Economic indicators can leave the leaders of nonprofits confused as to the financial direction their organizations are heading both in the short and long term. The current status of the American economy is especially difficult to figure out. On the one hand, we have a nearly record number of job openings, as the labor market continues to reel from the aftershocks generated by the COVID-19 pandemic. On the other hand, inflation coupled with increasing interest rates has sparked fears of the economic calamity called stagflation.
As a leader of your nonprofit organization, how do you make sense of macroeconomic signals that provide you with insight into the financial health of your organization? The answer is to understand how to detect the 4 warning signs that might indicate something is awry with your nonprofit’s finances:
1. Declining Donations
The heart of a nonprofit’s operations is the money brought in from donations. When the economy starts to tank, the first item cut from the budgets of both households and businesses is the money donated to nonprofit organizations. Even if the economy displays positive signs of robust health, donations can decline because donors have begun to question how your nonprofit spends its cash. Declining donations often produce a snowballing effect in that donors lose confidence in a nonprofit organization’s operation.
The key is to address declining donations head-on by asking donors for the reasons they have decided to cut back on funding.
2. Increasing Number of Past Due Accounts
When revenue decreases, one of the first impacts of lower cash reserves is the inability to meet financial obligations such as paying bills on time. If your nonprofit is not paying its bills on time, it might be an indication that your organization does not have the cash to meet its financial obligations. Notices in the mail, as well as calls from vendors, should alert leaders of a nonprofit to its sudden financial plight.
In addition, your nonprofit might fall victim to shoddy accounting practices that prevent the prompt paying of its bills.
3. Budget Anomalies
It frequently takes a herculean effort to get a nonprofit budget approved. However, once you get your organization’s budget in place, your work has not ended. You must closely monitor the budget to discover any anomalies. Any budget anomalies should be fully explained by the members of the leadership team responsible for taking care of budget requests. A common example of a budget anomaly includes meeting the financial obligations of one program by dipping into the cash allocated for another program. Other examples include using an endowment to pay bills and spending operational reserves for daily expenses.
4. Out-of-Control Leadership
Delegating too much power to one or just a few members of your nonprofit organization’s leadership team can lead to financial disaster. The most experienced and knowledgeable executives should never accrue power to the point that their financial decisions are not scrutinized by other members of your organization. For instance, your nonprofit’s auditor should not be making financial decisions, such as spending money your organization does not have to spend.
A leader who ignores expense limits represents a telling sign that the leader has gained too much power.
At Ernst Wintter & Associates LLP, we provide comprehensive audit, review, examination and compilation services as well as tax services that fit your business needs. Our professionals have specific expertise in the financial services industry, nonprofit sector, and employee benefit plan audit requirements. Please contact us today.