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PPP Loan Forgiveness Update

More details regarding Paycheck Protection Act loan forgiveness emerged from the US Small Business Administration last week that make it much easier for those who received PPP loans of less than $50,000 to apply for forgiveness. While the loan forgiveness process will still be administered by your lending bank and is not automatic, as some had hoped, stay tuned for a much simpler form for use with smaller loans. Robert Jackson from the Apple Growth Partners COVID-19 Response Team wrote this recent post summarizing the new process.

New PPP Loan Forgiveness Form from the SBA

By admin News / October 12, 2020

Monday, October, 12, 2020

Over this past weekend, the U.S. Small Business Administration (SBA) posted a new loan forgiveness form to the public for those who received a Paycheck Protection Program (PPP) loan of $50,000 or less. The new form, form 3508S, is much simpler than both the long form (form 3508) and the EZ form (form 3508EZ). While the form states that it is for those who received a PPP loan of $50,000 or less, note that a borrower cannot use the new form if the borrower, together with their affiliates, received total loans of $2,000,000 or more.
 
In addition to the $50,000 threshold, a borrower can use the new form if –

  • The requested forgiveness amount was used to pay costs that are eligible for forgiveness;
  • The borrower used at least 60% of the requested amount on payroll costs; and
  • The requested forgiveness amount took into consideration the applicable owner-employee or self-employed individual/general partner compensation caps.

The borrower does not need to show any calculations of the loan forgiveness amount on or with the form, as they would have to do with the long form or the EZ form. Furthermore, the borrower is exempt from applying the complicated loan forgiveness salary and FTE reductions when using the new form 3508S.

With the new form also comes simpler procedures for lenders.

As noted above, the $50,000 threshold applies to the original loan amount, not the amount of forgiveness being requested. It is also not a blanket forgiveness, which is something that lenders had been pushing for in the past few months. A borrower must still retain records that support the calculation of the forgiveness amount being requested.

The announcement of the simpler form comes about a week after the opening of the loan forgiveness season by the SBA. While it is not what many borrowers and lenders were hoping for, it will still ease the time burden on smaller businesses and their lenders. Keep in mind that banks are using their own equivalent online forms for loan forgiveness applications, so eligible borrowers should first check with your bank to see when the new form will be available to file with your bank.

To access the newly released Form 3508S, click here.
To access the instructions to Form 3508S, click here.

Contact our COVID-19 Response Team for questions on the new forgiveness forms. 

Robert Jackson, CPA

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New Data – Nonprofits, Benchmark Against Your Peers and Push Your Mission Forward

This week we’d like to share a blog written by the Nonprofit Practice Leaders of the global accounting firm, BDO, and the BDO Institute for Nonprofit Excellence. Interestingly, BauerGriffith was founded after the financial crisis of 2008, at a time when it became clear that nonprofits must not only operate with a clear view of their mission, but also a clear business strategy. Successful nonprofits have made that shift, which has, we believe, allowed many to achieve stability in their operations, if not thrive, in the wake of the economic challenges brought on by the pandemic. This survey report fleshes out this concept and presents some very helpful information for any nonprofit as they plan for the next 12-18 months — and beyond. We thank our friends at the BDO Institute for Nonprofit Excellence for their service to the sector.

By Nonprofit Practice Leaders | June 17, 2020   

From the global pandemic to growing economic uncertainty in the midst of an election year, nonprofits are being called upon—and challenged—like never before. Unsurprisingly, these organizations are rising to the occasion, adapting their programs and delivering aid to critical areas of need. But the journey is far from over, and now more than ever, nonprofit organizations need to be able to sustain their critical work.

The BDO Institute for Nonprofit ExcellenceSM is proud to announce its fourth annual benchmarking survey, Nonprofit Standards. The survey is intended to help nonprofit leaders prepare for the future, balance a nonprofit heart and business mindset, and gauge their well-being across key areas of focus, including crisis response, technology, downturn preparedness, policy and funding.

To learn how your nonprofit measures up, download the full report.

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Nonprofit Compliance Reporting Checklist

In representing small, mid-size, and even larger nonprofits, we often find the array of periodic compliance reporting can get lost. Sometimes this occurs because an individual is named the contact person for notifications, and that staff person or volunteer is no longer working. While most delinquent filing issues are fairly easy to fix, a pattern of noncompliance can cause issues over time, especially if you find yourself faced with other legal issues. Here’s a handy, though not absolutely comprehensive, checklist to help keep you on track, designed with 501(c)(3) public charities in mind.

  • IRS Form 990. Every 501(c)(3) organization must file a 990 in some form or another, even if you have no activity at all during a tax year. Larger organizations will file the full 990, and this rarely slips through the cracks. This is a big, complicated form, and we strongly recommend using a tax professional to complete or at least review prior to filing. Smaller organizations can file the 990EZ, which is much easier to complete and can be done by competent staff. Organizations with less than $50,000 in receipts during any year can file the 990-N, sometimes referred to as the 990 postcard. It is a very simple form, with just a few questions, and is filed on line. IMPORTANT NOTE: Even if you have $0 in revenues, you must file the 990-N every year. No exceptions. Failure to do so will result in loss of your 501(c)(3) tax exempt status. Our friends at the IRS are completely on top of this, so don’t think they’re not watching!
  • State Attorney General Filings. Nonprofit organizations are governed in most states by the state attorney general’s office, with powers arising out of their general authority over consumer protection. The reasoning here is that nonprofits are custodians of charitable funds for the benefit of the public, so the attorneys general oversee the nonprofits on this basis. In Ohio as in several other states, there is an annual filing regarding fundraising, which is required regardless of whether or not you do any fundraising. The attorney general’s office will also get involved if you seek to remove or change donor restrictions or designations on gifts.
  • Secretaries of State. You should also be aware of the need periodically to file a statement of continued existence or similar filing with your secretary of state’s office, confirming you are still in business at some level. Changes in your structure, including mergers or dissolutions, are also dependent on approval by the secretary of state.
  • Other State Compliance. Depending on the type of fundraising you do, you may have filings with your state department of insurance for charitable gift annuities, or with your state tax authority for certain types of charitable trusts.
  • Sales Tax. Yes, you may need to collect, remit and and report sales tax on items sold in your gift shop or cafeteria if you sell to the public on a regular basis.

State attorneys general are taking a greater interest in the management of nonprofits, with Ohio being among the most proactive in compliance and enforcement. Particular areas of interest include adherence with board fiduciary duties, conflicts of interest, self dealing and related party transactions, investment management, and accurate/adequate disclosure of the use of charitable funds.

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Business Basics 105 – Starting a Small Business

The Small Business Administration advises that one of the major causes of failure of small businesses is poor management. This could mean poor planning, cash flow management, recordkeeping, inventory control, promotion or employee relations, among others. It likely also includes poor capitalization. There are several key steps for starting and managing a small business, as follows:

You may come up with an idea and begin discussing it with your friends, family, professors, and other business people. At this stage you need a business plan, which is a detailed written statement describing the nature of the business, the target market, the advantages the business will have over its competition, and your (the owner’s) resources and qualifications. The business plan forces you to be quite specific about the products or services you intend to offer. It requires that you analyze the competition, calculate how much money you will need to start, and cover other details of the operation. It is also a must document for talking with banks and other investors.

A good business plan takes time to write, but you’ve got just five minutes, in the executive summary, to convince your readers not to throw it away. Next comes an outline of the comprehensive business plan. Remember, there’s no such thing as a perfect business plan, it will and should change as the business changes and grows. Getting the business plan into the right hands, finding funding sources, requires research. The time and effort you invest before starting your business will pay off many times later. Remember, the big pay off is survival.

The next step is financing your business. After your personal savings, friends and family are often the next source. Additional sources of funding can include banks and other financial institutions, angels, crowdfunding and venture capitalists, the Small Business Administration (SBA), the Small Business Investment Company (SBIC) Program, and a Small Business Development Center (SBDC). Once you have planned and financed your business, it’s time to get it up and running.

Step three is knowing your customers/market, which consists of people with unsatisfied wants and needs who have both the resources and willingness to buy. After identifying the market and its needs, fill those needs. Offer top quality at fair prices with great service. Not only do you want to get customers, but to keep them as well. Small businesses have the ability to know their customers better and adapt quickly to their ever changing needs. To best know your customers, LISTEN. Don’t let yourself get in the way of changing to meet the wants and needs of the customers.

As your business grows it becomes more difficult to oversee every detail, thus you must hire, train and motivate employees. Yet it is difficult to find good employees when you offer less money, skimpier benefits and less room for advancement than larger companies do. This is one of the reasons that good employee relations are a key to small business management. Employees of small companies tend to be more satisfied with their jobs than their counterparts in big companies because they find their jobs more challenging, their ideas more accepted, and their bosses more respectful. Employees who feel they are part of the team work to make that team, and thus the company, successful. Don’t fall into the trap of promoting employees simply because they have been with you the longest, or are family members, but aren’t qualified to serve as managers. You need to delegate to the most qualified individual(s). You may be best served to fire those who don’t meet your requirements, regardless of their tenure and regardless of family relations, so that you can recruit and groom employees for management positions who you can rely on as you delegate more of your responsibilities.

Small business owners often say the most important step in starting and managing their business was in accounting. Setting up an effective accounting system early will save you a lot of headaches later. Accurate record-keeping allows you to follow daily sales, expenses and profits, and also helps with inventory control, customer records and payroll.

Many businesses fail as a result of poor accounting practices leading to costly mistakes. A good accountant can help you with tax planning, financial forecasting, choosing sources of financing, and writing requests for funds. The key is to find an accountant experienced with small businesses. This critical advisor can help you to not only survive, but also to thrive.

Small business owners have learned, often the hard way, that they need outside advisors, especially early in the process. This includes legal, tax and accounting advice, and also marketing, finance and other areas. A necessary and invaluable advisor is a competent, experienced attorney who knows and understands small businesses. We can help with leases, contracts, operating agreements and protection against liabilities. A marketing advisor is also key and should help you make your marketing decisions long before you introduce your product or open your store. Market research can help you determine where to locate, who to select as your target market, and an effective strategy to reach it. Experience with small business marketing can be enhanced if this advisor also has experience with building websites and using social media. Two more critical advisors are a finance expert and an insurance agent. The finance guru can help you design a business plan and provide valuable financial advice, and an insurance agent will explain the risks associated with a small business, and in your industry, and how to cover them most efficiently with insurance and other means. And finally, don’t forget to seek out other small business owners and discuss and exchange ideas.

Both BauerGriffith attorneys and BG Consulting Group consultants serve as trusted advisors. Let us help you get your business off the ground.

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A Guide to Standing Committees for Nonprofits — Other Committees

Over the last several installments in this series, we’ve examined the typical array of standing committees of a nonprofit board. Standing committees are generally those that align with a director’s specific fiduciary duties relating to governance, conflicts of interest, high level strategy determinations, and various aspects of fiscal management. But boards, through a well organized committee structure, can be very helpful in other areas as well.

A well written code of regulations will give your board the authority to create other committees to support the work of your organization. I generally recommend these other committees not be designated as standing committees, but that should not create a perception of decreased importance for their work. Program, policy, external relations, and other committees that give more direct support to the work of your organization’s staff can increase your organization’s effectiveness by helping staff prioritize activity and by using loyal board members in a more hands on role. More than other committees, the focus and roles of these types of committee will change, sometimes frequently, based on the needs of the organization, hence my reluctance to designate them as standing committees.

Some basic tips to ensure other committees operate effectively include:

  • Review their charters annually to ensure their tasks align with the current work plan or strategic plan
  • Ensure open lines of communication with board leadership
  • Recruit experts to serve on subject matter committees (which can be a great tool for cultivating new board members)
  • Allow staff members in various levels of leadership to interact with the committee

In addition to standing and regular committees, subcommittees with a very particular focus on an issue or program element can also be an effective way to utilize talent and expertise on your board, recruit non-board volunteers to assist, or to create advisory groups to help your staff resolve sticky issues. Often work groups or task forces, established on a temporary basis, can provide excellent support for time limited projects, like crises, events or advocacy issues.

Don’t forget, your committee structure should be determined after a thorough examination of your staff structure and needs for board support. Don’t create committees just to give your board something to do. Create committees to help your staff get their work done effectively.

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Business Basics 104

Part 4 – Corporate Expansion

A merger is when two companies combine into one, whereas an acquisition is one company purchasing the assets, or assets and liabilities, of another company.

A merger might be of two companies operating in different parts of related businesses, putting their businesses together for an increased percentage of the supply chain. Or it might be two companies in the same industry combining in order to achieve economies of scale, or dominance in the market. Or it might be two companies in unrelated industries combining to diversify their business operations and investments.

Sometimes, with or without the owners’ approval, employees, management or a group of private investors will attempt to buy out the stockholders of a company, typically by borrowing the funds needed for such purchase. This is known as a leveraged buyout and, if successful, the employees, managers or investors, as applicable, become the new owners of the company.

The franchise is a specialized type of business operation. Some people are uncomfortable starting a business from scratch, preferring to join a business with a proven track record. A franchise agreement is an arrangement whereby someone with a good idea for a business, the franchisor, sells the rights to use the business’s name and sell its products or services to another, the franchisee, in a given territory. The franchisee can structure her business in any of the ways discussed previously, a sole proprietorship, a partnership or a corporation.

Advantages of a franchise include management and marketing assistance, personal ownership, nationally recognized name, financial advice and assistance, and lower failure rate. A franchisee usually has a greater chance of succeeding than a non-franchise start-up because she has an established product or service to sell, help choosing her phsyical location, and assistance in all phases of promotion and operation. Franchisors typically provide extensive training to their franchisees, so it is like having your own store but with consultants whenever you need them. Some franchisors also help with local marketing efforts rather than having its franchisees rely solely on national advertising. In addition, franchisees have a built in network of other franchisees with whom they can share their experiences and discuss similar problems they may be facing.

A franchise business is still your business , you are still your own boss, but you must follow more rules, regulations and procedures as required by the franchisor. With an established franchise, you get instant recognition and support from a product group with established customers nationally, or even internationally. Franchisees often get valuable assistance and advice from their franchisor, including in two of the most problematic areas for small business owners – arranging financing and learning to keep good records.

There are also disadvantages to the franchise model, including large start-up costs, shared profit, management regulation, coattail effects, restrictions on selling, and fraudulent franchisors.

Most franchisors require a fee for rights to the franchise, which might be as low as a few thousand dollars up to over a million dollars. In addition to purchasing the franchise rights, the franchisee typically pays a royalty either as a large share of the profits, or a percentage commission based on sales, not profit. Management assistance often has a way of becoming managerial orders, directives and limitations. Franchisees feeling burdened by the franchisor’s rules and regulations may lose the drive to run their own businesses. However, franchisees will often band together to resolve their grievances with the franchisor rather than wage their battles alone.

Unlike independent businesses, the actions of other franchisees impact each franchisee’s future growth and profitability. If fellow franchisees fail, this coattail effect could force the franchisee out of business even if her franchise has been profitable. In addition, unlike the owner of an independent businesses, who can sell her company to whomever she chooses and on whatever terms, many franchisees face restrictions on the resale of their franchises. Franchisors often insist on approving a new owner to ensure he meets its standards and as a measure of quality control. Many franchisors are small, even obscure companies that prospective franchisees know little about. Although most are honest, beware of franchisors that deliver little to nothing of what they promise.

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A Guide to Standing Committees for Nonprofits — The Development Committee

I may be biased, since I’ve been both a professional and volunteer fundraiser at various points in my career, but I think the Development or Fundraising Committee is, next to the Governance Committee, the most important standing committee of a nonprofit board. After all, if nobody is raising money, none of the other committees have anything to do! But while this committee is vitally important to the financial sustainability of your organization, it can also be the most challenging committee to manage and implement.

In developing a strategy to mobilize an effective Development Committee, I suggest we start with two premises or principals. The first premise is that fundraising is the responsibility of the whole board; every member, without exception, should play some role in raising funds for your organization. The second premise is that the primary responsibility of the Development Committee is to create and foster a culture within your organization that allows your full board to feel empowered, confident, and (dare I say) comfortable with their role in the fundraising process.

To me, this means the Development Committee is not created to be the small group of board members who do all of the asking during your various campaigns and initiatives. At the end of the day, they may be those people, but that shouldn’t be the primary reason people are asked to sit on the Development Committee. A structure like this will likely give the impression that the rest of the board isn’t needed in the fundraising process. Rather, consider these primary areas for your Development Committee to assist staff:

  • Create a development plan that is reflective of the goals and needs of your the organization
  • Communicate and cultivate buy in for the organization’s case for support among the full board
  • Create tools and resources for the board to use in their own individual fundraising efforts
  • Allow each board member to identify the specific tasks and roles they will play in the fundraising process
  • Create a sense of accountability for achieving those tasks and roles

Consider this sample description of the Development Committee:

Development Committee

The Development Committee shall: (a) review, approve, and support goals and strategies for, and oversee the progress of, the Corporation’s fundraising initiatives, including the Annual Fund, major and planned gifts, capital, endowment, and comprehensive campaigns, and events, in consultation with the Finance Committee; (b) support and assist the Development Office in its efforts to engage members, donors and supporters in the activities of the Corporation, and to cultivate, solicit, and steward donors; and (c) work with the Governance Committee to ensure that new Directors understand and accept their responsibilities in fundraising and development.

Some things to note:

  • I encourage you to state specifically the relationship between the Development Committee and the Governance Committee, to ensure fundraising is part of the recruitment, training, and board evaluation process.
  • I also encourage you to state specifically the relationship between the Development Committee and the Finance Committee, so that the contributed revenue goals in your budget are well thought out, well supported numbers informed by the needs of the organization and the donor resources available.
  • Remember that solicitation is only one relatively small part of the donor cycle. Encouraging and empowering board members to cultivate and steward donors can increase board involvement in fundraising and open the door to more good opportunities for staff to solicit.

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Competitions and Contests — Legal and Practical Considerations

Competitions, contests, drawing, raffles, auctions — all are frequently used tools in a nonprofit organization’s fundraising arsenal. What we may forget, though, is that both the IRS and state governments have laws and regulations applicable to these types of activities, which must be considered before launch. In addition, like campaigns or other fundraising initiatives, there are practical considerations to be addressed to ensure your efforts achieve the desired results.

The benefits of competitions, contests, drawings, raffles and the like include:

  • ability to reach new markets, raise visibility, create excitement
  • tapping into a revenue source other than philanthropy
  • for competitions, the opportunity to seek new ideas or creative input to address issues related to the organization’s mission

Challenges to watch out for include:

  • need for comprehensive, explicit rules, which you cannot change midstream
  • ability to publicize to the right audience to ensure your pool of entries will achieve your desired goal
  • no ability to cancel
  • requirement that all prizes be awarded, regardless of ultimate quantity or quality of entries
  • requirement of a public benefit (i.e., fundraising for your charitable mission or the development of a response to an issue of broad consequence)
  • conflicts of interest between competition applicants and judges
  • limitations on employee and related party participation

Rules relating to contests and competitions, where winners are selected based on merit or skills based criteria, and raffles or drawings, where winners are selected based on chance, will be subject to different rules and regulations by state and local governments. Those rules and regulations can include required disclosures, as well as registration and reporting requirements.

If your organization wants to consider a contest, competition, drawing or other event of this type, be sure to allow three to four months for planning. Also be sure to include a marketing and communication strategy, as well as clear goals and objectives for your event.

McKinsey and Company authored an excellent article on competitions and philanthropic prizes, which we commend to your reading. You can find it by clicking here.

For a good analysis of the considerations behind charitable auctions, check out this article from Blue Avocado, a magazine of the Nonprofits Insurance Alliance.

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A Guide to Standing Committees for Nonprofits — The Investment Committee

Last week we discussed the role of the Finance Committee for nonprofit organizations. Now we’d like to take a quick look at the Investment Committee, which generally has responsibility for overseeing the invested assets of an organization.

An Investment Committee can provide a good check and balance to ensure that restricted or reserved assets are properly stewarded for their intended purpose. The most common type of assets in this category would be your endowment, whether it’s a true endowment or a board restricted fund. An endowment is meant to have some degree of permanence, so it’s important to make sure the assets aren’t depleted just to balance the budget or cover routine expenses. In addition to an endowment, organizations sometimes have an investment account with less formal restrictions, but that operates more like a savings account may to an individual.

The Investment Committee:

  • Creates an investment policy to reflect the risk tolerance of the organization and provide guidance on the general portfolio makeup of the account
  • Creates a spending policy to clarify how much of the account can be drawn each year and how that amount is determined
  • Monitors the performance of the organization’s investments
  • Helps moderate the conflicting desires to create a large reserve fund that can provide consistent support to the operating budget through the yearly draws, and the desire to spend the money to balance budgets and expand programming

The following is a sample description of the Investment Committee:

The Investment Committee shall: (a) recommend policies to the Board concerning the management and use of the Corporation’s assets, including its endowment funds; (b) review and assure compliance with such policies that are adopted by the Board; (c) select a professional investment advisor to assist the Committee with periodic evaluations of the investment performance of assets, asset allocation, selection and monitoring of investment managers, and the execution of its responsibilities; (d) select and monitor the performance of investment managers and custodians; (e) for planning and budgeting purposes, recommend a policy for determining the annual transfer of funds from the any endowment funds to the operating or program budget; (f) report to the Board at least annually on the management and performance of endowment assets versus relevant benchmarks; and (g) if authorized by the Board, develop policies and guidelines for, and monitor the performance of, investments in any retirement or pension plan for the benefit of the Corporation’s employees.

The Investment Committee can be a good place for non-board volunteers to serve in an advisory capacity, even as voting members. As part of your board’s overall duty to manage the organization’s finances, though, it is important that any policies created by the Investment Committee be recommended to and approved by the full board.

The Investment Committee can be chaired by a vice chair of the board, or the assistant treasurer, or another officer or board member. However, if your treasurer chairs your Finance Committee, make sure he/she does not also chair the Investment Committee, in order to preserve the value of the checks and balances this committee is meant to create.

If you’re managing a smaller organization and have been reading this blog series, you may have begun to feel that I have suggested more standing committees than you have members of your board. Certainly there is room for overlap in the committee membership, and as I mentioned above, the Investment Committee is a place where non-board member volunteers can be effective. If you do have invested assets, though, I strongly recommend against operating with a combined Finance and Investment Committee. It may be possible to combine the duties of the Investment Committee with the Executive Committee. You may also want to make the Investment Committee a “committee of the whole”, which means your full board would take on these responsibilities.

Creating your investment and spending policies is very important work, and in a future post, we’ll take a look at some of the big questions to be considered when establishing these guidelines for your organization.

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A Guide to Standing Committees for Nonprofits — The Finance Committee

The next three standing committees we’ll examine are very closely related. These are the Finance Committee, the Audit Committee, and the Investment Committee. Sometimes the names of these committees are interchanged or combined, so as we move forward, make sure to focus on the function of the committees, not the names, to sort out the structure that will be best for your organization.

The Finance Committee is the group that has principal responsibility for your organization’s budget and financial performance. It is generally chaired by the organization’s Treasurer. The budget process will be the focus of the committee toward the end of the fiscal year. In close consultation with staff, the organization’s Treasurer and the committee will look at last year’s performance and determine new targets for income and expenses. The process isn’t really any different for a nonprofit organization than it is for any for profit business, and should produce a well reasoned, well supported projection of the next fiscal year’s full financial picture based on past financial and performance history.

I always recommend that the whole organization have a deep involvement in the budgeting process. Staff in your program areas will have the best information on the need for your organization’s services, be they social services, education, performing arts events, or anything else. The budget process is time for them to examine what resources they need to to their jobs, what the need is in your community for those services, and what the community can and will pay for them. Understanding this information will help them engage in meaningful discussions of what expenses will be needed, and what earned or contributed income is likely for the next year. Your organization’s development staff will also have an important role in the discussion, as they will be able to assess the extent to which the philanthropic community will support the services your program staff suggests.

In large organizations, this staff budgeting process will likely be coordinated by the executive director. However, when staff has made their initial budget recommendations, a robust discussion with senior staff and the Finance Committee should follow to balance not only the organization’s priorities but also the budget.

Once the Finance Committee is satisfied with the budget, a recommendation is made to the full Board for approval, since establishing and monitoring the budget is one of the primary duties of a board of directors. If possible, keep the Board updated on challenges during the budgeting process. When you present the final recommended budget to the board, I strongly recommend you include a narrative description with your spreadsheets, describing why each line item, or at least each group of line items, is increasing, decreasing, or staying the same compared to prior years. I find most boards want to see at least 3 years of past performance, meaning budgets and actual performance for each year, in order to understand the trajectory of the organization.

I understand this all sounds very formal and cumbersome, and if you’re leading a smaller nonprofit, you may not think it’s really necessary. However, I’d like to suggest that the process of establishing a budget really is the same, no matter the size or type of organization. For smaller budgets or organizations focused on a single line of business, the process may not take as long, but staff involvement is very important, and having a board committee dig into budget and performance is crucial for sustainability and success.

Remember, a budget is only an aspirational expression of your organization’s financial situation at the beginning of a fiscal year. Equally important is regular monitoring of actual performance compared to budget. This monitoring, along with regular reporting to the full board, is the second primary responsibility of the Finance Committee. In my experience, board members like to see regular, monthly updates, along with same time last year benchmarking to judge progress. To the extent possible, regular monthly or quarterly projections of where you’ll be at fiscal year end relative to budget are also extremely important, and allow you to communicate both good news (perhaps a new, large gift or grant or contract for services), and bad news (a loss of regular or anticipated funding) to the full board in a timely and meaningful way.

A caution for staff: Board and committee members who are unfamiliar or uncomfortable with formal financial reporting often request staff to prepare budgets and updates in many different formats, I believe in an effort to help them understand the reports they’re reviewing. Some want more information, some less. Some what spreadsheets, some want graphs. Some want dashboard style reporting, others just want the P&L. Listen to their concerns, adopt a standard form of reporting, and try to stick to it. Spend some time, or have your committee chair spend the time, teaching board members how to read the reports you are generating, to avoid spending time reformatting your reporting every month. (Yes, I have seen that happen.)

I’m often asked what kind of volunteers will make good Finance Committee members. Accounting expertise is helpful, but often your business office or outsourced CPA can advise on these technical issues. I like to see savvy business people who are used to the budgeting and financial monitoring process in their own business as members of this committee. I also strongly recommend a member of the development committee sit on the Finance Committee. Without that voice, it’s just too tempting for the contributed income line item to be whatever number is needed to balance the budget.

Another frequent question is whether non-board members can serve on the Finance Committee. In general, I recommend against this. I feel it is very important that the individuals setting and monitoring the organization’s finances be members of the board with the fiduciary duties of care and loyalty. That said, it is quite appropriate to use non-board volunteers for advice and counsel if your board does not have sufficient expertise in financial matters. These volunteers should not, however, be voting members of the Finance Committee.

The following is a sample job description for the functions of a typical Finance Committee:

Finance Committee

The Finance Committee shall: (a) review and make recommendations to the Board concerning the Corporation’s annual operating budget; (b) review and make recommendations to the Board concerning the Corporation’s annual capital budget; (c) monitor compliance with and variances from the budgets during the course of each year; (d) ensure that the Corporation’s financial reports provide accurate and timely information to the Board; (e) review proposed financings and borrowings, and make recommendations to the Board with respect thereto; (f) review the Corporation’s risk management and  insurance needs and policies, and make recommendations with respect thereto; (g) assist the Corporation’s Chief Financial Officer with long-term financial planning; and (h) review and approve fiscal policies, including those relating to check signing authority, accounts receivable collection, and management of accounts payable.

You’ll see this job description includes risk management, which we have not discussed in this blog. Some organizations make risk management a staff responsibility, which is quite appropriate. Including this activity in the responsibilities of your Finance Committee may depend on the expertise you have on your board.

You’ll also see that this job description does not include investment management, which I recommend, for organizations with investable funds, be housed in an Investment Committee, the subject of our next blog installment.