Mastering Financial Management in Nonprofits: The Critical Role of Professional Expertise
Apr 24, 2024Season 4Episode 127
Tim Barnes and Nathan Ruby
As a small to medium nonprofit with a small budget, it seems like a good call to try to do things yourself or with the help of volunteers. But are there areas where it actually makes more sense and provides even better value, to hire a professional? We would say most definitely.
One of those areas is nonprofit finances. On today's episode, Tim and Nathan discuss some places where seeking financial expertise is wise. Some those places are:
A small nonprofit may not be able to hire a financial employee but they might be able to hire a contractor or a third party firm to provide help and insights. In any case, this is one area where it is worth investing in expertise for the good of the long term health of the organization.
As a small to medium nonprofit with a small budget, it seems like a good call to try to do things yourself or with the help of volunteers. But are there areas where it actually makes more sense and provides even better value, to hire a professional? We would say most definitely.
One of those areas is nonprofit finances. On today's episode, Tim and Nathan discuss some places where seeking financial expertise is wise. Some those places are:
A small nonprofit may not be able to hire a financial employee but they might be able to hire a contractor or a third party firm to provide help and insights. In any case, this is one area where it is worth investing in expertise for the good of the long term health of the organization.
All opinions and views expressed by the hosts are their own and do not necessarily represent those of their respective organizations.
Nathan Ruby:
As a small to medium non-profit with a small budget, it seems like a good call to try to do things yourself or with the help of volunteers, but are there areas where it actually makes more sense and provides even better value to hire a professional? We would say most definitely.
Tim Barnes:
Definitely Welcome to the Practice of Nonprofit Leadership. I'm Tim Barnes and I'm Nathan Ruby. Okay, nathan, how many nonprofits have you seen, or probably served with, that depended on a volunteer to keep the books and handle the finances? You know, maybe it's your brother-in-law, bob, or your neighbor, joe, who you know they volunteered, they jumped in and they may be really great with their personal finances or even read a finance book one time. But there they are. They're there to help.
Nathan Ruby:
Yeah, I've seen it so much, tim, and you know gosh darn it. You know they're doing the best they can and God love them for trying. But the area of finances is one of those places where it is important to consider paying for a finance professional to help your nonprofit stay on track. You may feel like you aren't big enough or complicated enough to hire a CPA or finance professional. It's not only about the immediate, but also to build the foundation for your organization to grow and have impact. So when and why should an executive director consider hiring a financial professional to help their organization?
Tim Barnes:
That's a great question and, nathan, why don't we jump in? And maybe I'll just say we're going to talk specifically about hiring a finance professional, but this could be something to keep in mind, no matter what area that we're talking about. Sometimes it's really a good idea to hire somebody with the experience and the professional knowledge of an area that you could really use help in. But today we're going to focus in on professional finance, and so let's talk about some areas. There's like five areas I think that would be really good to consider hiring someone who has a finance background, and the first one is this when it comes to financial reporting.
Tim Barnes:
The first one is this when it comes to financial reporting so you know, we need to prepare finance reports for our board, for potential donors, and sometimes, especially when you're just starting out, if you're a small nonprofit, it's really good to have somebody with that kind of background to help you begin to think and understand what kind of reporting we need and what does that look like. And someone with a CPA or someone with a finance background can make sure that your financial statements are accurate which is always a really good thing and actually comply with regulations. It doesn't matter how small you are or how big you are. There are regulations that you need to follow and you need to comply with, and so it's important that you're doing the right thing. And good finance reports. Nathan, I'm sure you would agree with this. Good finance reports boost the confidence of the stakeholders in your organization.
Nathan Ruby:
Oh, absolutely Absolutely. And the bigger, the higher up the donor food chain you go, the more important that is. And maybe in your organization you're not going after $100,000 donors or $50,000 donors or even $1,000 donors, but as you grow and you get more sophisticated and you start to go up to that next level of donors, the higher you go, the more important that documentation is going to be. And so when you have a donor who's considering a gift that will transform your organization, and then they say I'd like to see the last three years of your financials, which I've been asked before- you better hope the last three years of your financials are up to snuff.
Tim Barnes:
Well, and that's exactly true. It's amazing how many times you're asked that question. You know you might be wanting to join a professional organization and they say, well, one of the steps to have membership in this organization is we want to see your you know, like you say, three years of finances and they're going to take a look at it to see if you're credible, and so that's really important to make sure that your financial reporting is on track. You're doing the right things, answering the right questions. Well, the second area is probably the one that you would most likely say oh yeah, I get that. And that's when it comes to tax preparation and when you are preparing your nonprofit's tax return. Now, you do know that as a nonprofit, you need to file a tax return, right? So many people I talk to go wait a minute, come on, we're a nonprofit, you need to file a tax return, right?
Nathan Ruby:
So many people.
Tim Barnes:
I talk to go wait a minute. Come on, we're not a nonprofit.
Nathan Ruby:
We don't have to do that.
Tim Barnes:
Oh man. Well, you do have to do reporting. You do have to do a tax report, a tax return, a 990 form. If you haven't heard that, you will hear that it's normally what you have to fill up, particularly when you hit about 50K in revenue or more, and before then you may need to report in another way, and that's why it's so important to have someone who knows what they're doing. A CPA or finance professional to help you step into that. And also, particularly with a CPA which is a certified public accountant is someone who's oftentimes experienced. Well, let me just say this you need to find a CPA who is experienced in nonprofit tax laws.
Nathan Ruby:
There's a difference between for-profit and nonprofit, so you need someone to give you that input and you need to have someone who's experienced in the nonprofit profit world yeah, you know, tim, a couple years ago we had the great idea and it is a good idea to open a, a store, uh, a, uh, you know, for swag, uh, for coats and hats and keychains and pens and all of that good stuff. And, uh, we had a lot of our donors and volunteers have asked for that over the years, and so we were finally due to a place where I was like, okay, yeah, let's do that. And it was going to be a store, so you're going to have to pay for it. And so I thought to myself, I'm just going to call our auditor just to double check to make sure that there's not anything that we have to do.
Nathan Ruby:
Um, and, because there's this thing called unrelated business income tax and that impacts non-profits, where, if you were deriving income from non-charitable ways, you may actually have to pay income tax or you may have to pay tax on that and one of those ways.
Nathan Ruby:
So if you have, like, a resale store, a thrift store as part of your organization and actually an online store counts for that, so if you put up a store on your website where you could get hats and pins and all of that year round, all of that income is subject to unrelated business income tax. But and this is what I found out if you do it periodically, then it qualifies as a fundraiser and there is no you bit on a fundraiser. So instead of having it up year round, we have it up two or three times a year, before Christmas and different times. But I kind of had an inkling there might be an issue, which is why I asked in the first place. But if I hadn't asked, we would have put that thing up. It would have been up year round and then, come audit time, there would have been a problem. So perfect example of get advice from people who know what they're talking about.
Tim Barnes:
Well, nathan, it occurs to me we should probably at this point remind our listeners that neither of us are tax professionals or consultants, not even close. So when you talk to the IRS, don't say, well, tim and Nathan said, do what we're talking about today and if you have questions, make sure you consult someone who knows what they're talking about. When it comes to taxes, we know just enough to be dangerous, but it's important for you to consider some of these things, but make sure you check with the professionals. So it's important for you to consider some of these things, but make sure you check with the professionals. So, tax preparation, you know again, having someone that you consult with in that area can ensure that you're taking, first of all, full advantage of the tax exemptions that you are allowed as a nonprofit, but it can also help avoid any potential penalties that may come because you don't know what you're doing no-transcript. So a third area, and this is one that I find, nathan, when I talk to people, that it just sometimes just doesn't occur to people or they just they kind of gloss over it. But it's this concept of internal controls. It comes to receding when it comes to filling out forms, all that you need to establish or evaluate some internal controls.
Tim Barnes:
What is the process of how you handle money, how you handle donations, how you handle reporting, and someone who has a finance background can help you design systems that protect your organization from fraud and error and ensures the security of the assets that you have and the integrity of your financial data. This is in the forefront of my mind at the moment, nate, because I've been over the last few weeks as we're recording this, I've been involved in our yearly audit. We have to do an audit every year, and so we get deep down into all the finances, and one of the things in my role that I have to do every year is I have to fill out a form or I have to answer some questions for auditors around the issue of fraud and about systems and how do you keep your organization from fraud, and so it's really important to think about that and to have somebody who can actually give you input in that. Nate, I know that's something that comes up for you guys as well.
Nathan Ruby:
Yeah, and I got to be full transparency here. In my type A personality, internal controls irritate the heck out of me. I got things to do, tim. I don't have time to worry about this. You know getting this signature and doing that and doing that.
Nathan Ruby:
However, tim's giving me the evil eye at the moment. However, internal controls are there to protect me and to protect him and to protect you. They're in there so that, if something bad happens or if something goes off the rails, or to keep things from going off the rails right, it's there to protect you and your staff from allowing bad things to happen. Or if a bad thing happens, you could say listen, these were our internal controls and I followed those controls. There's my signature, there's the initial of somebody else and your CPA will tell you what those controls should be for you and your organization. But yeah, I totally agree, tim, they are incredibly important and, yeah, it's an annoyance for me, but it's critically important to have. And we'll be doing that same thing because we start our audit process next week and you can tell by the sound of my voice I am thrilled to be sitting through all of that stuff.
Tim Barnes:
Yeah, it can be time consuming, it can be frustrating, but it's really really important. And another term that you may hear if you're not familiar with is gap, which is generally accepted accounting practices, and so it's important to pay attention to those and make sure that your organization is following those, and a CPA finance professional can help you with that. Even things like, I think, particularly as a smaller nonprofit, one of the accepted practices is that one person doesn't do everything with the money, so they don't receive the money, they don't receipt the money, they don't pay the bills. You know you really should have division of duty. You should have different people doing different things, and that's hard when you are a small nonprofit, and maybe that's where a volunteer or two can help come alongside you. But that's part of internal controls. How are we making sure that the money is getting to where it needs to go, actually being used, and it's been designated, some of those kind of things? So internal controls is really important.
Nathan Ruby:
Yeah, I think.
Nathan Ruby:
Another thing on internal controls Tim, we're in the nonprofit world this whole podcast is about nonprofits and I think Tim and I have been in this world our entire adult lives and there is a sense of you're not working in this world unless you have a sense of purpose and a sense of vision and mission and you care about, you know whatever the organization is doing and and so there's there's this level of trust that we're all here for the same purpose, we're all here to help, and so you know I don't have to worry about sarah or bob or joe or jane or whatever, because you know they're they're not going to do anything wrong.
Nathan Ruby:
They're not gonna, you know, commit fraud, they're not whatever, because they're not going to do anything wrong, they're not going to commit fraud, they're not going to steal, they're not going to do that. I know that, and Tim and I could give you, time after time after time after time, of organizations we've either worked with in a consulting capacity or organizations that, unfortunately, we've been part of or that we know about, where terrible things have happened and massive fraud has taken place. And we hate to talk about that, but it happens and almost always not 100%, but almost always it was a breakdown in internal controls that allowed it to happen. So we don't mean to keep belaboring this, but this is important and you need to do it.
Tim Barnes:
And I think that one of the reasons that we do belabor a little bit is because it's often a weak area in smaller organizations, because we're so focused on the mission and what we're trying to do, which is rightly so, but it's important to keep that in mind. So a good opportunity to bring somebody in who has that background, finance background to help you think that through. So a fourth area is around the issue of budgeting and forecasting and especially, again, I'm trying to think about when you are starting your organization or early on, the idea of setting up an annual budget and also thinking about chart of accounts, like what are the things that should be in our accounting system, what are the areas and in our budget, how do we decide what goes where? And having someone who has that background especially if you are a practitioner, coming in very passionate about the mission you have but finances is not necessarily your strong suit having somebody who really understands that to help you initially set all that up is really important. And a CPA also when it comes to budgeting and looking ahead forecasting, can help you bring some. They can bring some valuable insights based around financial trends and help you make kind of realistic projections of a budget.
Tim Barnes:
I mean, if you came in, you're in your first year and you go yeah, we're going to raise $2 million this year. Well, where's that coming from and how's that going to look, and you know who knows. But having someone with that background can help you understand how realistic some of your projections are as well. So having someone looking at your budgets and your forecasting. A fifth one is around strategic planning. It's kind of a little bit maybe similar to the forecasting, but you know when you're involved in strategic planning, where do you see your organization going? What do you want to accomplish? What's the long-term vision? Where are you going to head in the next five years? Some of those kinds of questions or even in the next two years. Finance is a big part of that and having someone with the experience in strategic planning again, someone who can bring some financial wisdom and insights to help you make informed decisions about your organization's future, is really, really, really important in that.
Nathan Ruby:
I guess I'm not sure exactly what terms to use, but I'll go back to my high school accounting class that the teacher gave me a C in and said don't come back for accounting too. There's a difference between a bookkeeper and a financial professional or a CPA. There's different. And so a bookkeeper will be very, very good at debits and credits. So if you buy a ream of paper, that's an expense. If you buy a $5,000 copy machine, that's an asset, so that's capitalized. Those are bookkeeper type of decisions that are made and that is a that's capitalized. Those are, those are bookkeeper type of of decisions that are made, and that is a skill set.
Nathan Ruby:
Another skill set is more of the strategic side, the, the forecasting, the. Um, you know we have this pool of money and we want to create, uh, outcomes on our program side. How do we allocate that money to get the best outcomes possible? That is a totally different skill set than where to. Is that a debit or a credit? Is that an asset or whatever? Very different. And so sometimes now, if you have somebody that is a CPA, they're going to know debits and credits also. But I think that's sometimes a confusion, tim, where people like well, I have somebody that's you know they're, they're they're doing that, you know our accounting and you know they're we've in the future, and to help you figure out how to allocate money to meet the goals that you have for your organization, two very different skill sets.
Tim Barnes:
And one of the questions may even be how much money do we need to be holding as we move forward? Should we have three months, uh, to, as we move forward, should we have three months? Should we have, you know, six months of funds that we're holding back in case of emergency, in case of, you know, something happens? That's a question that someone who can, who has some experience, can look at it and make some good recommendations around that. So I appreciate what you're saying. Strategic planning is a little bit different than the day-to-day booking and oftentimes in a bigger organization you might have a chief financial officer who that's a big part of what they do to help make some of those kind of decisions.
Nathan Ruby:
For us it's just tax preparation the CPA who understands nonprofit tax laws. So that means somebody who's experienced with nonprofits, because that is a resource I know. With our auditor all the time I am asking what are you seeing, what are others doing? And he almost always has an answer because he's got other clients that are nonprofit clients and so he can say no, I don't have anybody that's really doing that, or I've got yeah, I see this. Here's some best practices. So very, very helpful to have somebody that knows what's happening in your area within the nonprofit sector that can give you advice.
Tim Barnes:
So those are five areas that are really good opportunity to invite a financial professional, a CPA, to lean in and help you with some of those kinds of decisions, some of those kinds of actions. You know? Just a bonus thought and we've talked about this on our podcast before, but a bonus thought may be especially when you're smaller, you might not be able to afford two or three different finance people with different gifts in that way. And one of the things that our organization has done is we've actually gotten a third party. We've contracted an organization to take care of all of our finances, but in that contract we have access to a CPA, we have access to more of a CFO, we have bookkeeping, we have receipting, we have a number of things.
Tim Barnes:
For us, it turns out to be about four and a half to 5% of the total amount of revenue that comes in each year, and that's something you have to work on and think about. But that is another step. As you think about how do I grow this organization? Instead of trying to hire three or four people, you may be able to just get a third party to come in and provide a number of those services for you. So something to consider. Not right for everyone, but it may be something to think about as you see your organization growing. Any thoughts about?
Nathan Ruby:
that, nathan? Nope, I think that's all good and you know, being wise with how you use the resources of your nonprofit is an important part of your leadership role. But sometimes we could be penny wise and pound foolish. Hiring a professional, especially in the area of finance, can help you better steward your resources, make better decisions and create confidence in the integrity of your organization. And when should you consider hiring somebody to help? I would say and I think Tim will agree sooner than later is probably the best time.
Tim Barnes:
Well, thanks for listening today. We hope you are benefiting from what you hear on our podcast. If you have questions, if you have comments, if you'd like to engage us in some topic at your organization, our contact information is in the show notes. That's all for today, until next time.