Nonprofits: Don’t Ignore These Financial Warning Signs

Now that health providers are vaccinating populations in earnest, nonprofits are beginning to emerge from one of the most challenging events in recent memory. Your nonprofit might be in good shape, but don’t get comfortable if you haven’t had a California nonprofit audit service in the past year. Financial obstacles can arise at any time, and you need to look out for certain warning signs, such as those described below. Don’t ignore financial warning signs. Learn to identify and address red flags for a secure and resilient financial future. Navigate challenges with confidence and strategic insights.

Unreasonable budget variances

Carefully monitor budgets for unexplained variances. Although some variance can be expected, your staff should have reasonable explanations for significant discrepancies, such as funding changes or macroeconomic factors. You can mitigate negative variances by cutting unnecessary expenses, seeking lower-cost options, or asking a tax and audit services provider for suggestions.

Don’t overcome significant discrepancies by doing the following:

  • Overspending in one program and funding it by another
  • Dipping into operational reserves
  • Raiding an endowment
  • Engaging in unplanned borrowing

Partaking in the above can cause financially unstable cycles that progressively get worse.

Messy financials

Untimely and inconsistent financial statements, or statements that aren’t prepared using U.S. Generally Accepted Accounting Principles (GAAP) could lead you into trouble. Poor financial statements can cause poor decision-making and damage your nonprofit’s reputation. In the long term, unkempt financials can make it difficult to obtain funding or financing.

Insist that your team professionally prepare statements, use benchmarks to analyze efficiency, and schedule annual nonprofit audits. Your organization’s audit committee should communicate directly with auditors before and during the process, and all board members should review and question the audit report.

A significant decline in donations

If your donations are declining and long-standing supporters are saying they’ve lost confidence in your finances or leadership, investigate immediately. Ask your supporters about what they’re seeing or hearing that prompts concerns. 

Also look out for your development staff contacting major donors outside of your usual fundraising cycle. These contacts could signal your organization is desperate for cash.

Faulty leadership

Regardless of how experienced or knowledgeable your executive director is, they shouldn’t have absolute power. Your board must step in if an executive tries to ignore expense limits and breaks other rules of good fiscal management. Your board should also question any executive who tries choosing a new auditor or making strategic decisions without their input.

Warning signs won’t disappear on their own

If one of the above danger signs appears, it’s important to act immediately. They won’t disappear, and could worsen, until your organization takes action. Contact Ernst Wintter & Associates LLP for help evaluating your California nonprofit and for advice on getting your organization back on track.

Picture of Laura See, CPA

Laura See, CPA

Laura See is the Co-Managing Partner at Ernst Wintter & Associates LLP, bringing nearly 20 years of experience in public accounting. A licensed California CPA since 2010, she specializes in broker-dealer audits, nonprofit audits, 401(k) plan audits, and tax services for individuals and businesses. Laura plays a pivotal role in the firm's audit practice, ensuring adherence to SEC regulations and FINRA reporting requirements. She also conducts engagement quality reviews to maintain best practices and compliance with industry standards.

Laura earned her bachelor's degree in Economics with an accounting concentration and a minor in Psychology from California Polytechnic State University, San Luis Obispo. She is a licensed Certified Public Accountant in California (License #107725) and an active member of the American Institute of Certified Public Accountants.

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