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 What Are the Elements of an Accounting System?)

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

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

3. What can be detected from 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 a 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 Substantiation of Contributions.)

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

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 Independent Contractor (Self-Employed) or Employee?)


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 to 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 and 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 and Basic Overview of U.S. Nonprofit Financial Management.)

3. Devise a Chart of Accounts. (See Unified 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.)

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 from 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 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.)

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.)


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 HRNET, 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.)


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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

Basics and General Information

Budgeting

Bookkeeping and Accounting

Cash Management

Financial Statements, Analysis and Reporting



Basics and General Information

Bookkeeping Basics - Book Cover Bookkeeping Basics -- What Every Nonprofit Bookkeeper Needs to Know
by Debra L. Ruegg and Lisa M. Venkatrathnam, published by Fieldstone Alliance. Explains all aspects of developing and successfully managing systems to track and spend nonprofit finances. This is an easy-to-reference resource that is useful to new or established nonprofits. Today, nonprofits have to be more accountable than ever before about planning, managing and explaining their finances. This accountability now extends beyond just the Board treasurer -- other Board members no longer can expect just one person to handle the finances. This book helps everyone meet their responsibilities about finances!

The following books are recommended because of their highly practical nature and often because they include a wide range of information about this Library topic. To get more information about each book, just click on the image of the book. Also, a "bubble" of information might be displayed. You can click on the title of the book in that bubble to get more information, too.



Budgeting

The following books are recommended because of their highly practical nature and often because they include a wide range of information about this Library topic. To get more information about each book, just click on the image of the book. Also, a "bubble" of information might be displayed. You can click on the title of the book in that bubble to get more information, too.



Bookkeeping and Accounting

Bookkeeping Basics - Book Cover Bookkeeping Basics -- What Every Nonprofit Bookkeeper Needs to Know
by Debra L. Ruegg and Lisa M. Venkatrathnam, published by Fieldstone Alliance. Explains all aspects of developing and successfully managing systems to track and spend nonprofit finances. This is an easy-to-reference resource that is useful to new or established nonprofits. Today, nonprofits have to be more accountable than ever before about planning, managing and explaining their finances. This accountability now extends beyond just the Board treasurer -- other Board members no longer can expect just one person to handle the finances. This book helps everyone meet their responsibilities about finances!

The following book is recommended because of its highly practical nature and often because it includes a wide range of information about this Library topic. To get more information about each book, just click on the image of the book. Also, a "bubble" of information might be displayed. You can click on the title of the book in that bubble to get more information, too.



Cash Management

The following books are recommended because of their highly practical nature and often because they include a wide range of information about this Library topic. To get more information about each book, just click on the image of the book. Also, a "bubble" of information might be displayed. You can click on the title of the book in that bubble to get more information, too.



Financial Statements, Analysis and Reporting

The following books are recommended because of their highly practical nature and often because they include a wide range of information about this Library topic. To get more information about each book, just click on the image of the book. Also, a "bubble" of information might be displayed. You can click on the title of the book in that bubble to get more information, too.



Also See

Organizational Sustainability -- Recommended Books

Taxation (Nonprofit) -- Recommended Books

Strategic Planning -- Recommended Books

Social Entrepreneurship (Nonprofit) -- Recommended Books

Capacity Building (Nonprofit) -- Recommended Books

Fundraising -- Recommended Books

Program Management -- Recommended Books




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