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.
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.
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.
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.