5 Critical Issues for your Nonprofit’s Finance Committee
The role of a nonprofit’s finance committee is probably more important now than at any time since the 2008 financial crisis and ensuing Great Recession. Here are some of the areas your committee should focus on almost two years into the COVID-19 pandemic.
1. Cash flow
Financial reserves have taken a hit across all types of nonprofits, and some organizations haven’t yet recovered to the point that they can budget for replenishment. To make matters worse, for many nonprofits, fundraising has fallen far short of expectations. This makes effective cash flow management essential to survival.
Your nonprofit’s staff should prepare cash projections for the quarter, the month and possibly even the week, as well as expense projections. To avoid being caught off-guard, the finance committee should review regular reports on funding sources, especially those that dropped significantly or are in jeopardy of vanishing altogether.
2. Government relief programs
Nonprofits have been eligible for a number of relief programs, including the Paycheck Protection Program, the expanded Economic Injury Disaster Loan program from the Small Business Administration and the employee retention credit (ERC). Health care organizations may have qualified for the Provider Relief Fund and performing arts and cultural organizations might be eligible for the Shuttered Venue Operators Grant program.
The potential amount of assistance is substantial, but these programs all come with strict rules. For example, your nonprofit should be careful when applying for programs, accounting and reporting for your use of program funds, and, where applicable, obtaining forgiveness. Your finance committee should ensure that your organization has applied for all appropriate relief and is following the rules to maximize benefits and avoid penalties.
3. Unrelated business income (UBI)
Under the Tax Cuts and Jobs Act (TCJA), for tax years beginning after December 31, 2017, nonprofits must calculate UBI separately for each unrelated business. The IRS issued final regulations regarding this TCJA provision in November 2020 that apply to tax years beginning after December 2, 2020.
Among other things, the regulations require nonprofits to identify each separate unrelated trade or business with the appropriate two-digit code in the North American Industry Classification System (NAICS). Organizations with multiple unrelated trades or businesses must allocate deductions among them using a “reasonable basis” standard. Certain types of investments can be treated as single trades or businesses.
4. Budgets and plans
With so many uncertainties remaining, your finance committee (and appropriate staff) should initiate scenario planning, if it isn’t already a customary part of your process. In scenario planning, the participants assemble budgets for multiple revenue situations your organization could face — typically, best case, worst case and somewhere in between. Ask how your nonprofit could cover the projected expenses in each situation.
The budgeting process also often involves evaluating an organization’s financial performance in the most recent fiscal year, usually by comparing metrics with previous years or other benchmarks. Bear in mind, though, that circumstances in 2020 and, for many organizations, 2021, may render the data from these years of less value when it comes to projecting revenues and costs for a more “normal” future.
5. Fraud threats
The pandemic raised the risk of fraud for all types of organizations. Cybersecurity experts reported a surge in phishing schemes, often baited with the premise of some type of COVID-related relief.
And, of course, fraud can come from inside your nonprofit. Occupational fraud can climb when employees feel overworked and underpaid. Plus, rapid-fire changes made to accommodate the shift to remote work may have created vulnerabilities. When was the last assessment of risks and internal controls? Your nonprofit should perform an updated fraud assessment if it was last done pre-pandemic. You may need to implement new internal controls to address new fraud threats.
Sidebar: Are your financial statements in compliance?
With so much on the plate of your nonprofit’s finance committee, members could fall into the trap of assuming that financial statements already comply with the latest applicable accounting standards. But because some effective dates on new standards have shifted in the wake of the pandemic, critical compliance measures may have fallen through the cracks.
Your finance committee should confirm that your organization has started implementing several important Accounting Standards Updates (ASU) from the Financial Accounting Standards Board. The following have recently taken, or are poised to take, effect:
- ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606),
- ASU No. 2016-02, Leases (Topic 842),
- ASU No. 2018-08, Not-for-Profit Entities (Topic 958): Clarifying the Scope and Accounting Guidance for Contributions Received and Contributions Made, and
- ASU No. 2020-07, Not-for-Profit Entities (Topic 958): Presentation and Disclosures by Not-for-Profit Entities for Contributed Nonfinancial Assets.
Finance committee oversight should include the adoption of these new standards, which often takes more time and resources than initially anticipated.
Survive and thrive
The COVID-19 pandemic has spurred challenges that will linger for some time. But it also has highlighted how vital nonprofits are in times of trouble. With proper oversight from your finance committee, your organization can clear substantial hurdles.
Contact us to discuss your financial situation further or answer your questions.