other relief, be entitled to recover its reasonable attorneys' fees and costs of sustaining its position. Each provision of this Agreement shall be separately enforceable, and the invalidity of one provision shall not affect the validity or enforceability of any other provision. This Agreement shall be interpreted and construed in accordance with the laws of the State of California. Time is of the essence of this Agreement and of each and every provision hereof.

7.Arbitration. In the event of any dispute under this Agreement, the parties shall attempt to resolve the matter themselves in an amicable manner. Failing such resolution, any dispute under this Agreement shall be resolved by binding arbitration in San Francisco in accordance with commercial arbitration rules of the Judicial Arbitration and Mediation Services (JAMS) then in effect, or any other rules mutually agreed to by the parties. Any award or order made in any such arbitration may be entered as a judgment in a court of competent jurisdiction. Any dispute, and the resolution thereof in any manner, shall be and remain confidential information, and all parties shall protect the confidential information from public disclosure, using any and all reasonable legal and technical means.

8.Entire Agreement. This Agreement constitutes the only agreement, and supersedes all prior agreements and understandings, both written and oral, among the parties with respect to the subject matter hereof. All Exhibits hereto are a material part of this Agreement and are incorporated by reference. This Agreement, including any Exhibits hereto, may not be amended or modified, except in a writing signed by all parties to this Agreement.

IN WITNESS WHEREOF, the parties have executed this Fiscal Sponsorship Agreement effective on the _____ day of _________________, 1999.

FS

By:___________________

Dated:_________________

[Name of Supervisory Body]

By:___________________

Dated:________________

Sample: Fiscal Sponsorship Grant Agreement

01-17-2006

FlSCAL SPONSORSHIP GRANT AGREEMENT

On _______________, 1999, ___________________ ("Grantor") decided that financial support of the following purposes __________________________________ ("the project"), more particularly described in a proposal dated _____________________________,1999 ("the proposal"), from _____________________________________("Grantee") will further Grantors tax-exempt purposes under Section 501(cX3) of the Internal Revenue Code ("lRC"). With regard to the selection of Grantee or any other beneficiary to conduct the project, Grantor has exercised and shall retain full discretion and control over the selection process, acting completely independently of Grantee or any funding source. Grantor has created a restricted fund designated for the project and has decided to grant all amounts that it may receive and deposit to that fund (less any administrative charge set forth below), to Grantee, subject to the following terms and conditions:

1. Grantee's separate legal existence, for all purposes including tax reporting, is established by the following: [choose one]

Grantee is a ___________________nonprofit corporation which is, and shall be throughout the duration of this Agreement, organized and operated for tax-exempt purposes described in IRC Section 501(c)(3). Grantee has applied to the Internal Revenue Service for recognition of its tax-exempt status and shall keep Grantor informed on the progress of its application. OR

Grantee has provided Grantor with a completed and filed IRS Form SS-4, along with any other registration or governing documents, showing Grantee's separate existence as an unincorporated association. OR

Grantee is an individual person, acting as a sole proprietor. OR Grantee is a partnership comprised of _______________________.

2. Grantee shall use the grant solely for the project described in the proposal, and Grantee shall repay to Grantor any portion of the amount granted which is not used for that project. Any changes in the purposes for which grant funds are spent must be approved in writing by Grantor before implementation. Grantor retains the right, if Grantee materially breaches this Agreement, to withhold, withdraw, or demand immediate return of Grant funds, and to spend such finds so as to accomplish the purposes of the project as nearly as possible within Grantor's sole judgment. Consistent with Interpretation No. 42 of Statement No. 116 issued by the Financial Accounting Standards Board, Grantor retains the unilateral power, without approval from any funding source, from Grantee, or from any other interested party, to redirect use of grant funds away from Grantee to another beneficiary capable of fulfilling the purpose. of the project. Any tangible or intangible property, including copyrights, obtained from third parties or created by Grantee as part of this project shall remain the property of Grantee. The amount and date of each disbursernent of grant funds to Grantee shall be within the discretion of Grantor.

3. Grantee may solicit gifts, contributions, and grants to Grantor, earmarked for the purposes of the project. Grantee's choice of funding sources to be approached, and the text of Grantee's fundraising materials, are subject to Grantor's prior written approval. All grant agreements, pledges, or other commitments with funding sources to support this project shall be executed by Grantor. The cost of any reports or other compliance measures required by such funding sources shall be borne by Grantee. Grantor shall be responsible for the processing, acknowledgment, and deposit in the restricted fund of all monies received for the project, which shall be reported as the income of Grantor for both tax purposes and for purposes of Grantor's financial statements.

4. Grantee assumes the risk that any funding source may exercise the discretion to not grant or not appropriate funds to Grantor for support of the project. Any amount advanced by Grantor to Grantee, with the expectation that a pending grant request will be approved by a funding source, shall be treated as an obligation to be repaid by Grantee to Grantor, either from monies deposited in the restricted fund or from Grantee's assets, upon demand by Grantor. Regarding any funds awarded to Grantor by the City and County of San Francisco ("City") for support of the project, the parties agree as follows: Grantor's rights under this Agreement may be assigned to City without the prior consent of Grantee. This Agreement shall incorporate all the applicable terms of any Grant Agreement executed between Grantor and City, including but not limited to the City's audit and inspection rights. Grantee shall be listed as a "permitted subcontractor" under any such City Grant Agreement.

5. An administrative charge of ________ percent ( _____ %) of all amounts deposited to the restricted fund shall be transferred to Grantor's general fund to defray Grantor's costs of administering the restricted fund and this grant. In addition, any interest earned on the restricted fund shall be retained in Grantor's general fund.

6. Grantor shall not be responsible for the community programs, public information work, fundraising events, accounts payable and receivable, negotiation of leases and contracts, insurance, day-to-day disbursement of project funds, or other matters related to activities conducted by Grantee. No one working on the project shall be an employee of or independent contractor with Grantor. Grantee shall assume full and complete responsibility for all liabilities to third parties incurred in connection with the project including but not limited to any and all claims whether asserted or unasserted while this Agreement is in effect. With regard to the selection of any subgrantees to carry out the purposes of this grant, the Grantee retains full discretion and control over the selection process, acting completely independently of Grantor. There is no agreement, written or oral by which Grantor may cause the Grantee to choose any particular subgrantee.

7. Nothing in this Agreement shall constitute the naming of Grantee as an agent or legal representative of Grantor for any purpose whatsoever except as specifically and to the extent set forth herein. This Agreement shall not be deemed to create any relationship of agency, partnership, or joint venture between the parties hereto, and Grantee shall make no such representation to anyone.

8. Grantee shall submit a full and complete report to Grantor as of the end of Grantee's annual accounting period within which any portion of this grant is received or spent. The initial report shall be submitted by Grantee no later than sixty (60) days after the end of such period. The report shall describe the charitable programs conducted by the Grantee with the aid of this grant and the expenditures made with grant funds and shall report on the Grantee's compliance with the terms of this grant.

9. This grant is not earmarked to be used in any attempt to influence legislation within the meaning of Internal Revenue Code Section 501(c)(3). No agreement, oral or written, to that effect has been made between Grantor and Grantee.

10. Grantee shall not use any portion of the funds granted herein to participate or intervene in any political campaign on behalf of or in opposition to any candidate for public office, to induce or encourage violations of law or public policy, to cause any private inurement or improper private benefit to occur, nor to take any other action inconsistent with Section 501(c)(3) of the Internal Revenue Code.

11. Grantee shall notify Grantor immediately of any change in (a) Grantee's legal or tax status, or (b) Grantee's executive staff or key staff responsible for achieving the grant purposes.

12. Grantee hereby irrevocably and unconditionally agrees, to the fullest extent permitted by law, to defend, indemnify and hold harmless Grantor, its officers, directors, trustees, employees and agents, from and against any and all claims, liabilities, losses and expenses (including reasonable attorneys' fees) directly, indirectly, wholly or partially arising from or in connection with any act or omission of Grantee, its employees or agents, in applying for or accepting the grant, in expending or applying the funds furnished pursuant to the grant or in carrying out the program or project to be funded or financed by the grant, except to the extent that such claims, liabilities, losses or expenses arise from or in connection with any act or omission of Grantor, its officers, directors, trustees, employees or agents.

13. Either Grantor or Grantee may terminate this Agreement on thirty (30) days' written notice to the other party, so long as another nonprofit corporation which is tax exempt under IRC Section 501(c)(3), and is not classified as private foundation under Section 509(a) ("a Successor"), is willing and able to sponsor the project. The balance of assets in Grantor's restricted fund earmarked for the project shall be transferred to the Successor at the end of the notice period or sooner if all parties so agree. Grantee shall be eligible to be a Successor itself so long as Grantee has received, no later than the end of the notice period, a determination letter from the Internal Revenue Service indicating that Grantee meets the qualifications for a Successor stated above.

14. In the event of any controversy, claim, or dispute between the parties arising out of or related to this Agreement, or the alleged breach thereof, the prevailing party shall, in addition to any other relief, be entitled to recover its reasonable attorneys' fees and costs of sustaining its position.

15. This Agreement shall be governed by and construed in accordance with the laws of the State of California applicable to agreements made and to be enforced entirely within such State.

16. This Agreement shall supersede any prior oral or written understandings or communications between the parties and constitutes the entire agreement of the parties with respect to the subject matter hereof: This Agreement may not be amended or modified, except in a writing signed by both parties hereto.

IN WITNESS WHEREOF, the parties have executed this Fiscal Sponsorship Grant Agreement effective on the ______________ day of _________________ , 199_.

GRANTOR: __________________________________________

By: ______________________________

Name:____________________________

Title:_____________________________

GRANTEE: __________________________________________

By: ______________________________

Name:____________________________

Title:_____________________________

EXHIBIT 1: SPONSORSHIP POLICIES

Sponsorship Policies of FS

Accounts Payable
Acceptable invoices received by end of business on any Monday will be paid and mailed by end of business on the following Friday. "Acceptable invoices" must be original, approved, coded documents (small receipts to be mounted on 8.5 x 11 paper). It will be the responsibility of each project to submit a completed IRS Form W-9 for each new vendor.

Cash Advances
Under no circumstances does FS advance money to projects. Deposited funds must be cleared by the bank prior to any requested draw, which may take up to two weeks.

Employees
FS does not allow projects to pay individuals who satisfy the IRS definition of employees as contractors. FS management is available to discuss employee vs. contractor classification issues with projects.

Payroll
ANY request to change a payroll record (pay rate, termination, regularly scheduled hours) must be communicated to FS management via an employee action sheet at least five business days prior to the effective date of the change. In order to receive a paycheck, an employee must have submitted a completed; INS Form I-9, IRS Form W-4, California Development Department Form DE-4 (if applicable), signed acknowledgment of receipt of a personnel policies manual, and an employee action form at least five business days prior to payday. FS management will provide action forms, file all payroll tax returns, and IRS Form W-2's. The head of each project will need to sign a statement agreeing that their project will not deviate from the personnel policies manual.

Bonuses are a very regulated benefit for tax-exempt organizations in California. In fact, the payment of discretionary bonuses is expressly prohibited. FS management is available to discuss incentive compensation arrangements with projects to help avoid conflicts with regulatory agencies.

Benefits
No project can offer or deny benefits to its employees which differ from the personnel policies manual.

Job Descriptions
Projects are asked to develop and maintain job descriptions for each employee.

Grants, Awards, and Scholarships Made
For any grants, awards, or scholarships made by a project, FS management requires a copy of the signed grant agreement along with a completed check request form. FS's Executive Director's signature is required for amounts over $5,000. If the grant is made to an organization that is not a 501 (c) (3) charity that FS currently lists in its database, additional paperwork will be required. Forms and procedures are subject to the Executive Director's review.

Grants Received
FS's Executive Director must co-sign all original grant agreements and be copied at least one week in advance on all progress and final report submissions. Grants involving government or public agency monies have very heavy reporting and auditing requirements that a project must discuss in advance of acceptance with the Executive Director.

Donations
FS will accept, process, and acknowledge contributions to each project. This includes issuing receipts for tax deductions. Donations should be made payable to "XXX, a project of FS".

It is not the FS accounting staff's responsibility to meet with a fund's donors and walk them through paperwork. FS management will work with funds to educate them on the necessary forms to liquidate a noncash gift. Donations over $250.00 will be individually receipted. Stock gifts can only be made through FS's designated broker.

Credit Accounts and Other Liabilities
Project Directors may not incur debts or liabilities beyond the project's ability to pay; individual Project Directors are personally liable for any excess. A project's ability to pay is measured strictly by its cash balances, without including anticipated grants or contributions.

Fundraising Activities
Fundraising activities are very labor intensive to administer. FS management requires at least one month's notice of any fundraising events. A copy of all mailings and solicitations must be approved by FS management in advance of mailing or other distribution. The project must complete a Fundraising Checklist form prior to each event. Please remember, other than bingo, any fundraising device involving an element of chance (ex. raffles) are a misdemeanor in California. FS management is available to answer any questions a project may have regarding fundraising activities.

Volunteers
The use of volunteers exposes FS to additional liability. ALL volunteers who provide services to, or perform services for, a project without compensation for their time must sign the standard volunteer indemnification and release form. (Reimbursement of expenses does not constitute compensation for time spent.)

Financial Statements
FS management will provide a statement of monthly activity and a detailed trial balance within 30 days of each month end. Any corrections to the project's accounts must be requested within 30 days after receipt of that statement.

Bank Accounts
No project shall maintain any bank account other than those maintained on its behalf by FS.

Multiple Funds
FS has the ability to set-up cost centers within a fund. FS also has the ability to set-up multiple funds for a project. In situations where projects need multiple funds on the general ledger, FS management is available to advise on inter-fund transfers to help compliance with charitable trust rules.

Advisory Board
Each project will need to maintain a current listing of the names, addresses, and phone numbers of all members of a project's Advisory Board. Advisory Boards will be provided with standard Articles of Association and FS will register those articles with the State of California. Each project should forward a copy of meeting minutes to the FS Executive Director, as they are finished, as well as the Advisory Board roster and any other governing documents.

Administrative Fees
Except as stated below, FS will charge each project 10% of its gross receipts as an administrative fee. The forgoing rate does not apply to receipts attributable to grants from governments or public agencies, which are subject to a 15% administrative fee.
In addition to the administrative fee on gross receipts, FS will retain one-half of all interest earned by a project's funds on deposit.

FS will charge projects $50.00 for each employee to cover setup costs.

FS will charge projects $50.00 for each manual check required.

Insurance Provided by FS
FS maintains general liability insurance, and workers' compensation insurance for all employees at no additional charge.

Fiscal Year
All projects must use a fiscal year ending on June 30.

Lobbying
Funds are prohibited from excessive lobbying, or any other activities that would jeopardize FS's charitable tax-exempt status. FS has the right to determine, in its sole discretion, what constitutes excessive lobbying by a project, or what activities jeopardize FS's tax-exempt status. All lobbying expenditures must be reported to FS management.

Mail Services
FS is applying for a bulk mail permit that may be available to projects. To be eligible to use FS's permit, a mailing must go through FS's designated mailhouse. Costs for this service will be charged against the project.

Sponsor Identification
All project letterheads and external communications must include the identifying line, "A project of Fiscal Sponsor."

Amendments
These policies may be amended from time to time with consent of Project's authorized representative.

Acknowledgment
I have received, understand, and agree to the forgoing sponsorship policies of Fiscal Sponsor, on behalf of my project.

_____________________________ ________________________

Program Director's Name & Signature Date

or

__________________________________ ________________________

Advisory Board Chair's Name & Signature Date

What are some of the services typically provided by fiscal sponsors?

01-17-2006

Financial

Federal, state and local tax & informational returns

Receipt and acknowledgment of tax-deductible donations and grants

Payroll tax remittance and filings

Monthly financial statements

Financial record-keeping

Independent Audit

Check processing and issuance for expenses, I-9s, 1099s

Insurance

Directors' & Officers Insurance

Volunteer lnsurance

General Liability

Umbrella

Commercial Automobile

Human Resources Administration

Payroll processing, W-2s

Personnel policies in compliance with federal, state and local laws

Comprehensive benefits package

Benefits administration, 5500

Technical assistance on personnel issues

General Administration

Bulk rate postal permit

Resale permit

Sales tax reports

Legal advice

Grant progress reports

What are the benefits of using a fiscal sponsor?

01-17-2006

Speed - It normally takes four to six months from the time an application for tax exemption is filed with the IRS to receive notice that tax-exempt status has been granted, and that is IF the IRS has no questions about information contained in the application. Theoretically one could make arrangements to be fiscally sponsored in a day or less, although a couple of weeks is more typical.

Efficiency - Especially for small groups, having someone else provide most of your administrative, or infrastructure functions may be cheaper than doing it yourself. This is especially true if you are a group that is only expecting to be in existence for a short period of time.

Convenience - Most groups, start-up or otherwise, want to focus their energy on their charitable activities. Having to create and maintain an infrastructure can be distracting from the mission of the group.

Necessity - There are some funding sources that will not fund brand-new groups. One way around this restriction is to become part of a group that has some history.

What are the disadvantages?

As a sponsored project of an already existing 501(c)(3), your "parent organization" is legally responsible for everything you do. This includes the responsibility to comply with the terms of the grants you have been awarded and how you operate. If you and your sponsor disagree, you may be forced to "do it their way".

Some foundations have policies that do not permit them to make grants through fiscal sponsors.

What are the reasons to provide fiscal sponsorship to another organization?

01-17-2006

What are the risks of being a fiscal sponsor for others?

01-17-2006

Since the law considers the project and the sponsor to be one legal entity, each can be held responsible for the actions of the other.

What can a fiscal sponsor provide us that we couldn’t do on our own?

01-17-2006

What happens if we want to leave a fiscal sponsor?

01-17-2006

What is a "fiscal agent"? Is a fiscal sponsor different from a fiscal agent?

01-17-2006

Where can I read more about fiscal sponsorship?

01-17-2006

How do I figure out how much someone can give to my organization?

01-17-2006

Determining how much someone can give is part of a process called "prospect research." The research process involves collecting information on prospects in three primary areas:

• the prospect's financial circumstances (income, assets, etc.)
• the prospect's relationship to the organization
• key personal "linkages" between the prospect and key organizational supporters (donors, board members, members, etc.)

In his classic book on fundraising, Achieving Excellence in Fund Raising, Hank Rosso describes a research concept that echoes this approach known as the L-A-L principle:

"A research concept known as the L-A-L principle of prospect identification will help fundraising planners separate suspects from prospects, thus enabling staff members to direct their solicitation and enlistment energies toward those individuals who are most likely to give or to volunteer their services.

What is the L-A-L principle and what is its function in both fundraising research and constituency development? The principle is timeworn. It is a heritage of the past, a piece of wisdom passed on from one clan of veteran fundraising practitioners to another, and it is as described below.

L -- Linkage

A linkage relates to a contact, a bridge or an access through a peer to the potential donor. If there is access to the gift source, then this link to the prospect makes it possible to arrange an appointment to discuss the potential of a gift. If access ability is not a reality, then it would be difficult or downright impossible to arrange for an appointment. Solicitation becomes a matter of a letter or telephone approach, and neither is effective in the production of large gifts.

A -- Ability

Through research, it can be determined that the potential gift source has sufficient discretionary holding to justify a gift solicitation at the appropriate "asking" level. Two perceptions pertain: the asker's perception that the prospect has a gift capability at the level suggested, and the prospect's own perception that such a gift capability is reality. Some wealthy but financially insecure individuals who are not brought up with the tradition of philanthropy are not sure that they have sufficient resources to give at the level requested. They may not be psychologically prepared to give.

I -- Interest

If the potential contributor has no interest in the organization or little knowledge about its work, then the person will be prone to make a small gift or none at all. Interest in the organization and an understanding of its mission and accomplishments are imperative in the identification of valid prospects."

It is critical to understand that a prospect's ability to give is only part of what determines a gift's size or whether it will be made at all. Ability alone does not qualify someone as a legitimate prospect. People, as well as philanthropic institutions, will give and maximize their giving when a relationship between them and the organization has been established and developed. The stronger the relationship the more likely a prospect will give and give generously.

In the Grassroots Fundraising Journal, volume 2, no.5, Kim Klien discusses the prospect research process in terms of "ABC:"

You are looking for three things in each prospect:

• Evidence that the prospect is connected with someone in your organization, so that you can establish contact.
• Evidence that the person believes in your cause (or a similar cause), which includes evidence that the person gives money to similar organizations.
• Evidence that the person has the ability to make the size gift you want.

When you have positive information about ability, belief and contact, then you have a qualified prospect - that is, someone who can be asked for a gift. For obvious reasons, we call these criteria ABC, but in order of importance, they are CBA, and we'll examine them in that order.

Contact

The most important factor is contact. If you don't know the person or have no access to them, that person is a stranger and not a prospect. That's why you start with who you know. You know three kinds of people: people you know personally, people who are known by people you know (you might gain access to a person in this category by using the name of someone you both know), and definitely, people who are currently donors. Though you may not personally know each current donor, you can call any donor and say, "We don't know each other but we have in common that we support Very Good Group." As described earlier, many of your best contacts are going to come from people who give money already.

Belief

Ask yourself if there is any reason that the potential prospect would not believe in your cause. Social change groups often think that a person won't believe in their cause when in fact the prospect has no opinion one way or the other. He or she may not have heard of the group, or even the issue, or doesn't see how the issue affects him or her.

Sometimes a person may not recognize that his or her own beliefs are represented by a group because of the way the issues are presented. For example, an organization working to keep abortion legal ran into problems at a meeting in a small, politically conservative community when it described abortion as a vital feminist issue. This language did not resonate with the audience. When a leader in the organization said that the government should not make these decisions for us -- a woman should make a decision about the outcome of a pregnancy for herself, the meeting participants clapped loudly. Though they support legal abortion, they do not identify their support as a tenet of feminist ideology. Several large contributions to the abortion-rights group subsequently came from that community.

In a second example, a man living in a small town was approached for a donation by a suicide prevention group. The person asking him had not done any research on this prospect, but was able to make an appointment through a common acquaintance. The prospect believed suicide tended to indicate a weak character and was, furthermore, more a problem of big cities. He listened politely and noncommittally as the solicitor described the global nature of suicide, using as examples numbers of suicides in Los Angeles, New York an London. He was sent away with a token donation.

Later that year, another person did more research on this prospect. The prospect was member of the local Chamber of Commerce and active in civic affairs. He had lived in this community all his life and owned a great deal of real estate there, much of which had become suburban developments. This solicitor made an appointment to see the prospect and told him exactly how many suicides and attempted suicides happened right in that town. He further discussed that some of the suburbs had high suicide rates for no apparent reason. The suicide prevention program, he explained, proposed to address the problem of suicide locally having on-call counselors available at churches and libraries and by launching a large poster campaign telling people how these counselors could be reached. Posters would be hung in grocery stores ('Two of which are yours,' the solicitor commented) and other public places. The solicitor then asked the prospect to underwrite the entire campaign. He walked away with a check for $10,000 -- exactly what was needed. Obviously, this prospect is not interested if the entire city of Los Angeles kills itself. What matters to him is what happens in his community.

A great deal of money is lost through assuming a lack of belief on the part of a potential prospect. Be careful and broad-minded in weighing evidence of belief in a cause.

Ability

The first question to ask about ability is not how much the prospect has, but whether he or she gives away money at all. Many people profess to be committed to the environment, or women's rights or civil liberties; however, if they do not make financial contributions to groups representing those causes, they are not good prospects for them. We know that about seven out of ten adults are donors. You need to first determine if your potential prospect is one of those seven. If not, she or he is not a prospect.

Sometimes people wonder how they can find out if someone is a donor. There are several ways. (In the course of a conversation, one might ask, "Do you belong to Greenpeace? or ... the National Organization for Women?" If the person says yes, you know that he or she has given to these groups.

To find prospects, start with yourself. Can you give $100? Whom do you know who could give that much or more? (Keeping the size of a major gift at $100 opens up the possibility for a lot more people to become major donors. Almost any employed person can give $100 if they pledge $8-10 per month.) Recognizing that being a large donor is not the exclusive province of the upper-class, you begin to find a number of prospects among your own friends and acquaintances.

From yourself, you can move out to he Board of Directors and other volunteers or staff in the organizations. Statisticians tell us that every person knows 250 people -- no doubt some of these people can give large donations.

Another place to look for prospects is your current list of donors. Do you now have any donors who have given $50 or more? What is the highest gift you have received, and how did it come about? It is not unusual for people to send in $50 or $100 from a mail appeal, and sometimes people send in large donations based on a radio program or other publicity. If any of these people are in your area, it is perfectly legitimate to contact them to renew their gift and to ask them to give you the names of five to ten people they think could also give a gift. Ask first if they will ask their friends: if they don't feel comfortable asking, then ask if you can use their name in contacting their friends."

Therefore it is essential to think about fundraising as a long term process of building on-going relationships with potential donors. In other words, the task is to build a constituency of regular givers. Every organization has a natural constituency of people and institutions that are predisposed to be supportive of your mission: board members, clients, members, current donors and volunteers. Each member of these various constituency segments has a relationship with you. The process of fund raising requires that you understand that relationship and the existing level of commitment, and then solicit an appropriate gift. Beyond the natural constituencies are additional individuals and organizations that have similar interests, but have not yet been identified. The organization's job is to find out who these people are and begin developing relationships with them.

Answering the question "How much can someone give to my organization?" involves judgments (informed by facts) about their financial ability and their relationship to the organization. Remember, almost anyone can give something. However, true generosity depends on strong commitment to a cause that is built and reinforced over time. Involvement builds commitment and commitment leads to generous giving.

Excerpt from Hank Rosso's Achieving Excellence in Fund Raising reprinted with permission from author. Copyright (c) 1991 Jossey-Bass Publishers, San Francisco, Ca.

Excerpt from Kim Klein article in the Grassroots Fundraising Journal, volume 2, no.5, reprinted with permission from author. Copyright (c) 1986 Chardon Press/Grassroots Fundraising Journal.

How do I get my board involved in fundraising and how much should a board member give?

01-17-2006

There isn't a senior nonprofit manager alive that hasn't asked herself this question at some point in her career. Take some comfort in the fact that you are not alone in pondering this question. No one will argue with the notion that the ultimate responsibility for organizational success resides with the board of directors. Further, success not only requires good programs but it also requires the necessary funding to implement those programs and services. Yet this argument alone is rarely enough to motivate board members to spring to action around the fundraising program. True motivation springs from involvement in the life and mission of the organization.

It is a tremendous asset to any organization to have an active board of directors involved in the fundraising function. Most professional fundraisers will tell you that before boards get involved in fund raising, they must first be involved in the mission and governance of the organization. This involvement with the larger scope of the organization often leads to more focused commitment to the fundraising program. It is important to remember that fundraising is a means to an end, and therefore we must involve our board members in the ends if we are to secure willing help on the means.

First and foremost, board members must be engaged in the planning process to determine with staff what the organization wants and what it will do. Involvement in planning builds ownership of the plans which essentially become the organization's agenda for the future and the foundation for all subsequent fundraising. After goals, objectives, programs and services have been determined, planning turns to translating these aspirations into real financial needs, often reflected in budgets. It is essential that the Board participates in determining the financial needs if they are to be involved in serious fundraising in the future.

After this process has been completed, board and staff need to form a partnership to develop and implement a plan to secure the necessary funds required to go forward with the plan. The actual fundraising task is immeasurably strengthened when a true partnership between board and staff is in place. As with other management functions, staff manage the fundraising program, while board members get involved in those elements that are suited to their interests, skills and capabilities. A good fundraising plan is explicit about both board and staff responsibilities. The following breakout of tasks is an example:

BOARD
Have input into fundraising plan
Organize and participate on fundraising committee
Identify and cultivate new pro
Organize and participate on fundraising committee
Identify and cultivate new prospects/donors
Ask peers for donations
Always be an advocate for the agency
Make introductions for staff to follow-up
Accompany staff on key visits to funders
Help with expressions of thanks when appropriate

STAFF
Accompany staff on key visits to funders
Help with expressions of thanks when appropriate
Research new and existing donors
Write case materials
Assist board in any way possible
Write proposals
Accompany board members on solicitation visits
Ask for money when appropriate
Take care of all logistics related to fundraising activities
Plan, plan, plan

Most people do not gravitate to fundraising naturally or easily. It can be helpful to get board members involved in a process to explore their personal feelings about giving and asking. Several helpful exercises on overcoming reluctance to asking can be found in FAQ #3, Why Are People Afraid to Ask for Money.

A related question to the larger issue of board involvement in fundraising is how much should a board member give? We have another simple answer: the goal should achieve 100% giving by the board and for each member to make a "generous" gift. Obviously, each board member will have to determine what constitutes generosity in terms of their personal financial situation. Another question to ponder: If you can't convince your board members to give, and give generously, what barriers are standing in the way? Answering this question forthrightly will be a critical step in turning a bad situation around.

Fundraising requires commitment from people. The first place to look for the commitment is within the board. After all, the board is the vital link between a nonprofit organization and the public. Board membership in itself represents a significant level of commitment. The fundraising process demands a deepening of this commitment. Once in place, the organization has a powerful asset for reaching out into the larger community for gift support.

How do we select fundraising software?

01-17-2006

Overview

What can we expect to pay?

How do we know what computer configuration will best meet our fundraising needs?

What are some of the questions I should ask a software sales representative and what things should I look for in the product?

How should we handle staff training?

What about references?

For the short run, should I maintain my old and my new systems?

Fundraising database software needs to be set-up to reflect how we conduct our fundraising program. How does this work?

Is there anything special I need to know about data conversions?

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Overview

Over the past ten years, fundraising database software has gone from being a luxury to almost an everyday necessity for most development programs. However, unlike most other software genres, instead of facing few choices, purchasers are confronted with a multitude of options at every price level from comprehensive proprietary packages with sophisticated add-on modules to introductory-level shareware or freeware programs available on the Internet. And as a result, one of the most common computer-related questions voiced by development officers is, "How do we evaluate and choose a fundraising database program that best meets our needs?"

"We know we need a database for recording, tracking, reporting, managing, and implementing our development program, but where do we begin?" Begin your search with a thorough analysis of your current situation including:

Program Operations (what are the specific elements in your fundraising program plan?)

Computer Equipment (how many computers are there in your office? with what chip, speed, RAM, and storage? and if you have a network, how many are on it, and what is your network software?)

Expense Budget (how much can you spend?)

Staffing (what is your departmental structure, who and how many currently use your database software and at what level of proficiency?)

Now, make a determination of where you will be in 3 to 5 years in each of those same areas. These two steps will help clarify the most basic features and performance priorities required of your future software.

What can we expect to pay?

In general, the basic purchase price for fundraising software falls into four price ranges (not including the cost for additional user licenses, data conversion, additional staff training, and annual technical support agreements), as follows:

$1,500 and under (including shareware and freeware)

Generally, the products at this level are very simple, basic programs designed for organizations running very modest development programs with limited budgets. In most cases they have very limited constituent management capabilities (coding, indexing, sorting, etc.) and come with pre-configured reports. They are usually designed to export data to a word-processing program (for mail merge) or spreadsheet (for analytical reports).

$1,500 to $5,000

These programs are a major step up from the level below, they are fully networkable, and have all the features required for most development operations including extensive coding, tracking, and reporting capabilities. They include a broad array of pre-designed reports as well as report generating capabilities which eliminates the need to export your data to word-processing or spreadsheet programs.

$5,000 to $10,000

The programs at this level have all the elements above, but they tend to include a broader array of data recording and data management capabilities as well as more comprehensive recording and tracking for specialized development operations. Most of the programs in this range offer an assortment of equally comprehensive add-on modules (for an additional cost) to address specialized needs like membership, major/capital gift prospects, and special events management, to name a few.

$10,000 and up

In general, once you get beyond $10,000 for the base price, you are getting into the area of expensive, customized systems designed for complicated large institutional or organizational settings. These systems are designed to work with large area networks (LANs), wide area networks (WANs), and multiple sites, and are created to manage and manipulate huge amounts of constituents or data. Also, they are most often combined in packages to work with specialized software in other departments or offices like accounting and finance, facility management, and other non-fundraising program operations.

How do we know what computer configuration will best meet our fundraising needs?

Do we go IBM or Apple? Should we be networked? Questions of this nature deserve a more comprehensive response than can be included here, but there are some basic considerations:

As for basic configuration and equipment (mainframes, mini-mainframes, servers, and desktop computers), most development offices use desktop computers in a small network or as stand-alone computers.

For equipment and operating systems, for all intents and purposes, you face one of two choices using IBM compatible or Apple equipment, but you can have both systems working on a network. However, most fundraising software currently on the market is designed for an IBM compatible running Windows 95/98/NT or 2000.

As for new equipment, you will want:

• Pentium III level (or, if Apple, a Power PC) processor with the fastest speed you can afford (but usually no less than 500Mhz)
• Largest RAM you can afford (but no less than 64 Megs and preferably 128 Megs or more)
• Largest hard disk you can buy (4 to 6 Gbs for a workstation, 10 to 12 Gbs or more for a server).

If you are on a network, you will want a server that has a minimum of 10 Gbs disk space and preferably double (or more) since the program files in modern software "suites" will quickly fill that initial space. You'll still need room to load your existing work files and your new database.

With regard to networks, in general, even the smallest two-person office derives a benefit from being on a network. Printing is easier, editing documents is easier (though you will need to establish file naming procedures), and viewing and sharing data is greatly simplified.

Those are some very basic responses but each office, program, and organization is unique. Given the complexity of this situation, for a more specific recommendation on systems, equipment and configurations, contact a local computer consultant that has experience working with nonprofit organizations.

What are some of the questions I should ask a software sales representative? What things should I look for in the product?

Before looking at software, an organization must first be clear about its overall current and future operations (see #1 above). Having that information in hand, some of the basic questions to ask are:

How does their software's features meet your specific program management needs?

How does it conform to your program structure (does it work the way you work?) or does it force you to conform to its structure?

Does the manufacturer help configure or otherwise set-up the software to reflect how your program operates?

How does it look on the screen? Do the screens appear overly busy or complex? Is it easy on your eyes? Can you adjust for color, shading, contrast, etc.?

How many options can you use to tag or otherwise "code" a constituent?

How are gifts/grants, pledges, and pledge payments recorded?

How does the software handle importing of new records and/or data elements (e.g., phone numbers or zip+4 codes) from other sources? In what formats?

How does it handle exporting data? In what formats?

How are yearly program revenues tracked and reported?

How are appeals and solicitation programs managed?

How are grants tracked and reported?

How does the report generator work?

How does the mail merge work?

How do you search the database using multiple criteria?

How do you index or otherwise segment a group of constituents?

How are special events managed and reported?

How long has the company been in business?

How many installations have they made in similar type/size organizations?

Do they have any installations locally you can visit?

What would be the total cost for your installation (adding software purchase price including costs for all necessary user-licenses, data conversion, annual technical support, and initial staff training)?

What are their options for additional staff training?

How does their technical support work? What is the average telephone wait time? Can you get help via e-mail or fax?

How should we handle staff training?

Most sophisticated fundraising database programs will require a fair amount of staff training in order to be used properly and effectively. In most cases, paying for additional (more intensive) staff training either on or off-site is advisable after the initial free training. There is usually a sizable fee attached, but in most cases it is well worth the expense. Why have a high powered program if you're not going to use it effectively?

Identify at least two people in your organization to learn the program. In most organizations, only one staff member is the primary user; however, having a second person who has a basic, even rudimentary, understanding is helpful during vacations periods and other absences.

What about references?

For any product that you find interesting, ask the sales representative for at least three references you can contact by phone. Be sure to ask for clients that are similar to the type and size of your organization and development program. Call all the clients. Your conversation need not be more than a quick five-minute chat but you will get some interesting information. Some sample questions you might ask are:

What are its strengths?

What are its weaknesses?

How long have you had the program?

Do you like the program?

Does it do everything you need it to do?

Did you look at other programs?

Would you buy it again?

How was the staff training?

How did the data conversion go?

How is the Technical Support?

Once you think you've made your final selection, make a site visit even if you have to do a bit of traveling to another organization that has the software up and running. Make the visit without the sale representative present. Interview the staff members who are actually doing the data entry, coding, indexing, sorting and queries, mail merges, report generation, etc. Remember, the time and expense you spend on a site visit is nothing compared to what you will spend on a software product in the combined cost of the purchase price, data conversation, staff training, and annual support.

For the short run, should I maintain my old and my new systems?

Absolutely. Plan on a six month trial-and-error period for your new system. Don't expect (or promote the expectation) that you'll be up and running right away. Consider managing duplicate systems for a short period, say 3 to 6 months (Some organizations have run duplicate systems for up to for a year!) In the initial months, plan on your staff needing to call the manufacturer's technical support line everyday (and often several times a day). However, the more you use tech support, the faster you learn the program. Think about conducting several practice runs using the standard features you will use regularly over the course of the year -- managing a mail merge, conducting an event, exporting data, running reports. Invent scenarios and then practice the procedures or steps required to meet the need. It's much easier to learn a program when you're staff is not under pressure to perform.

Is there anything special I need to know about data conversions?

When an organization purchases a new database software, one of the first steps towards using the program is getting your old data into the software. In most cases, the manufacturer will do this for a fee. Be sure to get all the essential information from your software manufacturer before you have them do the conversion (price, turn-around time, ease of input, how much follow-up help you will get, etc.).

It's also worthwhile to ask other users of your new software how they converted their data. You might find other users have contracted with a local computer database consultant who has experience converting data for your new software and who can provide this service at a lower cost than the manufacturer. Finally, ask the manufacturer if they have affiliate relationships with any local computer consultants, as these people can often offer more timely on-site help with conversions as well as other issues.

Fundraising database software needs to be set-up to reflect how we conduct our fundraising program. How does this work?

All fundraising database software needs to be configured to reflect how your organization records and identifies constituents, labels gifts, reports information, and tracks progress, etc. The more comprehensive your program is, the more planning and set-up time you will need.

It is strongly recommended that you spend a healthy amount of time mapping out on paper your entire program before you even look at new software. Map out your individual and/or institutional giving programs from initial planning to year-end annual report. Then find a program that fits your specific need. For most organizations that already use a database, this is not much of an issue; however, it's always worthwhile to revisit your naming conventions to be sure your database reflects any changes in your audience or program operations. However, for organizations that have never used a database before, this step is critical.

You need to ask yourself, who are our major constituencies? There are as many ways to identify records for fundraising as there are nonprofit organizations. However, the basic rule is keep your list of main constituencies as simple as possible. Most organizations should have no more than six or seven main groups. You can have more ways to identify a constituent, but these labels should be located in a separate field in the database. For example:

If you are a school, your main groups might look like the following: Alumni, Current Parents, Past Parents, Board of Directors, Foundations, Corporations, Government, and Friends. An individual (or institution) in any one of these categories might also have other ways he/she needs to be identified, i.e. as a major gift prospect, a golf-outing participant, a class agent, a hall of fame dinner sponsor, a faculty member, a vendor, a board member prospect, a capital gift prospect, etc. However, all this information will be maintained in another field capable of holding multiple listings for each record.

The smaller the number of main constituency groups, the easier and faster you can input, organize, segment, track, and report information.

In addition to giving each record a main audience or constituency code, in most cases you will need to assign names or codes for other fields including, among others: prefix, title, suffix, salutation, gift labels, solicitations or appeals, special events, annual unrestricted/restricted funds, endowment/scholarship/capital funds.

What about the idea of creating my own fundraising database in an off-the-shelf database program like Filemaker Pro, Access, Paradox, or Approach, or that of another manufacturer?

The general rule of thumb for creating your own fundraising database is -- don't. Unless you have a full-time MIS department (not just one staff member) who you can rely on for timely assistance, it is probably not a good idea to develop your own system. There are many reasons for this including all the time and salary expense it takes to study your program, map out the database layout, build the required files, create field structures, design the screens, convert and load data, build stock reports, and debug the database. Why go through all this trial-and-error headache (and expense) when there are database products that will give you, in most cases, what you need now as well as provide room for future growth.

Having said this, if you have extremely limited financial resources (and even then, keep in mind there may be an appropriate shareware and freeware product available) or if you are determined to develop your own database, here are some pointers:

Hire a database consultant who has experience creating fundraising-related databases (and call her/his references).

Keep the fields simple.

Be sure there is a seamless interface between the database software and both your word-processor and spreadsheet software.

Think ease of use. Your staff may not have immediate access to technical support for the software and even then the software manufacturer's tech support people on the other end of the line will not know how your particular database file is set up.

Think short term. Once you get up and running you will probably want to track and use information in increasingly sophisticated ways. If so, you won't appreciate spending the time and money for your consultant to keep returning to build these features into your system. And, at this stage, you will most likely want to migrate to a package product. Be sure to build in password protection.

Written by: Duff Batchelder, Management Solutions for Nonprofit Organizations, 4 Wellyn Close, Bronxville, NY 10708, (914)779-4497, Email: duff@millbat.org

How do you ask for a "major" gift?

01-17-2006

The Letter

The Phone Call

The Face-to-Face Meeting

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For most people, asking for money is one of the most difficult tasks they will ever face. To answer this question we turn to an article by Kim Klein, The Fine Art of Asking for the Gift, which first appeared in the Grassroots Fundraising Journal, Volume 2, No. 3.

Many people have discovered that doing face-to-face fundraising reminds them of the true depth of their commitment to the organization. They remember why they became involved in the first place and why they think the work is important. Occasionally, people discover that their commitment is not that strong and they would be happier in another organization.

First and foremost, it is imperative that the people soliciting major gifts believe thoroughly in the cause of the organization and have demonstrated that commitment with a financial contribution. The size of that contribution is not important, but it must be a contribution which for that individual is significant. The message to the prospect from the solicitor is, "Join me. Do what I have done. Give a large contribution to this organization because it is really important."

Types of Prospects

There are three types of prospects for face-to-face solicitations:

• People who have given before, and are prospects for a repeat or upgraded gift
• People who have not given before, but are close to someone in the organization
• People who are interested in the cause but don\'t know anyone in the organization

For the latter type, some kind of cultivation is necessary before actually soliciting the gift. Inviting the person to a special event, house meeting, or educational evening will be important, or asking to see the person in order to describe the program and inviting him or her to the office (if the office is an exciting place) should precede the meeting at which a gift is requested. In this article, we will assume that the prospect is ready to be asked for the gift.

There are three steps in approaching a prospect:

• A letter describing the program and requesting a meeting to discuss it further
• A phone call to set up a meeting
• The meeting itself in which the gift is usually solicited

Obviously, if you are approaching your spouse or your best friend, you can skip the letter, and perhaps even the phone call. In some cases the letter will be enough and there will be no need for a phone call and meeting; in others a phone call alone will suffice.

The letter

The letter to prospects who have given before is the simplest. You thank them for their support in the past and ask them to give the same amount or more again. Describe some of your achievements in the past year and some of your future plans. Tell them you will phone them in a few days and, if they are in your area, offer to meet with them. Enclose a stamped, return envelope.

In a few days, phone them. Often you will discover that the check is in the mail. As you get to know major donors better, you will discover which ones prefer not to be phoned, but just wish to be reminded when it is time to renew their gift.

If you do meet with them, ask for a larger gift than they gave last year, or use the meeting as an opportunity to ask for the names of three people who might be interested in giving major gifts.

As you get to know the donors, you can see if they would make good board members, or if they would be willing to solicit some large gifts for your organization. Meeting with current donors tells people that they are valued and helps build their loyalty to the organization.

Letters to prospects you know rest heavily on the amount of respect and affection the prospect has for you. When writing to someone you know, use the same tone and format you would use in writing to him or her about anything else. If you normally call the person by his or her first name, do that in your letter. Mention to your friend that you are a donor yourself. You don\'t have to say how much you give -- just the fact that you give will tell your friend that your are asking him/her to do only what you are already doing.

If the person who knows the prospect is unable or unwilling to write the letter, then the person actually soliciting the gift may be a stranger to the prospect. In that case, begin the letter with "Jane Friendswithyou gave me your name. She said you will be interested in our work because . . . " Go on to describe the work of the organization and ask to meet with the person.

Indicate in the letter that you will be asking for money. The letter can describe how much the organization needs and what kind of gift you hope the prospect will make.

In writing the letter, remember that people have a short attention span. Make your sentences interesting, evocative, and short. Avoid using jargon or complicated explanations. Statistics are fine, if used sparingly. The idea of the letter is to spark the prospects\'s interest so that he or she will want to meet with you. The letter does not have to convince fully; and in fact, should just raise the person\'s interest. The face-to-face meeting is the time to convince the prospect to give.

The phone call

If you say you are going to call, call. Rehearse the phone call beforehand to anticipate possible hard questions or objections the prospect might have. The following are three different problems that arise during phone calls and examples of how they could be handled.

Scenario One: The Easy Prospect

You: Hello, this is Worthy Cause. Is this Mary Prospect?

Ms. Prospect: Yes, it is.

You: I recently wrote to you about . . . Did you get my letter?

Ms. Prospect: Yes, I think I did.

You: Do you have a minute now? (or, Is this a good time to talk?)

Ms. Prospect: I have just about one minute. Now remind me of what your organization does. I get so many letters..

You: Our organization . . . (two sentences at most.) What I would really like to do is get together with you for about half an hour to explain our projects in more depth. I know you are busy, so is there any time next week that I could come see you?

Ms. Prospect: I think I could fit you in next Wednesday at 10.

You: Great. I\'ll be there. Thanks so much.

Scenario Two: Time and Logistics Problems

Ms. Prospect: This is a really bad time of year for me. I\'m doing an inventory and then I have to fly to Washington DC and I just can\'t fit in another thing.

You: I can certainly understand that. Why don\'t I call you next month and see if things have settled down, and you might have some time then?

Ms. Prospect: That would be fine

-or-

Ms. Prospect: This is just too busy a time for me. I\'ll call you when I can work you into my schedule.

You: I know you have a lot on your mind. I\'ll call you in a month or so to see if things have settled down.

-or-

Ms. Prospect: I never make decisions to give away such large gifts without talking it over with my husband. We do all our giving jointly.

You: That seems extremely reasonable. May I come and talk to you both?

Scenario Three: Disagreements with the Organization

Ms. Prospect: I got your letter, but I have to tell you honestly that I think the government should be taking care of this, and you all should be lobbying for restored government funding in this area.

You: We agree that the government should be taking care of this problem, and we\'re working with a coalition of groups to pressure for restored funding. But in the meantime, these people are without services, and we have to turn to people like you who understand the need so clearly. I\'d like to talk with you about our government strategy, since I know that it is an area of interest to you, in addition to discussing our program. Could we meet next week?

-or-

Ms. Prospect: Aren\'t you the group that had to fire your Executive Director for incompetence a little while ago?

You: Yes, our Executive Director was released when the board discovered . . . I know you\'ll be pleased to learn that Much Better Person has taken her place and things are now completely back to normal. I really want to talk about our programs in more detail. Is it possible to set up a meeting in the next few weeks?

-or-

Ms. Prospect: I have other priorities at this time and I\'m not sure your organization falls within my present commitments.

You: I know that you have other priorities. I would really appreciate it if we could discuss our organization\'s program because I think it falls within your concerns. Jan Friendswithyou indicated that you are strongly committed to . . . and we do work in that area now.

Ms. Prospect: I\'m afraid you\'ll be wasting your time.

You: I\'m not worried about that. I don\'t want to waste your time, but I do think a brief meeting would help us both to see if we have any goals in common.

The importance of being assertive

Most of the time when people put us off we assume that they are tying to say no, but are just too polite to come right out with it. This is a false assumption. Prospects are looking for signs that you are really serious about your organization. They appreciate persistence, assertiveness, and an attitude that what you have to offer is critically important and worth taking some time to discuss.

If you are easily put off and take the first no as the final answer, it says to the prospect that you are not terribly concerned about the organization, or that you don\'t really care whether or not the prospect gives. Clearly, you don\'t want to be rude, but be willing to push the prospect a little, and don\'t take the first resistance as the final word.

The Face-to-Face Meeting

Once you have an appointment you are ready to prepare for the face-to-face solicitation. This is not as frightening as it seems. First of all, the prospect knows from your letter or your phone call that you will be talking about making a contribution. Since he or she has agreed to see you the answer to your request is not an outright "no." The prospect is considering saying "yes." Your job is to move him or her from "I\'m considering giving" to "I\'d be delighted to give."

The purpose of the meeting is to get a commitment to give. Everything else revolves around this purpose. It is fine for the conversation to go off on a tangent, but you must keep bringing the conversation back to the financial needs of the organization and the possible role of the prospect in meeting those needs.

As the solicitor, you must appear poised, enthusiastic, and confident. If you are well prepared for the interview, this will not be too difficult. Many times, board members and volunteers are afraid they will not appear knowledgeable about the organization. It is perfectly fine to bring along a staff member or someone who has been with the organization a long time to answer difficult questions. Sometimes going with a partner also helps you feel more relaxed. It is also fine to answer a question with, "I don\'t know, but I\'ll be glad to get you that information."

Help the prospect to see that giving to your organization is a logical and natural extension of his or her interests and concerns. Ask the prospect questions, and carry on a conversation with him or her. "Do you agree with our approach?" "Did you see the article about us in last week\'s paper?" "Has Jane Friendswithyou talked much about our organization?"

When you finally ask for the gift, look the prospect right in the eye and in a clear, bold voice, say, "Can you help us with a $300 contribution?" or, "We are hoping you can give $500-$1,000." Keep looking at the prospect, and don\'t say anything after you have asked for the gift. It is the prospect\'s turn to speak. Although it may seem like a long time between your request and his or her response, it is only a matter of a few seconds.

Sometimes the prospect will say, "I\'d like to help, but that figure is way out of my range." Your response can be, "What would you feel comfortable giving?"

After you ask for the gift and get an affirmative answer, discuss how the prospect wants to make the gift. Perhaps they will give you a check right there, or mail it in the return envelope you brought. For larger gifts, prospects (now donors) may want to transfer stock, or make other arrangement that will cause the gift to arrive in a week or two. Once these arrangements are made, thank the donor and leave.

Immediately after the interview, send the donor a thank you note. Another thank you from the organization should be sent when the money arrives.

Summary

Although it can be anxiety producing to ask for money the first few times you do it, it is thrilling to get an affirmative commitment from a major donor. It is also a good feeling to know that you were able to set aside your own discomfort about asking for money for the greater purpose of meeting the needs of your organization. Knowing that you can talk comfortably about the financial goals of your organization is empowering. Boards of Directors find that they are immeasurably strengthened when each of their members feels able to ask for money.

Reprinted with permission. Copyright (c)1986 Chardon Press/Grassroots Fundraising Journal.

What should we look for in a director of development and what is the typical salary range?

01-17-2006

Even if you can afford someone with experience, make sure your top candidates for the job have the kind of experience that fits your job description. In other words a grassroots organization that wants to build a broad-based donor constituency around a particular issue needs to look for someone with experience in similar organizations. On the other hand, an organization that defines its fundraising program as mostly seeking corporate gifts will want to look for someone very different.

There are some generic skills that contribute to fundraising success. These include, but are not limited to:

• Excellent communication skills (written and verbal)
• Being well organized
• A self starter
• Able to see and work within the big picture
• Able to work behind the scenes
• Works well with a diverse range of people

All job skills and experience have some intrinsic market value. Of course, many factors determine what a seller (the job seeker) is willing to take and what the buyer (the nonprofit organization) is willing to pay. To put it more simply, most of the salaries of professional positions live within a standard range, with a number of factors determining the final number in a specific situation.

How much a particular organization should pay depends on what it wants and how much it can reasonably afford to pay. Generally, development directors are considered senior management positions and therefore such positions often command higher level salaries (relative to other agency positions). It is not uncommon for the development director to be the second highest paid person on the staff. In fact, in most smaller agencies, the primary fundraising responsibility is with the highest paid employee -- the executive director.

In pure numbers, the range of compensation for people with the director of development title runs from $20,000 - $150,000. From the organization's point of view, it needs to determine whether it can afford to pay for someone with experience and a track record in the development field. Even people with only two or three years experience are likely to seek annual salaries of $35,000 - $40,000. Significant experience (5 years or more) quickly runs into ranges from $45,000 - $80,000.

Small organizations that cannot afford this salary level might also consider seeking a part-time person. Total dollars will be less, but the higher full time equivalent (FTE) salary can attract experienced people who are seeking a part-time situation. In many cases a part-time person with experience will be more productive than a full-time novice.

On the other hand, many of the skills that make for a successful director of development are available in people with no development experience: writing, verbal skills, and ability to work well with different types of people. All that is really lacking is actual development work experience. Because the development profession offers individuals a solid career track with numerous opportunities for advancement, many very capable people are willing to work for relatively lower salaries. The downside to this approach, of course, is that these people are likely to be successful and will soon be looking for more money.

Another approach that has proven successful is to have the executive director be the manager of the development program. This strategy usually works in small to medium size agencies. This arrangement usually requires other staff to assist with some management responsibilities. Even if the executive director does not have primary responsibility for development, she should be very supportive of the office, offering to regularly assist with personal calls, strategy development, board work, etc.

Why are people afraid to ask for money?

01-17-2006

Sources of our fears

How to dispel fears about money?

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The purpose of this FAQ is to discuss some of the reasons that asking for money is hard and to provide some tips to help people get over the fear of asking for money. In her article, Getting Over the Fear of Asking, Kim Klein discusses the sources of fear and techniques for overcoming the barriers that prevent people from raising funds for their organizations.

Asking people for money is both the most difficult and the most important part of fundraising. Every community-sponsored organization uses a variety of methods to ask for money, such as direct mail appeals, special events, pledge programs, products for sale, and so on. But the hardest way for an organization to raise money is for board, staff and volunteers to ask people directly for donations. Experience has shown, however, that it is almost impossible to have a major gifts program without face-to-face solicitation of the prospective donors.

Sources of our fears

Asking a person for money face-to-face is an acquired taste. Few people love to do it initially. In fact, most people are afraid to do it. If you are afraid to ask for money, that's normal. If you are not afraid, that's great. Stop reading this article and go ask somebody for a donation!

People are afraid to ask for money for a wide variety of reasons and we can't hope to explore them all here. However, it is important to look at the role money plays in our American society to understand the sources of our fears.

Most of us are taught that four topics are taboo in polite conversation: politics, money, religion, and sex. Many of us were also raised to believe that asking people what their salary is, or how much they paid for their house or their car is rude. In many families, the man takes care of all financial decisions. It is not unusual, even today, for wives not to know how much their husbands earn, for children not to know how much their parents earn, and for close friends not to know one another's income. Many people don't know anything about the stock market, what the difference is between a "bear" and "bull" market, or what the rising or falling of the Dow Jones means for the economy.

Many small organizations have discovered that if they seek a paid staff person to be a program or volunteer coordinator; they will be flooded with applications, but if they seek a fundraising coordinator, they will have almost no skilled applicants.

The net effect of these taboos about discussing money is that money takes on the air of being both mysterious and bad. The hidden message is that good people don't deal with money except insofar as they must in order to live. Many people, misquoting the Bible, say, "Money is the root of all evil." In fact, Paul's statement to the Philippians in the New Testament is, "Love of money is the root of all evil." Money, in itself, has no good or evil qualities. It is not a moral substance. Money facilitates people getting what they want or need. As such, how money is used, where it is obtained and inequities of who has it and who does not, has moral implications. This is very different from money itself being evil.

When money is mysterious and taboo, only those persons willing to learn about it can really control it. In America, an elite upper class controls most of the nation's wealth, whether by earning it or inheriting it, or both. It serves the interest of this ruling class for the mass of people to continue not to know about money. As political activists and participants in social change, it is not only important for fundraising, but for all organizing purposes, that we learn about money -- how to raise it effectively and ethically, how to manage it, and how to spend it wisely.

How to dispel fears about asking for money

We will describe two easy exercises your group can do that will help dispel fears about asking for money. A member of the group can act as facilitator or you can ask someone outside the group to facilitate. These exercises can be done individually, but they are more effective when group members share with each other in recognizing and letting go of fears about money. To do the exercises, you will need a black board or sheet of butcher paper.

Exercise Number One

In this exercise, the group looks objectively at its collective fears about asking for money. Fear of asking for money is similar to what you feel when you hear a noise in your house at night when you are alone. Your immediate, normal reaction is to fear. You have two choices about how to respond to this fear: 1) you can give in to it, huddling under the covers, and imaging all the worst things the noise could mean, or 2) you can take the more sensible, but much more difficult action of getting up and turning on all the lights until you probably discover that the noise was something as simple as the cat, a leaky faucet, the wind, or nothing at all.

In the same way, looking at all your fears about asking for money in the light of discussion with others will show that many of them are irrational, and that for most, the feared outcome is far less likely to happen than you think.

To begin the exercise, each person imagines asking someone for a large amount of money (anything over $50). Going around the room each person says out loud what they think will happen to them. What will the person they are asking think of them? What will they think of themselves? The facilitator writes down all the feared outcomes. After four or five minutes, there will probably be a list that includes the following:

The person will say no

The person will yell at me (or hit me)

The person will give me the money; but won't really want to, and will resent me

I know the person doesn't have the money

It is imposing on our friendship for me to ask, and we won't be friends anymore

The person will think that the only reason I was nice to them was to get money

The person will say "yes" and then ask me for money for his or her cause

I don't know if my group really deserves the money as much as some other groups might

The person will ask me questions about the organization that I can't answer

After this brainstorming session, the group should look at the fears that are listed and notice that they fall into three categories:

• Fears of responses that are extremely unlikely to happen (I'll be punched, I'll be sued, I'll have a heart attack)
• Fears of things that might happen but could be dealt with if they do (the person will ask me for money, the person will ask questions I can't answer)
• Fears of things which will definitely happen occasionally (the person will say no).

Examine the third type of fear first. For most people, the worst thing that can happen when they ask for money is that the person will say no. But, everyone who does fundraising will experience this kind of rejection. Remember, just as it is your privilege to ask for money, it is the other person's privilege to turn you down. The person being asked may have just spent $400 on his or her car, or been asked to give to five other organizations, or have other current priorities. While no one likes to be turned down, it is important not to take being turned down as a rejection of you personally.

In the second category of fears -- that someone will give to your organization, and then ask you for money for his or her special cause -- you can make your own decision. You don't owe the person a favor. To be supportive of him or her and the cause, you may want to say yes, but you are not obligated to do so.

Questions you can't answer can be responded to with "I don't know" or "I'll find out and let you know."

Fears such as, "I know the person doesn't have the money" are very common. However, unless you have a financial statement from the person you are asking, or unless you know her or she is on welfare, or has recently experienced a devastating tragedy, you don't know that the person doesn't have the money.

Other fears can be dealt with the same way. The group should look at each fear and see which category it fits into.

Sometimes it is not appropriate to ask someone else for money, but this is true far less often than we think. When you consider asking someone for money, and decide not to, ask yourself, "Do I have a reason not to ask, or just an excuse based on assumptions I am making about the other person?"

Exercise Number 2

When thinking about why a person would give money to an organization, think about why you give money to any organization. Your reasons for giving or not giving will be much the same as everyone else's and will help you understand what motivates people to give.

In this exercise, participants imagine that an acquaintance of theirs has come to them, explained a cause he or she is involved in, and asked for a gift. Imagine that the gift is an affordable amount, but not an amount one could give to everybody who asked. For most people, this amount is somewhere between $25 and $50.

For thirty seconds participants write down on their own sheet of paper all the reasons they would say yes to this request. Then for the next thirty seconds, they list all the reason they would say no. Asking participants to share their results, the facilitator then writes the "yes" and "no" reasons on two separate sheets of butcher paper, or two sides of the blackboard. Generally, there are more yes reasons than no reasons. The following are the most common reasons:

YES

like the person asking

believe in the cause

get something for my money

tax deduction

I feel generous

know my money will be well used

just got paid

want to support my friend

feel guilty saying no

know other people in the group

liked the approach

NO

disliked the person asking

don't believe in the cause

don't have the money

bad mood that day

organization has a bad reputation

give to other things

already been asked several times that week

don't know what my money will be used for

think person asking is naive

The group discusses the two lists. Looking at the no list, these answers fall into two categories:

• reasons which are not the asker's fault, and which could not be known ahead of time
• reasons which appear to be "no" but are really "maybe."

In the first case, the asker usually cannot know that the prospect does not have the money right now, or that he or she is in a bad mood, or has been asked several times that week. When this is the reason for the rejection, the asker can only thank the prospect for his or her time, and go on the next prospect.

In the second case, if the prospect knew more about the organization, knew how the money was used, knew that the reasons for the bad reputation have been cleared up, he or she might give. The "no" answers are really "maybe." "Maybe I would give if I thought the organization did good work." The person asking for the money must be prepared to discuss the prospect's reasons with him or her and hope to persuade the prospect to change to an affirmative answer.

A few of the "no" reasons reflect badly on the asker. For example, if the prospect thinks the asker is naive or pushy or dislikes the asker altogether, then this was an unfortunate choice of a person to solicit the gift.

The point of this exercise is twofold -- to illustrate why people give and don't give and to illustrate that people have more reason to say yes than to say no to a request for a contribution.

These exercises and the subsequent discussion they involve will help people in your group understand that asking for money is not as frightening as they may have thought. The worst thing that can happen is that the person asked will say no and usually they say no for reasons outside your control or knowledge.

Reprinted with permission. Copyright (c)1986 Chardon Press/Grassroots Fundraising Journal.

How can our board members help raise money?

01-16-2006

There is no one right answer to this question. Unlimited possibilities exist for your board to help raise funds. A variety of suggestions can be found in the following article, 55 Ways for Boards to Raise $500, written by Kim Klein, founding publisher of the Grassroots Fundraising Journal.

All good fundraising plans have one thing in common: they show a diverse number of sources for their income. The board of directors plays a crucial role in the selection, implementation, and evaluation of fundraising strategies. In addition to other ways that board members may participate in fundraising, they individually commit to raising and giving a certain amount of money, or commit to working by themselves on specific strategies with no financial goal attached.

It is a good idea for board members doing fundraising on their own to write up their plans. This "contact" allows staff to know when they might be called on to help, ensures that events don't happen on the same day, or the same donors aren't solicited by several board members, and also helps to remind board members of their commitments.

In order for this method to work, the organization or the board fundraising committee should think of many specific ways board members could actually raise money by themselves. The fifty-five ways suggested below are by no means an exhaustive list, nor will they all work for every group. Few board members could use all fifty-five ways, but almost any board member should be a able to use two or three of them.

All of these methods have been used by different volunteers in a wide variety of organizations. Some methods are much more popular than others. Some depend on access to certain resources.

Presenting board members with fifty-five ways that would work for your organization helps counter the excuse, "I would help but I just don't know what to do." Having each board member write out a plan, with goals and a time line, also gives them a sense that if they do their best with this plan, they will have helped significantly. Many board members feel that fundraising is never ending, and that no amount of effort is enough. "Whatever I do, I could have done more, and probably should have," they say. This feeling of inadequacy leads to high turnover, burn-out, and resentment in boards. Specific fundraising contracts can help avoid that result.

55 Ways for Board Members to Raise $500

Give it yourself. This is the easiest way for those who are able, although if you are able to give them that much money you should be helping raise much more than $500.

List all your friends who are interested in your organization, or similar organization. Decide how much each one should give. Write to them on your own stationery, include a brochure from the organization and a return envelope. Phone those people who don't respond in two weeks, Some people will need 10 friends to give $50, and some people need 50 friends to give $10. Most people will need a combination such as: 2-3 @ $50, 4-5 @ $25, 15 @ $10.

Give part of the $500. Then ask your friends to join you in giving $25, $50, or whatever your gift is. This is most effective because you are not asking them to do anything you haven't done.

Set up a challenge campaign. Challenge gifts can be quite small. Tell people you'll give $5 for every $25 they give, or will match every $10 gift up to ten gifts. For added suspense, make this challenge during a fundraising event. You or the host can announce, "We now have the Dave Buckstretch Challenge for the next five minutes. Dave will give $5 for every new member that joins Worthy Cause."

If your organization has a diverse funding base with several grassroots fundraising strategies in place, use them all:

• sell 100 raffle tickets for $100
• give $50
• bring 10 people to an event that costs $10 to raise $100
• buy two gift memberships @ $15 each to raise $30
• get 15 friends to join @ $15 each to raise $225

Help with your organization's phone-a-thon. Bring the names of people you think would like to join and call until you have raised $500. Or trade names with someone in the organization and call their friends until you have reached $500. This is particularly effective for people who are shy about asking their own friends for money, but not afraid to ask people they don't know.

Acquire mailing lists for your organization. If you belong to another group, perhaps you can set up an exchange, or perhaps you have access to a list of members of some other group. You can ask all your friends to give you the names of 10 to 15 people they think would like to join. You would need to recruit about 25 members at an average gift of $15. Depending on how "hot" your list is, you might need as few as 200 names (to do a bulk mailing) or as many as 1500-3000 (if you expect a 1-2% response.) You would have to have a greater response if you wanted the mailing to pay for itself and also generate $500.

Give the organization something they need that is worth $500, such as a fax machine, filing cabinets, couch, adding machine, computer program, etc.

Pledge $20 a month, and get one other person to do likewise. Then sell $20 worth of raffle tickets.

Teach a seminar on a topic you know: fundrasing, knitting, organic gardening, organizing, proposal writing, environmental impact reports, gourmet cooking, dog grooming, starting your own business. Charge $20-50 per person, with a goal of 20-30 people.  Either absorb the cost of promotion, or have enough participants to cover it.

Give some or a lot of things to your organization's garage sale, making sure they are worth $500, and then help to sell it all.

With 4 or 5 friends, have a spaghetti dinner at a church or union hall or other big room with a large kitchen. Charge $10 per person and feed more than 50 people. You can charge extra for wine or garlic bread, or for dessert.

Have a fancy dinner at your home or a regular dinner at someone's fancy home. Serve unusual or gourmet food, or have special entertainment. Charge $25 or more per person, and have 20 or more guests.

Get three friends to help you have a progressive dinner. Start at one person's home for cocktails and hors d'oeuvres, progress to the next person's house for soup or salad, the next person's for the main course, and the last person for dessert. Either charge by course, or for the whole package. To make it extra special (and much more expensive), get a limousine for the evening that carries guests from house to house.

Host a wine and cheese party. Do not charge admission and invite as many people as you can. During the party, give a short talk about your organization, and ask everyone to consider a gift of $25, $50, or $100 or more (depending on the crowd). Either pass out envelopes and ask people to give then, or after the party contact everyone individually who came and ask for a major gift. Indicate that you have given, and if appropriate, how much you have given.

Get your gambling friends together. Charge a $5 entrance fee, and have a poker evening, asking that every "pot" be split with the organization. Individuals win and so does the organization. You can charge extra for refreshments, or include one or two glasses of something with the price of admission. (Watch the laws in your community on this one. In some communities it is illegal to gamble, even in your own home.)

Do one fundraising event every other month that nets at least $75. This might look like:

• Poker party raises $100
• Fancy dinner (8 people at $25) raises $200
• Sell 50 raffle tickets @ $1 raises $50
• Book sale raises $50
• Recycle newspapers raises $100

Solicit small businesses, churches, synagogues, or service clubs for $500. If you are active in a church, or own your own business and are involved in business organizations or service clubs, this can be very effective. You can often raise $200-$500 with a simple proposal and oral presentation.

Take a part-time job in addition to your present work, and give everything you earn up to $500.

Ask 5-10 people to save all their change for 3-5 months. You save yours. Count it at the end of the prescribed time and use one of the other methods to raise the rest. (You may not need to.)

Ask 2-5 friends to help with a bake sale, book sale, or garage sale. You and your friends bake the goodies, or get the books or other stuff required for the sale, staff it, and help clean up afterwards. This is an excellent way to get people involved in fundraising without ever actually asking them for money.

For the fairly rich: give your organization $5,000 as an interest-free loan for a year. They invest it, earn 8-10% and at the end of the year, they give you your $5,000 back.

Sell your organization's materials, buttons, T-shirts, bumper stickers, or whatever else they have for sale. Also, help distribute these to bookstores or novelty shops.

The Farming Out Method: Entice 5 friends to sell 100 raffle tickets each, or to raise $100 however they like. Share this list of suggestions with them. Give them a nice dinner at the successful end of their efforts (or a bottle of good wine, or a weekend away).

Get a famous or popular person to do a special event. Watch the costs on this, or you may lose money.

Invite people to your birthday party and ask that in lieu of gifts they give money to your organization.

Conduct a volunteer canvass. For one evening, you and a group of friends take literature to all the neighborhoods around you asking for money at the door. Be sure to comply with city and county ordinances.

Lead or get someone to lead a nature walk, an architectural tour, a historic tour, a sailing trip, a rafting trip, or a horseback ride. Charge $15-25 per person, or charge $35 and provide lunch. Advertise the event in the newspaper to draw in people from outside your organization.

Start a pyramid dinner, or a chain dinner. Invite 12 people and charge $12 each. Get two people of the twelve you invited to invite 12 people each at $12, and two people from each of those two dinners to invite 12 people at @$12, and so on. Here's the income:

Your dinner -- 12x$12 = $144

From your dinner -- 12x(12+12) = $288

From those dinners -- 12x(12+12+12+12) = $576

Twelve is used in this example because it worked very well for the Nuclear Freeze Campaign in California, which was Proposition 12. In many communities, most of the income for the campaign was generated by 12x12 dinners.

Collect cans for recycling. Ask all your friends to save their cans and bottles for you and turn them in to a buy-back recycling center.

Sell your frequent flyer mile to friends or donate them to the organization for a raffle. Watch the rules of the airline on this but most airlines let you give away miles, and you may be able to sell your miles as long as you don't go through a mileage broker.

If you live in a nice house or own a getaway cottage in a beautiful place or in an expensive city, rent it out for a week or a weekend two or three times during the year and give the proceeds to your organization. Or rent a room in your home for much less than the cost of a hotel room to people needing a place to stay while they are on business in a big city. You may even make a new friend in the process.

If you own a valuable dog and you breed it, donate the proceeds from one or two puppies. (I know some animal lovers will join me in feeling mixed about bringing more animals into the world when so many need homes; this suggestion is for people who were already planning to breed their dog. It is not intended as an incentive.)

Organize a service raffle. Get four people (one can be you) to donate a simple but valuable service that many people could use and sell raffle tickets for $3-$5 each. Keep the price a little high so you don't have to sell so many and so that the buyers have a higher chance of winning. Services can include child care for a weekend or for any weekend night two weekends in a row; one day of housecleaning; yard work; house painting (interior or exterior), etc. Sell the tickets to neighbors, work mates, and to other board members. Encourage people to buy several by offering discounts for multiple purchases, such as one for $5, 3 for $13, 4 for $17, 5 for $20. If you are really bold or live in a more affluent area, or have few friends, sell the tickets for $20 each. A full day of housecleaning for $20 is a real bargain, and buyers have a high chance of winning with fewer tickets sold.

Offer to do something your friends and family have been nagging you to do anyway, and attach a price to it. For example, quit smoking on the condition that your friends donate to your group, or get your friends to pay a certain amount for every day you don't smoke up to 30 days. Agree to match their gifts at the end of thirty days if you didn't smoke. Give them their money back if you did. (This method could be applied to other healthy behaviors, such as exercising or not eating sugar.)

If you belong to a church, research whether your church or theirs has a discretionary fund. Many churches have small pools of money available to groups through a women's fellowship or pastor's discretionary fund or various seldom-used endowments. Grants are often in the $50-$500 range and so go largely untouched by fundraisers. Sometimes simply writing a letter will free up this money and it tends to be renewable if someone is willing to ask the church yearly.

Research all the service clubs in town and see what their giving policies are. They often have formal giving guidelines for large grants of $2,000 and up, but have smaller amounts of money available for specific small projects.

Find out what items your group needs and try to get them donated. This is good for people who really hate to ask for money but who don't mind asking for things that cost money. Items that one can sometimes get donated include computers, paper, office supplies, office furniture (second-hand from banks and corporations as they redecorate), typewriters, adding machines, food, even cars.

Ask someone to donate $50 a month for a year. Ask four people to donate $10 a month for a year. Ask nine people to donate $5 a month for a year. Get the organization to send reminders to them or send the reminders yourself.

Find a few friends who have small savings accounts and pool them into one account. Invest the pool in a Treasury Bill or CD and when it comes due, give everyone what they would have made if they had invested only their little amount, and give the group the rest. For example, if four people invest $2,500 each for a pool of $10,000 in a CD that matures in a year, they may be able to earn 6% interest for a total of at least $600 (actually more, depending on the compounding factor). If each person invests only $2,500 for a year individually, they may not be able to earn more than 4%, for a total of $100 each or $400 for everyone. The $200 difference can be given to the group while everyone gains the interest they would have made. Find more friends or invest for longer to make up the $500.

Give it yourself. (This is so good I have to say it twice.)

Strategy with a long-deferred payoff (we hope): leave the group a bequest.

With similar hopes as above, get friends to include the group in their wills.

Ask friends who belong to service clubs, sororities, antique collecting groups, support groups, bridge clubs, etc. to discuss your organization in their group and pass the hat for donations. A once-a-year sweep of even small organizations can yield $100 from each.

For the church-going: ask if your organization can be a "second collection." The church passes the plate for its own collection and then you or someone from your organization gives a brief talk (or sometimes the whole sermon) about your group and the plate is passed again; the proceeds go to your group.

A variation on the above is to organize a "second collection Sunday" and get as many churches as you can to take up a second collection for your organization. Someone from your group will need to be at each service and give a brief talk. Second Collection Sundays can be very lucrative, as witnessed by the Catholic Campaign for Human Development, which collects $8 million on one Sunday in all the participating Catholic churches in the United States.

If, as a child, you collected something avidly that you now store in a basement, consider selling it. Coins and stamps are particularly valuable and have usually increased in value over the years. But your collection of rocks, toy ships, rockets, arrowheads, or dolls can also be valuable. When you donate the income from the sale, you can deduct that amount from your taxes -- an added bonus of this strategy, since you probably paid little or nothing for the items in the collection.

Have a sidewalk sale or garage sale for your whole neighborhood or building. Go around to your neighbors and tell them you will take their stuff outside and sit with it all day to sell it if they will donate half or all of the proceeds to your group. Since this is stuff people want to rid of anyway, it is a good deal for them. In one apartment building with ten units participating in donating stuff, an organization netted $3,000 in one day. Three people from the organization helped with the selling. With a few high-ticket items, such as a washer/dryer or some nice lamps, you can make good money.

If you have an artistic bent, offer to design greeting cards to specification for organizations or individuals for a fee. If you are good at calligraphy, sell your skills to schools for graduation announcement, friends for classy but low-cost wedding invitations, or just fun certificates such as "World's Greatest Dad" for Father's Day or "Outstanding Friend." Create unique Halloween costumes or masks. Donate the proceeds from your artistry.

Create a take-off on the "adopt-a-highway" techniques by naming budget items of your group as available for adoption. You could develop a flyer that reads, "The following items have been found near death from negligence and abuse. Won't you help? $25 per month will ensure that our computer is maintained. $100 per month will release our photocopy machine from toiling with no toner and a dying motor. (We can lease a new one.)"

An idea for people who live in border towns -- get permission to place a large container in stores or even at the airports of towns near national borders. Have a sign that asks people (in several languages) to throw in any coins or paper money they have not exchanged. Many times people leaving Canada or Mexico don't have time to exchange all their money or cannot exchange their loose change. Multiply this times hundreds of shoppers or travelers and you can make a lot of money. UNICEF does this in many European airports.

Hold an "I'm Not Afraid" Auction. You do this with just a few friends or hundreds of people if you have enough items to auction. You survey a few people (and use your own common sense) about what things need to be done in their home or office that they are afraid of or would really rather not do. This is different from a service auction -- there has to be an element of dread in the activity. For example, some people cannot wash their windows because their apartment is too high or the second story of their house is too high and they suffer from vertigo. If you are not afraid of heights, you can sell your window-washing service. This goes for drain cleaning, minor roof repairs, antenna fixing, etc. Or, if you are unafraid of cockroaches or waterbugs or spiders, you can offer to clean out that dark corner of a garage or basement for a small fee. Snakes can be found in gardens and woodsheds, but maybe that doesn't bother you. The problem doesn't need to be as serious as a phobia. How about allergies to dust, pollen, weeds? if you don't have them, you can mow, sweep, clean for a fee. By marketing it as an "I'm Not Afraid" Auction, you also have the option for people to name something they need done to a group of volunteers, and then have a volunteer say, "I'm not afraid to do that." In that case, you need a set fee for service.

Similar to the suggestion above is the "Details Auction." This is for all your friends whose desks are overflowing with papers or who can't get their receipts in order to give to the tax preparer or who complain they can never find anything. If you are well organized, offer to clean up their desk, get their Rolodex in order, file their papers, etc. If you like to shop, sell that to people who don't and do all their holiday shopping for them, or buy birthday, baby shower or niece/nephew presents for them. Anything that people feel they cannot control is the organized person's fundraising dream come true.

Find out which of your friends (perhaps this is true for you also) work in corporations with matching gift programs. Then ask them to donate and get their gift matched, and ask them to ask their co-workers to donate and get their gifts matched.

Get an "affinity" credit car. (This is for really large organizations or chapters of national organizations.) A firm, such as Working Assets, sets up a credit card with your logo on it, and a small percentage of each sale goes to your group. The Nature Conservancy, the Women's Building in San Francisco, and others are using this successfully. It requires a guarantee of volume of users.

As you can see, almost all of these strategies involve asking for money and giving money yourself. These are the basic premises of fundraising -- you must ask, you must give. Everything after that involves creativity, imagination and a sense of fun. I also listed two twice -- give it yourself and ask someone for it. That's not because I didn't really have 55 ways -- it is because those are the best, fastest and easiest ways to get money.

Reprinted with permission. Copyright (c)1986 Chardon Press/Grassroots Fundraising Journal.

How are budgets used in nonprofit organizations?

01-17-2006

Budgets are management tools which are used by nonprofits to plan and monitor the use of resources. Nonprofit organizations use several different types of budgets, and each type is used for different purposes.

Line item budgets display the budget of an organization by income and expense type and show the bottom line as income minus expenses. This format, while used by many nonprofits, is designed mainly for for-profit enterprises because in for-profits the main question is how much money is being made.

Source budgets allow nonprofits to plan and monitor the use of money from a particular funding source. These budgets often take the form of a proposal budget for a grant or contract. It's important to remember that a source budget is almost never a complete description of the cost of a program or project. A source budget only shows the costs that are being paid for by that particular funder.

Activity or program budgets, on the other hand, allow nonprofits to plan and monitor the use of resources by functions including programs, administration, fundraising, and membership development. Because nonprofits are mission-based, this is an essential perspective for nonprofit managers and board members, and it allows them to see the full cost of each activity within the organization.

Program by source budgets show the information from a program budget, including the full cost of that activity, alongside the source budgets of the various funding sources that help to pay for the program. This format allows organizations that use it to divide program costs among the funding sources and to understand which costs in a program are funded and which are not.

The following workshops provide more information on this topic:

Budgeting for Nonprofit Organizations

Budgeting for Grant Proposals

How can we allocate indirect costs to programs?

01-17-2006

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What Are Indirect Costs?

Why Allocate Indirect Costs to Programs?

What Are the Methods for Allocating Indirect Costs?

Is There More Than One Way to Calculate an Indirect Cost Rate?

What is the Standard for Allowable Indirect Costs?

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What Are Indirect Costs?

In a multi-program organization, all costs can be divided into two different types: direct and indirect. Direct costs are those which are clearly and easily attributable to a specific program. For example, the cost of new basketballs is clearly related to the after-school athletics program. Similarly, it is easy to justify charging counselors salaries to the counseling program.

Indirect costs are those which are not easily identifiable with a specific program, but which are, nonetheless, necessary to the operation of the program. These costs are shared among programs and, in some cases, among functions (program, management and general, and fundraising). The executive director's salary is a common example of an expense which benefits all programs and functions. Other indirect, or shared, costs may include rent, telephone, postage, printing and other expenses which benefit all programs and functions of an organization.

Why Allocate Indirect Costs to the Programs?

The full cost of a program rightfully includes a share of the overall costs of the organization. Knowing the full cost of a program sets a basis for financial analysis of the program, for pricing fee-based services, and for requesting reimbursement from funders for the full costs of providing services.

What Are the Methods for Allocating Indirect Costs?

There are several methods for allocating indirect costs. The two most common are case-by-case allocation and developing an indirect cost rate.

Case-by-Case Allocation

One method of allocating indirect costs is to determine a rate of actual usage for each program. For example, you may decide to keep track of long distance telephone calls and charge them to the appropriate program when you pay the phone bill each month. Similarly , some organizations use a counter or log to track copying expenses for each program and/or function. Time sheets may form the basis for allocation of salaries for the executive director, accountant, and staff whose work benefits more than one program or activity. A different method can be adopted for each line item or case.

The advantage of this method is that it seems to "make sense." A major disadvantage, however, is that it often requires a great deal of time consuming record keeping. Even if you keep the records needed to precisely allocate shared expenses among programs, not all expenses will be covered. If, for example, the rent is allocated by square feet, how should you allocate the hallway and rest rooms? What about the local phone calls which can not be tracked using a code?

For those shared expenses which cannot easily be divided directly into programs and functions, an indirect cost rate is useful.

Developing an Indirect Cost Rate

The first step in determining an indirect cost rate is to separate all costs into two groups: direct and indirect costs. The indirect costs are aggregated into an indirect cost "pool" and then allocated to the programs based on a set proportion or rate.

There are several measures used to determine the proportion of indirect costs to allocate (apply) to each program. The following simple example illustrates an indirect cost rate based on the relationship between total indirect costs and total direct costs:

Example 1-- The Tadpole League

The Tadpole League has a total budget of $3,300. The budget is distributed as follows:

Program A has direct costs of $1,000

Program B has direct costs of $2,000

Indirect costs to run the programs is budgeted at $300

Total costs are $3,300

Since Program A's direct costs are one-third of the total direct costs of the agency ($1,000 out of $3,000), it should bear one-third of the indirect costs. Similarly, since Program B incurs two-thirds of the total direct costs of the agency, it should bear two-thirds of the indirect costs, as well.

The Tadpole League can create an indirect cost rate which will allow it to easily accomplish this allocation. An indirect cost rate (using direct costs as a base) is established by dividing the total indirect costs by the total direct costs. For the Tadpole League the indirect cost rate is:

Total Indirect Costs divided by Total Direct Costs = $300/$3,000 = 10 percent of total costs

Each program s share of indirect costs can be calculated as a proportion of its direct costs:

Program A Indirect Expenses: $1,000 x 10% = $100

Program B Indirect Expenses: $2,000 x 10% = $200

Total Indirect Expenses = $300

After the indirect costs have been allocated to the programs, the budget now reads as follows:

Program A has direct costs of $1,000, indirect costs of $100 = $1,100

Program B has direct costs of $2,000, indirect costs of $200 = $2,200

Total costs are $3,300

This illustrates that after Program A has picked up its fair share of indirect costs, the true cost of running Program A is $1,100. As you can see from this example, using direct costs as a basis for your indirect cost rate will result in larger programs being charged with more of the indirect costs than smaller programs.

Is There More Than One Way to Calculate an Indirect Cost Rate?

The Office of Management and Budget Circular A-122, Cost Principles for Nonprofit Organizations, describes the method of developing a federal indirect cost rate, using these same principles. However, even within these guidelines, indirect cost rates for the same organization may vary from federal agency to federal agency. Organizations may allocate indirect costs based on how many people are served in each of their programs, how large each of their sites is, or other logical methods.

What Is the Standard for Allowable Indirect Costs?

There is little agreement in the nonprofit or funding community about how to calculate the rate, what to include, and how much is fair. There are no across-the-board standards or maximum levels for indirect costs. Some foundations have informal, unwritten guidelines for a maximum level. Under federal guidelines, allowable indirect costs range from 3 percent to 70 percent, varying from agency to agency.

Contrary to popular belief, indirect costs are not an easy measure of an organization s efficiency or stewardship. For example, imagine a multi-service agency where each program has its own bookkeeper, purchases its own supplies, and has all its own equipment. Such an organization would have no indirect costs at all, but would be clearly less efficient than if the programs shared bookkeeping costs, supplies and equipment.

Final Comments

Because the presentation of financial information influences the way we assess an agency's finances, the selection of indirect costing methods and accounting procedures has an important impact on decision-making. Several urgent and perhaps conflicting demands are made of the indirect costing process: to attribute indirect costs in the fairest way possible, to attribute the most indirect costs to the programs that can best afford them, to eliminate as many indirect costs as possible by having each program buy its own supplies, etc. Finding a balance among these demands that clears confusion and informs decision-makers is a responsibility of all participants in the nonprofit sector.

How do we account for pledges?

01-17-2006

How Do We Account for Pledges?

What Pledges Should Be Recorded?

What Are the Accounting Entries for Recording Pledges?

How Do We Account for Uncollected Pledges?

Reporting Issues

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How Do We Account for Pledges?

A pledge is a promise, either written or verbal, to make a contribution at a later date. For example, a donor may pledge to make contributions totaling $10,000 over the next three years. In another example, a donor may pledge to make contributions of $50 each month through payroll deduction for the upcoming year. Pledges may also involve non-cash contributions, such as a pledge to donate artwork at the end of next year.

By showing Pledges Receivable on the Balance Sheet, a nonprofit organization shows the amount of money it can reasonably expect to receive in the future in pledged contributions. In the past, organizations have had some leeway in the timing of recognizing pledges as income. In 1993, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 116, Accounting for Contributions Received and Contributions Made, that set down firm guidelines for pledge accounting.

What Pledges Should be Recorded?

A pledge must be bona fide to be recorded in the accounting system. Some indicators that a pledge is valid include written evidence created by the donor using words such as ìpromise,î ìagree,î or ìbinding,î or whether the pledge appears to be legally enforceable.

Pledges are either conditional or unconditional. An unconditional pledge is a promise by a donor to give a gift to the nonprofit in the future. The nonprofit does not need to meet any specific requirements before receiving the gift, and there are no other conditions stipulated by the donor. The examples at the beginning of this article illustrate unconditional pledges. Statement 116 asserts that unconditional pledges must be recorded in the financial record when they are made.

A conditional pledge is contingent on the occurrence of an uncertain future event. For example, a donor might promise to contribute $1,000 if the organization obtains a matching gift of $2,000 from new sources. Conditional pledges are recorded on the books only when the condition is met, so this pledge would not be recorded as revenue until the matching gift is obtained. (Once a condition has been met, in the above case when a matching gift has been obtained, the pledge becomes unconditional, and is recorded.) Prior to meeting donor-imposed conditions, conditional pledges are included in the footnotes to the financial statements.

What are the Accounting Entries for Recording Pledges?

Suppose that at the end of the 2004 fiscal year, you have two unfulfilled pledges: one is a pledge to make a gift of $1000 during the next year; the second pledge promises gifts of $2,000 per year in each of the next three years, for a total of $6,000.

The end-of-year journal entry to record these unconditional pledges is:

Pledges receivable

$7,000

Contributions Receivable

$7,000

To record newly received unconditional pledges

When the pledge payment of $1,000 is received in 2005, the entry is:

Cash

$1,000

Pledges Receivable

$1,000

To record receipt of a pledge

It is important to note that the $1,000 is recognized as revenue in 2004, and not in 2005 when the cash was actually received.

In an example of a conditional pledge, a donor may pledge $25,000 to renovate a half-way house on the condition that the building is purchased. This pledge would be mentioned only in a footnote until the nonprofit buys the building. At that point the pledge would be recorded and recognized as revenue.

How Do We Account for Uncollected Pledges?

Accounting for collectible pledges is similar to accounting for uncollectible accounts receivable. For example, suppose $20,000 in unconditional pledges were made to your organization during the year and your experience indicates that, on average, 20 percent of these will not be collected. An expense account can be established called Allowance for uncollectible pledges. The following journal entry would be made at the end of the year:

Uncollectible pledges expense

$4,000

Allowance for uncollectible pledges

$4,000

To record estimate of uncollectible pledges

The allowance account would subtract from the value of pledges receivable on your balance sheet:

Pledges receivable

$20,000

Less: Allowance for uncollectible pledges

$4,000

Net pledges receivable

$16,000

How do we interpret our financial statements?

01-17-2006

Financial Indicators from the Statement of Activities (Income Statement)

Financial Indicators from the Statement of Position (Balance Sheet)

Financial Indicators from More than One financial Statement

Samples of Vertical Analysis and Horizontal Analysis

Financial Indicators Using Information from more than One Financial Statement

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Readers of financial statements can learn a great deal about the health of a nonprofit organization by examining the numerical information presented. In particular, financial information helps readers:

Measure the organization's efficiency, using factors such as:

• Units of service produced compared to costs
• Fundraising income compared to amounts spent on fundraising
• Net income in a fee-producing program compared to the fees received
• Evaluate the adequacy of financial resources, often through:
• Liquidity ratios, such as the current ratio
• Comparison of total liabilities or total assets with net assets (formerly called fund balance)
• Cash flow projections

Seek significant financial trends by:

• Vertical analysis (looking at a simple line item as a percentage of total revenue or expense)
• Horizontal analysis (comparing prior periods with the current period)

For different organizations, different numbers will have different meanings. For example, imagine an organization that shows an operating deficit for the year of $20,000. Is that a red flag? In a small organization with few reserves, such a deficit may indeed indicate serious over-spending of failure to generate revenue. In a large organization, $20,000 may represent less than one percent of revenue and may not be significant. Yet another organization may be purposefully spending down cash reserves on an important program and this "deficit" may represent that decision. For still another organization, a loss of $20,000 may not be a concern by itself, but because it represents the third consecutive year of deficits, does cause concern.

Ratios, too, have different meanings in different situations. For example, a new organization may find it spent 90 percent of its dollars on fundraising. In an established organization, such a ratio would certainly be a red flag. But on closer look, this new organization's services are delivered by volunteers, and the only paid staff they have is a fundraiser.

Just as a fast food chain and an airline are in different businesses with different financial indicators, a specific ratio will mean something different in different types of nonprofits. There are different red flags for arts organizations than there are for human service organizations, and different red flags for organizations that rely on donations than for organizations that rely on individual fee payments.

In several cases, ratio analysis is used to evaluate the organization's financial health. Ratios are a tool for comparing numbers representing different aspects of an organization's financial status. The value of the tool is in identifying which numbers to compare, and determining what the comparison might indicate. Although accountants have determined certain standard ranges for these ratios within some nonprofit industries (arts, libraries, human service agencies, etc.), it is most important to identify the trends in your own organization and analyze changes over time. Therefore, instead of giving specific ranges in the following examples, this article indicates the likely significance of a "high" or "low" relationship between the numbers compared in the ratio.

Financial Indicators from the Statement of Activities (Income Statement)

Surplus or deficit

If income is greater than expenses within a given period, say a year, the organization has generated a surplus. If expenses are greater than revenue, the organization experiences a deficit for the period. There is no rule that says organizations should have surpluses, deficits, or break even. Typically nonprofits budget to break even. However, organization may deliberately decide to spend down their cash reserves (expandable net assets) for a specific purpose such as starting a new program. Doing so results in an operating deficit, but one which is planned. Similarly, if a nonprofit has determined that it needs a cash reserve for specific future purposes (cash flow, investing in a new program guarding against future declines in funding, etc.), the Statement of Activity should reflect an operating surplus. An "unplanned" surplus, deficit, or even a break even position should be analyzed to determine its causes and to plan for the implications.

Budget to Actual for Revenue and Expense

Perhaps the most commonly used financial indicator is a comparison of budgeted revenue to actual revenue, and budgeted expense to actual expense. These comparisons are made on both a monthly and a year-to-date basis. Significant variations from budget should be investigated to see whether new projections should be make based on actual experience, and/or whether managerial intervention is appropriate.

Functional Expense Ratios

When completing Federal Form 900, nonprofits must report expenses functionally, broken down into the categories of Program , Management and General Activities, and Fundraising. Donors and agencies who evaluate nonprofit performance, often look to see that most of your organization's funds are being used for programmatic purposes. However, different sources recommend differing practices and policies for allocating expenses among the functional expense categories. As a result, it is important to develop consistent guidelines within your own organization to determine which of your expenses go to program support, and which to management and general activities or fundraising.

Some functional expense ratios are:

Take Program Expense and divided by Total Expense

If high, most of the expenses are related to program. Relatively little is spent on management or on fundraising.

Take Fundraising Expense and divided by Total Expense

If high, a large percentage of expenses are spent on fundraising efforts. Prospective donors may draw the conclusion that too high a portion of their contribution will be spent on fundraising, rather than on program services.

Financial Indicators from the Statement of Position (Balance Sheet)

Short-term liabilities coverage ratio (quick ratio)

Will there be enough cash to pay bills in the immediate or near future? Add together all assets that can be used to pay bills over a specific period of time, such as one month or three months and compare this with the bills that must be paid within that same period of time.

Take Cash + Unrestricted Investment + Accounts Receivable and divided by Current Accounts Payable + Current Accruals

If high, there may be too much in cash, some could be earning more if invested. If low, you may be in danger of a cash flow crisis, not enough cash to pay pressing bills.

Current Ratio

Will cash flow be adequate to pay bills over the next year?

Take the Current Assets and divide by Current Liabilities

If high, Same as above. Caution: Even if current ratio is adequately calculated for the year, there may be periods within the year where there is an inadequate cash to pay bills.

Deferred Revenue or Net Temporarily Restricted Assets

Deferred revenue traditionally refers to cash which has been received for some restricted condition which has not yet been met. Under the new Statement of Financial Accounting Standards No.116 issued by the Financial Accounting Standards Board (FASB), most of these funds will be held not as deferred revenue, but as an addition to temporarily restricted net assets.

To determine the ratio, take the Deferred Revenue and divide by the Cash + Savings - or - take the Temporarily Restricted Net Assets and divide them by the Cash + Savings.

If deferred revenue or temporarily restricted net assets exceeds cash and savings, you may be spending restricted cash for purposes other than those which the funder intended, or using monies designated for future purposes (such as magazine subscription fulfillment) to meet current expenses.

Financial Indicators Using Information from More Than One Financial Statement

Fund Balance Ratio or Unrestricted Net Assets Ratio

The fund balance ratio, now called the unrestricted net assets ratio, measures the amount of unrestricted, spendable equity to the organization's annual operating expense.

To determine the ratio, take Expendable Unrestricted Net Assets and divide them by Annual Expenses.

If low, the organization has little unrestricted, spendable equity available to meet temporary cash shortages, an emergency, or deficit situation in the future. This may be the case even in organizations with significant unrestricted net assets, if the major portion of equity is tied up in fixed assets.

Days Receivables

The days receivables ratio measures the average number of days it takes to collect on a sale or service performed for a fee. This ratio is useful to organizations which earn significant portions of their revenue from fees charged to clients or from product sales.

To determine this ratio take the Accounts Payable times 365 days and divide by purchases.

If high, payments taking longer than 30 or 60 days are inconsiderate and may result in friction with community vendors. In addition, the organization may be incurring additional costs as a result of late or deferred payments (e.g., late fees, interest expense, etc.). A very long days payables ratio or a sudden increase in days payable may indicate an inability to pay bills.

Failure to Produce Financial Information

In order to assess the financial health of your organization, timely and reliable financial information must be available. Lack of adequate financial information may indicate that not enough time is available from staff or outside contractors to perform the accounting function, that staff needs more training in financial statement perpetration, or that financial systems need to be improved.

Final Comments

Ultimately, the most important performance measure of a nonprofit is not to be found in financial statements at all. To determine "success," a nonprofit must measure progress against its goals. For example, perhaps an organization has set as a goal providing 200 terminally ill patients with hospice care over twelve months. Determining how many patients were served and at what cost is not difficult. But these calculations show how efficient the has been - not how effective the group has been at providing compassionate, professional care for these patients. It is important to remember that financial indicators are powerful tools for nonprofit managers, when used in pursuit of meaningful goals.

How do we interpret the financial statements of a nonprofit organization?

01-17-2006

• Financial condition of the organization including amount of cash on hand; ability to meet obligations to vendors, employees, creditors, and funders; and the size of the organization's reserves
• The amount of money that is restricted temporarily for future uses or restricted permanently for investment only
• How much income was generated and how much was spent for each of the major activities of the nonprofit (including programs, administration, fundraising, and membership development)
• How the income and expenses of the organization by activity relate to the budget for each
• Projected cash flow for the next 13 months

This kind of information allows board members and nonprofit managers to make decisions and plan for future activity. Timeliness of this data is crucial because the condition of the organization and its environment are usually closely linked and subject to rapid change.

The following workshops provide more information on these topics:

Financial Management Concepts

Reading and Using Financial Statements

Budgeting for Nonprofit Organizations

How do we prepare for an audit?

01-17-2006

Choosing an Auditor

What Information is needed for the Audit?

When Does an Audit Begin?

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Choosing an Auditor

A nonprofit's audit is addressed to its board of directors, who have ultimate financial accountability for the organization. The board's finance or audit committee should recommend an auditor for approval by the full board. If you do not have an appropriate board committee, the director or an individual board member can bring a recommendation to the board.

While there are many criteria you may consider when selecting an auditor, the following are usually important considerations:

Experience in the nonprofit sector

Since there are some differences between for-profit and nonprofit accounting and in how financial statements are interpreted, an auditor who has other clients in the nonprofit sector is likely to be more helpful and efficient.

Experience with other nonprofits in your area of work

You may want to consider an auditor experienced with similar agencies who knows the specific reporting requirements of your primary funding sources.

Training in General Accounting Office (GAO) Standards

If you are required to have an audit which meets government standards, your auditors must fulfill GAO s continuing education requirements.

References for the audit firm and the auditor

In addition to experience, you are looking for indications that the auditor has the technical expertise, communication skills, and flexibility to conduct your audit in an efficient and effective manner. A good working relationship with your auditor will help ensure that the audit goes smoothly.

Fee

In those states where it is permitted, you will want to compare bids from auditors regarding the fees they charge to do the work you require. Pro-bono (free) audits are rare and nonprofits are cost sensitive. However, fees can be a tricky measuring stick for choosing an auditor. There are some outstanding auditors who work with nonprofits for a reduced fee. A firm may produce a lower bid the first year to get your business and then significantly raise the fee in subsequent years. Auditors who do not have the necessary experience with nonprofits may take longer to produce the audit, causing them to raise the audit fee in later years. They may also prepare a less complete report which has less value to the board and the public. Also, they may require nonprofit staffs, who are typically overburdened, to do even more work in preparing for the audit. Finally, some auditors who charge a lower fee do not provide the organization with a management letter detailing areas of weakness in the accounting system. This letter is an important management tool, of benefit to both the board and staff.

On the other hand, an expensive audit does not guarantee an excellent product. Your goal will be to get the reports and advice that you need and can understand for a reasonable fee.

There are differing recommendations regarding changing auditors after you have established a relationship with one individual or firm. Some people feel that it is important to change audit firms to gain a different perspective, while others argue that by doing so you needlessly add costs. One way around this is to switch partners within the firm so that you are gaining a fresh perspective while still getting the benefit of experience with your organization.

What Information is Needed for an Audit?

To prepare for your audit ask your auditor what information you will be required to provide. Many auditors prepare a list of those records which they will need to examine, forms which you will need to complete, and questions you will need to answer. Complete, accurate, and accessible records and other information prepared in advance of the audit will help ensure that the process goes smoothly and more quickly, reducing the financial and emotional cost of an audit.

While the following is not a complete list, it is representative of the information an auditor is likely to require:

Confirmations

A confirmation is an independent statement which supports the financial information in your records. Auditors will ask you to prepare confirmation letters on your letterhead (they will provide the format) to your bank(s), funders, attorney, people, and organizations you owe money to and who owe you money to confirm the amounts reflected in your books. Confirmations are mailed by and returned directly to your auditor to ensure their credibility.

Evidence of Internal Controls

The auditor will either meet with staff members or request that they complete a questionnaire documenting the procedures related to spending and receiving money and other resources, complying with laws, donor restrictions and regulations, maintaining property and equipment, and recording financial information in the books.

Documentation.

The auditor will request a number of schedules (lists) of information related to the following:

Assets

Accounts Receivable -- Who owes you money, how much, when it was due?

Property and Equipment (Fixed Assets) -- When acquired, how much you paid, how long they are expected to last, how much they are depreciated each year, and how much has been depreciated to date?

Note: Many nonprofits ask their auditors to maintain this schedule for them and to prepare the annual calculation of depreciation.

Liabilities

Payables -- Who you owe money to, how much you owe each individual/organization? Copies of invoices or loan agreements.

Revenue

Grants and Contributions--Funder/donor names and addresses, grant period, grant amount, when received, restrictions, and copies of the grant letters and grant applications. In the case of individual contributions, your auditor will specify which donors to include on this list based on a minimum level of contributions they will establish for you based on your overall budget and total contributions.

Donated services and materials--You may be required to place a dollar value on contributions of certain services and materials. Prepare a list of these donations to discuss with your auditor.

Special events and benefits--Show income and expenses, and documentation for the value of goods or services which donors received (and, therefore, are not included in the tax-deductible portion of their payment.)

Documentation--such as contracts and invoices, names and addresses, registrations, etc. for fees from memberships, tuition, performances, and other services.

Inventory--If you sell tee-shirts, books, or other products, keep a record of sales throughout the year so that beginning inventory can be reconciled with inventory at the end of the year.

Expenses

Payroll records, including federal and state tax returns related to payroll, vacation records.

Smaller nonprofits rely on their auditors to prepare many of these schedules based on information they give to the accountant. You can save on the cost of your audit by preparing the majority of these schedules internally, using staff or board volunteers, rather than asking the auditor to prepare them.

ADDITIONAL INFORMATION

In addition to the schedules noted above, be prepared for the auditor to review the following items:

Board minutes

Leases and other contracts

Bank statements, bank reconciliations, checkbooks, and canceled checks

Financial files for paid bills and deposits

Components of the accounting system -- chart of accounts, journals and ledgers, printouts if the system is computerized, trial balance, etc.

Budget for the fiscal year being examined

Finally, you will want to consider the non-financial aspects of the audit. The staff should understand what is involved in an audit, that it is a routine examination of financial and other information, and that they may be asked a few questions in relationship to that examination. You should assign one person to be the audit coordinator. In a small nonprofit, that may be the bookkeeper or executive director. In a larger organization, it may be the finance director. The audit coordinator should have access to all in formation the auditors may need, and should plan to be available to the auditors while they are on-site. In addition, some thought should be given to setting aside a physical location for the auditors so they can work efficiently.

When Does an Audit Begin?

Most organizations select an auditor prior to the end of their fiscal year. About the time your fiscal year ends, you will want to meet with your auditor to determine what information will be required for the audit. If your financial management system is reasonably well organized, the audit can usually begin within two months of the end of your fiscal year. However, new government funding and other complicating factors may extend the amount of time needed to prepare for the audit.

How much cash should we hold in reserve?

01-17-2006

Cash flow shortages which arise when expenses fall due before the income to pay for them is received.

Factors which contribute to cash flow shortages in a balanced budget include seasonal or irregular cash flows (e.g., a summer camp or a theater company which receives most of its cash in a few months of the year, but have to pay bills year round), delays in collecting fees for service, and delays in grant payments or contract reimbursements.

This type of cash flow shortage can usually be uncovered by realistic and careful cash flow budgeting. Questions frequently asked during this process include:

How much do you usually need to borrow to meet payroll and other ongoing expenses during the course of the year?

How often do you have to delay payments to vendors? How much are those bills?

How late is your government reimbursement each month? What is the average outstanding amount at any given time?

Cash flow shortages which are caused by the unpredictability of delivering services which are part of the organization's basic mission.

For example, the Red Cross, which is in the disaster business needs an enormous reserve to accommodate years when earthquakes, floods, and fires all hit at the same time. Money saved for unexpected problems is sometimes called a contingency fund and can be calculated either as a percentage of annual expenses or as a percentage of a key fundraising event if you have one. The more past experience you have to rely on when making contingency calculations, the more accurate they are likely to be.

Cash flow shortages which are caused by unexpected emergencies, such as the withdrawal of a key funder or the loss of a key asset.

Examples of unexpected emergencies include a fire destroys your site, your heating system needs to be replaced, etc. There is no easy or sure way to predict these kind of cash needs. Factors which contribute to these kinds of emergencies include the stability of funding sources (in general, fees for service or from sale of products and membership dues are considered more predictable and stable than grants and contributions) and the predictability of expenditures (if you have old equipment or other fixed assets there is a higher probability that something will go wrong unexpectedly).

The more thought you give to anticipating these kinds of emergencies, the easier it will be to cope with them. The types of questions asked to anticipate these situations vary from organization to organization. Some examples include:

If the fall fundraiser is rained out, how much do you need to tide you over until you can try it again in the spring?

If a fire destroys your theater and you want to move the play to another venue how much will it take to keep the staff and actors on payroll during the transition? How much will additional rent and publicity costs amount to?

How many months would it take your organization to get back on its feet in case of disaster? What are your monthly core operating expenses?

Cash is needed to start a new program or take advantage of an unexpected opportunity which will significantly contribute to your mission.

You might want to determine what it would cost to implement a pilot project, allowing you to test the concept and show some preliminary results to potential funders.

In addition to a reserve for operating expenses, some organizations may build a reserve for an endowment fund or save money towards a large capital purchase (such as a building or computer equipment.)

Each of these areas should be considered by your board and senior staff to determine how much of a cash reserve is desirable for your organization. There is no one answer to how much of a reserve is right for nonprofits because the answers to the questions noted above will vary from agency to agency. You might consider each of the points raised above and determine how much of a reserve is needed for your organization. The following example illustrates how to establish an operating reserve goal:

Example 1 - The Helpful Organization

The Helpful Organization has had to borrow $5,000 from the board president for the past two years in order to meet cash flow shortages over the summer. In addition, its current government funder has been predicting cuts of 5-16 percent sometime in the next two years. Its current grant is $35,000.

The Helpful Organization also hopes to start a family literacy program on the weekends which will complement its after-school tutoring program for high school students. One semester of the program is likely to increase its expenses by $7,000. Given these factors, the Helpful Organization might set the following reserve goal:

Cash flow

$ 5,000

Guard against reduced funding -

16% x $35,000

$ 5,600

Investing in new program

$ 7,000

Operating reserve goal

$17,600

Another organization might include in its calculation some percentage of its annual operating expenses. Recommendations on ìhow much is enoughî vary from source to source, ranging from no reserve (from some funders) to up to two yearsí worth of expenses (the maximum acceptable to the National Charities Information Bureau.). You want to balance prudent management, taking into account the factors noted above, with putting your assets to work to serve the community. If you perform the calculations above and your reserves significantly exceed your anticipated needs, it is probably time to discuss how to invest more of those funds into programs serving the community.

Building a reserve requires an operating surplus, or ìprofitî from unrestricted sources during the year to provide extra, or reserve cash. Even nonprofit organizations are legally entitled to show an operating surplus. They may not use that surplus to benefit any member or officer of the corporation, but must use the surplus for their designated mission to the community. Cash reserves do not need to be held in separate accounts. To indicate that the board has set aside money as a cash reserve for operations, the unrestricted net assets on the balance sheet might be divided as follows:

Assets

$35,429

Liabilities

$12,226

Unrestricted Net Assets

$23,203

Board designated reserve

$15,000

Undesignated portion

$ 8,203

An operating reserve, whether it is designated as shown above or simply an accumulated fund balance, is likely to have some impact on your fundraising. Some funders may question your need for their contribution if you have had surpluses from previous years. You will need to explain your policies regarding your cash reserve(s), what factors you considered and why the reserve is there. This will often alleviate a funders concern that you are accumulating cash at the expense of the people you serve.

In summary, you will need to develop a policy which articulates how much is enough to guard against emergency, invest in new programs, replace or improve capital assets, smooth out cash flows, and put the rest of your cash to work for the community.

How should we invest our short-term cash balances?

01-17-2006

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Determining How Much to Invest and for How Long

Who should We Invest With?

Checking and Savings Options with Immediate Cash Availability

Certificate of Deposits and U.S. Treasury Savings Options

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Careful management of short-term cash balances can add to an organization's current income and provide the basis for an investment program which will benefit the organization in the future. Even small balances can be invested to earn some interest.

Organizations with significant assets to invest should consider the services of a portfolio manager, a finance professional at a brokerage firm, bank, or other financial institution. Frequently a member of your board can provide advice on how to invest or where to seek help.

Determining How Much to Invest and for How Long

The investment of funds in the short-term is one aspect of short-term cash flow planning and cash management. As part of the annual budget process you will want to determine as accurately as possible the amount of cash inflow and cash outflows, as well as their timing. The cash flow budget should give you a good idea of when you will have surplus cash to invest.

Generally speaking, the longer funds can be committed to an investment the higher the percentage return will be (assuming the same amount of risk.) For example, cash balances in a checking account may earn little or no interest while cash invested in a risk-free six month treasury bill can yield significant interest. Therefore, it is to your advantage to identify cash which may be invested for a longer time once you have determined your cash needs and are confident that they are covered.

Who Should We Invest With?

It is worth comparing services and yields from a variety of financial institutions before making your selection. Some banks offer special services to nonprofits. Others may charge higher fees because they offer services which smaller nonprofits are unlikely to take advantage of.

Checking and Savings Options with Immediate Cash Availability

An interest-bearing checking account and/or a savings account should be considered in order to earn some return on monies as they flow in and out of the organization on a daily basis. Terms vary widely, but a short discussion with a board member, banker, financial advisor, or broker should help you sort it out quickly. Some donors, especially government agencies, require that interest earned on their monies be returned to them.

When considering an interest-bearing account you should consider the net cost incurred from the combination of interest and other fees, which may include monthly service charges, per check fees, electronic transaction charges, and other fees resulting from insufficient funds and returned checks. An interest-bearing account is advantageous only if your average balance is sufficient to avoid fees, such fees are waived automatically for you, or the interest generated from your balance is consistently greater than the fees charged to maintain the account.

Banks offer a variety of checking and savings instruments. Typically higher interest is paid on those accounts requiring higher minimum balances. When deciding what type of account to open, you will want to consider the following factors:

Bank Fees

Review the entire list of bank fees, not just the minimum balance fee.

Daily Balance

Ask whether fees are computed on an average versus minimum daily balance. On a minimum daily balance basis, you are penalized for falling below the required minimum balance for even one day, regardless of your balance for the month.

You might also look into a sweep account with your bank. In this arrangement, you maintain a predetermined amount in your checking account. At the close of each business day, the remainder is then swept automatically into a savings account or other account that may yield higher interest. If your organization could benefit from such an arrangement, be sure to discuss options with a number of banks as the level and type of security offered can differ widely among banks. This service may only be available to nonprofits with substantial cash to invest.

The Federal Deposit Insurance Corporation (FDIC) insures up to $100,000 of depositor funds in a single bank, whether funds are in a checking, savings or other account. Some instruments available through a bank may not be covered. These include certificate of deposits (see below) and money market funds,. Money market funds are mutual funds holding a portfolio of securities, often with a minimum balance of $1,000 or more. These funds are usually available on demand, which means you can withdraw them by writing a check from your account. While there has never been a default, money market funds are subject to some risk. Money market investments can be made directly with the fund or through a broker.

Certificates of Deposit and U.S. Treasury Savings Options

Some investments, such as Certificates of Deposit (CD's) offer higher, fixed rates on funds deposited for a specified period of time. Before selecting such a savings plan or investment, your organization should seriously review its cash flow needs to determine whether assets can be set aside -- inaccessible -- for a long period. Substantial penalties for withdrawing funds from a CD before the due date are customary. In addition, some CD's may not be covered under FDIC insurance.

U.S. Savings Bonds offer more savings with higher returns for investment terms from six months to five years or longer. These bonds and notes can be purchased in various denominations for as little as $75.

U.S. Treasury Bills (T Bills) and U.S. Treasury Notes yield an even greater return than savings bonds, but have higher minimums. Treasury bills have $10,000 minimums and maturity dates of less than one year. Three- to six-month issues are available weekly and one year issues are sold monthly. Treasury notes have a maturity from one year to thirty years. Treasury Bills and Notes can be obtained directly from the Federal Reserve Bank nearest you, or from commercial banks and brokers. Again, you should consider how long you can set aside organizational funds without jeopardizing your organization's cash flow.

Other federal agencies issue bonds and notes, such as Fannie Mae (Federal National Mortgage Agency) bonds. For additional information on other government investment options, contact your banker, financial advisor, or a knowledgeable board member.

Is there a way to just show a figure for "net fundraising events" rather than listing each event under both income and expense?

01-17-2006

It's true--fundraising income and expense can distort the budget. For example, if an organization's annual dinner brings in $25,000, but costs $15,000, the budget should really show only the $10,000 as net income (a separate, break-out worksheet should show the expected gross income and expenses for analysis purposes). In line with this clarity, Federal Form 990, the annual form required for most nonprofits, asks only for the net of fundraising special events.

There are two approaches. One solution is simply to track both income and expense to the same account; If, for example, account #488 is for the Annual Dinner, you can post both income (Credits) and expenses (Debits) to that account. The printout will show only the net. If you want to know the grosses, you will have to look at the year-to-date general ledger printout. In the previous example, software would print out only $10,000 in the line item for the Annual Dinner income.

Should we get an audit?

01-17-2006

Some nonprofits are legally required to obtain audits. Many states require an audit for nonprofits which receive contributions over a specified amount (the amount varies from state to state) and/or nonprofits who hire a paid fundraiser. You may contact the Secretary of State or Office of the Attorney General for regulations in those states where you raise money. In addition, nonprofits which spend $500,000 or more in direct or pass-through federal funding during a single fiscal year are required to have an audit.

You may choose to obtain an audit even if you are not legally required to do so. Many funders commonly request audited financial statements. In some cases, they will accept statements prepared in-house. Alternatively, they may accept a CPA review (see below.)

In addition to these external requirements, the board may seek reassurance that the financial information they are considering as part of their oversight function is accurate and complete. In cases where financial problems or irregularities in the financial system have occurred, the board and the general public may look to an audit to provide assurance that these problems have been resolved. Also, the audit process can be valuable to your executive director and finance staff since it confirms the financial picture and helps you strengthen internal control procedures.

Finally, an audit signals a new phase in the organization's maturity. As your organization's financial transactions become more complex, undergoing the rigors of an audit will help your staff understand and develop the financial systems required to track and manage finances responsibility. In addition, as others become attracted to your organization's work, many will expect you to be able to provide them with audited financial statements as they are considering making a contribution as a donor and/or a volunteer.

What accounting software should a nonprofit organization use?

01-17-2006

• Financial reports that are needed by board, management, staff and funders
• Size of organization
• Number and complexity of transactions
• Sophistication and size of accounting staff
• Amount of money available for this purpose

A number of accounting software solutions are designed specifically for nonprofit organizations. These systems usually allow for the tracking of restricted donations and grants and for the functional classification of expenses and income. One disadvantage of these systems is that the cost may be prohibitively high for many small and mid-sized nonprofits.

Solutions that are designed for the for-profit sector are often used by nonprofit organizations as well. It's important to remember that if your organization chooses accounting software that is made primarily for for-profits (such as QuickBooks), the software will have to be tweaked and set up carefully to get the information that is required for nonprofits.

Most importantly, when considering what accounting software to use, remember that this is only one tool among many in a coherent financial management system. The accounting software has to be set up properly to be useful to the organization, and it does not replace the need for a system of internal controls, good planning and budgeting, or training of staff and board members in nonprofit financial management. If the underlying financial data is not accurate and organized, the resulting output from the accounting system may be useless or may even harm the organization's ability to understand its financial picture.

The following workshops provide more information on this topic:

Financial Management Concepts

Reading and Using Financial Statements

Introduction to Bookkeeping in QuickBooks

Intermediate Bookkeeping in QuickBooks: Applying Skills to the Non-Profit Environment

What are internal controls?

01-17-2006

A key principle of internal controls is the segregation of duties so that no financial process is handled by a single person from beginning to end.

Board members, executive directors, and staff all have essential roles to play in setting up and maintaining a working system of internal controls.

The following workshops provide more information on this topic:

Financial Management Concepts

Reading and Using Financial Statements

What are the alternatives to an audit?

01-17-2006

A review is a more limited examination of the financial statements by a CPA. During a review, the CPA asks questions of management and conducts some analysis, but does not undertake the extensive testing required for an audit. As a result, the review provides only limited assurance that the financial picture is fairly presented. A review may cost less than half of an audit and may satisfy state requirements for smaller nonprofits.

A compilation is a report prepared by an accountant using financial data supplied by the organization. The accountant organizes this financial information into standard financial reporting formats, but does not review the numbers for accuracy or provide assurance regarding the information that is included.

What are the differences between nonprofit and for-profit accounting?

01-17-2006

As mission-based organizations, nonprofits need information on how the organization is doing financially (just like for-profits do) as well as information on how resources are being used to fulfill their missions-which are those organizations' purposes for existing. For this reason, nonprofits break their expenses down not only into line items (such as salaries or supplies) but also into what are known as functional categories (such as programs, administration, and fundraising). While it's not required, most organizations also choose to track income by functional category, allowing them to see how well the separate activities support themselves.

Contributed income also differentiates nonprofits from for-profits. The rules for accounting for contributions in nonprofits are designed to ensure that the donations will be used as the donor intended and to create consistency in financial reporting among nonprofit organizations. The most significant of these rules is that nonprofits must record contributions in one of the following categories: unrestricted, temporarily restricted, or permanently restricted.

Unrestricted grants and donations are those that have been made to nonprofits for general use. The donor has made the contribution without specifying a purpose or time period within which the funds must be used.

Temporarily restricted funds are those that are donated for a specific purpose or for use during a specific period of time. Nonprofits are required to track the balances of these gifts separately from unrestricted ones. Once the organizations use the temporarily restricted funds for the specified purposes or the time restrictions expire, those moneys are released from restriction and become unrestricted.

Permanently restricted contributions most often take the form of endowments. Unlike temporarily restricted funds which become unrestricted over time or upon fulfilling the purpose designated by the donor, permanently restricted funds are restricted in perpetuity. Typically this means that organizations can invest the funds to generate income, but they are not allowed to spend the original contributions. Income generated by investing permanently restricted donations may be unrestricted or temporarily restricted according to the donor's designation.

These two differences between nonprofits and for-profits (tracking expenses by function and tracking contributions by level of restriction) result in nonprofit organizations having financial statements which are dissimilar from for-profit enterprises. These statements might be unfamiliar to staff, executive directors, and board members, and there are specific challenges to tracking the information that is required to produce them.

The following workshops provide more information on these topics:

Financial Management Concepts

Reading and Using Financial Statements

Budgeting for Nonprofit Organizations

Intermediate Bookkeeping in QuickBooks: Applying Skills to the Non-Profit Environment

What are the elements of an accounting system?

01-17-2006

Components of an Accounting System

The Accounting Cycle

Maintaining the Integrity of an Accounting System

Stages in the Development of an Accounting System

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An accounting system is comprised of accounting records (checkbooks, journals, ledgers, etc.) and a series of processes and procedures assigned to staff, volunteers, and/or outside professionals. The goals of the accounting system are to ensure that financial data and economic transactions are properly entered into the accounting records and that financial reports necessary for management are prepared accurately and in a timely fashion.

Components of an Accounting System

Traditionally, the accounting system includes the following components:

Chart of Accounts

The chart of accounts is a list of each item which the accounting system tracks. Accounts are divided into five categories:

Assets, Liabilities, Net Assets or Fund Balances, Revenues, and Expenses. Each account is assigned an identifying number for use within the accounting system. (See Financial Management FAQ 6: What Should Our Chart of Accounts Include? for information on designing the chart of accounts and using it for reporting.)

General Ledger

The general ledger organizes information by account. The chart of accounts acts as the table of contents to the general ledger. In a manual system, summary totals from all of the journals are entered into the general ledger each month, which maintains a year-to-date balance for each account.

In a computerized system, data is typically entered into the system only once. Once the entry has been approved by the user, the software includes the information in all reports in which the relevant account number appears. Many software packages allow the user to produce a general ledger which shows each transaction included in the balance of each account. For example:

Acct. No. 5105 Account Name: Office Supplies

Beginning Balance @ April 30: $1,535.26

Ck. No. 1443 John s Office Supplies 5/12 $347.40

Ck. No. 1451 Quality Paper Store 5/17 $32.89

Closing Balance @ May 31: $1,915.55

Journals and Subsidiary Journals

Journals, also called books of original entry, are used to systematically record all accounting transactions before they are entered into the general ledger. Journals organize information chronologically and by transaction type (receipts, disbursements, other). There are three primary journals:

The Cash Disbursement Journal is a chronological record of checks that are written, categorized using the chart of accounts.

The Cash Receipts Journal is a chronological record of all deposits that are made, categorized using the chart of accounts.

The General Journal is a record of all transactions which do not pass through the checkbook, including non-cash transactions (such as accrual entries and depreciation) and corrections to previous journal entries.

As organizations mature, and handle greater numbers of financial transactions, they may develop subsidiary journals to break out certain kinds of activity from the primary journals noted above. The most common examples of subsidiary journals include:

The Payroll Journal, which records all payroll-related transactions. This may be useful as the number of payroll transaction s grows and becomes too large to handle reasonably within the cash disbursements journal.

The Accounts Payable Journal and Accounts Receivable Journal track income and expense accruals. These are useful for grouping income and/or expense accruals which are too numerous to track effectively through the general journal. Some accounting packages require you to set up all bills as accounts payable and all revenue as accounts receivable, eliminating the cash disbursements and receipts journals altogether.

The process of transferring information from the journals to the general ledger is called posting. Computerized accounting systems often require users to post all income and expense transactions through the accounts receivable and payable journals. Other automated systems allow users to post to cash disbursements or receipts journals, but cannot produce detailed financial information from these journals (such as a list of checks written presented in numerical order.) See Financial Management FAQ 9: What Accounting Software Package Should We Buy? for further information.

Checkbook

In very small organizations, the checkbook may serve as a combined ledger and journal. Most financial transactions will pass through the checkbook, where receipts are deposited and from which disbursements are made. Smaller organizations receiving few or no restricted contributions find it easier to keep track of financial activity by running all of their financial transactions through a single checking account. Very small organizations, with few deposits and disbursements, may prepare reports directly from the checkbook after the balance has been reconciled with the bank balance.

Accounting Procedures Manual

The accounting procedures manual is a record of the policies and procedures for handling financial transactions. The manual can be a simple description of how financial functions are handled (e.g., paying bills, depositing cash and transferring money between funds) and who is responsible for what. The accounting procedures manual is also useful when there is a changeover in financial management staff. See Financial Management FAQ 24: What is an Internal Accounting Control System and How Can We Make Ours Effective? for further ideas of what to consider as part of an accounting procedures manual.

The Accounting Cycle

The accounting cycle may be represented schematically as follows:

financial transactions -> analyze transaction -> record transaction in journals -> post journal information to general ledger -> analyze general ledger account and make corrections -> prepare financial statements from general ledger information

The routine aspects of the accounting cycle (recording transactions, posting, etc.) are generally done by bookkeepers or data entry clerks. Accountants focus on the more analytical aspects of the accounting cycle (analyzing transactions, preparing financial statements.) Many small organizations rely on a single individual to perform all of these functions.

Maintaining the Integrity of an Accounting System

The key tasks for maintaining the integrity of an accounting system include the following:

Trial Balance

In a manual system all balances from the general ledger are tallied on a monthly basis to make sure that debit balances equal credit balances. Once debits equal credits, financial statements can be prepared using trial balance amounts. Computerized accounting systems almost always produce a trial balance as a built-in report. Many software packages will not allow you to post an entry to the general ledger until the debit and credit balances are equal.

Bank Reconciliation

Each month you will need to reconcile the balance in your checkbook with the balance in your account according to your bank. This process has three basic steps:

Compare deposits and checks as they are recorded in the checkbook with those reflected in the bank statement. Adjust any discrepancies.

Adjust for bank charges or interest earned into the checkbook balance.

Subtract uncashed checks from the bank s balance and add in checks you have deposited which are not yet reflected in the bank's balance.

See Financial Management FAQ 21: What Internal Controls are Needed for Cash Disbursements?, FAQ 23: What Internal Controls are Needed for Payroll?, and FAQ 24: What is an Internal Accounting Control System and How Can We Make Ours Effective? for additional information about policies and procedures which will help you maintain the integrity of information entered into the accounting system.

Stages in the Development of an Accounting System

Your accounting system will change as your organization's needs and resources change. A new, small organization may only need to keep an accurate record of activity in its checkbook. As the number of transactions grows, that organization will add manual cash disbursements and receipts journals, but may still prepare monthly reports using a summary sheet of income and expense items. Finally, as the organization acquires assets other than cash, accruals are added, and transactions become more complex, a full general ledger system will need to be incorporated.

As their volume and complexity grow, the financial management activities will also require increasingly sophisticated staffing, whether by paid or volunteer staff or a combination of staff and outside service providers. An accounting system is only as good as the staff's ability to put it into practice, and should be designed with its users in mind.

What does an Auditor do?

01-17-2006

Auditors are not expected to guarantee that 100 percent of the transactions are recorded correctly. They are only required to express an opinion as to whether the financial statements, taken as a whole, give a fair representation of the organization's financial picture. In addition, audits are not intended to discover embezzlements or other illegal acts. Therefore, a "clean" or unqualified opinion should not be interpreted as an assurance that such problems do not exist.

An unqualified opinion includes wording such as, "In our opinion, the accompanying financial statements present fairly the financial position of ABC Agency at the fiscal year ending June 30, 19XX, ... in conformity with generally accepted accounting principles."

A qualified opinion is issued when the accountant believes the financial statements are, in a limited way, not in accordance with generally accepted accounting principles. A qualified opinion might include wording such as, "In our opinion, except for the omission of... the accompanying financial statements present fairly..."

Many auditors provide nonprofits with year-end financial management services which are not part of the audit. These include preparing:

Year-end financial statements based on client records

Notes to the financial statements

Depreciation schedules

Accrual and other adjustments based on client information

Smaller nonprofits with limited accounting expertise may choose to pay their auditors for these tasks. The Board should be aware of the additional services being provided by the auditor and should ask the auditor if these impact their independence to the organization. Also, you should know that these services are provided in addition to the audit and can be completed by staff or volunteers to lower the cost of the audit.

What financial reports do management and the board need?

01-17-2006

What reports do we need to prepare and how often?

Who prepares these reports and who should review them?

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Because each nonprofit organization faces different financial issues and has different resources to bring to financial functions, each organization will choose a different set of regular financial reports to prepare and analyze. At different times an organization will need different reports to provide information to support its decision-making.

What reports should we prepare and how often?

The answer will depend on several factors, including the extent to which the organization is financially stable, the degree and extent to which the financial picture changes during the period, the availability of cash to meet financial obligations, the availability of staff or other professionals to prepare reports, etc.

A mid-sized human service organization in reasonably good shape financially might consider the following schedule of reports:

Monthly Reports

Statement of Position (Balance Sheet)

What is our financial health? Can we pay our bills?

Statement of Activities (consolidated) showing budget to actual information

What has been our overall financial performance this month and to date?

Departmental Income and Expense Statement showing budget to actual information

How does actual financial experience compare with the budget? Is specific action called for, such as limiting expenses in certain areas? Does experience indicate a change in the budget is appropriate?

Narrative report including tax and financial highlights, important grants received, recommendations for short-term loans, or other means of managing cash flow

An executive summary of financial highlights, analysis, and concerns.

Quarterly Reports

Fundraising Reports; actuals vs. projections for donations; status report on all foundation proposals.

Are fundraising results on track?

Cash flow projections for the next six months

Do we anticipate a cash surplus or shortage?

Payroll tax reports

Have payroll tax reports been submitted on time and tax deposits been made?

Fee for service report showing number of fee-paying clients and revenue against projections?

Are we servicing approximately the same number and type of clients as we had anticipated? If not, what action or change is appropriate?

Annual Reports

Annual Federal forms, including 990 and Schedule A; State Reports

Has the organization fulfilled its reporting responsibilities to federal and state governments?

Draft financial statements for year: Statement of Activities; Statement of Position; Income Statement for each program. Aggregated financial statements with narrative showing key trends

Focus: Internal management decision-making. What was our financial performance over the past year? In what ways and for what reasons was performance different from the budget? What financial implications must be taken into account when planning the upcoming year?

Audited financial statements for the entire organization, including Statement of Position, Statement of Activities, Statement of Cash Flows, Statement of Functional Expenses

Focus: External accountability and financial disclosure to funders and the public

Management letter from the auditor

What recommendations has the auditor made related to the accounting system, internal controls, and financial planning?

Who Prepares These Reports and Who Should Review Them?

In a small nonprofit the board treasurer or outside accountant/bookkeeper might prepare the financial information for all in-house financial statements, and work with the executive director to prepare the narrative with financial highlights to be presented to the board. A controller or finance director would prepare these reports in a larger organization. The program director, if you have one, would ordinarily prepare the quarterly fee-for-service report. Similarly, the director of development would prepare the quarterly fundraising report.

The executive director reviews all reports prior to presenting them to board members to ensure that the financial information makes sense and can be translated into issues and opportunities facing the organization. In addition, key staff members such as program directors and the director of development should have the opportunity to review income and expense reports for the whole organization.

When the board is large enough to include a finance committee, that committee reviews all financial statements and reports on financial activity to the full board. In a smaller nonprofit, the executive director might report first to the board treasurer, who can then keep the full board apprised of the organization s financial status.

The finance committee will often review the numbers in greater detail than the full board. The full board may be better able to respond to aggregated information with important financial trends and issues highlighted in an accompanying narrative report. While each board member should have the opportunity to review organization-wide income and expense reports to understand the impact their department's activities have on the whole organization, members who are inexperienced at reading financial statements may get lost in overly detailed statements. To help the board fulfill its oversight function, it is important for the executive director and the finance committee to present the information in as clear and concise a manner as possible.

The audit and management letter are addressed directly to the board of directors because of its oversight function. Typically, the auditor works with the finance staff to prepare federal and state reports and may be included at board meetings during which presentations are given.

What financial statements are nonprofits required to issue?

01-17-2006

Statement of Financial Position

Statement of Activities

Statement of Cash Flow

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The end products of the accounting process are the financial statements, summarizing all of the financial transactions of the organization for the period. The Financial Accounting Standards Board issued Statement of Account Standards No.117, Financial Statements for Not-for-profit Organizations requiring nonprofits to prepare three primary financial statements:

• Statement of Financial Position (Balance Sheets)
• Statement of Activities (Income Statement)
• Statement of Cash Flows

In addition, nonprofits must provide information about expenses as reported in their functional classifications (program services and supporting services.) Voluntary health and welfare organizations are also required to present a statement that reports expenses by their natural classification (e.g., salaries, rent, telephone, printing, etc.) Other nonprofits are encouraged to report in both formats as well.

The following briefly describes the information included in each statement.

Statement of Financial Position

Reports amounts of the organization's assets, liabilities and net assets (fund balances) at a specified date. This statement was previously known as the Balance Sheet.

Assets are properties and resources the agency owns and can use to achieve its goals.

Current assets include cash accounts, certificates of deposits and other investments, and items such as receivables which will be converted to cash within one year. Fixed assets include land, buildings and equipment.

Liabilities are debts of the organization, what is owed. Current liabilities typically include accounts payable to vendors, short-term loans due, withheld payroll taxes due, etc. Long term liabilities include long term debt, mortgages, etc.

Net Assets (previously called fund balances) represents the net of assets over liabilities. Three classes of net assets must be reported on unrestricted, temporarily restricted, and permanently restricted. Restrictions are determined by the conditions which donors place on their contributions.

Statement of Activities

Reports revenues, expenses, and the resulting change in net assets for the year. Charges are reported for each of the three classes of net assets (unrestricted, temporarily restricted, and permanently restricted.) This statement was previously known as the Income Statement or Statement of Revenue, Expenses and Changes in Fund Balances.

Statement of Cash Flows

Reports how the organization's cash position changed during the year. Cash flow information is divided among receipts and disbursements from investing, financing, and operating activities. Many nonprofits ask their auditors to prepare this statement.

Other Related Documents

In addition to the financial statements required for audit purposes, nonprofits are required by federal and state governments to file various information returns to maintain their tax-exempt status and document tax compliance. The primary federal reports are the annual Form 990 and Schedule A to the 990. State governments may require additional reports.

What is an A-133 Audit?

01-17-2006

What is an A-133 Audit?

When is an A-133 Audit required?

How often will you be audited?

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What is an A-133 Audit?

The Office of Management and Budget (OMB) has issued Circular A133, Audits of State, Local Governments, and Nonprofit Organizations, which requires nonprofits spending more than $500,000 per year in federal funding to have an audit. This audit is required even if the federal money you receive is passed through another agency. For example, a city housing authority may make a grant to a local nonprofit housing developer which contains H.U.D. funding. The local housing developer is subject to A-133 audit requirements even though the grant was not directly from H.U.D.

A-133 audits, like non-federal audits, test financial statement information. However, the A-133 audit looks more closely at tracking and classifying revenue from federal sources. In addition, the auditor looks for compliance with general and specific government audit requirements, which cover both financial and non-financial factors such as program effectiveness, client eligibility, efficiency with which resources are used, etc. The auditor must also test internal control procedures more rigorously than in a standard audit, making sure that adequate systems are in place for complying with the requirements noted above. Because of the expanded procedure involved and increased reporting requirements for the auditor, the audit may cost substantially more than a traditional audit and involve more time from your staff. You should be allowed to build these additional audit costs into your grant. In practice, however, many nonprofits receiving pass-through federal funding have had difficulty convincing their government funders to include audit money in their grant.

How often will you be audited?

You are required to have an A-133 audit for each year in which you spend more than $500,000 in federal funds. . If, however, you were audited every other year between 1992 and 1995, you may undergo an A-133 audit every other year, but the report must cover both years under consideration.

As you can see, receiving federal money can require a lot of extra work. This work begins as soon as you receive a grant award. If your organization receives funds from a non-federal agency or grantor, you are expected to ask whether your grant includes federal monies. In some cases your funder will not know the answer, even though they are required to inform you whenever federal funding is included in your award. You are required to make a good faith effort to determine whether federal money is included, and if so how much. Each federal award is identified with a number from the Catalogue of Federal Domestic Assistance (CFDA). Your granting agency should tell you the CFDA number(s) for any federal funds included in your award since you are required to report this information as part of your audit. When you do receive federal funding, alert your auditor right away so you can get help setting up the proper systems for complying with government regulations. You may also want to get a copy of the OMB Compliance Supplement, which describes the A-133 requirements. Alternatively, your auditor may have prepared guidelines for you to follow. Then identify the person on your staff who will monitor compliance with the federal guidelines. The sooner you learn of the extensive requirements which go along with federal funding, the better able you will be to incorporate them into your accounting system.

What is an audit?

01-17-2006

The Board of Directors is responsible for hiring the auditor and the auditor reports to them.  As such, the audit report is addressed to the board of directors as the trustees of the organization. The report usually includes the following:

A cover letter, signed by the auditor, stating the opinion, as described above.

The financial statements, including the statement of financial position (balance sheet), statement of financial activity (income statement), and statement of cash flows. Health and social service organizations also have a statement of functional expenses. Many audits show comparative information between fiscal years.

Notes to the financial statements, as required by GAAP, which might include a description of the company, information about functional expenses,  a schedule showing future debt and lease commitments of the organization, further information about contributions, volunteer services, and other significant information not obvious in the financial statements.

In addition to the materials included in the audit report, the auditor often prepares what is called a management letter or report to the board of directors. This report cites areas in the organization's internal accounting control system which the auditor evaluates as weak.

What is an internal accounting control system and how can we make ours effective?

01-17-2006

Developing an Internal Accounting Control System

The Accounting Procedures Manual

Maintaining Effective Controls

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Internal accounting control is a series of procedures designed to promote and protect sound management practices, both general and financial. Following internal accounting control procedures will significantly increase the likelihood that:

• Financial information is reliable, so that managers and the board can depend on accurate information to make programmatic an d other decisions
• Assets and records of the organization are not stolen, misused, or accidentally destroyed
• The organization s policies are followed
• Government regulations are met.

Developing an Internal Accounting Control System

The first step in developing an effective internal accounting control system is to identify those areas where abuses or errors are likely to occur. Many accountants can provide you with a checklist of areas and questions to consider when you are planning your system. The following areas and objectives in developing an effective internal accounting control system:

Cash receipts

To ensure that all cash intended for the organization is received, promptly deposited, properly recorded, reconciled, and kept under adequate security.

Cash disbursements

To ensure that cash is disbursed only upon proper authorization of management, for valid business purposes, and that all disbursements are properly recorded.

Petty cash

To ensure that petty cash and other working funds are disbursed only for proper purposes, are adequately safeguarded, and properly recorded.

Payroll

To ensure that payroll disbursements are made only upon proper authorization to bona fide employees, that payroll disbursements are properly recorded and that related legal requirements (such as payroll tax deposits) are complied with.

Grants, gifts, and bequests

To ensure that all grants, gifts, and bequests are received and properly recorded, and that compliance with the terms of any related restrictions is adequately monitored.

Fixed assets

To ensure that fixed assets are acquired and disposed of only upon proper authorization, are adequately safeguarded, and properly recorded.

Additional internal controls are also required to ensure proper recording of donated materials, pledges and other revenues, accurate, timely financial reports and information returns, and compliance with other government regulations.

Achieving these objectives requires your organization to clearly state procedures for handling each area, including a system of checks and balances in which no financial transaction is handled by only one person from beginning to end. This principle, called segregation of duties, is central to an effective internal controls system. Even in a small nonprofit, duties can be divided up between paid staff and volunteers to reduce the opportunity for error and wrongdoing. For example, in a small organization, the director might approve payments and sign checks prepared by the bookkeeper or office manager. The board treasurer might then review disbursements with accompanying documentation each month, prepare the bank reconciliation, and review canceled checks.

The board and executive director share the responsibility for setting a tone and standard of accountability and conscientiousness regarding the organization's assets and responsibilities. The board, usually through the work of the finance committee, fulfills that responsibility in part by approving many aspects of the internal control accounting system. Common areas requiring board attention include:

Check issuance

The number of signatures on checks, dollar amounts which require board approval or board signature on the check, who authorizes payments and financial commitments, etc.

Deposits

How payments made in cash (for admissions, raffles, weekly collection plate, etc.) will be handled, etc.

Transfers

If and when the general fund can borrow from restricted funds, etc.

Approval of plans and commitments before they are implemented

The annual budget and periodic comparisons of financial statements with budgeted amounts, leases, loan agreements, and other major commitments.

Personnel policies

Salary levels, vacation, overtime, compensatory time, benefits, grievance procedures, severance pay, evaluation, and other personnel matters.

The Accounting Procedures Manual

The policies and procedures for handling financial transactions are best recorded in an Accounting Procedures Manual, describing the administrative tasks and who is responsible for each. The manual does not have to be a formal document, but rather a simple description of how functions such as paying bills, depositing cash, and transferring money between funds are handled. As you start to document these procedures, even in simple memo form, the memos themselves can be kept together to form a very basic Accounting Procedures Manual. Writing or revising an Accounting Procedures Manual is a good opportunity to see whether adequate controls are in place. In addition, having such a manual facilitates smooth turnover in financial staff.

Maintaining Effective Controls

The executive director is commonly responsible for overseeing the day-to-day implementation of these policies and procedures. Due to the number of detailed requirements involved if your organization receives government funding, there should be one person in the organization (possibly the grant administrator) with the responsibility of understanding and monitoring those specific regulations and compliance factors.

The auditor's management letter is an important indicator of the adequacy of your internal accounting control structure, and the degree to which it is maintained. The management letter, which accompanies the audit and is typically addressed to the board as trustees for the organization, cites significant weaknesses in the system or its execution. By reviewing the management letter with the executive director, asking for responses to each internal control lapse or recommendation, and comparing management letters from year to year, the board has a useful mechanism for monitoring its financial safeguards and adherence to financial policies.

As your nonprofit changes and matures, and your funding and programs change, you will need to periodically review the internal accounting control system which you have established and modify it to include new circumstances (bigger staff, more restricted funding, etc.) and regulations (such as receiving federal awards with increased compliance demands.)

What is cash flow and how should we manage it?

01-17-2006

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Projecting Cash Flow

Useful Strategies for Adjusting the Timing of Cash Flows

A Sample Cash Flow Budget

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"Cash flow" management refers to the need to have cash come in -- flow in -- at the right times, so that it is available to flow out as needed. Everyone knows that if an organization has more expenses than income, sooner or later it will find itself in trouble. However, even if income matches or exceeds expenses in a given year, the cash fro m the income may not arrive in time to pay the bills as they come due. A cash shortage can be very disruptive to your ability to carry out your mission. To avoid disruptions of business or to take advantage of temporary cash surpluses, cash flow can and should be projected, monitored, and controlled.

Projecting Cash Flow
Projections of receipts and expenditures, which comprise cash flow, are typically developed as part of the budget process, so that you can anticipate and develop strategies for funding the shortages or investing the surpluses. (Many of these strategies are described later in this response sheet.) Cash flow projections follow a format similar to your budget's. For each month, anticipate how much money you will receive and how much you will spend in each category.

To try this for the first time, you must look at your organization's prior year's checkbook as a basis for your cash flow projection for the coming year, adjusting for any anticipated changes that will affect the timing and amount of payments and deposits. These changes might include when your programs are offered, what programs are offered, new funding sources or expiration of previous funding, increases or reductions in interest rates, etc. While your new cash flow projection will largely correspond to your budget, some cash flow may come in from receivable from the prior year, cash may go out for payments made for last year's bills, and some income and expenses for the current year will be delayed until next year and, therefore, would not be included in the current year's cash flow budget.

As the year progresses, cash flow projections can be updated. By comparing budgeted cash flows to actual deposits and expenditures, and understanding the nature of any variances, you can strengthen your ability to accurately anticipate cash flow in the future.

Note: A cash flow budget or projection should not be confused with a financial statement called "Statement of Cash Flows." The statement describes changes in cash from year-to-year due to operating surpluses or deficits, makes adjustments for non-cash items such as depreciation, and shows increases or decreases in accounts payable an d accounts receivable. This statement is usually prepared by your auditor along with other financial statements during the audit.

Useful Strategies for Adjusting the Timing of Cash Flow
In a simple example, imagine an organization with no cash in the bank and a balanced budget, with $10,000 in revenue and $10,000 in expenses. If the income is received first, the organization will be able to spend it down as expenses are incurred. If, however, the expenses come in before the income, the organization cannot pay its bills until the cash is received. In this case, the organization has a problem with the timing of cash flow rather than a shortage of revenue or an excess in expenses.

There are common strategies for dealing with the timing of cash flows, whether it is a cash shortage or a cash surplus.

Meeting a Projected Temporary Cash Shortage
In order to meet a projected temporary cash shortage, you may want to consider any of the following strategies:

• Obtain a loan, usually from a bank or an individual such as a board or staff member.
• Arrange for a line of credit from a bank.
• Speed up the collection of receivables (money owed to you).
• Move up the fundraising event or campaign you are planning.
• Finance the purchase of equipment by leasing it or paying for it over time.
• Liquidate investments.
• Delay payments to vendors.

This strategy is commonly followed in the corporate sector. Nonprofits are often reluctant to delay payments for fear of damaging the public trust or disappointing the vendor, who may be another small business person in the neighborhood. When you must delay payments to vendors, it is often advisable to explain the situation to them carefully, and let them know when they will be paid and how much will each payment be. You may even consider alerting vendors that bills incurred at certain times of year will always be paid. For example, you may experience a cash flow shortfall during the summer. You could negotiate up front with vendors that bills will be paid within thirty days during most of the year, but within ninety days during the summer.

Taking Advantage of a Projected Temporary Cash Surplus
To take advantage of a projected temporary cash surplus, your organization may:

• Make short term investments in certificates of deposit, money market funds, or U.S. Treasury Bonds.
• Buy supplies on sale that you will use over the course of the year.

In addition to reviewing your organization's revenue and expense budget, the board should review the organization's cash flow budget. The review should also include any measures related to managing cash flow which involve commitments on the part of your organization such as loans or revised terms with vendors.

The Helpful Organization: Sample Cash Flow Budget
Total Budget
January
February
March
April
May
June

EXPECTED REVENUES
Government Grants
$35,000
$12,000
$4,000
$16,000

Foundation Grants
$50,000
$5,000
$7,500
$15,000

Individuals
$12,000
$1,500
$30,000

Fees for Service
$55,000
$3,000
$4,500
$4,500
$5,000
$5,000
$3,000

Total Revenue
$152,000
$3,000
$9,500
$6,000
$24,500
$24,000
$49,000

EXPECTED REVENUES
Salaries & Fringe Benefits

Executive Director
$38,000
$3,167
$3,167
$3,167
$3,167
$3,167
$3,167

Program Directors
$50,000
$4,167
$4,167
$4,167
$4,167
$4,167
$4,167

Administrative Assistant
$27,000
$2,250
$2,250
$2,250
$2,250
$2,250
$2,250

Rent
$12,000
$1,000
$1,000
$1,000
$1,000
$1,000
$1,000

Supplies
$11,000
$5,000
$6,000

Telephone
$3,300
$300
$250
$300
$500
$350
$250

Postage
$2,500
$150
$150
$150
$150
$150
$150

Copying
$2,950
$100
$100
$100
$100
$100
$100

Total Expenses
$146,750
$16,134
$11,084
$11,134
$13,584
$11,184
$17,084

NET INCOME <LOSS>
5,250
<13,134>
<1,584>
<5,134>
10,916
12,816
31,916

Cash on Hand - Beginning
2,648
2,648
<10,486>
<12,070>
<17,204>
<6,288>
6,528

Ending Cash Available(Before Loan Activity)
7,898
<10,486>
<12,070>
<17,204>
<6,288>
6,528
38,444

Loan <Loan Payback>
0
12,000
0
6,000
<10,000>
<8,000>
0

Cash After Loan Activity
7,898
1,514
<70>
796
1,712
6,528
38,444

What is depreciation?

01-17-2006

For example, suppose that on January 1st an organization acquires a computer with an estimated useful life of four years. The computer costs $2,500. When the purchase is recorded, the following journal entry is made:

Fixed Assets (increase by)

$2,500

Cash (decreases by)

$2,500

Explanation: To record the purchase of a computer for $2,500

At the end of each of the next four fiscal years, including the current year, the following journal entry will be made:

Depreciation Expense (increases by)

($2,500/4 years = $625 per year)

$625

Accumulated Depreciation (increases by)

$625

Explanation: To record depreciation expense for the year.

It is very important to remember that the cash for the computer was spent in the first year. However, one-fourth of the expense for the computer will appear on the Statement of Activity (Income Statement) for each of the four years it is deemed to have a useful life. Therefore, in the three years after the purchase a depreciation expense of $625 will appear on the financial statements even though no cash was expended during those years.

Accumulated depreciation, as the name implies, reports on the amount of depreciation which has accumulated over time. By the end of the first year, one-fourth of the computer will be depreciated. At the end of the second year, two-fourths (i.e., one-half) will be depreciated. By the end of the fourth year the computer will be fully depreciated. In other words, the full cost of the computer will have been recorded as an expense.

The fixed asset portion of the Statement of Position (Balance Sheet) will represent this accumulated depreciation for the computer as follows:

Year 1

Computer (cost)

$2,500

Less: Accumulated Depreciation

<625>

Net Fixed Assets

$1,875

Year 2

Computer (cost)

$2,500

Less: Accumulated Depreciation

<1,250>

Net Fixed Assets

$1,250

Over the remaining two years, accumulated depreciation will increase by $625 per year and net fixed assets will decrease by $625 per year, until accumulated depreciation is $2,500 and net fixed assets is zero.

In this example, the organization determined that the useful life of the computer was four years, and that at the end of that time the computer would have no remaining value. Most nonprofits charge an equal amount of depreciation expense to each year of the asset's useful life. This is called "straight-line depreciation".

To calculate depreciation charges for each fixed asset, you must know how much the asset cost (including all costs necessary to make the asset operational), how long the asset can reasonably be expected to last before it needs to be replaced, and whether the item will have any salvage value at the end of its useful life. Since there are certain conventions for items such as computers, vehicles, furniture, buildings, and other fixed assets, you should consult with your accountant when estimating the useful life of a new capital purchase.

Since depreciation expense is a non-cash expense (that is, cash is usually paid out in the year the asset is acquired, but the expense is distributed over several years), it is important to plan for the replacement of fixed assets as they wear out or become obsolete. For example, some organizations set aside an amount of cash equal to the amount of their yearly depreciation expense so that money will be available to purchase a new asset once the current one is fully depreciated. See Financial Management FAQ "How Much Cash Should We Hold In Reserve?" for some guidelines.

What is the board's responsibility in investment?

01-17-2006

Specifically, the board should review three areas related to investments:

Cash Management

Cash management refers to ordinary transfers, usually of small amounts, between the checking account and other liquid accounts such as savings accounts. For example, if an organization anticipates having excess cash for a few months, the organization may open an account that earns more interest and temporarily hold cash there.

While these tasks are typically managed by staff, the board has a responsibility to oversee cash management and periodically review staff work. In most boards, the finance committee meets periodically with finance staff to review cash management guidelines and practices.

Endowment Funds (called permanently restricted net assets)

Endowment funds, also called permanently restricted net assets, are created when donors designate contributions to a fund where the principal amount of the gift (the amount of the contribution) will not be spent, but will be maintained in perpetuity, for the purpose of producing income for the organization.

The board's key responsibilities with endowment funds are to ensure that the principal is maintained and that the endowment is invested wisely. Assets held in the endowment fund (cash, stocks, bonds, land, works of art, etc.) should be managed prudently, according to guidelines which the organization has adopted for management of the funds. When organizations need cash, either because of an ongoing deficit or short-term cash deficits, they are tempted to borrow from endowment funds. Any such loans from the endowment fund should be approved by a formal vote of the board and a repayment schedule should be established. Because such loans put the principal of the endowment fund at risk, they should be discouraged.

It is the responsibility of the board to establish guidelines for the management of the endowment fund. These guidelines are typically discussed by the finance committee, which makes recommendations on policy to the board. Some of the most important guidelines to establish are the following:

Shall the principal be maintained at face value or should the endowment be managed so that the value of the endowment increases at the rate of inflation?

For example, if an organization has an endowment fund valued at $2 million and the earnings are used for current purposes, over time the endowment funds purchasing power will be reduced, although it will still show on the books at $2 million. Some organizations choose to reinvest an amount of the earnings equal to inflation in the endowment fund, in essence defining maintaining the principal as the principal adjusted for inflation.

This is sometimes achieved by adopting a spending rule. For example, some organizations assume long term inflation at four percent and average portfolio return at nine percent, and thereby adopt a rule to spend five percent of the average market value of the endowment over the next three years.

Shall gains on contributed, non-cash assets be treated as additions to principal (and, therefore, to be held in perpetuity), or as income (and, therefore, available for current expenditure)?

For example, imagine an organization that receives a contribution of ten shares of stock, valued at $1,000 each for a total of $10,000. A year later, the organization sells the stock, now valued at $1,100 a share, for a total of $11,000. Must the organization now keep $11,000 in perpetuity, or can it keep $10,000 in the principal, and take $1,000 into income for current purposes? (In some cases a donor may place restrictions on the contributed assets such as specifying that a donation of stock cannot be sold.)

How often will we withdraw the cash resulting from interest income from the portfolio and into the checking account of the general operating fund?

Some organizations choose to take the earnings from the principal out of the investment accounts only once a year. Others pull out the earnings quarterly, or even monthly. Of course, the longer the intervals between withdrawals, the more income will be realized (because the income will be earning interest, too, until it is withdrawn).

Maximizing Income Through Prudent Investment

Whether assets belong in an organization's general fund, its endowment fund, or other fund, these assets should be invested wisely. Key decisions the board should make related to investments are:

Should we hire a portfolio manager or investment advisor, or make our investment decisions?

Organizations with substantial assets often hire a portfolio manager. Organizations with fewer dollars to invest usually rely on the expertise of a board member or the finance committee.

The portfolio manager, typically employed at a bank, brokerage, or an investment advisory firm, is responsible for making in vestment decisions for the organization. The portfolio manager will meet with the finance or investment committee to learn about the organization 's financial objectives and other concerns, and then make investment decisions throughout the year to meet those objectives. The portfolio manager should give the organization a monthly or quarterly written report which shows all the trades made in the period, the investments at the end of the period, and the value of each investment.

Portfolio managers and investment advisors are generally paid on a retainer basis (a flat monthly fee) for their services, although some are paid as a percentage of the portfolio and others by commission on trades (the latter creates an incentive to make frequent transactions). Great care should be taken in selecting a portfolio manager and the finance or investment committee should routinely review the manager's performance in detail (usually by making comparisons to the returns in the financial markets and the returns on mutual funds which have similar investment objectives as the organization), just as they should when working with other professionals such as auditors and attorneys.

Some organizations that have identified and agreed on an investment strategy choose to invest directly in a mutual fund that with similar investment objectives, rather than hire a portfolio manager.

Should we create an investments committee?

Organizations with little investment activity often choose to have their finance committees oversee investments. Some organizations with substantial investments choose to create a second committee to oversee investments. One common arrangement is for the investments committee to be chaired by an experienced member of the finance committee, and to include both other board members as well as non-board members, with board members comprising a majority of the investment committee. Having non-board members on the committee allows the organization to use the expertise and perspectives of individuals who may not have the time or other qualifications to be members of the board.

In some cases, the investments committee or the finance committee makes specific investment decisions themselves, such as to move funds from Treasury bonds into mutual funds, to sell a particular stock, etc. In other cases, the committee selects and meets regularly with the portfolio manager to review investment decisions, and if necessary, recommends changing to a new manager.

What guidelines should we establish for the investments committee or for the portfolio manager?

The following questions are examples of concerns that boards take up in investment management. Often these questions are discussed primarily in the investments and/or finance committee, where committee members are more likely to be familiar with financial terms and the implications of financial decisions. In some organizations these questions are left to the investments or finance committee, while in other organizations proposed guidelines are brought to the whole board for approval. The answers to these questions will change over time as the organization's needs change; the appropriate committee must be in touch with board concerns, as well as with the following questions.

Is our primary objective short-term earnings or long-term equity growth?

An investment that provides higher returns may not grow as much in equity. For example, a stock with relatively high dividend income may not increase significantly in its par value. Conversely, a piece of real estate may not provide much rental income, but over time may increase greatly in value and could be sold at great profit. Organizations with large portfolios will want a diverse portfolio that balances investment types; other organizations may choose different objectives as their program plans and cash needs change.

What level of risk is acceptable to our organization?

In general, the higher the expected return on an investment, the higher risk of losing the principal. Some organizations may feel comfortable only with investments that are virtually risk-free (despite low returns), such as savings accounts within FDIC-insured limits or U.S. Treasury bills and notes. Such low-risk investments typically are expected to earn less than higher risk investments such as stocks or money market funds. But if the company or the money market funds goes bankrupt, the organization may lose its investment entirely.

Should we establish any non-financial guidelines for investments?

Some organizations specify a preference for stocks in locally owned companies; one drug/alcohol abuse organization specified that no investments be made in companies that manufacture alcoholic beverages. Socially responsible investing is an example of utilizing non-financial guidelines.

How quickly must our investments be convertible to cash?

For example, do we want a certain percentage of funds liquid, that is, convertible to cash within, for example, five days?

These guidelines only touch on the important and often complex questions that boards must address in effectively managing investments. Most boards delegate their responsibilities to the finance committee in both oversight of staff work and setting financial guidelines. The finance committee typically brings major policies to the board for approval, and makes annual or quarterly written reports to the board on how cash and investments are being held, and on earnings performance during the previous period.

What is the difference between cash-basis and accrual-basis accounting?

01-17-2006

Cash basis accounting means that the organization records income at the time it receives money, usually in the form of cash or a check. It also means that expenses are recorded at the time they are actually paid. In other words, the only time a transaction is recorded is when cash is received or disbursed. It's a relatively straight forward method by which most individuals and many small businesses handle their finances.

In accrual basis accounting, income is recorded at the time that it is earned, as opposed to when it's actually received. And expenses are recorded when they are owed, as opposed to when they are actually paid. While more complicated, using accrual basis accounting is often beneficial for nonprofits. It allows the organizations that use it to see beyond the current cash balance to what is owed by and to the organization. In other words, accrual basis accounting provides a more complete financial picture.

When looking at the financial statements of a nonprofit, it's important to know whether those statements have been prepared on a cash or accrual basis because there can be significant differences between the two. Generally, nonprofit organizations for which there are material differences between how the financial statements would look on a cash basis vs. an accrual basis will benefit from using the accrual method.

The following workshops provide more information on this topic:

Financial Management Concepts

Reading and Using Financial Statements

Introduction to Bookkeeping in QuickBooks

Intermediate Bookkeeping in QuickBooks: Applying Skills to the Non-Profit Environment

What is the unrelated business income tax?

01-17-2006

Will Unrelated Business Income Affect Your Nonprofit Status?

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All 501(c)(3) organizations, with the exception of federal agencies, are subject to a tax on unrelated business income. Unrelated business income is income generated by a trade or business activity not substantially related to the exempt purpose of the organization and regularly carried by that organization.

A trade or business activity is an activity conducted for the purpose of generating income from the sale of merchandise or performing a service. For instance, a university bookstore selling trade books to students and the general public is engaged in a business activity. An activity is substantially related to the exempt purpose of the organization if it is causally related and contributes importantly to the exempt purpose. For example, an art museum regularly charges an entry fee for admission to exhibits. In addition, the museum operates a restaurant which is open to the general public. The earnings from the restaurant are used to support museum activities. The admission fees are substantially related to the purpose of the organization and are not considered unrelated business income. However, the restaurant income is unrelated business income, even though it is used to support the general mission of the museum.

Taxes paid by a nonprofit on unrelated business income are paid at corporate rates. Without such a tax, nonprofits would be at a substantial advantage in the marketplace when competing with for-profit organizations.

Organizations engaged in conducting unrelated business activities are not subject to income taxation under the following conditions:

All work is performed by volunteers

Substantially all of the merchandise being sold has been acquired by gift

The activity is being conducted for the convenience of the organization's members, patients, employees, etc. For example, in the case of trade unions, work-related clothing and equipment may be sold at the job site and, therefore, not subject to the unrelated business income tax.

It should be noted that if unrelated business gross income (income before related expenses have been subtracted) is less than $1,000, it is not necessary to file an unrelated business tax return (Federal Form 990T).

There are several special rules and exceptions relating to special types of unrelated business income.

Income from bingo games is not considered unrelated business income if the bingo game is legal under both state and local law and commercial bingo games are not legal in the jurisdiction.

Tax-exempt organizations can exchange or rent donor or membership mailing lists without generating unrelated business income.

As part of an exempt organization s solicitation activities, it may distribute low cost items (e.g., stickers, stamps, etc. with an aggregate value of less than $5) without unrelated business income consequences.

Will Unrelated Business Income Affect Your Nonprofit Status?

The following information, excerpted with permission from Advising Nonprofits, published by the Lawyers Alliance for New York, details the conditions under which unrelated business income might and might not affect your nonprofit status:

Tax-exempt organizations are permitted to carry on business activities which further their exempt purposes.... However, activities which do not further the organization's purpose could jeopardize its tax exempt status if they go beyond boundaries established by courts and the IRS....

In general, cases upholding the tax-exempt status of organizations engaged in profit-making activities have found that one, or more, of the following conditions existed:

• the organization was primarily operated for non-commercial purposes
• the activity in question has some direct relationship to a non-commercial exempt purpose of the organization
• the size of the commercial activity was reasonable in comparison to the organization s overall activity and not greater than necessary to accomplish the exempt purpose
• the commercial activity did not further private interests or confer an undue benefit on insiders...

On the other hand, courts have upheld the denial or revocation of tax-exempt status for organizations carrying on profit-making activities when the following conditions exist:

• the commercial activity does not directly further any exempt purpose of the organization, and the profit-making activity is a substantial part of the organization s overall activity or appears to be its primary purpose
• the profit-making operation is carried on at a scale which is out of proportion to the exempt purpose being supported
• the commercial activity is a kind normally carried on by for-profit businesses and the nonprofit is competing directly with commercial enterprises
• insiders of the nonprofit such as directors or employees benefit inappropriately from the business activity...

You should consult your accountant if you think there is even a possibility that some of the activities your organization performs would qualify as unrelated business income and, therefore, make your organization liable for taxation.

What should our chart of accounts include?

01-17-2006

What Should Our Chart of Accounts Include?

What are the Features of a Simple Chart of Accounts?

Income and Expense accounts follow the Statement of Position accounts.

How can we Capture More Complex Financial Information?

Sample Chart of Accounts

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What Should Our Chart of Accounts Include?
Your chart of accounts, which is a list of each account that the accounting system tracks, should be designed to capture the financial information you need to keep track of your financial information and make good financial decisions. Only information recorded with an account code from the chart of accounts will be recorded into the financial records, and from there into financial reports.

The chart is divided into five categories: assets, liabilities, net assets or fund balances, revenues, and expenses. Each account is assigned an identifying number for use within the accounting system. Aside from certain conventions regarding numbering and the order in which information is presented (see below), you can tailor your chart of accounts to your organization's specific needs.

In order to decide what to include in your chart of accounts you will want to consider each of the following questions:

• What reports do you want to prepare?
• What financial decisions, evaluations and assessments do you need to make on a regular basis?
• What level of detail do you require?

What is your capacity for tracking financial information?
The best way to design a chart of accounts is to first consider what reports you want to prepare to satisfy external requirements and help you with internal management assessment and decision-making. You can then determine which categories to include in the reports you plan to produce. For example, your chart of accounts should correlate to the categories in your budget so you can easily prepare reports comparing budgeted with actual income and expenses. The Model Chart of Accounts, developed by the Nonprofit Management Group at Baruch College/CUNY, cross-references each account number to the corresponding line items required for reporting on Federal Form 990 (see the Sample Chart of Accounts provided at the end of this FAQ)

As you think about the different types of income your organization receives, you might want to consider what questions you will want to address in your financial reports: Will you need to distinguish between corporate and foundation grants so you can monitor your fundraising efforts? Are some contributions restricted? Do you earn fees for some of your services? If so, can all fees be combined into one account, or do you want information on fees from each type of activity?

You can ask yourself similar questions regarding your organization's expenses: What is the lowest level of detailed information that you would like from your financial records? How will you use the information if you record it? For example, most organizations want to keep track of office supplies in the aggregate rather than accounting separately for paper clips, pens, rubber bands, etc. A less obvious example might be in postage. Do you want to include in the postage expense category fees for messengers and express delivery, or do you want to report these separately? If you are worried about the amount being spent on express delivery you should create a separate expense category. If you do not plan to analyze this level of detail, however, it would be advisable to combine the two categories. You can always pull specific invoices related to express delivery to do a periodic analysis without tracking the information in your general ledger.

In addition to the types of income and expenses you want to keep track of there may be other factors to consider as you put together the chart of accounts. If you have more than one site, do you want to keep track of information separately for each site? Or, if you have more than one program, do you want to keep track of items such as supplies, postage, salaries, etc. for each program? And finally, under the new Financial Accounting Standards Board Statements No. 116 and 117, nonprofits will have to report revenues and expenses in three categories: unrestricted, temporarily restricted, and permanently restricted. It is important, therefore, that the chart of accounts supports these reporting requirements, as well.

The greater the level of detail you require, the greater the likelihood that you will need accounting software to keep track of your financial transactions. Accounting software often allows you to divide up transactions into many small pieces, and then determine what level of detail to use in your reports. Keeping track of very detailed information manually is time consuming, and few nonprofits have the staff to do so.

Of equal importance is the ability and availability of your bookkeeper to manage a complex number of variables. For example, your bookkeeper may need training to be able to support a more complex chart of accounts as your accounting systems becomes more complex.

A good rule of thumb is to keep the chart of accounts as simple as possible, and revise it as your need for information increases over time. Throughout the year, as you write checks or receive money, keep track of those times when it was unclear to you which account number to assign to the transaction. That can be an indicator that the chart of accounts needs to be revised or that the criteria for assigning account numbers need to be clarified.

What are the Features of a Simple Chart of Accounts?
The sample chart of accounts provided at the end of this FAQ illustrates how you might track income and expense items, along with conventions which are usually observed when assigning account numbers. This sample is intended to be a guide which you can use for developing your own chart of accounts. It is not comprehensive and some of the accounts included in the sample may not be useful to you. You should note to the following features of the sample chart of accounts:

Account categories are presented in a standard order, beginning with the accounts presented in the Statement of Position (Balance Sheet.) These are:

Liabilities
Liabilities are obligations due to creditors, such as loans and accounts payable. Current liabilities, those obligations which fall due within the next year, are usually listed first, followed by long-term liabilities. Accounts payable and payroll taxes payable are usually listed before other payables. Deferred revenue and other liabilities are often further down on the list. Liabilities often begin with the number "2."

Net Assets (or Fund Balances)
Net assets, formerly referred to as the fund balance(s), reflect the financial worth of the organization. They represent the balance remaining after obligations are subtracted from an organization's assets. Accounting software designed with for-profits in mind may report net assets under the heading "equity." Organizations which only receive unrestricted gifts will have only one net asset account. Those with temporarily or permanently restricted net assets, such as endowments will have more than one net asset account. Net asset accounts begin with the number "3."

Income and Expense accounts follow the Statement of Position Accounts.
You will notice that account numbers proceed from lowest to highest, with room between numbers in each category. This allows you to expand the level of detail presented in the chart of accounts as your activities grow.

Certain related accounts are grouped together with related numbers. For example, the general number for payroll taxes is 7310. However, each type of payroll tax expense has been assigned its own account number " F.I.C.A. expense is 7311, Unemployment Insurance is 7312, etc. Some computerized accounting software will allow you to prepare reports which aggregate all accounts with the code 731x into a single line item. Even manually, this type of expense grouping simplifies consolidating information for reports.

Please note, however, that typically you would not post information to account 7310. This account is considered the "heading" for all related expenses.

How can we Capture More Complex Financial Information?
If you need to keep track of separate funds (temporarily and permanently restricted), separate programs or departments, separate sites, etc., your chart of accounts can be designed to accommodate these needs using a "multi-tiered" chart of accounts. The sample chart of accounts shows a single tier. Adding a second section or tier to your account codes allows you to code line items into various categories.

For example, suppose an organization has three programs: counseling, tutorial, and recreation. Each program would receive its own account code as follows:

7210-01

7710 - 03

7210 - 02 - A and 7210 - 02 - B.

Sample Chart of Accounts

This sample has been developed using some of the broad account headings and codes presented in the Model Chart of Accounts developed by the Nonprofit Management Group for nonprofit organizations. This example illustrates the way in which the Model Chart of Accounts can be tailored to the specific needs of an individual organization. To obtain a copy of the complete model chart of accounts please contact:

Nonprofit Management Group
Department of Public Administration
Baruch College/CUNY
17 Lexington Avenue, Box 336,
New York, NY 10017
(212)-447-3659

What are the components of an IT plan?

01-17-2006

b) Mission of the organization

i) Describe the mission of the organization

ii) Define its programs and functions

iii) Sketch the organization's future direction.

c) Information functions of the organization

Summarize the primary information management needs of the organization. This should be the result of in-depth analysis of the organization functions and how information supports those functions. It may be helpful to develop information flow diagrams to show how information flows through a program, between programs, or through the entire organization. (See the diagrams in "Examples of IT Planning Documents" to see how you can chart this flow).

d) Assessment of current functioning technology

Conduct an inventory of the current technology employed by the organization as it supports the functions defined in Section 6.c. This section should outline what works well and what needs improvement. Be sure to include staff training on technology as part of this assessment, instead of solely focusing on the functioning of the technology.

e) Recommendations for system implementation

Create a map of the future system as a remedy to the specific issues identified above.

i) Infrastructure: Identify the specific hardware of computers, networks, phone lines, etc. necessary to support the system.

ii) Information management applications: Decide upon the specific applications that will either be developed or purchased to support the functions identified in Section 6 (c). Be sure to consider how a central, shared resource such as a common database of contacts or a library of text documents could be used to benefit multiple programs or staff.

iii) Management/policy requirements: Outline the organizational or management changes that will be required for managing this system. This may include hiring new staff, changing organizational policy, modifying job descriptions, and more.

f) Implementation plan and timeline

Develop an overall plan for making the recommendations possible. It should include plans for the transition of current data, training of staff, technical support during the transition, etc. (See the "Examples of IT Planning Documents" section for examples of implementation documents).

g) Budget

As a rule of thumb, organizations should be expected to spend 2-3% of their annual budget as an ongoing cost of an information system. The initial outlays for hardware, software, and training may be closer to 5% for the first year. Consider the following potential costs:

i) Personnel

ii) Hardware

iii) Software

iv) Consultants

v) Contingency fund (5% minimum)

What are the key points to remember in IT planning?

01-17-2006

People often seek solutions in technology to remedy an organizational problem that can't be fixed by applying "new" technology. For example, a director may perceive that communication among staff is a significant problem so she may install a new e-mail system. Staff members are now able to send large numbers of daily e-mails ranging from shared jokes to key time-sensitive documents or decisions. However, staff members may become overwhelmed by the number of daily e-mail messages and communication may remain as poor as it was prior to installing e-mail. While e-mail may have increased the speed of communication, without a discussion among staff about why communication was poor, the organization may not be able to remedy its problem with technology alone.

b) Make sure senior management supports the IT planning effort, and make sure sufficient funds are raised.

Management is responsible for planning for the growth and development of an organization. Any information you develop will need to grow and change along with the organization. If management does not fully support the IT projects, you may not receive the funding and organizational support you need.

c) Include staff from all levels of your organization in your planning process.

An information system is often conceived of as purchasing an application for a specific group (e.g. the accounting department or development staff). Today, as hardware and software have become more integrated, planning an information system is more like preparing shared office space and it will require the requisite amount of good planning. To be successful, staff members from all levels of your organization must be included in the process.

d) Clearly identify your organization's functions and design IT accordingly.

The purpose of an information system is to support the functions of your organization, and not the other way around. Be sure to clearly identify what you need to do and then find the technology that appropriately supports it. Don't use technology for technology's sake.

e) Plan for today's and tomorrow's needs.

Although it is difficult to predict the future, people often make the mistake of working to solve today's problems without thinking about needs they may have for technology in the future. A good example of this is the Y2K bug. When planning new systems, try to project out a number of years to identify potential future needs.

f) Don't insist on the latest technology … unless it makes sense.

Magazines and newspapers are full of advertisements and articles touting the latest improvements in technology of all types. Readers are often made to feel that if they don't have the newest and fastest technology, they will somehow be "left behind". Avoid the hype and focus on technology that is affordable, supportable, and appropriate for your functional needs. Nonprofits usually have limited fiscal and staff resources so choosing tried and true technology is more important than experimenting with the latest trends. The more experimental the technology, the more likely it will fail.

g) Carefully assess your staff's skills and ability to understand, support, and enhance technology.

A common mistake organizations make is to develop a system that staff cannot properly support. Although technology has been greatly simplified in recent years and the general knowledge of computers has increased, it is essential to consider what your staff knows and can understand before proposing a complex system.

h) Plan for staff training both at the outset and for ongoing development.

Although technology amazes us daily, it is utterly dependent upon people for its operation and maintenance. Your staff will be your greatest resource throughout IT planning and maintenance, and yet to do so, they require training and support as well. Make sure you provide adequate support for staff to carry out their responsibilities.

i) Plan for ongoing maintenance.

An information system is as dynamic as the organization, so assume that it will need to change with the organization.

j) Define the problem before deciding on the solution.

Make sure you understand what you are trying to fix before you attempt to fix it. Sometimes the solution may be better staff training or a change in procedure rather than a new computer system.

k) Remember: "free" is not always free.

Nonprofit organizations are regularly offered "free" computer systems that could be compared to Trojan horses. A group may donate an older piece of equipment to your organization. This may require using older software that is less user-friendly than newer software tends to be. It may be more prone to failure or require greater technical knowledge and skills to support. Additionally, if the technology is outdated, a vendor may no longer provide support and it may be difficult to find consultants who know the system. When receiving donations of equipment, an organization should analyze all of the potential costs of ownership before agreeing to accept and implement it.

When developing custom software applications, one should be cautious when using volunteers. Using volunteer help can be highly effective, especially when the goals are clearly defined and the volunteer is well managed. However, some volunteers may lose interest in a project along the way, or may have to squeeze in time for your project into evening or weekend hours, or delay it indefinitely. In another situation, a volunteer may complete a programming project, but then may be unavailable for continuing assistance, maintenance, and trouble-shooting. Since a software application may become critical to your daily work process, you must be prudent in accepting free help. If an application goes down, you must make sure you can find support staff in a timely manner.

What are the prerequisites of an IT planning process?

01-17-2006

Do you have...

1. Support from your Executive Director and Board of Directors?

2. Time commitments from key staff?

3. The budget, or the commitment to raise the necessary funds?

4. A defined scope for the planning process?

5. Access to knowledgeable resources on current technology?

6. Clear and reasonable expectations for the project?

What are the steps in IT planning?

01-17-2006

a) Organize an IT Planning Committee

The information system will become the common workspace for everyone in your organization. In order for this workspace to be effective, you should include staff from all levels of the organization in the planning process. Ideally, this committee will include line staff, administrators, board members, and any technical staff or consultants. The IT Planning Committee should not be chaired by an expert in technology. Having someone who understands the everyday operations of your organization is more important than having someone with technical expertise. In particular, the IT planning committee chair should be familiar with the various types of information your organization uses in its day-to-day operations. This will ensure that the organization's mission, not its technology, will lead the planning process.

b) Document your organization's functions that involve information

The first step is to focus on what your organization does and how it does it. You will need to map out the "flow" of information through your organization as it passes from person to person. For example:

• Chart the flow of a phone call from a client to the receptionist to the call's conclusion with a caseworker.
• Or follow the arrival of a donation in the mail to the daily deposits and on to the accountant's reconciliation.
• Or outline the how home health workers are scheduled to visit clients and identify the information they need to complete those visits.

A good approach is to draw a flow chart that identifies a question or process and then charts the results of each possible answer. For example, if you were charting the flow of how phone calls are routed in your agency, it might look like this:

c) Assess your current use of technology

Most agencies are using some form of technology to manage information and complete their work tasks. This technology may be something as simple as a fax machine or it may be as complex as a multi-user database on a computer network. Assessing your current use of technology may help you gauge the level of sophistication your organization can support and the additional resources you will need.

d) See what other organizations are doing

You may be able to save time and effort by investigating how agencies similar to yours are developing systems. This is especially useful if you require a system that performs a fairly common function or task. Look to your collaborative partners locally or if you are part of a national organization, ask how others solved the problem. (See the slide "Technology Assessment of Other Agencies" in the "Examples of IT Planning Documents" below).

e) List and prioritize information systems projects

Make a list of projects that you feel are worthwhile. For each project, describe the goals and objectives, the perceived benefits, and the perceived costs. Whenever an organization undertakes a major project, staff usually consider the costs and benefits of the activity in order to determine whether it is worth pursuing. The key to this evaluation process is to clearly define how this technology will improve operations. Avoid implementing technology just to have the technology. Make sure it is solving a real problem in the organization and adding value. (See the diagrams in "Example of IT Planning Documents for ideas of how to organize this cost and benefit information).

f) Define your organizational structure for Information Systems

Agencies choose several ways to develop and support their information management systems. Some hire in-house staff to fill this role, others use consultants and outside firms, and others use a combination of the two. Since all information systems will require ongoing support, you will need to determine how best to manage and support the technology you select. If you find yourself balking at the projected costs of maintenance and support for a system, you may want to scale down the breadth of the system.

g) Define your organization's policies and procedures for information management

Outline your organization's procedures as they are now, and then define how the new information systems will impact those procedures. Changes in the way information is managed often require that you revisit organizational policies. For example, who will decide what information is shared and what is not, how passwords and security features will be implemented, what the policy for checking for computer viruses is and the like? Remember, it is always important to make sure that organization's goals and objectives drive the technology and not the other way around.

What is Information Technology (IT)?

01-17-2006

Information Technology is any form of hardware or software that supports the storage and management of information. It may be a physical device such as a computer, or it may be a software application that manages a specific function (e.g., selecting, sorting, and printing donor mailing labels). To most effectively apply technology, it is essential to create an Information Technology Plan that outlines what are the organization's functions and how information technology will support them. Ideally this IT plan does not stand alone, but is a component of a broader strategic plan for the organization.

What is IT planning?

01-17-2006

IT Planning is the process of identifying your organization's goals and objectives in using information technology and results in a written plan for implementing these goals. Similar to strategic planning, both the actual process of IT planning and the resulting IT plan are equally important. The process of planning will: 1) help clarify how information flows in your organization, 2) inventory the technology currently in use and clarify its effectiveness, 3) identify problem areas and possible solutions, and 4) help to prioritize these solutions. The plan will: 1) outline the changes to be made, 2) the resources required for these changes, and 3) the staff and/or training requirements needed to implement technology.

Keep in mind that the IT plan will evolve as participants gain insight into the issues confronting their organization and the solutions offered by information technology. Your goals may change along the way and solutions you initially developed may not match your changing expectations. Use the mission of the organization as a continual guide in deciding which avenues to pursue and to ensure that information technology serves as a tool toward that end rather than the end itself.

Where can I find IT planning resources?

01-17-2006

Online resources:

a. National Center for Technology Planning, www.nctp.com

b. The Evergreen Society, www.nonprofit-info.org

c. Nonprofit technology: www.nonprofit-tech.org

d. State Library of North Carolina: http://prioris.dcr.state.nc.us/hottopic/techplan/techplan.htm

e. TechAtlas: http://techatlas.org

Publications

a. The Art of Strategic Planning for Information Technology: Crafting Strategy for the 90s, by Bernard H. Boar

b. A Practical Guide to Information Systems Strategic Planning, by Anita Cassidy

c. Office Information Technology: A Decision-Maker's Guide to Systems Planning and Implementation, by Randy J. Goldfield

d. Building Your Own High-Tech Small Office, by Robert Richardson

CompuMentor
435 Brannan Street, Suite 100
San Francisco, CA 94107

415.633.9300

www.compumentor.org

Why do I need to make an IT plan?

01-17-2006

Frequently, people start out a technology project with the goal of solving a single problem or automating one organizational function, such as client management or donor tracking. Although the result can be a good solution for that particular issue, it may lead to incompatibilities or inefficiencies between programs or departments. The process of developing an IT plan can help identify dependencies between staff or areas and thereby aid in suggesting ways to integrate and simplify functions.

By first conducting a broad analysis of your organization's functions and tasks, you can create information systems that will potentially support all of your agency's functions and work together. For example:

A donor system may track donation information that will need to be fed into the accounting system. Ideally this information could be entered once into the donation system and exchanged electronically with the accounting system.

Or you might have a volunteer tracking program which stores names that could be used for donation appeals, holiday cards, and the like.

Or you might want a client tracking system that creates reports or electronic files for submission to funders or regulators.

By mapping out how information flows in your organization and how it is used, you can more easily pin point where information is shared. Knowing this flow is the first step in creating more efficient and organized information systems.

Finally, an IT plan can help your organization identify the skills or expertise required to implement the technology. Too many technology projects focus on acquiring the equipment, purchasing software, and getting a system up and running with little regard for how to maintain and support the system. An agency may contract with a highly skilled consultant to create and implement a sophisticated system, only to realize they do not have the funds for hiring skilled staff, training staff, or to pay for ongoing maintenance. A key aspect of the planning process will be to identify the resources (in terms of money and staff skills) needed to implement and maintain the technology.

For example, you may realize that in order to set up a web page, you will need to hire a part time graphic designer and full time web master, and that you will need a substantial capital grant for equipment. It may take six months to raise the necessary grant money and to hire appropriate staff. Knowing this in advance, you can either set a more realistic schedule for implementing the technology or you can redefine priorities based on the funds you already have.

Case Studies: Could something like this happen in your organization?

01-17-2006

The following case studies are provided to give the reader an idea of the types of lawsuits we have handled for our nonprofit organization members and their boards of directors. The reader should remember that the vast majority of claims of this nature are lodged by disgruntled employees. We have provided a variety of different scenarios below to give a broader perspective on the type of claims to which board members are exposed.

Double trouble

When Elisa complained to Joe, the executive director, that her manager, Roger, was sexually harassing her, Joe told her he would look into it; but he was overwhelmed with work and put off any investigation. Elisa complained again, this time in writing. Once again, Joe did not take action. Elisa quit and threatened to sue. Now, faced with a possible lawsuit, Joe investigated the allegations and determined that they were true. He fired Roger. But, that is not the end of the story.

Elisa sued Joe and the nonprofit organization and its board of directors for allowing sexual harassment in the workplace and failing to investigate in a timely manner. She argued that she was constructively terminated. To add to the misery, Roger also sued for wrongful termination. He alleged that his behavior had been tolerated for many years. and that he was given no warning that his behavior was no longer appropriate.

Misrepresentation of market forces?

A small nonprofit housing advocacy group helped a group of twenty low-income families obtain government-subsidized loans to purchase a group of low-income condominiums. Not long after the purchases were completed, the real estate market took a serious downturn. Many of the condos were worth less than the outstanding amount of the loans. Several of the homeowners sued the nonprofit and its board of directors for misrepresentation of the benefits of home ownership and failing to warn them of the possible loss in home value.

Disability or inconvenience?

Sarah worked as a counselor at a group home for teens. She took insulin regularly for diabetes, but from time to time fainted while on duty. The nonporfit for which she worked accommodated her schedule so that she could take her insulin shots in a timely manner.

However, Sarah was also a part-time student and during the second semester of the year her class schedule dramatically changed. She was not able to work the hours previously arranged, and the nonprofit was not able to accommodate her new hours. She was terminated. Sarah sued the nonprofit organization and its board of directors for discrimination under the ADA, alleging that the real reason for her termination was her diabetes

Legitimate fundraiser or scam?

The board of directors of the nonprofit was aware that nearly all of the organization's funds were coming from services provided by a for-profit fundraiser, but they never thought to review the contract with the fundraiser or question the fee being paid to the fundraiser.

The Attorney General sued the board of directors of the nonprofit, and the nonprofit organization itself, alleging improper fiduciary oversight and misuse of funds. The lawsuit alleged that the for-profit fundraising organization was fraudulently representing that the funds would be used for drug rehabilitation and education when, in fact, 90 percent of the proceeds were going to the for-profit fundraiser. The Attorney General alleged that the board of directors should have been aware of the fraudulent actions of the for-profit fundraiser and should not have permitted the nonprofit organization to take part in the scheme.

Copyright (c)1994-97 CompassPoint, 706 Mission Street, 5th Floor, San Francisco, CA, USA 94103-3113. (415) 541-9000. Distribution and reprinting permitted as long as this copyright notice is included. All Rights Reserved.

Reprinted with permission from The Nonprofits' Insurance Alliance of California (NIAC), a charitable nonprofit insurance pool owned and operated by 501(c)(3) nonprofits in California. More information about the property and liability coverages and other services available through NIAC is available on their website at http://www.niac.org or by contacting them at P.O. Box 8507, Santa Cruz, CA 95061 or by phone at (800) 359-6422.

D & O Coverage Forms: Cutting through the confusion

01-17-2006

There is a wide variety of policies available on the market today. Your insurance broker can help you evaluate which policy form is best for your organization. There are far too many variables to adequately evaluate the many differences FAQs of this nature. However, there are some important distinctions which make the coverage provided by some of these policies far superior to others. A few of the most desirable provisions of coverage for nonprofits include:

Broad definition of insured

With a broad definition, the named insured includes "any natural person who was, is or becomes a director, trustee, officer, employee, committee member, or volunteer" as well as the nonprofit organization itself. This is a major departure from for-profit policies which typically cover only the directors and officers.

To check if a nonprofit policy contains this broader coverage, look at the definition of insured. If the organization is not a named insured, and its only coverage from the policy is for reimbursement of monies paid to indemnify directors and officers for claims made against them, there are serious unaddressed exposures. Nonprofit managers should ask their insurance professionals to advise them of any potential gaps in coverage of this nature.

Requirement to advance defense costs

Unfortunately, deciphering the language which states the manner in which the insurer will pay for defense is often quite difficult. It might be reasonable to assume policy language stating that "the Company will pay on behalf of the Organization any Loss..." is a commitment to advancing defense costs. However, later in this policy, "Loss" is defined as "amount paid by the Insured or Organization." This reimbursement language is easily missed, but it can be disastrous to the nonprofit that is required to reach into its own funds to pay the bills.

Look for the language that requires the insurer to advance the costs of defense. Reimbursement language requires the nonprofit to pay all costs and attorney fees out-of-pocket and wait for repayment by the insurer. Since D&O cases are often expensive and lengthy, reimbursement policies can severely stretch a nonprofit's resources.

Broad coverage for employment practices liability

Employment practices liability coverage is not universally provided in nonprofit D&O policies. In those policies granting coverage, the language is not located in a consistent policy section. In some, it is within the "Exclusions," where employment contracts are exempt from the breach of contract exclusion. In others, coverage may be found in the body of the policy or in the endorsements.

In addition to contract causes of action, such as wrongful termination, nonprofit D&O policies also should address the exposures for employment-based discrimination and harassment. However, not all D&O policies cover these allegations. Those that do, accomplish this either by covering all employment-related suits or by listing specific exposures. If the policy includes a specific list, the reader must determine if all exposures are included. There should be coverage for cases arising under both state and federal laws; those specific to employment and those, such as the Americans with Disabilities Act (ADA), applicable in many contexts.

Of equal importance, and not so easily determined, is an insurer's interpretation of certain definitions. For example, if the insurer defines sexual harassment as sexual abuse, there may be no coverage under that D&O policy if it contains a sexual abuse exclusion. If there is a question on this matter, a nonprofit manager should ask his or her insurance broker to contact the D&O carrier to determine the insurer's interpretation of this, and similar terms and issues.

Most of the lawsuits against directors and officers will involve some form of employment practices liability. Insurers are becoming more keenly aware of this exposure and some have made subtle policy changes which restrict coverage in these areas. The nonprofit manager should request his or her insurance professional to make sure that all of the coverages listed in this section are included in a policy designed to cover the exposures which arise from corporate governance, and should check whether a separate deductible applies to employment-related allegations.

Copyright (c) 1994-2005 CompassPoint, 706 Mission Street, 5th Floor, San Francisco, CA, USA 94103-3113. (415) 541-9000. Distribution and reprinting permitted as long as this copyright notice is included. All Rights Reserved.

Reprinted with permission from The Nonprofits' Insurance Alliance of California (NIAC), a charitable nonprofit insurance pool owned and operated by 501(c)(3) nonprofits in California. More information about the property and liability coverages and other services available through NIAC is available on their website at http://www.niac.org or by contacting them at P.O. Box 8507, Santa Cruz, CA 95061 or by phone at (800) 359-6422.

Policies and Procedures: How can you minimize the chances of facing an employment-related lawsuit?

01-17-2006

Keep your employee handbook updated and in compliance with current law

In our review of hundreds of nonprofits' employee handbooks we have seen policies incorporated into the handbooks that are patently illegal. For example, policies requiring two years of service before offering pregnancy leave, or those requiring employees to work as volunteers instead of receiving pay for overtime work are simply illegal and will be indefensible in case of a lawsuit. It is important to be aware of changes in the law and to make sure that managers and all staff are made aware of the changes.

Clearly and promptly document each employment action

Each time you meet with an employee on a performance matter, make sure that you document it promptly and have the employee sign it to acknowledge that he or she has seen the document. The employee may disagree with your assessment and may indicate so on the document, however, you should attempt to have the employee acknowledge receipt and review of the document. Keep one copy in the personnel file. During meetings with employees on performance matters, it is also a good idea to have two people from the nonprofit, in addition to the employee, present.

Make "at will" the standard of employment

California is an "at will" state. If your employee handbook or other document specifies a term of employment or provides that employees will be terminated only "for cause" you have created an additional hurdle for yourself which is not required by law.

Many nonprofit managers resist imposing the "at will" language because they believe that they must then become less supportive of employees. To the contrary, the "at will" language does not require employers to fire without cause, it simply may make it easier to avoid a lawsuit once it is determined that an employee is not performing adequately and must be terminated. (Imposing the "at will" standard on present employees may require additional considerations and before doing so, you may want to consult an employment professional.)

Ban the word "permanent" from your employee handbook

Using the words "permanent employee" in a handbook can be construed as providing all employees lifetime employment. If that is not your plan, get rid of the word "permanent."

Do not include termination as one of the actions covered by any grievance policy

To many nonprofits, this recommendation sounds odd. Isn't that often what the grievance policy is for, as an appeals board in case of termination? If you allow a termination to be brought to the grievance committee, you have effectively destroyed your ability to terminate "at will." With the ability to grieve a termination, you may be setting up your organization to be able to terminate only "for cause."

Again, this does not mean that your organization should not give ample opportunity to help poorly performing employees improve. It means only that you have reserved the right to determine when termination is appropriate and have not waived that right in favor of some third party's determination of what is proper "cause."

Follow your employee handbook to the letter!

This guideline may be the most important of all. If your policies provide for written notice before termination, if you promise to provide a second chance, if you have agreed to provide a written response in 30 days, etc., make sure you do just that. You may be taking a completely justified personnel action, however, if you do not follow your own policies, this will be used against you in a court of law.

Conduct candid, thorough annual reviews

The emphasis on this is "candid." If your managers are unable to be truthful with employees about poor performance and areas which need improvement, you are asking to be placed in a very difficult position if you need to terminate an employee whose performance is unacceptable. If an employee alleges discrimination or harassment when he or she is terminated following a consistent record of acceptable performance reviews, the allegation simply looks much more substantial. Be honest-not overly generous.

Make a prompt, thorough investigation of allegations of harassment or discrimination

Nonprofit managers are being asked to do more with less and there is never enough time to accomplish it all. However, if you do not take allegations of harassment and discrimination seriously and conduct prompt, thorough investigations, you put your organization and its mission to the community at risk. Instances of harassment and discrimination are taken seriously by the courts and allegations of such should be taken seriously by nonprofits.

Seek legal advice before taking an employment action

Even though California is an "at-will" state and termination technically can occur without "cause," courts frequently expect some showing of cause for the termination. Consequently, it is advisable to obtain legal counsel prior to taking any personnel action of this nature.

We understand that with limited discretionary funds, obtaining legal consultation before taking an employment action such as a layoff, termination or demotion, may be a stretch for a nonprofit's budget. Nonprofits' Insurance Alliance of California feels so strongly about the value of such consultation that it arranges to pay for legal advice for its member-insureds who purchase D&O insurance if it is determined that such advice could potentially avoid a lawsuit. (For more information about this service call NIAC's D&O underwriter at 1-800-359-6422.)

Copyright (c)1994-97 CompassPoint, 706 Mission Street, 5th Floor, San Francisco, CA, USA 94103-3113. (415) 541-9000. Distribution and reprinting permitted as long as this copyright notice is included. All Rights Reserved.

Reprinted with permission from The Nonprofits' Insurance Alliance of California (NIAC), a charitable nonprofit insurance pool owned and operated by 501(c)(3) nonprofits in California. More information about the property and liability coverages and other services available through NIAC is available on their website at http://www.niac.org or by contacting them at P.O. Box 8507, Santa Cruz, CA 95061 or by phone at (800) 359-6422.

Prevention and Protection: What are the keys?

01-17-2006

The steep increase in the number of employment-related lawsuits is the primary reason that nonprofit board members are at risk. Employees of nonprofits may be more long-suffering and willing to endure more job insecurity and accept fewer "perks" than their counterparts in the for-profit world. In this regard, they are probably less likely to sue the nonprofit for whom they have worked hard and in whose mission they believe. However, employees who feel they have been mistreated by the nonprofit or who disagree with policy decisions made by management or the board may retaliate with emotion and conviction. If these disputes result in lawsuits, the process can be expensive and difficult for both sides.

Employee handbooks in compliance with law, strict adherence to personnel policies, and generally good communication with employees can go far to mitigate potential problems. Boards of directors need to adopt and stand behind clear anti-discrimination and anti-harassment policies and make sure that management promptly and honestly investigates and thoroughly documents allegations of this nature and takes appropriate action. Not all lawsuits can be avoided, but having proper procedures in place and following them can go far toward providing a strong defense.

Not all D&O insurance policies provide the same protection. A buyer should take care, in particular, to make sure that the policy includes a broad definition of who is an insured, provides for costs to be paid by the insurer as they are incurred, and includes broad coverage for employment-related activities.

Managing a nonprofit organization was never an easy task, and it is getting more complicated each day. Those who volunteer for board membership and those who serve in management positions already give generously of their time and their talents. They should not be asked to put their personal assets at risk each time they make a governance decision.

Copyright (c)1994-06 CompassPoint, 706 Mission Street, 5th Floor, San Francisco, CA, USA 94103-3113. (415) 541-9000. Distribution and reprinting permitted as long as this copyright notice is included. All Rights Reserved.

Reprinted with permission from The Nonprofits' Insurance Alliance of California (NIAC), a charitable nonprofit insurance pool owned and operated by 501(c)(3) nonprofits in California. More information about the property and liability coverages and other services available through NIAC is available on their website at http://www.niac.org or by contacting them at P.O. Box 8507, Santa Cruz, CA 95061 or by phone at (800) 359-6422.

Things every director and officer should know -- commonly asked questions

01-17-2006

The duty of obedience forbids acts outside the scope of corporate powers. The governing board of the organization must comply with state and federal law, and conform to the organization's charter, articles of incorporation and bylaws.

The duty of loyalty dictates that officers and directors must act in good faith and must not allow their personal interests to prevail over the interests of the organization.

The duty of care requires directors and officers to be diligent and prudent in managing the organization's affairs. The individuals charged with governing must handle the organizational duties with such care as an ordinarily prudent person would use under similar circumstances.

For many years, directors and officers of nonprofit organizations enjoyed a sense of invulnerability because their services were associated with a nonprofit and not an attractive target for litigation. Nonprofit board members who continue to believe they are invulnerable in the 1990s may be in for an unpleasant surprise.

The duties of corporate governance-obedience, loyalty and care-may seem high-minded and so much legalese. However, the importance of these responsibilities becomes crystal clear when a nonprofit board member is faced with a lawsuit alleging improper fiduciary oversight or improper oversight of employment practices resulting in allegations of sexual harassment or wrongful termination.

Nearly ninety percent of claims against boards of directors will involve some type of employment dispute. We also have learned that those ten percent of claims not involving employment disputes can be expensive and can happen to the smallest of organizations.

The claims involving employment disputes may allege wrongful termination, sexual or other harassment, sexual , racial or age discrimination, violation of the Americans with Disabilities Act (ADA), failure to hire, failure to promote, and just about any other allegation a disgruntled employee can make. The risk of getting such a lawsuit filed against the board of directors does not necessarily expand proportionately to the number of employees in an organization. Very often, the parties at odds in a wrongful termination lawsuit are the executive director and the board of directors. Many of these lawsuits can be avoided, or at least be dismissed in the early stages of the lawsuit, if the nonprofit follows its own personnel policies. But more on that later...

Other Allegations

While employment practices disputes generate the most lawsuits against boards of directors, another allegation of concern is breach of fiduciary duty. A lawsuit alleging breach of fiduciary duty could be brought by a donor, a concerned citizen, or the Attorney General. In short, this type of lawsuit alleges that the board of directors is not appropriately using and protecting the assets and resources of the nonprofit organization.

There are no laws in California that prevent individual nonprofit board members or a nonprofit organization from being sued. There are two state statutes which often are thought to offer protection of this nature, but a quick review of them shows why they offer little protection.

Corporations Code section 5047.5, a statute within the general provisions of the nonprofit corporate law, protects "uncompensated" directors. However, specifically excluded from the liability protection benefits of this section are:

actions alleging the director or officer is guilty of self-dealing,

actions maintained by the Attorney General,

liabilities arising from intentional, wanton or reckless acts, gross negligence, fraud, oppression or malice on the part of the director or officer, and

directors who are salaried employees.

In addition, and this is the most important part, before an uncompensated director or officer can claim protection under section 5047.5, the nonprofit corporation must maintain general liability insurance applicable to the claim with a minimum coverage of at least $500,000. As discussed above, a general liability policy almost never will be applicable to a claim against a director or officer. Unless the nonprofit organization recognizes that D&O coverage is the insurance that "applies to the claim," and purchases this coverage, there is no protection under this law.

Corporations Code section 5239, which pertains specifically to public benefit corporations, has similar problems. Its protections are not available if the director or officer receives any salary, fee or other consideration, other than a per diem or reimbursement for expenses.

Also, directors and officers must prove to the court that:

the act or omission was within the scope of the officer's or director's duties;

the director or officer acted in good faith; and

the act or omission was not reckless, wanton, intentional or grossly negligent.

As with section 5047.5, eligibility for protection afforded to volunteer directors and officers through section 5239 is contingent on the act or omission being covered by a policy of insurance. The most common type of liability insurance coverage purchased by nonprofits, a general liability policy, usually will not be applicable to a claim against a director or officer. In which case, this law offers little protection.

If you think this sounds like a Catch-22, you are right. There are no protections under California law for directors and officers of nonprofit organizations unless they have an insurance policy in place that applies to the claim. So, the catch is, if you have D&O insurance, the law may offer some help. If you don't have insurance that covers the claim, forget it. You'll get no help from the law.

And, if you happen to have D&O insurance that covers the claim, don't expect the present California law to offer much relief. Typically, the most expensive part of any lawsuit is determining the facts, such as whether the director or officer acted in good faith, and whether the act was simple or gross negligence. Once the point is reached where the court determines that the board member should not be held liable because he or she acted in good faith and that it was simple negligence, not gross negligence, most of the expenses of the lawsuit will already have been incurred.

Importantly, there is no California law which provides any protection, no matter how minimal, for the nonprofit organization itself. The protections discussed above apply only to individual directors. A lawsuit against a board of directors will typically name the individual directors and the organization as defendants. A D&O policy is the only protection available for the organization.

Finally, no state law can offer any protection for allegations of breaches of federal laws such as those covering racial, sexual, and age discrimination and discrimination against those with disabilities. As discussed earlier, a D&O policy may provide defense for such allegations until it is determined that the law was intentionally broken.

The promise by an organization to indemnify its board members is only as good as the amount of unrestricted and available assets of the nonprofit. When a nonprofit agrees to indemnify board members, it agrees that in situations where it is permitted to do so by law, it will pay to defend board members and possibly pay damages.

It is possible that some coverage for board service may be found under an individual's homeowner's policy, but the extent of that coverage depends on the specific wording of that policy. For example, it is not uncommon to find coverage under a homeowner's policy for accidents which cause "bodily injury" resulting in the course of volunteer activities. However, as discussed in an earlier section, insurance policies which cover "negligent acts" typically do not cover the "intentional actions" of a board of directors. In a manner similar to a general liability policy, a homeowner's policy may provide coverage for accidents, but as indicated earlier, these types of policies typically provide no protection for the activities involved in the governance of the agency.

Additionally, even if every board member individually has a homeowner's policy which provides coverage for his or her decisions as a board member , where is the coverage if the organization is named in the lawsuit? The organization would be required to mount its own defense.

"What about the Volunteer Protection Act of 1997?"

Federal legislation, known as the Volunteer Protection Act of 1997, was signed into law by President Clinton on June 19, 1997. This law has many of the same problems as the California laws discussed above. In particular, to receive any protection, the volunteer must prove in a court of law that he or she:

was acting within the scope of his or her responsibilities,

if appropriate or required, was properly licensed or certified,

did not cause the harm by willful, criminal, or reckless conduct or gross negligence, and

did not cause the harm by operating a motor vehicle, vessel, aircraft, etc.

Also, it provides for states to continue to maintain other criteria they have imposed on volunteers, such as the requirement in California that there is insurance in place that covers the claim.

This law does nothing to protect nonprofit organizations from being sued for actions of their volunteers. In fact, it makes it crystal clear that nonprofits are to be held responsible for the actions of their volunteers!

"Wait a minute. My board indemnifies board members in its bylaws. Isn't that adequate protection?"

The promise by an organization to indemnify its board members is only as good as the amount of unrestricted and available assets of the nonprofit. When a nonprofit agrees to indemnify board members, it agrees that in situations where it is permitted to do so by law, it will pay to defend board members and possibly pay damages.

There are two shortcomings here. First, nonprofits may not be permitted to indemnify board members against certain types of actions, such as allegations of self-dealing. For these types of allegations, the nonprofit may be prohibited from using charitable dollars in a board member's defense, whether or not the accusations are justified. And secondly, few nonprofits have sufficient unrestricted funds to mount an expensive and prolonged defense.

It is possible that some coverage for board service may be found under an individual's homeowner's policy, but the extent of that coverage depends on the specific wording of that policy. For example, it is not uncommon to find coverage under a homeowner's policy for accidents which cause "bodily injury" resulting in the course of volunteer activities. However, as discussed in an earlier section, insurance policies which cover "negligent acts" typically do not cover the "intentional actions" of a board of directors. In a manner similar to a general liability policy, a homeowner's policy may provide coverage for accidents, but as indicated earlier, these types of policies typically provide no protection for the activities involved in the governance of the agency.

Additionally, even if every board member individually has a homeowner's policy which provides coverage for his or her decisions as a board member, where is the coverage if the organization is named in the lawsuit? The organization would be required to mount its own defense.

What board practices are particularly important to guard against lawsuits?

01-17-2006

A board of directors should follow several practices to guard itself against the threat of lawsuits. While even the best practices are no guarantee that the board will not be sued, good board practices can be a wonderful defense in the case of unjustified allegations.

Informed and regular review of financial statements
Board members should understand the sources of income for the nonprofit and know where those resources are being expended. If a professional fundraiser is used, the board should determine that the fee charged by the fundraiser is comparable to that charged for similar services by other companies.

At least once each year, the audit committee of the board should meet with the auditor without management present.

Regular attendance at board meetings
As a board member, ignorance of a problem in the agency is not a good defense. Board members must make informed decisions about the governance of the organization by thorough review of board packets and regular attendance and participation at meetings. It is important for board members to vote against proposals for which they are not in favor. Silence may well be interpreted as agreement by a court of law.

Have a clear understanding of the board's role in personnel situations
The Executive Director should have the authority to hire and fire staff below the Executive Director level. If the role between the board of directors and the Executive Director is not clear, the board may find itself embroiled in a situation which would have been better resolved at the staff level.

Avoid conflicts of interest
Board members who receive any compensation from the organization must fully disclose the nature of services provided and the amount of the compensation received. The board of directors must make a determination, independent of the compensated director, that the arrangement is in the best interests of the nonprofit and that a more favorable arrangement for the nonprofit could not be obtained elsewhere. There are specific guidelines about how these matters must be handled to avoid the possibility of sanctions. A nonprofit which is uncertain about how this may affect its agency should consult its attorney.

While nonprofits should never make a loan to a director, it is also unwise for the director to make a loan to a nonprofit. A board member with a loan to a nonprofit is in a situation of potential conflict; is he or she acting in the best interests of the nonprofit or in a manner most likely to get the loan repaid?

Boards with a director who provides insurance or real estate broker services to a nonprofit must be especially careful. While it may appear that that individual is providing the best possible service through a reduced commission or a donation to the agency, the nonprofit periodically should confirm that the services it is receiving are satisfactory and that the broker is not unfairly benefiting from his or her relationship with the nonprofit.

Copyright (c)1994-2006 CompassPoint, 731 Market Street, Suite 200, San Francisco, CA, USA 94103. 415.541.9000. Distribution and reprinting permitted as long as this copyright notice is included. All Rights Reserved.

Reprinted with permission from The Nonprofits' Insurance Alliance of California (NIAC), a charitable nonprofit insurance pool owned and operated by 501(c)(3) nonprofits in California. More information about the property and liability coverages and other services available through NIAC is available on their website at http://www.niac.org or by contacting them at P.O. Box 8507, Santa Cruz, CA 95061 or by phone at (800) 359-6422.

Where does Directors & Officers Insurance fit into the overall insurance picture?

01-17-2006

Served in late June, the lawsuit alleged that the executive director was guilty of sexual harassment and discrimination. Damages in excess of $500,000 were alleged. Shaken, the board turned the lawsuit over to its insurance broker for handling by their general liability insurer. The board was informed that there was no coverage for employment-related practices under the general liability policy and that they should look for coverage under their directors and officers insurance. The directors looked at each other with pained expressions. They had decided to save money for the new expansion and agreed not to purchase directors and officers insurance this year.

Although the details vary, that story happens all too frequently. What's worse, sometimes boards who had the foresight to purchase directors and officers insurance fail to purchase the broad coverages they need.

Because we have seen too many situations like the one illustrated above, these FAQs are not about helping you to decide whether or not to purchase directors and officers insurance. They are intended to help you understand the need for this type of coverage, help you evaluate your various coverage options and, if possible, help you avoid lawsuits of this nature altogether. Whether you have directors and officers insurance or not, becoming embroiled in a lawsuit can strain your organization and stress your employees. The best course is avoidance whenever possible.

If you understand the following section, you will have grasped a concept that few understand about why general liability offers little protection for board members.

General liability insurance
General liability insurance provides coverage for "negligent" acts. If your organization or its employees or volunteers (including board members) negligently cause someone "bodily injury, personal injury or property damage" general liability insurance provides coverage. In short, if someone is physically injured or his/her reputation is hurt, or another person's property is damaged because of a mistake by someone at your agency, you usually can rely on general liability insurance for coverage. Example: A client trips and breaks a leg because of a faulty stairway at the nonprofit.

Directors and officers (D&O) insurance
Directors and officers (D&O) insurance provides coverage for "intentional" actions taken by a board of directors that someone else thinks are wrong. In our employment-related case, the board affirmatively sets personnel policies which are intentionally carried out by management. These are intentional, willful actions which result in some type of damage other than bodily injury. Example: An employee is terminated and alleges age discrimination.

However, it is important to understand that, even though directors and officers coverage likely will provide defense against allegations of illegal acts, such as harassment and discrimination, it is not possible to purchase insurance for illegal acts. This means that if an organization and/or individual is found guilty of intentional discrimination or harassment, the insurer which defended the lawsuit will not be able to pay any damages awarded by the court and will likely seek reimbursement for the cost of the defense.

Copyright (c)1994-2006 CompassPoint, 731 Market Street, Suite 200, San Francisco, CA, USA 94103. 415.541.9000. Distribution and reprinting permitted as long as this copyright notice is included. All Rights Reserved.

The Nonprofits' Insurance Alliance of California (NIAC) is a charitable nonprofit insurance pool owned and operated by 501(c)(3) nonprofits in California. More information about the property and liability coverages and other services available through NIAC is available on their website at http://www.niac.org or by contacting them at P.O. Box 8507, Santa Cruz, CA 95061 or by phone at (800) 359-6422.

What is social entrepreneurism?

01-16-2006

"I hear a lot of people use really similar phrases to describe what sound like the same things: venture development, community wealth creation, social ventures, social entrepreneurs, social entrepreneurship, nonprofit enterprise, affirmative business, social purpose business, and microenterprise? What are the differences and similarities?"

Given that the emerging field of social entrepreneurism has grown out of a number of fields, including business, social welfare, community development, community service and international development, it is no wonder there are a variety of approaches and various terms to describe the work in which we are engaged!

At its core, people are talking about two things: individuals and organizations. Individuals in this field are often called social entrepreneurs. These people engage in their work in a variety of innovative ways: through for-profit companies which pursue socially responsible business practice; through nonprofit organizations operating ventures which create economic opportunity for others; and through nonprofit organizations which are founded as an innovative response to a particular social issue or cause. In all fairness, the people who plan, launch and manage all these types of organizations could be called Social Entrepreneurs. The key point here is that Social Entrepreneurs are people who attempt to take innovative approaches to social and other issues, most often with the use of traditional business skills applied in order to achieve some type of social goal.

From an organizational perspective, there are two forms of social entrepreneurship: nonprofit and for-profit. In the for-profit arena, a corporation that pursues "enlightened capitalism" could be said to be a socially responsible business. The Social Venture Network and Business for Social Responsibility both work with such corporations and business people. The nonprofit sector is itself, quite large and diverse (as are the resources available to them-- see for example, CompassPoint Nonprofit Services). Some nonprofits are focused on the goal of assisting individuals in launching their own small, for-profit businesses. The practice of assisting individuals who are members of "disadvantaged" communities to start their own businesses is referred to as microenterprise orself-employment. The Association for Enterprise Opportunity works to assist nonprofits in the United States that are pursuing self-employment strategies.

Terms such as a nonprofit enterprise, social purpose venture, community wealth venture and affirmative business, all speak to the practice of nonprofit organizations operating ventures to create economic value and/or create supported employment and training opportunities to those transitioning into the economic mainstream. In general, these efforts could be thought of as spanning a continuum ranging from those that engage in fee-for-service activities, to those that engage in a variety of corporate/nonprofit partnerships (such as cause-related marketing or "cross-branding" efforts), to those which operate revenue generating ventures employing a particular client population. In discussing any given organization's efforts, it is obviously important to understand how they view themselves along that continuum. For example, the work of the Roberts Enterprise Development Fund focuses primarily upon supporting nonprofits engaged in enterprise creation as a way of providing transitional and permanent employment to homeless and very low-income individuals.

Can the nonprofit sector really create jobs in the mainstream economy?

01-16-2006

Yes and No! The marketplace creates employment opportunities with greater and lesser degrees of success. nonprofit enterprise is not a panacea for poverty or a replacement for the operation of market forces. What nonprofits can do is create transitional jobs for those attempting to re-enter or join the economic mainstream. The nonprofit sector is ideally positioned to fill that social need in a way that the for-profit sector will never be positioned to do. In the process of creating these transitional employment opportunities, the nonprofit sector will certainly create some number of market-based, "permanent" jobs. However it would be foolish to think that nonprofits, with their social mission, increased costs of providing support services and other burdens, would ever be able to create more jobs than those for-profit businesses operating without community expectations and demands.

How do I go about starting a nonprofit enterprise?

01-16-2006

There are a variety of ways to start this process, but it all boils down to knowing your organization's current capacity, understanding what "value" you may have in the market place, and identifying what, if any, competitive advantage you may have, both as a nonprofit and potentially as a for-profit entity.

You might begin by doing a self-assessment of your organization, identifying your current strengths and position as a nonprofit.

At a minimum, ask yourself the following questions about your agency:

1. What is our core mission and reason for existence? What do our articles of incorporation say? What do our employees say? What do our clients or communities of interest say?
2. How do we currently deploy our resources in support of that mission?
3. Do we use our resources as effectively as we could to pursue our mission?
4. Are there activities that really don't relate to our mission and that we could transfer to another nonprofit with greater capacity to deliver that service or program?
5. Are there other organizations in our area that could provide these services more effectively than our organization?
6. What are our total assets (financial, real estate, volunteer, professional, etc.)?
7. What are our significant liabilities and challenges? (carrying debt, no financial stability, etc.)?
8. Is it possible for us to develop earned income based on any of our current activities?
9. Can we modify something we currently provide for free into a product or service for which we could charge fees?

When considering enterprise activities, it might be helpful to think about those possibilities in the following order:

Start from the inside and work outward. The further away you get from your mission as a nonprofit enterprise, the more likely you are to fail since you will have less expertise and may encounter increasing levels of risk. Historically, those enterprise activities with which a nonprofit had no prior experience or expertise have seen a higher failure rate than those that were directly grounded in the experience or background of the sponsoring organization.

How do we determine what kind of business to start?

01-16-2006

DEFINE GOALS, ASSESS ORGANIZATION AND COMMUNITY

Why do we want to start a business venture? What are our goals?
Prioritize goals.
How does creation of a business venture fit with our organization's mission?
What other organizational issues need to be addressed?
In what areas does our organization excel, what are our strengths?
What resources/facilities do we have that might be of use in a business venture?
What aspects of our community might affect a business venture?

DEVELOP VENTURE CRITERIA

What is the primary goal for the venture?
What are the employment impact goals for the venture?
What are the community impact goals for the venture?
What staffing goals do we have for this project?
What are our financial and timeline goals?

PRE-FEASIBILITY STAGE: ELIMINATE BAD BUSINESS IDEAS

Products or services
The market and the competition
Operating requirements
Management requirements
Employment requirements
Financial requirements
Special considerations
Summary

FEASIBILITY STUDY

Product or service
Market analysis
Operations
Organization and Management
Financial Analysis
Development Requirements
Critical Risks and Opportunities

You should also read books from your local library on small business development and contact your local office of the Small Business Administration.

How do we educate ourselves on these issues?

01-16-2006

This is not rocket science. The challenge is how to integrate business principles into the nonprofit marketplace. Read our book, New Social Entrepreneurs and become familiar with other resources available to you.

Find information based in actual experience, not on theory or philosophy (And don't launch your enterprise based upon someone else's vision-base your expectations on others' direct experiences and your dreams on your own desires!) Conduct informational interviews with groups that are actually engaged in the type of work you are researching. While you will certainly put your own spin on your approach, many of the ventures you will consider will be in existing markets with existing nonprofit and/or for-profit practitioners from whom you may learn.

The greatest challenge is how to reach people, obtain information and support.

How do you draw these excellent people to your venture opportunity?

01-16-2006

Should we pay market rate for a for-profit manager or market rate for a nonprofit manager?

Every nonprofit enterprise must confront a core truth: if you want a profitable, sustainable business, you must pay for managers who are able to create market-based value -- which in this case means money. If you want a former social worker to run your business like a program area, fine. What you will get is a new program area for your organization. If you want a venture that is economically successful, you will need managers able to deliver. They may come out of the nonprofit sector, but they MUST have the appropriate skill set to bring you the success you deserve. In order to get that experience, you may find that you will have to pay a business manager more than a program manager. This can be a difficult issue for any nonprofit to address, however it is also an important one for each organization to come to terms with. Ultimately, the goal of the social purpose enterprise is to get to a financial stage where it can pay market rate compensation to both managers and employees.

Isn't it illegal for a nonprofit to run a for-profit business? What are the laws and regulations regarding the creation of nonprofit enterprises?

01-16-2006

Not necessarily. nonprofit organizations are clearly prohibited from engaging in ongoing commercial or other activities which profit an individual or outside interest; however, all nonprofits should be profitable, or you would be out of business and unable to pursue your charitable mission! In general, nonprofit organizations may operate "business" ventures to the degree that those ventures are directly related to the pursuit of the social mission of the nonprofit. They may even operate out and out for-profit ventures as subsidiary corporations-but need appropriate legal council every step of the way, since each situation is different and has different implications for the sponsoring organization. You should always be sure to secure solid legal advice if and when you are considering any of these types of ventures.

There is no single law book regarding this process. In general, the legal "code" for nonprofit enterprise consists of existing regulations as well as a series of IRS private letter rulings over the course of the last 30 years. Each of these is specific to the original case and jurisdiction and is not pertinent to every other situation that might arise for a nonprofit executing these strategies. However, they do give a general indication as to how the IRS views various types of nonprofit business or job creation activities.

Many communities have nonprofit resource centers that may have libraries with helpful guidance on this issue. For example, The National Economic Development and Law Center offers a free document [PDF] regarding many of the legal ramifications of creating a business venture out of a nonprofit.  Other resources may be found on our "Friends of the Family" page. The key point to understand is that each organization is different with different conditions. Again, anyone considering engaging in community wealth creation and nonprofit enterprise should be sure to consult informed legal counsel in order to best understand how to structure the effort and limit the liabilities to the sponsoring organization. Don't take the information on this Web Site or any other resource at face value. Talk to an attorney!!

Should a businessperson or a nonprofit person manage the business? Should she have an MBA or an MSW?

01-16-2006

It's important to understand that many different skills and talents are called upon to create the successful venture. However, having said that, if you are engaging in any type of business development it is critical that your organization has managers with real, demonstrated business skills and experience. A fundamental skill set should include:

Comfort with numbers and an ability to use financial calculations to help keep the venture on track
Understanding of market dynamics
Ability to manage time, people and priorities
Ability to operate in a constantly changing environment

Additionally, it is especially helpful if your manager knows the particular industry that is the focus of your business.

Should I bring in a consultant? How do I know when to do so?

01-16-2006

There are some things to look for and be aware of when hiring consultants:

How much actual experience do they have in the same business you are doing? Ask for examples of their work and references for agencies where they've done the exact same thing Do they have experience in the operational side of business, not just planning? Are they familiar with only large business or small business?

A general rule of thumb is to remember that consultants should be used to improve your knowledge of how to successfully engage in this work-not replace your efforts or act as your proxy! Regardless of the specific task at hand, you should find a consultant who is committed to a process of "knowledge transfer" whereby you learn how to engage in the analysis yourself. Remember: When your venture opens its doors you need to be the one who understands how to run it and how to overcome the challenges you confront-not your consultant!

Should I just get an MBA student to take care of this for me (to plan, give advice, etc.)?

01-16-2006

MBA students and other interns can be a valuable resource to the nonprofit organization engaging in enterprise creation. The contribution of these folks is greater than simply that of conducting a particular project or task. In our experience, the presence of MBA students can help provide an "outside perspective" on the work. By asking questions and appropriately challenging assumptions of the nonprofit, student interns can provide a valuable contribution to the process of enterprise development and creation of an "entrepreneurial environment."

At the same time, it is also important for nonprofits to understand the limitations of student interns. They are not a source of cheap labor. If you are not willing to invest the time and energy in providing orientation and operational information to an intern, this source of support is not for you. Furthermore, student interns are often only available for short periods of time, perhaps 10 weeks or less. The agency's expectations should be realistic. Consider making use of an intern to manage a focused, time-specific project as opposed to being in charge of ongoing enterprise operations. Another consideration is the fact that when all is said and done, such folks are still students-they have other interests, courses and responsibilities and are not salaried staff of the organization. While they provide a significant, meaningful contribution to nonprofits, there are also challenges to integrating them into the organization in an appropriate way. How to best make use of interested students is an important issue to be managed by each nonprofit.

What are the eight most critical success factors?

01-16-2006

1. Existence of or the ability to create a strong entrepreneurial team
2. A comprehensive planning process
3. Identification of a compelling business opportunity
4. Understanding your unique, competitive edge
5. Finding a fit with your overall goals and needs
6. The possibility to
7. Existence of adequate financial controls and tools for planning and monitoring the effort
8. Access to long-term, adequate and appropriate financing

What are the reasons for creating nonprofit enterprise?

01-16-2006

Basically, there are two reasons an organization might pursue nonprofit enterprise:

1. As a strategy to further its social mission, for example to create transitional and permanent job creation to benefit a targeted population.
2. As a source of earned income as part of a strategy to diversify the revenue base.

What are the reasons for not attempting to launch a nonprofit enterprise?

01-16-2006

It should be understood that launching a nonprofit enterprise is not going to solve your organization's problems-it will simply alter the type of challenges you have to deal with! It's important to understand that over the years many nonprofits have failed to successfully pursue this strategy, and nonprofit enterprise creation should probably not be motivated by a simple desire to replace lost funding or increase income. These types of ventures are not easy, and there is no quick return for the investment of money, time and energy. However, if you are interested in providing employment and training opportunities to individuals who have experienced chronic unemployment or if you are seeking a way to diversify your revenue base, launching a nonprofit enterprise may be for you.

What kinds of industries are the best for nonprofits interested in job creation?

01-16-2006

The best industries are the ones in which you can find your own market niche in which to be successful! Understanding how to pursue successful economic development strategies comes from two "sides:" first, understanding the larger, economic sectors within which one moves, and, second, having the individual and organizational capacity to capture those opportunities present in those sectors. Successful enterprise activities are a blend of both. If you are a great manager with incredible vision and superb execution, but you are selling buggy whips, you will be less successful than if you are practicing your skills in another, growing sector. By the same token, if you are a poor manager, it doesn't matter what sector you are in - your results will still be poor. self-sustaining based on their earned income and enterprise activities.

What organizational capacity do you need to be successful?

01-16-2006

There is a public misconception that only large, established nonprofits have the capacity to successfully plan, launch and manage a nonprofit enterprise. In fact, large organizations, while having potential resources, also carry a greater institutional burden and culture that must be altered or abandoned in order to engage in successful nonprofit enterprise. Smaller organizations have greater flexibility to approach their work and carry less of an institutional memory that needs to be shifted in order to pursue enterprise creation. In the REDF Portfolio, some of our organizations have been in existence for over 25 years and have multi-million dollar budgets, but many have existed less than 5 years and are already significantly self-sustaining based on their earned income and enterprise activities.

What will be the impact of this on our organization? Should I anticipate board and staff changes?

01-16-2006

"If you like your staff, board, and clients the way they are, then don't do this because it will change everything." (a REDF Portfolio Executive Director).

Nothing is constant but change. The pursuit of nonprofit enterprise will mean you yourself will change, as well as everything else. You will need new skills, your organization will need new resources and perhaps structures, and your clients will face new expectations. The whole point, however, is that at some level what you have pursued in the past will never be what you pursue in the future. nonprofit enterprise creation provides you with an opportunity to reinvent your organization in anticipation of the challenges of the next century. Remember, this is not survival of the strongest or the biggest-it's survival of the fittest: Change or Die!

Where can I get the money to do this?

01-16-2006

The first step is for the nonprofit itself to use volunteer and in-kind staff time to engage in the initial assessment of any enterprise opportunity. If you haven't invested your own resources in the effort, why should anyone else? Having done that, it may then be time to begin identifying potential funding partners to support the expanded planning effort and possible venture that might arise from it. These partners may include foundations, individual donors or governmental sources with which the organization already has funding relationships. It may also mean developing new, "investor" relationships with individuals and donors who share your vision of social entrepreneurship.

Can I produce GAAP or audit-like financial statements in QuickBooks?

01-17-2006

For users of QuickBooks Pro or Premier, there is a new product called Nonprofit Books which works with QuickBooks to track unrestricted and restricted funds more easily and which will produce nonprofit financial statements on a monthly basis.

Can QuickBooks be used for fund accounting?

01-17-2006

You should also set up unrestricted, temporarily restricted and permanently restricted equity accounts. QuickBooks will not allow you to move money from the "Net Income" account (this is where QuickBooks shows your change in net assets) during your fiscal year. Once the year is over, however, QuickBooks moves the money in "Net Income" to "Retained Earnings" and you can move money from that account. So on the first day of your new fiscal year, you can divide your net assets into unrestricted/temporarily restricted/permanently restricted.

For users of QuickBooks Pro or Premier, there is a new product called NonprofitBooks which works with QuickBooks to track unrestricted and restricted funds more easily and which will produce nonprofit financial statements on a monthly basis.

Does it matter which version of QuickBooks I use?

01-17-2006

Intuit now makes a MAC version of QuickBooks. However, it was made for MAC OS (operating system) X and higher (although they say minimum requirement OS 9.2.2.)

Secondly, Intuit offers different levels of QuickBooks in each year - Basic, Pro and Premier. Pro offers additional and improved capabilities above Basic, and Premier offers more than Pro. Most of the changes from level to level may not be very useful to nonprofit users, but Pro and Premier do have at least one feature not offered in Basic that is vital to the nonprofit user: the ability to transfer reports directly into Excel by just pushing a button. So we encourage all nonprofit users to use at least Pro. Premier also offers remote access to your software.

How do I know if QuickBooks is right for my nonprofit organization?

01-17-2006

Also, users of QuickBooks Pro or Premier can look into a new product called NonprofitBooks, which has been designed for use in tandem with QuickBooks. NonprofitBooks specifically addresses the allocation and GAAP reporting limitations of QuickBooks.

Is there a way to track grants and contracts in QuickBooks?

01-17-2006

Is there a “right” way to use QuickBooks?

01-17-2006

If you need training in using QuickBooks as it was designed to be used and/or in adapting the software to nonprofit bookkeeping, see CompassPoint's training schedule for QuickBooks classes.

What is QuickBooks, and how can nonprofits use it?

01-17-2006

QuickBooks is accounting software designed to be used by small, for-profit businesses. However, because of its relatively low price and its user-friendly interface, it is also used by many small and mid-sized nonprofit organizations.

Since it is designed for the for-profit sector, using QuickBooks in a nonprofit environment creates some specific challenges. For example, it is not designed to track unrestricted and temporarily restricted fund balances as required by Generally Accepted Accounting Principles (GAAP) for nonprofit organizations, nor is it possible to produce GAAP nonprofit financial statements directly from QuickBooks. It is possible, however, to manipulate QuickBooks so that it can work for many organizations.

To use QuickBooks for a nonprofit, it is essential to pay close attention to how the software is set up. For instance, use "classes" within QuickBooks to track program and supporting activities as well as levels of restriction, and, if you wish to track funding sources in the accounting system, use the "customer" and "job" functions to accomplish this.

Once you set up classes to track your organization's activities and unrestricted and temporarily restricted fund balances, you will be able to produce reports from QuickBooks that can be printed to Excel where they can be manipulated to get nonprofit financial statements. In order to facilitate moving your reports from QuickBooks to Excel, be sure to purchase QuickBooks Pro or Premiere, rather than Basic.

The following workshops provide more information on this topic:

• Introduction to Bookkeeping in QuickBooks
• Intermediate Bookkeeping in QuickBooks

How can I find out how to start a nonprofit organization?

06-04-2007

Read "Get Ready, Get Set" or "En Sus Marcas... Prepárense....",

a publication that can be downloaded for free from the Center for Nonprofit Management website at: www.cnmsocal.org/Services/publications.html

Get a copy of "How to Form a Nonprofit Corporation in California."

The book walks you through the process of becoming a nonprofit organization, and includes information on how to get the necessary forms.
Mancuso, Anthony. How to Form a Nonprofit Corporation in California
11th Edition. Berkeley: Nolo Press, 2005.
To purchase visit www.nolo.com.
 

Attend the workshops at CompassPoint.

So You Want to Start a Nonprofit?
This workshop will provide an overview of forming a nonprofit organization, focusing on basic legal requirements. Topics include an overview of the different legal classifications of organizations, an overview of the application for tax-exempt status, articles and bylaws, tax requirements, forms and processes, the legal aspects of forming a board of directors, and more. Also, a representative of the Tides Center will discuss the benefits and disadvantages of fiscal sponsorship as opposed to incorporation. For information on scheduled workshops, go to:
www.compasspoint.org/workshops

This page modified from a guide from the Center for Nonprofit Management
www.cnmsocal.org/StartingANonprofit.html

What forms do I need to complete?

06-04-2007

State of California

• Go to the branch office of the California Secretary of State to get forms for incorporation.
  
• Forms and general information is also available online at: www.ss.ca.gov/business/bpd_forms.htm#be
  
• For an overview of laws in California applicable to tax-exempt organizations, including filing requirements, see www.ftb.ca.gov/forms/misc/927.pdf

Federal

Contact the IRS for forms you will need to get tax-exempt status:

• If there are questions concerning the IRS, you can reach their Tax-Exempt specialists by calling (877) 829-5500. The IRS sends out a packet of their forms needed to start a nonprofit.
• Visit the IRS charities website: www.irs.gov/charities/index.html.
  
• A nice explanation of the life cycle of a tax exempt organization is provided at http://www.irs.gov/charities/charitable/article/0,,id=136459,00.html.
  

You may also want to download the following helpful IRS publications:

• Publication 4220, Applying for Tax Exempt Status www.irs.gov/pub/irs-pdf/p4220.pdf
• Publication 557, Tax Exempt Status of your Organization www.irs.gov/pub/irs-pdf/p557.pdf
• Publication 4221, Compliance Guideline www.irs.gov/pub/irs-pdf/p4221.pdf

Additional information:

• To reach the IRS Exempt Organization Customer Service, visit www.irs.gov/charities/article/0,,id=96085,00.html.
• To find out what types of errors can cause delays in processing your application, see the IRS' top ten reasons list for processing delays at www.irs.gov/charities/article/0,,id=96361,00.html

This page modified from a guide from the Center for Nonprofit Management www.cnmsocal.org/StartingANonprofit.html

How much time and money does it take to do Strategic Planning?

01-17-2006

It depends! A useful strategic plan can be sketched out in a few hours for no cost, done at a one- or two-day retreat for several hundred or a few thousand dollars, or take over a year and cost up to $100,000.

On what does it depend? There are many factors that influence the cost

and time frame for an organization. Taken together, these factors can be weighed and balanced to develop an appropriate planning process.

It sounds obvious, but the thing to consider is how much time and money is, or can be, available for planning. It pays to be realistic. There are usually relatively narrow ranges for both available money and time commitment. These ranges need to be respected and used as meaningful constraints. If a board and staff are heavily involved in a labor-intensive project or other immediate issues, they will not have the time or the energy to devote to an intensive planning process. And, while strategic planning is often supported through technical assistance grants, it is more appropriate for some organizations than others to invest a lot of money in strategic planning. One fifty-year-old organization with a multi-million dollar budget had not deeply examined its mission and program mix in decades. It received a $100,000 grant to support a two-year planning process that also covered the cost of staff time devoted to the planning process. A young organization may not be comfortable spending even $3,000 for a planning process lasting a few months when its entire operating budget is less than $100,000.

The experience level of the leaders of the planning process is another critical factor. It generally takes more time and requires more outside assistance if the organization's leaders have little experience with strategic planning. On the other hand, if an organization has a well-developed annual program and budget planning routine, much of the information needed for strategic planning may be readily available, thus shrinking both the time and cost of a strategic planning effort.

Other factors that will have an impact on the amount of time needed to do strategic planning include:

The degree of commitment to the current mission statement. Is there a fundamental agreement as to the purpose, mission, and guiding principles which guide the organization? Is there a shared vision of the impact the organization wants to have in the world, and what the organization would need to do to accomplish that result? If so, the mission statement may only need polishing; if not, a full day or more may need to be devoted to this task.

The amount of new information. The amount of new information that needs to be gathered in order to make informed decisions. How well do planners currently understand the strengths, weaknesses, opportunities, and threats facing the organization? How current is feedback on the organization's programs and services from outside stakeholders: clients, funders, community leaders, etc.? What information is needed to assess the competitive environment and the effectiveness of current programs?

The level of agreement on priorities. How much agreement or disagreement currently exists regarding allocation of resources? Is there agreement over which clients to serve and what services are most important? Or are there power struggles going on over competing internal resource needs for program services, facilities, development, staff, etc.?

The level of trust. The level of trust among and between staff and board. The level of trust among all the key stakeholders involved in the planning process can significantly hinder, or greatly support, the discussion of differences and the management of conflict.

Involvement of key stakeholders. How much time and energy needs to be spent involving key stakeholders in the planning process in order to get both their input and their support for decisions made during the planning process?

The size of the organization. Is there only one service provided, or does the organization provide a variety of services that need to be

What are the keys to effective Strategic Planning?

01-17-2006

The elements we highlighted above in our definition speak to the characteristics of strategic planning which we believe are most necessary for success. In addition, a few other thoughts about our approach are suggested here as advice to prospective planners.

1. Focus on the most important issues during your strategic planning process.

It may take a while to become clear, but inevitably there are only a few critical choices which the planning process must answer. (If you don't have any really important choices to make about your organization's future, you don't need a strategic plan.) Resist the temptation to pursue all of the "interesting" questions. You simply won't have time, energy or resources to do it all.

2. Be willing to question the status quo.

In order to understand what is most important in the current and in the expected future, old assumptions about what is important must be challenged. It is possible to honor the past and still to make new decisions-don't allow new ideas to be characterized as inherent criticisms of the past.

3. Produce a document.

Whether an organization engages in an abbreviated process or an extensive strategic planning process, a planning document should be created. A useful strategic plan can be a few pages long. The document is a symbol of accomplishment, a guide for internal operations, and a marketing tool for current and future supporters.

4. Make sure the strategic plan is translated into an annual operating plan for at least the first year.

A critical test of a good strategic plan is that the operational implications are clear. Without a practical operating plan that articulates short-term priorities - and clearly identifies who is responsible for implementation, a strategic plan will rarely be implemented. Writing the first year's annual operating plan and supporting budget with the strategic plan in mind makes sure your strategic plan passes this test.

What does a "Strategy" look like?

01-17-2006

Strategies are broad, overall priorities or directions adopted by an organization: strategies are choices about how best to accomplish an organization's mission. A few brief examples illustrate the point.

Sample Strategies

In pursuit of their mission to "increase opportunities to experience world class art in our community", a relatively new museum chose an innovative acquisition strategy -- they chose to rent much of their collection, rather than primarily raise money to increase their art collection.

Sample long-term objectives within this strategy:

- At least 50% of our exhibitions will be from other museums collections

- Focus our art collecting on 20th century California artists

Sample short-term objectives within this strategy:

- Within the next year, collaborate with other museums to put on one exhibition that highlights 19th century Japanese drawings and one exhibition that highlights French impressionists.

After many years spent caring for neglected animals, an SPCA (Society for the prevention of Cruelty to Animals) shifted its overall program strategy toward prevention. To implement the strategy all programs were instructed to develop and implement an education component to their service, and the staff increased their efforts to pass legislation designed to prevent unwanted pets and animal abuse.

Sample long-term objectives within this strategy:

- Within the next 5 years, reduce by at least 50% the number of animals we have to put to sleep

- Get passed new legislation that increases regulation of "puppy mills"

Sample short-term objectives within this strategy:

- Within the next year, each department will develop and implement a plan for adding an education component to their scope of work

- Hire an education director to coordinate our education efforts

- Develop and implement a "Spay and Neuter Campaign"

In each case, the organization has made a clear choice among competing options about how best to pursue its mission. It is easy to see how each of these core strategies might be translated into specific goals and objectives over a period of several years and for the immediate future. What is not easy to see is how much effort, experimentation, and discussion were required to find these successful strategies. The strategic planning process helps organizations identify various strategic options and to make intelligent choices in developing strategic directions and plans.

What if I have only one or two days to do Strategic Planning?

01-17-2006

There are always trade-offs to be made in selecting a planning process. Even in a six- to twelve-month process, hard choices have to be made concerning which issues to explore and which to leave alone.

Use Exhibit A to help you choose; don't be afraid to adjust the process as you go along if you find that a more, or less, intensive process will serve the organization.

Exhibit A: Levels of Planning Process

What is a business plan?

01-17-2006

Should strategic plans always have a longer-term focus?

Content Usually a strategic plan articulates both core future strategies and specific longer term goals and objectives. A strategic plan may also - or sometimes only, be very current focused and articulate shorter-term goals and objectives.

Strategic Decisions Versus Operational Decisions

Strategic Decisions

- Fundamental, directional

- Longer-term impact

Operational Decisions

- Focused on current operations

- Shorter-term impact

How is Strategic Planning with nonprofit organizations different from planning in the for-profit business or government?

Content Strategic planning is interdisciplinary and incorporates concepts from military strategy, history, business practices, and organizational theory. It came to prominence as a distinct discipline in the 1950s and 1960s because of its popularity among many corporations' headquartered in the United States. Still, the essential concepts are applicable to any organizational setting.

What is similar about strategic planning in nonprofits, for-profit business, and government is the essence of strategic planning-in an organizational setting deciding what to accomplish, and how to go about it in response to a dynamic operating environment. What is different is the nature of the internal and external forces which bear on the essential task.

The governance of organizations in the three sectors is quite different and has significant implications for strategic planning. Both nonprofits and for-profit businesses are governed by a board of directors, whereas government organizations are governed by a wide variety of publicly elected bodies. The boards of for-profit businesses represent, or are, the literal owners of the business. Nonprofit boards represent the public interest.

For-profit businesses especially in the past twenty years have emphasized customer satisfaction to a greater degree than either nonprofits or government. For-profit business has invested heavily in market research and in attempts to improve quality as they compete for customer business. Because the direct consumers of the products and services of nonprofits and government typically pay only a small portion of the cost, the funders, whether foundations or taxpayers, have had a much greater influence than customer satisfaction on the strategies of organizations in these two non-business sectors. This is beginning to change; witness the popularity of the Reinventing Government, a book which emphasizes increased responsiveness of the government to the public and increased focus on accountability in the nonprofit sector.

Finally, values and an orientation to a mission have typically been the hallmark of nonprofits and less influential in for-profit business and government. This also is changing. In the past decade, much of the for-profit business sector literature, starting with In Search of Excellence, has emphasized the importance of values and mission statements in well-run companies. Similarly, it is not uncommon now to find government offices with mission statements that articulate the unique contribution the office aspires to make to the public welfare. However, with minor translation to different contexts, much of the conceptual framework* is equally applicable to organizational settings in either the for-profit business or government sectors.

What is strategic planning?

01-17-2006

Strategic planning is a systematic process through which an organization agrees on-and builds commitment among key stakeholders to- priorities which are essential to its mission and are responsive to the environment.

Strategic planning helps leaders to be intentional and pro-active in allocating resources to achieve these priorities.

What is the difference between Strategic Planning, Long Range Planning and Operational Planning?

01-17-2006

Strategic planning, however, assumes that an organization must be responsive to an environment that is dynamic and hard to predict. Strategic planning stresses the importance of making decisions that position an organization to successfully respond to changes in the environment. The emphasis is on overall direction rather than predicting specific, year-by-year, concrete objectives. The focus of strategic planning is on strategic management, that is, the application of strategic thinking to the job of leading an organization to achieving its purpose. As a result, while some organizations may develop visions that stretch many years into the future, most strategic plans discuss priority goals no farther than five years out, with operational objectives identified for only the first year.

Strategic planning and operational planning involve two different types of thinking. Strategic decisions are fundamental and directional, and over-arching. Operational decisions, on the other hand, primarily affect the day-to-day implementation of strategic decisions. While strategic decisions usually have longer-term implications, operational decisions usually have immediate (less than one year) implications.

Clearly, these various levels of planning overlap. Strategic plans should outline core strategies (the primary focus of the organization's resources to best achieve its mission), and usually contain a description of longer-term program and administrative priorities (long term goals and objectives. But a strategic plan may also include -- or primarily emphasis, operational plans if the organization's operating environment is particularly volatile -- actions to be taken in the next year. Both long term and operational (short-term) goals and objectives are needed to support core strategies. All are important and need to be done well. However, it is important not to confuse the three concepts: strategic planning, long term planning and operational planning.

Strategic Planning

• Views future as unpredictable
• Views planning as a continuous process
• Expects new trends, surprises and changes
• Considers a range of possible futures & emphasizes strategy development based on assessment of the organization's internal (strength and weaknesses) and external (opportunities and threats) environment.
• Asks: "Based on our current understanding of environment, are we doing the right thing? How can we best use our resources to achieve or mission?"

Long Range Planning

• Views future as predictable -- assumes current trends will continue
• Focuses on setting long range objectives
• Assumes a most likely future and emphasizes working backward to map out a year-by-year sequence of events
• Asks: "What should we be doing each year for the next 3-5 years?

Operational Planning

• Views future as something that needs to be implemented now.
• Focuses on setting short-term (less than one year) objectives.
• Assumes much more detailed planning regarding who and how activities will be accomplished
• Asks: "What do we need to be doing for the upcoming year/immediately to best accomplish our mission."

What is the language of Strategic Planning in the nonprofit sector?

01-17-2006

Is there a difference between mission and purpose? Why distinguish between external and internal vision? What is a strategy? What distinguishes goals from objectives and programs from activities?

A successful strategic planning process supports an organization involving its stakeholders-paid and volunteer staff, board, clients, funders, and the community-in reaching consensus about what end results they are trying to achieve (external vision, purpose, goals, and objectives), and the means to accomplish those results (internal vision, core services, specific programs and administrative functions, and activities).

An organization's strategic plan is not an end in itself, but rather a means of achieving its purpose. Tom Peters (In Search of Excellence), John Carver (Boards That Make a Difference), and many others have emphasized the need for the people implementing a strategic plan to have enough flexibility and authority to be creative and responsive to new developments-without having to reconstruct an entire strategic plan. This flexibility is required most in adjusting means. In other words, the purpose of an organization and the priority goals are much less likely to change than are the programs and activities necessary to achieve them.

For example, an organization decides it wants to achieve a particular goal and decides to set up a program to achieve that goal. If another organization has decided simultaneously to set up a similar program, the first organization may collaborate with the second organization or in some other way adjust its program plan without changing its original goal.

Peters calls this being "tight on ends," that is, building strong commitment to the purpose and goals of an organization, while allowing the people in the organization to creatively adapt their methods to best achieve the goals, or staying "loose on means."

The planning process presented in Strategic Planning for Nonprofit Organizations: A Practical Guide and Workbook is built on the important relationship between "ends" and "means". Because different individuals use different terminology, the following exhibits define the language to help make the thinking behind this process clear and useful.

What should we not expect from Strategic Planning?

01-17-2006

Everything said above to describe what strategic planning informs an understanding of what it is not.

Strategic Planning does not predict the future

Though strategic planning involves making assumptions about the future environment, the decisions are made in the present. "Planning deals with the futurity of current decisions. Forward planning requires that choices be made among possible events in the future, but decisions made in their light can be made only in the present." Over time, an organization must monitor changes in its environment and assess whether its assumptions remain essentially valid. If an unexpected shift occurs, major strategic decisions may have to be revisited sooner than they would in a typical three to five year planning cycle.

Strategic Planning is not a substitute for the judgment of leadership.

Strategic planning is a tool-it is not a substitute for the exercise of judgment by leadership. Ultimately, the leaders of any enterprise need to sit back and ask themselves "What are the most important issues to respond to?" and "How shall we respond?" Just as the hammer doesn't create the bookshelf, so the data analysis and decision-making tools of strategic planning do not make the decisions. There is no right answer-strategic planning merely supports the intuition, reasoning skills, and judgment that people bring to the work of their organization.

Strategic planning is not a smooth, completely predictable, linear process.

Strategic planning, though structured in many respects, typically does not flow smoothly from one phase to the next. It is a creative process, requiring flexibility-the fresh insight arrived at today might very well alter the decisions made yesterday. Inevitably, the process moves forward and back several