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Non-Profits: Heed These Financial Danger Signs

Many non-profits are just starting to emerge from one of the most challenging environments in recent memory due to the COVID-19 pandemic. Even if your organization is in good shape, do not get too comfortable. Financial obstacles can appear at any time, and you need to be vigilant about acting on certain warning signs. Consider the following.

Budget Variances
Once your board has signed off on a budget, you should carefully monitor it for unexplained variances. Although some variances are to be expected, staff should be able to provide reasonable explanations — such as funding changes or macroeconomic factors — for significant discrepancies. Where necessary, work to mitigate negative variances by, for example, cutting expenses.

Also make sure you do not:

  • Overspend in one program and funding it by another
  • Dip into operational reserves
  • Raid an endowment
  • Engage in unplanned borrowing

Such moves might mark the beginning of a financially unsustainable cycle.

Messy Financials
If your financial statements are untimely and inconsistent or are not prepared using U.S. Generally Accepted Accounting Principles, you could be heading for trouble. Poor financial statements can lead to poor decision-making and undermine your non-profit’s reputation. They also can make it difficult to obtain funding or financing.

Insist on professionally prepared statements as well as annual audits. Members of your organization’s audit committee should communicate directly with auditors before and during the process, and all board members should have the opportunity to review and question the audit report.

Declining Donations
For example, you have noticed a decline in donations. Then you start hearing from long-standing supporters that they are losing confidence in your organization’s finances or leadership. This should be investigated immediately.

Ask supporters what they are seeing or hearing that prompts their concerns. Also note when development staff seek donations from major donors outside of the usual fundraising cycle. These contacts could mean your non-profit is scrambling for cash.

Faulty Leadership
Even the most experienced and knowledgeable non-profit executive director should not have absolute power. Your board needs to step in if an executive tries to ignore expense limits and breaks other rules of good fiscal management. The board also should question an executive who attempts to choose a new auditor or makes strategic decisions without the board’s input.

Do Not Ignore the Signs
If one of these danger signs appears, it is important to act swiftly. Financial problems do not disappear on their own. Contact us for help evaluating the situation and for advice on how to get your organization back on track.

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