Succession Planning for Nonprofit Boards

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Nonprofits that are serious about their own sustainability should also be serious about planning for the smooth and thoughtful transition of their leadership. Whether a transition occurs due to an unexpected vacancy on the staff or Board, or the anticipated transition of a long-tenured leader, being ready with a plan in place can help a nonprofit weather the inevitable storms of leadership transition. An effective succession planning process requires collaboration between Board members, executives, and key staff members. To be most effective, the planning, if possible, should be completed in advance of any departures.

It is important for the Board members to secure the organization’s future by clarifying direction and ensuring strong leadership. Having a succession plan will help obtain strong Board members when they are needed. The Board should work together to develop and approve succession plans for various scenarios. It also may be of benefit to the Board to create a Board committee to address transitional issues in the case of an unexpected departure of an executive.

A key element to having a good succession plan is developing competency-based criteria to be used as a guideline for recruiting and electing Board members. These competencies can be grouped into universal competencies that all Board members should possess and essential collective competencies that one or more Board members bring to help the Board execute its responsibilities effectively. On at least an annual basis, the organization’s recruitment needs should be analyzed by reviewing the Board’s competencies that are in place, and looking to fill any gaps based on anticipated vacancies. A list of prospective members should also be maintained and updated as necessary so that interviews could be held when an opening arises. If the Board anticipates an opening within the next twelve months, recommendations should be made for a replacement as soon as possible.

Many organizations have established standing committees of the Board that contain both Board members and non-Board members. This is a great way to develop a farm system from which to recruit if a Board position is opening. These committee members are already engaged with the organization, are knowledgeable about the organization, and are familiar with the Board and management. In addition, Board members can gain some insight into committee member effectiveness before they are brought onto the Board.

Once a list of candidates is developed, the candidates should have initial interviews/ communications with other Board members. The list of candidates should then be narrowed down to the eventual replacement after the Board has reached a consensus.

A problem that many organizations face with succession planning is failing to start or failing to finish. In order to prevent this from happening, it may be beneficial to recruit one or two Board leaders with the interest and skills to champion this issue. These leaders can recruit others to form a group that will help in the planning. It is also important for the group to set a timeline and a completion date so that there is something to strive for. A useful tool to help Boards stay on top of succession planning is to develop a chart that can include the Board members, their length of service, expiration of their current term, as well as committee and officer positions held. This will help give a clear picture of upcoming vacancies that may need to be filled. In addition, it is important to open lines of communication with Board members whose terms are expiring to determine what their intentions for future Board or committee service will be.

The quality of leadership of the Board members of a nonprofit organization is extremely important to its ongoing success and sustainability. Poorly handled transitions can wreak havoc on an organization, while carefully planned and managed transitions actually set the organization up for greater success in the future.

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Fundraising: A Different Approach

For too long, the nonprofit sector has taken a “one size fits all” approach to fundraising; with dinner dances and golf outings clogging the calendar and development staff making phone calls looking for sponsorships at pre-established levels. Now I’m not suggesting that nonprofits shouldn’t do fundraising events. For many nonprofits, these are highly successful and bring in significant levels of discretionary funding for organizations. What I am suggesting, however, is that nonprofit organizations should consider what other options they have that they can offer to their business partners to start to develop more meaningful collaborations.

Businesses understand that if they are going to work with the nonprofit sector they are going to need to support the agencies they work with. While fundraising events provide an avenue for business owners to support charity, there is often very little benefit that the business derives from these sponsorships. Wouldn’t a relationship with your business partners where both sides benefit be a better option, with the potential of driving larger resources to your agency?

When was the last time you sat down with your donors or business partners and had a heart-to-heart with them to find out what they are looking for in a relationship with your organization? Donors want to support your organization in a meaningful way, but they would also love to derive some competitive business edge in the process. By taking time to understand their business model, what about your organization excites them, and how you can fit into their strategic thinking, you can really create a collaborative arrangement that really works for everyone.

I understand that this may be a little abstract, so let me throw out an example. Cerini & Associates strongly believes in education. We invest a lot of money each year in educating both our staff and the industries we serve. We were looking for a way to make a deeper impact thank what we were already doing. Along came the Book Fairies, a nonprofit organization that collects gently used books and puts them in the hands of teachers, students, and adults in an effort to reduce illiteracy and break the cycle of poverty. Real impact that appealed to us. We could have supported one of their events, but instead we opened a discussion about how we could effectively partner to help them leverage their impact, while creating a business advantage for C&A. We agreed on a model where for every billable hour of service C&A had, they would pay to put a book in the hands of a child.

Benefit to Book Fairies: Book Fairies develop a relationship with a new strategic partner that hadn’t funded them in the past, with C&A becoming one of the organization’s largest donors. In addition, C&A has been promoting its partnership with Book Fairies, which is increasing awareness of the Book Fairies brand.

Benefit to C&A: C&A has been able to promote the relationship to its clients and prospects, letting customers know that if they work with the Firm, not only does the customer get accounting talent, they are also making a difference in the lives of children by helping to facilitate the distribution of books. Furthermore, Book Fairies has been including C&A in much of its social media and press releases, which has helped to improve the C&A brand. Much more impactful than a tee sponsor.

In today’s environment, where people have the access to obtain information instantly, where it’s easy to get recommendations and ratings, and where people have a much greater desire to make a difference, there are plenty of ways that you can offer real value to strategic business partners well in excess of an add in a journal. Furthermore, your business partners will appreciate the entrepreneurial outlook you bring to the table during the exploratory discussion. Finding ways to be a good partner to your donors will go a long way in making you the charity of choice when the time comes to write that check. Think about it.

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NYPMIFA: What is it and what does it mean for me?

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NYPMIFA – what does this strange acronym mean? These seven letters are used to abbreviate the New York Prudent Management of Institutional Funds Act. NYPMIFA is not something completely new to us. This legislation was signed into New York State Law by Governor Patterson on September 17, 2010 and relates to the Uniform Prudent Management of Institutional Funds Act (“UPMIFA”). UPMIFA provides guidance regarding investment management and spending. UPMIFA strives to promote a total return approach to spending, similar to that of the total return approach to investing. UPMIFA supports investing at a rate that will preserve the purchasing power of the principal over the long-term, while spending at a rate that will reflect the donor’s intentions.

How is this affecting the nonprofit sector? One, it enables nonprofits to spend from endowments whose fair values have dropped below the original gift level, so long as the spending is deemed prudent by the nonprofit. And two, it creates restrictions on any earnings in excess of the spending policy, even in the absence of a donor restriction. In other words, should the Board establish a spending policy noting up to 3% of earnings can be used by the organization and the investment returns turn out to be 10%, the extra 7% of earnings would be treated as a temporarily restricted amount until appropriated.

In passing NYPMIFA, New York State has adopted much of UPMIFA’s standard principles, but with three major differences. The first difference relates to its requirements surrounding written policy. NYPMIFA requires the Board to develop formal spending and investment policies, and also to review those policies on an annual basis. Additionally, there are eight standards of prudent spending outlined by NYPMIFA. Nonprofits are required to have a written policy describing how those standards have been adopted. The second difference relates to NYPMIFA’s presumption of imprudence. The Act believes that a nonprofit’s spending would be considered imprudent if it spends more than 7% of the endowment’s market value, which is to be measured on a quarterly basis and calculated over a period of no less than the preceding five years. The third and last major difference relates to written notification. NYPMIFA, unlike any other state’s version of UPMIFA, requires nonprofits to notify their existing endowment donors, in writing, for approval to spend below the original gift amount. The Act specifies the required language to be used when notifying donors as well as guidelines for the notification itself. Nonprofits must allow donors a 90-day window to respond to the notice before encumbering endowment funds for the first time under NYPMIFA. A donor is considered “available” under NYPMIFA if the individual is living (or if the donor is an institution, is in existence) and can be located and identified with reasonable efforts. However, notification is not required if (1) the gift instrument already allows for spending below the fund’s historical value, (2) the gift instrument specifically limits the nonprofits ability to encumber or accumulate funds, or (3) the endowment is the result of a gift which was part of a solicitation/ funding originated by the nonprofit.

So, what does this specifically mean for your nonprofit? Donor intent documented in a gift document must always be respected. If the donor is silent as to appreciation and spending rules, NYPMIFA then comes into play. Boards will have to set specific spending policies in place that either call for the preservation of endowment funds or prudent spending of endowment fund assets as outlined by NYPMIFA. Should the Board choose to spend endowment funds as it deems prudent, it must act in good faith and exercise care while considering, if relevant, the following factors:

  • the purpose of both its organization and the endowment fund;
  • the duration and preservation of the endowment fund;
  • the overall economic environment;
  • the organization’s investment policy;
  • the anticipated investment return on the endowment;
  • the possible impact of inflation or deflation;
  • other resources that may exist within the organization; and
  • if appropriate and necessary, alternatives to spending of the endowment fund and the impact such alternatives may have on the organization.

For each of the aforementioned factors, the organization must maintain contemporaneous records of the Board’s decision, the consideration given, and, if applicable, the action taken.

Let’s recap, because this is not a simple subject.

  1. NYPMIFA advocates for stronger protocols on investment management and requires prudence from the Board in investing institutional funds held in endowments or for investment purposes. It requires nonprofits to have formal investment policies that consider factors such as economic conditions, inflation rates, tax implications, and others noted within this article.
  2. In an effort to try to preserve organizational assets, many nonprofit Boards take a very conservative approach to investments by keeping them all in certificates of deposits or U.S. Treasury securities. Pursuant to NYPMIFA and the need for prudent consideration of the factors outlined above, this may no longer be an appropriate way of handling an organization’s investments. NYPMIFA requires the diversification of investments; unless the Board determines special circumstances exist that deem doing so inappropriate. Such a decision should be documented and is required to be evaluated annually.
  3. Should a nonprofit decide to utilize the services of an external investment advisor for management of its institutional funds, the Board must exercise care in selecting and monitoring the advisor. This is inclusive of ensuring no conflicts of interest exist, establishing the advisor’s role and level of control, and monitoring performance results.
  4. Prior to NYPMIFA, a nonprofit had to obtain approval from the donor or would have to resort to soliciting the supreme court in its jurisdiction or the surrogate court where the will was probated (for an intestate donation) if the nonprofit wanted an endowment released. Thankfully, NYPMIFA provides some level of flexibility in dealing with funds that have become obsolete, wasteful, impractical, or impossible to effect. Now, under NYPMIFA, an organization can either get donor consent or obtain a modification by a court. This doesn’t seem to be much of a change; however, the difference is should the donor decide not to consent to a release or modification of a restriction, the organization is no longer barred from soliciting the court. In either case, the donor and State Attorney General must be given notice. NYPMIFA also allows nonprofits to modify or release donor restrictions without receiving judicial approval, upon 90 days’ notice to the Attorney General, if (1) the fund’s value is under $100,000, (2) the fund has existed for more than twenty years, and (3) the proposed use of the fund after release is consistent with the purpose outlined in the original gift.
  5. NYPMIFA also requires that an organization soliciting new endowment funds include a statement in its solicitation materials, unless otherwise restricted by the grant instrument, noting that the nonprofit may expend as much of the endowment fund as it deems prudent after considering the factors governing appropriation decisions set forth in NYPMIFA.

It is essential that nonprofit Boards and investment committees are well educated on the rules surrounding NYPMIFA to ensure that all of its provisions are properly being considered and implemented. Retaining qualified and experienced legal counsel to help navigate through the complexities of NYPMIFA may be a good first step to ensuring compliance.

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Too Many Nonprofits, Too little M&A

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Nonprofit organizations are facing an increasing number of demands and it’s finding many of them stretched so thin that creativity and strategy are the only answers left to overcome these demands. Government funding is decreasing while costs continue to increase. Regulations are becoming more stringent. Individuals are less inclined to give because of the 2018 Tax Cuts and Jobs Act. All of these issues are added to the preexisting struggles to remain attractive for potential new donors, maintain good funding relationships with historical donors, and find efficiencies to limit administrative spending and have more direct service costs. Above all, nonprofit organizations’ goals at the end of the day are to fulfill their mission, provide their services successfully, be known for those services, and eliminate any open ends to ensure a complete and fulfilling mission overall.

Mergers and acquisitions (M&A) are out of the ordinary in the nonprofit world. Resources are very scarce since it is such a rarity and guidance on M&A in the nonprofit world is lacking. However, if used strategically, M&A can be beneficial to your organization and a great way to gain a competitive advantage in your nonprofit service areas. M&A should be as accepted in the nonprofit world as it is in the for-profit world. In addition to the challenges mentioned above, there are too many nonprofit organizations registered in the United States. Consolidation needs to happen. If M&A became a regular part of nonprofit business, it would be a win for everyone. In a saturated sector of nonprofits where there are not enough people who need the services of the organizations providing them, employees wouldn’t be as few and far between and competition would be decreased, which means more quality employees and donors for you. In the government-regulated sector of nonprofits where a lot of compliance and training is required, consolidation could decrease the time, effort, and cost of that training through shared knowledge and resources.

Why are M&A a better approach over alternative solutions? Growing an organization organically is no easy feat. Costs and time are generally not favorable and geographic expansion requires knowledge of the population and whether it is in need of your services. Requirements could include building an additional location, fostering new relationships with funders, learning skills and building knowledge to deliver those new services, as well as beating new competition. M&As are strategic if used effectively. Your organization would merge with an entity that already has the location, the donor relationships, the skills and knowledge, and reputation that is known over their competition.

The biggest take-away from this should be that M&A needs to be set up properly and rolled out smoothly and strategically within the consolidating organizations in order for it to be a successful transaction. As a board member, there are a few questions you should ask yourself, your peer board members, and key management personnel of the organization before a M&A occurs:

  • How will this M&A benefit the organization and the communities it serves? Each M&A is unique and occurs for its own specific reasons, but some of the benefits you may find include an expansion on geographic influence and serving a greater population, enhancement of or addition to services, advancement in reputation, and access to additional resources, just to name a few.
  • Does this M&A support or enhance the organization’s mission? Remember why the organization exists in the first place. Think about how the M&A would benefit or hinder the organization. What would ultimately happen to the organization if the M&A didn’t occur? Does the merging or acquiring entity have similar goals in its mission statement?
  • What challenges does the organization currently face that could hinder the M&A opportunity and how can those challenges be mitigated? Cost is an issue that faces many M&A candidates. Both organizations should be writing up a formal business plan that paints a picture for a fluid M&A throughout. This should be prepared in a way that is ready to present to potential donors who would be interested in providing funds to help with the process. Ensure the organization doesn’t miss a beat by reviewing any compliance requirements with laws and regulations.
  • What advantages and disadvantages would the organization face with this M&A? In addition to the expansion of geographic influence and the impact on a more widespread population, some may find the advantageous expertise and long-term financial stability to be attractive factors. Disadvantages the organization may want to consider include negative reactions from donors or staff, programs that become muddled and don’t differentiate themselves from one another, or a M&A candidate that has goals so far from your own that the organizations would not consolidate seamlessly.

Once the organization has had time to explore these thoughts, and if its leaders decide to move forward at this point, a more detailed analysis should ensue. Create a reasonable and realistic budget for the M&A. Capture every cost you can think of including travel, legal and accounting fees, additional compensation, etc. Don’t forget to leave room for unexpected costs. Specific details from both entities should be reviewed, including the latest set of financial statements, a list of donors, and organizational charts, among others. Once all vital information has been reviewed, consolidate it all into a summary that lays out how the M&A will impact both organizations. This helps paint a picture and will ultimately be a crutch in your decision- making regarding whether to move forward with the M&A. This also shows that you have done your due diligence and will leave minimal room for surprises.

If you decide to move forward from here, start designing the newly combined entity. Gather all contracts and historical business records from the original entities, determine if the transaction will be a merger, acquisition, or joint venture, and create a meaningful name. Who will be on the Board? How will the assets and liabilities from the originating entities be integrated? Which overlapping costs could be eliminated from the combined entity? Build this new organization using each entity’s best features. Think about location, operational details, and review administrative procedures and agreements. Brainstorm new long-term and short-term goals, as well as your plans to reach those goals. What needs to be done to ensure this new organization fulfills its mission? Which funders are most likely to provide help? Make sure all employees understand their new roles. Granted, the initial transition might be a bumpy ride, but through practice and time, the M&A will be something of the past and your organization will be operating smoothly again.

In the nonprofit world, these opportunities usually come when someone in a key management position is retiring or an entity is in financial distress. This is a reactive approach to M&A and the opportunity may not come forth at the best time for you. If you treat M&A as a routine option for your nonprofit, you will take a more proactive approach and the opportunity will be there when you’re ready. Gain a competitive advantage in your nonprofit service area. At least consider making M&A a streamlined part of your organization’s business strategy.

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What the Board of Directors Should Know About IRS Form 990

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IRS Form 990 is an informational tax form that the majority of tax-exempt organizations must file annually. The Form’s main purpose is to give the IRS an overview of the organization’s activities, governance, and detailed financial information. Additionally, Form 990 includes a section to describe its accomplishments in the previous year to justify maintaining its tax-exempt status. The IRS uses the information reported in Form 990 to ensure that organizations continue to qualify for their tax exempt status.

Federal tax law does not define that it is the Board’s duty to receive or review a Form 990, but organizations who do not have a Board review policy in place may be considered to have a significant weakness and lack of oversight. There has been a substantial increase in the demand for transparency and accountability within the nonprofit sector, further cementing the importance in the Board’s involvement in the organization’s review of the final Form 990.

The following “Board Member Review Checklist for Form 990” highlights some key areas that Board members should examine as a part of their review of Form 990.



  • Is the brief description of the organization’s mission truthful and clearly defined?
  • Will the mission description positively influence a potential donor?
  • Does the current year summary of financial information compare favorably or unfavorably with the prior year?


  • Does the information in Part III explain to the user of Form 990 why the organization exists, who it serves, and the information about activities it will undertake to accomplish its mission?
  • Are the program services described in enough detail to present an accurate depiction of the organization?


  • Have paid individuals been properly classified as employees rather than independent contractors to avoid payroll tax issues?
  • If the organization is a charitable organization and received more than $250 from a single donor, was a receipt provided to enable the donor to corroborate his or her charitable contribution deduction?


  • If the organization does not have the Board-adopted written policies indicated, should the Board consider adopting any?
  • Should the Board consider a change in the procedures for setting compensation to minimize the future risk of investigation by the IRS? An organization that over-compensates its management may open themselves to personal liability.
  • If the organization is conducting activities in multiple states, is it properly registered in those states and completing each states filing requirements?


  • Does the compensation of those listed in Part VII appear justifiable in view of the organization’s activities, size, and their responsibilities?


  • Does the revenue data indicate too much reliance on one source that could be threatened by a poor economy or other external factors? Should alternate revenue streams be considered?
  • Too much reliance on unrelated business income [as reported in column (C)] could risk an organization’s exempt status. Is column (C) insignificant as compared to totals in column (A)?


  • Are compensation and benefits (lines 5 through 9) consuming too much of the organization’s revenue?
  • Are expenses justifiable and in line with the organization’s mission?
  • If completed, do the totals of column (C) management and general expenses and column (D) fundraising expenses appear disproportionate relative to total program service expenses in column (B)?


  • Is a large amount of cash (line 1) being kept in non-interest bearing accounts?
  • Are resources being averted from program service activities to related party loans (lines 5 and 6)?
  • Is oversight being exercised over related party loans to ensure adequate collateral, interest, timely repayment, etc.?
  • Are notes and loans receivable (line 7) sufficiently collateralized and monitored for timely repayment?
  • Does an increase, if any, in accounts payable or accrued expenses (line 17) during the year suggest potential cash flow problems?


  • Where the organization’s financial statements appropriately audited or reviewed by an independent accountant (if applicable)?
  • If audited, do the auditors’ report to the group responsible for overseeing the financial reporting process (an audit or finance committee or the governing Board)?


  • Does the data (Part II Section C or Part III Sections C and D) indicate that the organization is in danger of becoming classified as a private foundation rather than remaining a public charity?


  • If exempt under Section 501(c)(3), are policies followed to prevent participation in a political campaign that could jeopardize tax-exempt status?
  • If the organization is a Section 501(c)(3) entity that is eligible to make the lobbying expenditure election but has not, should it do so to minimize the likelihood that exempt status will be lost because of excessive lobbying (see Part II-A)?


  • If any box on line 1a is checked, is the economic benefit warranted or should it be re- examined?
  • Does the organization require strict accountability for expense reimbursements to prevent abuse (lines 1b and 2)?
  • Is the organization setting compensation based on one or more methods indicated by the box descriptions for line 3?


  • Did the organization consider all direct or indirect transactions or relationships that may require disclosure? (See Part IV questions 25 through 28.)
  • Are business transactions with interested persons fully disclosed, including the amount, nature of the transaction, and relationship with the organization, management, and Board?


  • Is the 990 review process fully described?
  • Does the organization describe how public documents (Forms 990, 990-T, if applicable, and 1023) are made available for public inspection (website, office, Guidestar, etc.)?


  • Did the organization receive any payment from, or engage in any transaction with, a controlled entity within the meaning of section 512(b)(13)? Organizations fall under section 512(b)(13) if a parent/subsidy relationship exists, or if the same persons constitute a majority of the members of the governing body of both organizations, or the same entity/ persons controls both organizations.
  • If the answer to the above question is yes, did the information on schedule R include appropriate current year related transactions?

Board members should be aware that Form 990 is made available to the public and can be inspected by third parties, so a thorough review remains an important duty of the Board. Board members and organizations that are educated about the Form 990 will benefit from accurately reported information that best reflects the organization and its values which could result in increased public support.

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Understanding Financial Reporting for a Board Member

Most Board members are not expected to be nonprofit financial experts, but they should have a basic understanding of the information in the financial statements that is presented to them. Having a basic understanding will help them better govern a nonprofit and allow them to better understand an organization’s financial position, cash flows, and results of operations. This is important, as it is the role of the Board to ensure that the organization’s funds are used prudently and that the organization is fiscally sound enough to fulfill its mission. By having better fiscal insight, Board members are better able to read and interpret financial reporting, and ask the necessary questions of the organization’s internal fiscal staff as well as the external auditors.

To have a basic understanding of the financial statements, a Board member should be familiar with the common components of financial statements:

  • Statement of financial position (balance sheet)
  • Statement of activities (profit and loss)
  • Statement of functional expenses (required for some health and welfare organizations)
  • Statement of cash flows
  • Footnotes

The Independent Auditors’ Report is shown before the financial statements. This report provides the period under audit, the responsibility of the auditor and management for the audit of the financial statements, and the auditors’ opinion.

An unmodified opinion is what agencies are striving for, but what is an unmodified opinion?

  • The purpose of an audit is to opine on the information presented in the financial statements. Once the audit of the financial statements is complete, the auditor will give an opinion as to whether the information presented in the financial statements is in accordance with accounting principles generally accepted in the United States of America, better known as “GAAP.” An unmodified opinion is a “clean” opinion in which the financial statements are presented in accordance with GAAP and the information presented in the financial statements is not materially misstated.

What are GAAP-based financial statements?

  • To be in accordance with GAAP, typical not- for-profit financial statements must include the statements and footnotes noted above.
  • The amounts presented on the financial statements are recorded on the accrual basis of accounting (revenue recorded when earned and expenses are recorded when incurred), as opposed to the cash basis (revenue recorded when received and expenses recorded when paid). Many smaller organizations maintain their books throughout the year on the cash basis and convert to the accrual basis for their annual audit..

A Board member should be familiar with the information that is presented in the financial statements.

The statement of financial position has three categories:

  1. Assets – Most common assets of an organization include cash, investments, accounts receivable, prepaid expenses, and fixed assets. The assets are presented in order of liquidity (how fast the asset can be converted into cash). Current assets are those assets that are generally expected to be available for use within a one year cycle (such as cash, receivables, and prepaid expenses) and long-term assets are those that cannot be used in the near term (such as property and equipment and restricted cash).
  2. Liabilities – Represent the current (generally due within one year from the statement of financial position date, such as accounts payable, and current debt obligations) and future (such as long- term debt and contingencies) obligations that the organization is expecting to meet through the use of its assets. In essence these are liens, or anticipated liens, against an organization’s assets.
  3. Net Assets – The difference between total assets and total liabilities. It represents the portion of the assets that the organization owns (not allocated for a liability).

Net assets fall into two categories: without restriction (also includes net assets that are designated by the Board for specific uses) and with restriction (includes temporarily restricted and permanently restricted).

  • Restrictions on net assets are created by the donor. Temporarily restricted net assets can be restricted as to time and/or purpose and will be considered “released from restriction” once the restriction(s) has been met. Permanently restricted net assets generally are held in perpetuity (Board may have some control over this depending on the wording in the donor’s gift) and typically the earnings from the principal amount can be used for general operations or temporarily restricted for a specific purpose.
  • Net assets will increase or decrease based upon the results of its operations as reflected on its statement of activities.

The statement of activities includes:

  • Support (contributions, grants, and net fundraising income) and revenue (fees for services and program service revenue).
  • Net assets released from restrictions, which represents the use of an organization’s restricted net assets. The amount is reflected as an increase to net assets without restrictions and a decrease in net assets with restrictions under support and revenue. The concept of net assets released from restriction is that once a purpose or time restriction is met, usually through the use of the funds, these resources are no longer restricted and should be included in net assets without restrictions.
  • Expenses, subtotalled by program, general and administration, and fundraising. These amounts will agree to the totals reported on the statement of functional expenses.
  • Some people think that a nonprofit cannot make a profit. A nonprofit is a business, just like any other business, and it should strive to create appropriate “profitability” and establish adequate reserves to develop strong fiscal viability.

The statement of functional expenses reports the natural classification of the expenses (e.g. payroll, fringes, rent, etc.) that were spent on the organization’s programs, general and administration, and fundraising activities. Many donors focus on this schedule, because they are interested to see what percentage of an organization’s expenditures are spent by the organization in a program service capacity (program service percentage). This is particularly important for organizations receiving significant NY State originated or pass-through funds as Executive Order 38 limits the amount of general and administrative costs that can be funded by the State to no more than 15%.

The statement of cash flows reconciles the beginning of the year cash balance to the end of the year cash balance. The cash activity is separated by three types of activities: operating, investing, and financing. The statement of cash flows combines the statement of financial position and the statement of activities to help you to better understand the sources and uses of cash within an organization.

Footnote Disclosures:

  • The footnotes disclose information about the organization, its programs, significant accounting policies, detailed information on significant accounts, and commitments and contingencies. The footnotes are an important aspect of the financial statements as they add a better understanding as to the detail behind the numbers on the statements.

In addition to the information presented on the financial statements, Board members should be familiar with certain key benchmarks, trend analyses, and ratios that will help them to better understand the meaning and impact of many of the numbers on the financial statements. This information is often looked at by funders, banks, and other users of the financial statements to assess the organization’s fiscal health. If these ratios are not strong, it could impact an organization’s ability to obtain funding. The most common trend analyses and ratios include the following:

Liquidity – shows the organization’s ability meet its financial needs in the next fiscal year:

  • Is measured by working capital (current assets less current liabilities) and current ratio (current assets divided by current liabilities). You want to have at least positive working capital.
  • It measures the ability of an organization to meet its current obligations with the current assets it has available. Banks like to see a current ratio of approximately 1.5 to 1.

Days in Cash:

  • The number of days the organization can operate with its cash balance (as of the statement of financial position date) without bringing in any additional resources.
  • Depending on how an organization is funded, an appropriate days in cash figure could range from 45 days (organization with a consistent monthly funding stream) to as much as a year (an organization with one big annual fundraising event or appeal). Understanding days in cash can provide a quick insight into whether or not an organization is having, or is going to have, cash flow issues.

Days in Accounts Receivable:

  • The number of days it takes an organization to collect on its receivables. Depending on the type of funding an organization receives, a Board member would want to see the number ofdaystobenomorethan45andtoseethe days decrease over time, or at least remain consistent. Days in accounts receivable is typically more relevant for organizations that rely on regular revenue streams (such as fees for service or regular government vouchers) than those that are more fundraising-driven. If an organization’s days in receivables are greater than its days in cash, the organization may have cash flow issues if a line of credit is not in place.

Trend in Net Assets:

  • A Board member would want to see the organization’s net assets increase over time, or at least remain fairly consistent. A steady or continuous increase in net assets means the organization is operating efficiently (i.e. programs are appropriately run and expenses are controlled). Growth in net assets typically means better cash flows and better liquidity.

Expendable Net Assets:

  • It’s important when looking at an organization’s net assets that you also understand if those net assets are available for use by the organization. Too often, organizations have significant levels of net assets, but they are still having difficulty meeting their day-to-day obligations. Expendable net assets takes an organization’s net assets, removes long-term assets (e.g. property and equipment, security deposits, restricted resources), and adds back debt related to the removed assets. This will really hone in on the level of expendable or usable net assets the organization really has. After all, you can’t pay your staff with bricks from your building.

Program Trend Analysis:

  • A significant measurement of an organization operating effectiveness is based on the success of its programs. It’s important to see if a program is profitable, break-even (i.e. deficit-funded, where the organization is reimbursed for the expenses already paid to run the program), or operating at a loss.

Program trend analysis will be unique from agency to agency, depending on the organizations’ operations and funding sources. Some examples include:

  • Total program revenues less expenses (this could be in total or by funding source).
  • Sources of revenue (what percentage of an organization’s revenue is coming from each revenue stream) help to identify concentrations in revenue.
  • Revenue and/or expense per unit of service.
  • Trends in units of service (important for fee-based revenue streams).

Fundraising Event Profitability:

  •  The profitability of an organization’s fundraising event(s) is measured by the total revenue raised from the event less the total expenses associated with the event. This measurement can assist in determining if an event is worth continuing or should be modified to potentially generate more income. A good rule of thumb is you would like your events to generate at least three times the related expenses.

Program Service Percentage:

  • This represents the percentage of every dollar that is spent on running the organization’s programs. The higher the percentage, the more dollars targeted to program activities. The nature, size, and funding sources of your organization will all impact your program service percentage. Larger organizations, government funded organizations, and health and welfare organizations all tend to have higher program service percentages.

By having a better understanding of your organization’s finances, by being more engaged in financial discussions and by understanding the impact of the financial information, you can identify concerns or opportunities early on. This will put you in a better position to help steer the organization forward and ensure that it is able to maximize its organizational impact.

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Social Impact for Nonprofits

Social impact is defined as the significant positive effect that your organization’s activities have that addresses a social issue or cause, and, on a grander scale, on the overall wellbeing of society. Nonprofit organizations exist to promote and advocate for specific social causes. To get to the heart of how successfully your organization is performing, and whether the investment of your organization’s valuable resources are bringing about desired results, your organization should be measuring and reporting on its social impact. A popular approach to understanding and measuring social impact is the Theory of Change, which seeks to explain how the activities of a nonprofit bring about its desired goals in the context of the society it functions within. This is a multistep process that can be outlined as follows:

Step 1: Identify desired goals.

These goals should be clear, concise, and measurable. A good starting point to developing these goals would be reviewing the organization’s mission, which should be clearly established. Your organization’s goals should, at a minimum, take into account the following:

  • The social issue you are seeking to address;
  • The target population you wish to serve;
  • The activities you will engage in to enact change; and
  • The impact you are seeking to bring about within the community you wish to serve.

Step 2: Identify available inputs.

These are the available resources you can work with and invest to achieve the goals outlined in Step 1. They can be fiscal, physical, intellectual, etc.

Step 3: Identify outputs.

These are the actions your organization will take within the community using the available inputs identified in Step 2, to achieve the goals identified in Step 1. In tandem with identifying outputs, you should also determine specific output indicators that can be measured to track what outputs your organization has delivered to target populations within the community over time. These indicators are generally quantitative in nature, focusing on the number of outputs delivered over a set period of time.

Step 4: Identify desired outcomes.

These are the environmental changes brought about as a direct result of the organization’s activities identified in Step 4. Outcomes should be simply defined and objectively measurable, rather than overly complex or subjective. As with Step 3, you should also determine specific outcome indicators that can be measured to track the changes that occur in the community as a direct result of your organization’s activities. Ideally, your outcome indicators will tell you how successful the organization was in achieving its desired outcomes. Outcome indicators can be both quantitative and qualitative in nature. Qualitative indicators are subjective experiences that are linked to specific outcomes. It’s a good idea to have a mix of qualitative and quantitative indicators to track each identified outcome.

Step 5: Measure output and outcome indicators over time.

How an organization measures output and outcome indicators can vary widely depending on the unique activities of the organization. Your organization should research available data collection tools to determine which best suits your needs and activities. Both output and income indicators can be measured internally by staff responsible for delivering services to target populations. Output indicators should be measured in real time as services are being delivered. Outcome indicators can be measured a determined length of time after services have been delivered. Organizations commonly utilize questionnaires to interface directly with target populations to measure outcome indicators. Measurement and tracking should take place over a predefined period of time. Those responsible for collecting data should be adequately trained to ensure consistency of application across the organization.

Step 6: Analyze the data, measure the impact, and report the findings.

Your organization should review, interpret, summarize, and draw conclusions about whether the data supports that your activities brought about a meaningful social impact. In addition, the data should be formalized into a narrative report that can be shared internally with management and the governing body. Keep in mind that if the results of your analysis are inconclusive, you may benefit from modifying indicators or data collection procedures and repeating the process.

Considering social impact is a vital and meaningful way to measure an organization’s success towards achieving its purpose. By taking a systematic approach to both

measuring and reporting on its social impact, organizations can obtain meaningful feedback that it can use to improve the quality of its programs, and ultimately further its mission. Social impact reporting can also be repurposed to market your organization to the various stakeholders (funders, donors, governments, communities, etc.) to whom your organization may be held accountable, to potential funders and donors who are looking for an organization that stands out among the pack, and to other nonprofit organizations with whom you can collaborate.

Download the full guide for Nonprofit Board Members

Additional Board Responsibilities

people shaking hands in office

Most Board members understand that it is their responsibility to provide fiscal and programmatic oversight and guidance for the organization they govern; however, they are not always aware of some of the other areas that Board members should be involved with in order to properly oversee the organization they are involved in. These responsibilities can be performed at the Board level, or through a committee of the Board, such as a compliance committee, audit committee, or finance committee, as described earlier.

Corporate/ Medicaid Compliance

If your organization receives $500,000 or more in Medicaid funding, it is required to have in place a formal Medicaid Compliance Program. Even if you don’t receive Medicaid funding, but you receive funding from other government sources, you should still consider having in place a compliance program to ensure that the organization is properly complying with contract terms and regulations. This goes beyond a quality insurance function, and includes:

  • Appointing a Medicaid/ Corporate Compliance Officer to oversee the Compliance Program;
  • Educating the organization’s staff, Board members, and others regarding appropriate behavior and compliance;
  • Providing staff members with the ability to report instances of non- compliance or fraud without fear of reciprocation;
  • Developing a formal risk assessment and testing strategy; and
  • Monitoring areas of non-compliance, developing corrective action plans, and self-reporting where necessary.

There should be regular (at least quarterly) reporting to the Board as to the status of the Compliance Program and findings, if any.

Pension Compliance

The U.S. Department of Labor (“DOL”) is stepping up the number of audits it is performing, it has added new rules increasing the fiduciary responsibility of plan sponsors, and the number of employee suits of plan sponsors is on the rise. It is important for the Board to understand the organization’s fiduciary responsibility and ensure compliance with DOL regulations. As part of its responsibilities, Boards should:

  • Review with its investment advisors the investment choices to determine if investments are underperforming;
  • Have the plan benchmarked to determine if fees paid by the plan are appropriate;
  • Meet with your plan auditors (if your plan requires an audit) to determine if the plan is in compliance with DOL regulations; and
  • Meet with your human resources staff to determine how plan compliance is being monitored.

Internal Controls

Most Boards believe that the internal control environment is the responsibility of management. While management is responsible for designing and implementing an effective control environment, it is the Board’s responsibility to ensure that the control environment is operating effectively. This can be accomplished by the Board reviewing controls (documentation of the control environment), hiring an internal auditor to test the control environment, and through discussion with external auditors.

Risk Analysis

Most organizations utilize insurance as a way to mitigate risk. Too often, however, no one is reviewing the organization’s insurance policies to determine if they are effectively mitigating risk for the organization. The Board should ensure that a proper evaluation of the organization’s insurances is properly being performed.

Executive Compensation

It is the Board’s responsibility to hire and evaluate the performance of the Chief Executive Officer, and in many instances, other key members of the management team. Formal evaluations should be performed, and compensation should be linked to such evaluation. Furthermore, in setting executive compensation, it is important to perform a salary study to determine if compensation is reasonable and supportable, given the compensation of other similar organizations in your marketplace. This is especially important, since many New York State funded agencies are subject to Executive Order 38, which puts certain limitations on how much executives can potentially earn.

These are just some of the main issues that should be of concern to Board members and discussed at Board meetings. The key is to understand how the organization you’re involved with operates and the issues that are impacting it and its industry. This will help ensure that you are making proper decisions in helping to mitigate risks and concerns and help move the organization forward.

Download the full guide for Nonprofit Board Members

Making the Decision to Become a Board Member

man in suit looking at the sky

You’ve been asked by a nonprofit organization to join its Board of Directors. With that comes a tremendous level of responsibility that goes beyond just showing up for meetings and passing resolutions. It requires an understanding of what being a Board member entails: your duties, the organization’s expectations, your legal exposure, the role you’ll be expected to play, the time and money commitment, etc. It also requires some due diligence and soul searching on your part.

It is critical to determine if you are the right person for the job. You need to look in the mirror and ask yourself some difficult questions. Remember, the organization has certain expectations of you as a director and you need to recognize exactly what these expectations are in order to conclude whether or not you’re prepared to make the sacrifice. Outlined below are some important questions and key points to consider:

Are you passionate about the organization and the impact it has on society?

Having passion for the organization and its cause is perhaps the most vital trait that someone can bring to an organization. If you don’t have passion, you may find yourself reluctant to make the sacrifices or put in the time, energy, and effort to meet the organization’s expectations. We’re all busy. Many of us have work or family obligations that hinder our capacity to offer time and/or energy to a nonprofit — even one that we have a personal passion for. You need to find out what the time requirements are, then decide whether you can and want to realistically meet those expectations.

Can you effectively contribute to the Board?

Even if you have determined that you have a passion for the cause, that still may not be sufficient. Do you have knowledge, skills, experience, contacts, or other qualities that will assist the Board in performing its functions? Perhaps those who extended the invitation can offer some insight on this. A high-functioning Board will have thought this question through in advance and be prepared to offer a detailed answer. After determining what they have in mind, contemplate whether you see your ability to contribute the same way they do.

What are the financial requirements of being Board member?

Many Boards have financial expectations for each member. A “give or get” Board policy may exist, which requires each Board member to contribute or obtain gifts of a specified dollar amount. The Board may also expect you to absorb the costs of being a director, such as the price of meals, travel, and gas. Whatever form these financial expectations take, you need to be prepared to meet them before accepting a Board position.

Finally, you need to ask yourself if you can put the interests of the organization ahead of your own.

Remember, this is part of your duty of loyalty to the organization. Regardless of your personal feelings and goals, the interests of the organization must come first.

If by now you have determined that you are right for the tasks ahead, you should then focus on whether the organization is right for you. When buying real estate or anything tangible, the prudent consumer will research the product and decide if it is right for him or her. The same is true of deciding to join the Board of an organization.

You already know what the mission and programs of the organization are; you asked this question when you were determining if you had a passion for the organization. So let’s turn to some other central points to consider:

Take a look at the other leaders of the organization. Do you know them? Are they people you respect or can respect? Are they people you can work with on a personal basis?

You need to be comfortable with the people you are sharing responsibility with. In the course of Board work, conflicts can develop even between individuals that know, like, and respect one another. Don’t compound this by choosing to be involved with people you are not comfortable with. If you’re unsure of some of the people you may be dealing with personally, ask around in your network of friends and professional colleagues to make an informed decision.

Next, turn your attention to the financial condition of the organization.

At a minimum, you should review the organization’s latest annual reports and its IRS Form 990s. These are public documents and will have copies of the Form 990s if they are being filed. It would also be wise to request and review the audit results if the organization is of a size that requires an annual audit. Pay close attention to any management letter that the auditors prepared as this document will contain insights into the organization that may not be revealed in the financial documents.

Consider where the organization is headed.

The organization should have a vision and a strategic plan. Is the Board paying attention to the plan? Some organizations have strategic plans that are no more than a dusty notepad on the shelf. Others have plans that are living documents, consistently being referred to, with growth measured toward established goals. You want to be connected with an organization that fits the latter description, and not the former.

Understand how the Board operates.

Are there active committees that carry on the work of the Board? Try to ascertain whether the full Board is really making decisions, or if there is a smaller group within the Board that seems to be making the decisions and then informing the other Board members after the fact.

There will always be some uncertainties for new Board members and some period of adjustment, but the organization owes you an orientation process to develop the knowledge and understandings essential to contribute. At a minimum, you should comprehend the following:

  • The organization’s legal documents, including its bylaws.
  • The structure and operation of the organization.
  • The key issues facing the organization now and in the near future.
  • What the Board has been doing (in the form of minutes and/or reports).
  • Financial documents (if you have not already reviewed them).
  • How the Board conducts its business, including its operating rules, policies, agenda-setting, and meeting management rules.

This is the short list of what you should look for in the organizational orientation. If you don’t get offered such an orientation, ask for one. You don’t want to assume the legal obligations of a Board member if you are in the dark about what is really happening within the organization.

The final question that needs to be asked is what protection(s) the organization offers its directors.

This is a critical item and should be a deal- breaker for you if you are not comfortable with the protections provided. The American Bar Association’s Guidebook for Directors of Nonprofit Corporations states: “In recent years, litigation against directors of many varieties of nonprofits has increased in frequency. … All directors need to understand the action that may be taken to protect them against liability related to their service on [a] nonprofit corporation’s Board.” Two particular areas that should be examined are indemnification and insurance.

Indemnification is a term describing what the corporation might repay a director for expenses arising from a lawsuit against the director. Such indemnification is controlled by the laws of the particular state in which the corporation operates as well as by the bylaws of the organization. There are two types of indemnification:

“mandatory indemnification” and “discretionary indemnification.”

The prospective Board member should clearly comprehend what the rules are for his or her organization. The details of this very technical, legally complex subject are well beyond the scope of this short article. Suffice it to say that this is a critical topic for the prospective director and one that should be thoroughly understood before committing to an organization.

Even if the corporation has indemnification procedures, the ability of the corporation to fulfill those promises is dependent upon its financial circumstances. This is where insurance comes into play. The type of insurance you want to ask about is Directors and Officers (D&O) insurance. The coverage under D&O policies will depend upon the laws of the state involved and the terms of the individual policy offered. Prospective directors should understand what the terms of their policy are and should ideally be provided with a memorandum by the organization that outlines the D&O coverage being offered.

Deciding to join a Board is not a simple matter. There are quite a few questions and points to consider. Who would have thought when you got the invitation to join a local nonprofit Board that the process of deciding whether to say yes would be so lengthy and strenuous? Please don’t be discouraged. Most good nonprofits will pass all of the tests above with flying colors.

We commend you on your interest to give back to the community, and express our hope that your service on a nonprofit Board is both satisfying and rewarding. Whatever the process is to get you to the point of saying “yes,” once you do, the personal sacrifices and contributions you make will no doubt be much-appreciated and gratifying.

Download the full guide for Nonprofit Board Members

Related Party Transactions

dollar sign with a key in it

At its most basic level, a related party is one that is either directly or indirectly able to significantly influence or control another party. Thus, a related party transaction is a transaction that occurs between two or more parties with inter-linking relationships.

Specifically, in the nonprofit sector, a related party is generally a person who serves as a director, officer, or key employee of the nonprofit organization or any affiliate thereof; any other person who exercises the powers of directors, officers, or key employees over the affairs of the nonprofit corporation or any affiliate; or any relative of any of the preceding individuals. “Relative of an individual” refers to his or her spouse or domestic partner, ancestors, brothers and sisters (whether whole or half-blood), children (whether natural or adopted), grandchildren, great-grandchildren, or the spouse or domestic partner of brothers, sisters, children, grandchildren, and great-grandchildren. In addition, any entity in which any of the foregoing individuals have a 35% or greater ownership or beneficial interest, or, in the case of a partnership or professional corporation, a direct or indirect ownership interest in excess of 5%, constitutes a related party. It’s a long and convoluted list, for sure.

It is important to consider the potential ramifications of a related party transaction involving a nonprofit organization in which a related party has a substantial influence over the affairs of the corporation and the five-year look-back period of the federal statute that accompanies such an instance. Consider this admittedly-muddy example: The wife of the great-grandson of an individual who three years ago was a very significant donor to a nonprofit organization provides services for a fee to the organization. As a result of her affinity for the organization, these services are being provided at well-below market rate and the donor has had no other relationship with the organization. In this example, the donor (great grandparent) could be a “key employee” even though never serving as an employee because, as a very significant donor, the great-grandparent may have been in a position to exercise substantial influence over the affairs of the organization within the five-year look-back period. Therefore, a transaction of this nature is subject to the heightened requirements and procedures for related party transactions. The moral of the story here is to be mindful of these issues as they arise, and become educated enough to spot potential areas of risk and exposure.

Under the New York State Nonprofit Revitalization Act (“NPRA”), the belief is that a related party transaction is invalid and, therefore, unenforceable, unless the organization’s governing body determines that the transaction is fair, reasonable, and in the best interests of the organization. Under previous law, related party transactions gave rise to questions as to whether any director or officer involved was fulfilling his/ her duty of loyalty to the organization; however, such transactions, if approved and entered into, were valid, binding, and enforceable against the organization.

Oftentimes related party transactions can be benign. For instance, an organization purchases a laptop from a company that employs the wife of a staff member who has no decision-making ability regarding the purchase. However, that benign transaction can rapidly turn problematic if the appropriate steps are not followed — for example, if the laptop was not purchased at the best possible price and the transaction was not appropriately reviewed and approved.

Assuming that a related party has an interest in a proposed transaction involving the nonprofit organization, for the transaction to be valid, the related party must:

  • Disclose in good faith the material facts concerning his or her interest in the proposed transaction; and
  • refrain from participating in deliberations and votes on the proposed transaction.

Of course, a related party is allowed to provide information to the Board (or a Board committee) regarding the proposed transaction and to respond to questions. In addition, when evaluating a related party transaction, the organization’s governing Board must:

  1. Consider alternative transactions not involving a related party;
  2. approve the transaction by no less than a majority vote of the directors present at the meeting; and
  3. contemporaneously document the basis for approval.

The NPRA provides the New York Attorney General with a distinct authority to bring an action to enjoin, void, or rescind any related party transaction or proposed related party transaction that violates any provision of the law or that was otherwise unreasonable or not in the best interests of the organization at the time that the transaction was approved. Alternatively, the Attorney General has authority to seek other relief, including restitution, removal of directors or officers, or in the case of wilful and intentional conduct, payment of an amount up to double the amount of any benefit improperly obtained.

To help combat any potential conflicts within an organization, it is critical that a conflict of interest policy be developed, written, and implemented. While it has been an age-old element of good governance practices for the governing Board of an organization to formally adopt and require compliance with a written conflict of interest policy, the NPRA has codified this practice by requiring that all nonprofit organizations adopt a written conflict of interest policy that meets certain statutory requirements, including a requirement that the presence and resolution of conflicts of interest be documented in the organization’s minutes. Elements of a sound conflict of interest policy are discussed in greater detail within the Board Policies and Procedure section of this guide and a sample template can be found on our website at

Download the full guide for Nonprofit Board Members