Managing Your Nonprofit’s Finances and Taxes

Free Nonprofit Micro-eMBA Module #8: Managing Your Nonprofit’s Finances and Taxes

© Copyright Carter
McNamara, MBA, PhD, Authenticity Consulting, LLC.

This module is in the nonprofit organization development program.
However, this module can also be used by anyone as a self-study
exercise to learn more about managing nonprofit finances and taxes.

Sections of This Module Include the Following

Introduction
Outcomes
Materials for Review
Suggested Topics for Reflection and Discussion
Activities to Build Systems and Practices
Assessments
Tracking Open Action Items

INTRODUCTION

Financial management is a major responsibility of the board
and nonprofit chief executive. It’s not uncommon for nonprofit
founders and chief executives at first to have very limited skills
in financial management. However, they should quickly develop
at least basic skills in financial management, including in the
critical areas of managing operating and program budgets, bookkeeping,
financial controls, cash management, financial statement generation
and analysis. This module will help you understand those critical
areas of financial management, and build the basic systems and
practices needed in a healthy nonprofit organization.

The board has final responsibility for the financial health
of the nonprofit organization. Therefore, it’s critical that new
nonprofits quickly build up the roles of the treasurer and finance
committee. The treasurer and finance committee can be wonderful
assets to the chief executive when managing the finances of the
organization — however, the board members and chief executive
should never completely ignore the finances by leaving them for
the treasurer and other board members to manage. The board’s role
in ongoing governance of the nonprofit finances can include ongoing
review of financial reports during board meetings, approving yearly
budgets and financial statements, approving a set of fiscal policies
(guidelines for managing the nonprofit’s finances), reviewing
results of a yearly audit conducted by an outside auditor, co-signing
checks that are over certain limits and approving contracts.

NOTE ABOUT LEARNING FINANCIAL MANAGEMENT: At first, when learning
financial management, many people might react that the learning
experience seems mostly like filling one’s head with strange concepts
and processes. Typically, the learning process starts with this
experience — it probably isn’t until the learner actually enters
an accounting transaction and analyzes a financial statement that
learning about financial management seems more “real”.
But the learning process almost always starts by reviewing concepts
and processes. Financial management almost always tells the truth
about the situation of a nonprofit — so the learning process
is well worth the effort.

NOTE ABOUT BOARD COMMITTEES: Consider establishing a Board
Finance Committee to review and help guide implementation the
information in this learning module. Major activities and goals
from this learning module could be incorporated in that Committee’s
Committee
Work Plan.

OUTCOMES

Financial Management

1. Learn Basics of Bookkeeping and Finances
2. Understand Budgeting and Deviation Analysis
3. Understand Basic Cash Management Practices
4. Recognize Major Nonprofit Financial Statements
5. Know Basics of Nonprofit Financial Analysis
6. Evaluate Your Financial Management Practices

Managing Taxes

1. Know Key Steps to Apply for Tax-Exempt Status
2. Access Form to File Form 990
3. Know When Unrelated Business Income Applies
4. Know Terms of Lobby and Advocacy
5. Evaluate Your Tax Management Practices

MATERIALS FOR REVIEW

• The following materials will help you address each of
  the topics and learning activities in this module.
• Note that additional materials for review are associated
  next to certain topics and activities listed in this module.

Background Reading

Quickly get a “big picture” view of the aspects of
financial management by scanning the types of topics and their
order at
All
About Financial Management in Nonprofits

Understanding the Basics and Getting Ready

Basics
of Financial Management — particularly the sections:
– – – Fiscal
Sponsorship — Help You Get Started? (read at least 3 of the articles)
– – – Your
Board Treasurer — A Critical Resource to Help You Get Started
(read all)
– – – Charter
and Work Plan for Board Finance Committee
– – – Getting
and Using Accounting Services (read first 3 articles)
– – – Getting
and Using Banking Services (read all articles)
– – – Software
to Help Manage Your Finances
– – – Reviewing
the Basics of Nonprofit Financial Management
– – – – – – Basic
Overview of U.S. Nonprofit Financial Management

Activities in the Yearly Accounting Cycle

Bookkeeping and Controls:

Understanding
and Setting Up Your Nonprofit Bookkeeping and Accounting (read
all article — they’re important)
Addressing
Financial Controls and Risk Management (read at least 2 articles)
– – – Sample
Financial Procedures Manual

Critical Operating Activities in Yearly Accounting Cycle:

Designing
and Managing Budgets (read all — understand basic format and
terms in budgets)
Managing
Cash Flow (read all — understand cash flow, petty cash and board’s
role)
Credit
and Collections (read all)
Budget
Deviation Analysis (read all)

Financial Statements and Analysis:

Financial
Statements
– – – Cash
Flow Statements (read all)
– – – Statement
of Activities (Income Statement) (read all)
– – – Statement
of Financial Position (Balance Sheet) (read all)
Financial
Analysis (scan articles)
Financial
Reporting
– – – Annual
Reports (read at least 2 articles)

Nonprofit Taxation

Taxation
— particularly the sections: – – –
– – – Do
I Need Help to Get Started? (read all)
– – – Getting
Tax-Exempt Status (read all — this is important stuff!)
– – – Federal,
State, Sales, Payroll Taxes, etc. (read all)
– – – Preparing
and Filing Form 990s (read all)
– – – Donations
and Taxes (read all)
– – – Unrelated
Business Income Taxes (UBIT) (read all)
– – – Lobbying
and Taxes (read articles in “basics”)
– – – Special
Topic — When Hiring, Need Independent Contractor or Employee?
(follow links out to “start here”)

SUGGESTED TOPICS FOR REFLECTION
AND DISCUSSION

• Learners are strongly encouraged to discuss the following
  questions with peers, board members, management, and staff, as
  appropriate.

Preparation for Financial Management

1. What is fiscal sponsorship? When is it appropriate to consider,
that is, when might it be helpful to someone who is founding a
nonprofit? (See Fiscal Sponsorship.)

2. What is the role of the board treasurer? (See Have a Treasurer to Help You?)

3. What is the role of the finance committee? (See Charter and Work Plan for Board Finance Committee.)

4. What needs to be considered when selecting an accountant?
(See Getting and Using Accounting Services.)

5. What needs to be considered when buying accounting software?
(See Software to Help Manage Your Finances.)

6. What needs to be considered when selecting a banker? What
services might a nonprofit need from a bank? (See Getting and Using Banking Services.)

7. What is the board’s role in financial management? (See Basic Overview of U.S. Nonprofit Financial Management.)

Basics of Accounting

1. What is the accounting cycle? (See Basic Overview of U.S. Nonprofit Financial Management.)

2. What are the elements of an accounting system? (See Elements of Accounting: Assets, Liabilities, and Capital)

3. What is a fiscal policies and procedures manual? (See Sample Financial Procedures Manual.)

Bookkeeping and Financial Controls

1. What general activities are included in bookkeeping? (See
and Basic Overview of U.S. Nonprofit Financial Management.)

2. What is cash-basis vs. accrual-basis accounting? (See Basic Overview of U.S. Nonprofit Financial Management.)

3. What bookkeeping journals might you start out with? (See
Basic Overview of U.S. Nonprofit Financial Management.)

4. What is a Chart of Accounts? (See Basic Overview of U.S. Nonprofit Financial Management.)

5. What is the purpose of financial internal controls? What
are some practices in internal controls (HINT: think about signing
checks, opening mail, how to verify that account totals are accurate,
etc.)? (See Basic Overview of U.S. Nonprofit Financial Management.)

Operating Budget, Cash Management, Credit and Collections,
and Budget Deviation Analysis

1. What is a yearly (or operating or annual) budget? How is
a yearly budget prepared? (See How Do We Prepare a Budget? (scroll
down to this topic).)

2. What is a cash flow and how should cash be managed? (See
What is Cash Flow and How Should
We Manage It?)

3. What is a cash flow statement? (See Nonprofit Cash Flow Statements.)

4. What is a budget deviation analysis? What information is
considered during this analysis? (See Budget Deviation Analysis.)

Managing Program Finances

1. What is a functional or program budget? (See
What is a functional budget?)

2. What are program direct costs?
(See Allocate Direct Costs)

3. What are program indirect costs?
(See What Are Indirect Costs?)

Financial Statements and Analysis

1. What are the three major forms of financial statements used
by nonprofit organizations? (See Financial Statements.)

2. What general information is included in a Statement of Financial
Position? Statement of Activities? Statement of Cash Flows? (See
Financial Statements.)

3. What can be detected from the analysis of a Statement of Financial
Position? Statement of Activities? Statement of Cash Flows? (See
Financial Statements.)

Financial Reporting

1. What reports do the board and management need to see? (See
Financial Reporting.)

2. What information should be included in an annual report?
(See Annual Reports.)

Nonprofit Taxation

1. What does tax-exempt mean? (See Do I Need Help to Get Started?)

2. How does a nonprofit obtain tax-exempt status? (See
How to Become a Tax-Exempt 501(c)(3) Non-Profit Organization.)

3. What is Form 990? What nonprofits must file this Form
and how often? (See Preparing and Filing Form 990s (including about
public disclosure).)

4. What kind of substantiation does the IRS require for contributions?
(See IRS Requires Substantiating Charitable
Contributions.)

5. What is unrelated business income? How much can you earn
without reporting it? How is it calculated? (See Unrelated Business Income Defined.)

6. How much lobbying can a 501(c)(3) do? Electioneering? (See
Lobbying.)

7. Name at least five of the major considerations the IRS makes
when determining if someone is a contractor or an employee of
an organization. (See Understanding Employee vs. Contractor Designation)

ACTIVITIES TO BUILD SYSTEMS AND
PRACTICES

• Learners are strongly encouraged to complete the following
  activities, and share and discuss results with peers, board members,
  management and staff, as appropriate.
• As you proceed through the following activities, be sure
  to note any incomplete actions in the Action Item Planning List.

Building Role of Treasurer and Board Finance Committee

1. One of the greatest assets of a chief executive can be the
board treasurer and finance committee. Do you have a board treasurer
and a finance committee? If not, make it a high priority to recruit
a treasurer and organize a board finance committee. (See Your Board Treasurer — A Critical Resource to
Help You Get Started and Charter and Work Plan for Board Finance Committee.)

Bookkeeping and Financial Controls

1. Select the journals with which you will be working. If you
are a small nonprofit that is just starting out, then you’ll likely
only need a cash journal. (See Basic Overview of U.S. Nonprofit Financial Management.)

2. Will you be using a cash-basis or accrual-basis accounting?
If you’re a small nonprofit, then you’re likely to use the cash-basis
to record transactions and an accrual basis for generating your
financial statement. (See Basic Overview of U.S. Nonprofit Financial Management.)

3. Devise a Chart of Accounts. (See How to Design a Scalable Chart of Accounts.)

4. Adopt a preliminary set of financial internal controls.
Consider practices about signing checks, opening mail, verifying
that account totals are accurate, etc.) (See Sample Financial Procedures Manual (find the link to click “here”.)

Designing an Operating (Annual or Yearly) Budget

1. Your operating budget depicts the revenue the nonprofit
expects to earn or be granted, and the expenses it expects to
incur. It also depicts how that revenue will be spent. Budget
development starts with strategic planning. If you completed Module 6: Developing Your Strategic Plan.
then you already have designed a basic yearly operating budget.
If you completed Module 7: Designing and Marketing Your Programs,
then you’ve updated your operating budget to include functional
budgets for each of your programs. If you have not completed these
two modules, you should review the information and materials in those
modules to draft a basic operating budget and associated functional
budgets for each of your programs.

2. Obtain authorization of the operating budget (including
functional budgets for each program) by the board. Board members
should receive copies of the operating budget for their review
and authorization in a board meeting. The minutes of the board
meeting should reflect members’ approval of the budget. Approval
indicates that the board expects the nonprofit to operate over
the coming year according to the expected expenses and revenues
depicted in the approved operating budget. Note that if board
members have been involved in previous strategic and program planning,
then their approval of the budgets should be very straightforward
at this point.

Managing Program Finances

1. If you finished the learning modules about strategic planning
and about program design and marketing, then you probably already
have a good sense for the revenue and expenses of each of your
programs. If you have not done so, write a basic functional or
program budget. The board should review and authorize this budget.
(See How Do We Prepare a Budget?)

Financial Statements, Analysis and Reporting

1. At this point, you’re ready to generate a basic Statement
of Financial Position, Statement of Activities and Statement of
Cash Flows. The board should review and authorize these statements.

2. Attempt a basic analysis of these statements and write the
conclusions and recommendations from this analysis. The board
should review the conclusions and recommendations. (See Financial Analysis.)

Nonprofit Taxation

1. Have you obtained “tax-exempt” status from the
IRS? If so, be sure to keep the master copy of the letter safely
stored away. What taxes are you exempt from? (See Frequently Asked Questions About
Applying for Tax Exemption.)

2. Attempt to fill in a Form 990? What information do you need
to complete and file the form? When do you have to file the form?
(See Preparing and Filing Form 990s (including about
public disclosure).)

3. Will you have any unrelated business income? What is the
source of this income? How will you report it? (See Unrelated Business Income Defined.)

4. Does (or will) your nonprofit engage in lobbying can a 501(c)(3)?
How much? Will that be a problem? (See Non-Profit Organizations CAN
Lobby.)

Develop Your Fiscal Policies Manual

1. Now that you’ve considered all of the aspects of financial
and tax management for your nonprofit, you’re ready to compile
a set of policies to ensure that finances and taxes continue to
be managed effectively. Work with the Finance Committee to write
an outline of the content of a fiscal policies manual. The Committee
should adopt an action plan to develop and authorize the necessary
policies for the manual. The manual should be reviewed and authorized
on a yearly basis. (See Basic Overview of U.S. Nonprofit Financial Management.
and Sample Financial Procedures Manual (find the “click here”).)

ASSESSMENTS

1. Conduct a detailed audit of your financial management practices
and internal controls by answering the questions about “Financial
Indicators” in the Checklist of Nonprofit Indicators. List an
action plan to complete items suggested by the audit, but not
done by your organization.

REMINDERS FOR THOSE IN THE ON-LINE DEVELOPMENT PROGRAM

Reminders About You

1. Are you using your skills learned in previous modules? For
example, as you using methodical approaches to problem solving
and decision making? Are you using strong practices of meeting
management? Are you communicating key information to others throughout
your organization?

2. Are you discussing topics and materials with peers, board
members and others, as appropriate? Discussion and ongoing feedback
are some of the best methods to really learn new information and
materials.

3. Are you helping others to hold you accountable to your times
that you committed to reading and study in this program?

4. Are you reflecting on learnings from past modules and how they build on the learning
in this module? For example, are you seeing your organization from a systems view,
as explained in the module “Starting and Understanding Your Nonprofit?”

TRACKING OPEN ACTION ITEMS

1. One of the first indicators that an organization or a person
is struggling is that open action items are not tracked and reviewed.
(Open action items are required actions that have not yet been
completed.) Instead, people only see and react to the latest “fires”
in their workplaces or their lives. Whether open action items
are critical to address now or not, they should not entirely be
forgotten. Therefore, update and regularly review a list of open
action items (identified while proceeding through this program)
that includes listing each open action item, who is responsible
to complete it, when it should be completed and any associated
comments. When updating the list, consider action items as identified
during discussions, learning activities and assessments in this
module. Share and regularly review this action item list with
the appropriate peers, board, management and employees in your
organization. You can use the following Action Item Planning List. (At that Web address,
a box might open, asking you which software application to open
the document.)

2. If you have questions, consider posing them in the national,
free, online discussion group hr.com, which is attended
by many human resource and organization development experts.

(Learners in the nonprofit organization development program
can return to the nonprofit organization development program.)

For the Category of Financial Management (Nonprofit):

To round out your knowledge of this Library topic, you may
want to review some related topics, available from the link below.
Each of the related topics includes free, online resources.

Also, scan the Recommended Books listed below. They have been
selected for their relevance and highly practical nature.

Related Library Topics

Recommended Books

johntalaguit