Industries Archives

Promoting good governance with a board policy

Non-Profits|May 29, 2025

Your nonprofit’s board of directors should enjoy the role, the opportunity to support a cause close to their hearts and the camaraderie of working with others who’re dedicated to achieving the same mission. But the job can be challenging. For example, boards must take ethical and practical action in times of crisis and always avoid conflicts of interest. You can help your directors navigate obstacles and make appropriate decisions with a board governance policy.

Start with a purpose

Begin your board governance policy by explaining its purpose. In general, your policy should provide a framework for making decisions consistent with your charitable mission. Be sure to include your nonprofit’s mission statement, a common thread that weaves through directors’ obligations, in your policy. Another purpose is to inform board members of their fiduciary duties under state law and obligations related to your nonprofit’s federal tax exemption.

From there, your policy should describe director responsibilities and obligations, emphasizing that the board can oversee all organizational operations. This is a good place to differentiate between board member and staff responsibilities. Also, the policy should advise board members that they may rely on information and reports from staffers and professional advisors they believe are dependable and competent in particular areas.

Recognize fiduciary responsibilities

The heart of your governance policy should explain board members’ core fiduciary duties, starting with their duty of care. This duty stipulates that directors must exercise reasonable care in all decision-making and not incur unnecessary risk. When performing their duties, board members should act in good faith and in a manner they believe to be in your nonprofit’s best interest.

Duty of care implies “reasonable inquiry,” meaning directors must ask questions and demand information that allows them to make informed decisions. They don’t have to be financial experts, but they should:

Understand basic financial terminology,
Be able to read financial statements and judge their soundness, and
Know how to recognize red flags that signal a possible change in your nonprofit’s financial health.

As stewards of public trust, they also have a duty of loyalty. In a nutshell, directors must always act for the good of your organization. Mandate that they fully comply with your nonprofit’s code of ethics and conflict-of-interest policy. And state that they must refrain from taking advantage of business or personal opportunities that become known because of their position on your board.

Support your effort

Some nonprofit boards have a governance committee that oversees organizational policy and helps ensure that the organization complies with its governing documents. A governance committee can operate effectively without a formal policy as long as it’s able to coordinate the board’s manner of governing.

A board handbook is another tool you might consider. It details the board’s size, term limits, and required committee structure (although some of these responsibilities may be found in your bylaws) and includes other policies that relate to the board and its oversight of your organization.

Finally, professional support is critical to good governance. If your board is unsure how to act in a particular situation — or simply needs assistance formulating a governance policy — consult your financial and legal advisors.

Mine your nonprofit’s audit report for good suggestions

Non-Profits|May 22, 2025

Only some not-for-profit organizations are required to conduct independent annual audits. For example, the federal government and many states mandate an audit if a nonprofit receives more than a specific amount in charitable donations. Some grantmakers and lenders may do so as well.

But even if audits aren’t required, they’re a good idea for all organizations. They can alert you to critical shortcomings, promote transparency and help reassure donors and grantmakers that your nonprofit is taking steps to reduce risk. What’s more, recommendations contained in your audit report can be a treasure trove of information on how to strengthen internal controls.

Stronger segregation of duties

Better segregation of staff duties is a common auditor recommendation, especially in small organizations. Let’s say, for example, that an auditor discovers a nonprofit’s office manager makes bank deposits, reconciles bank statements and mails vendor payment checks. The manager also has check-signing authority for purchases under $500 and posts all cash receipts and disbursements to the general ledger.

Giving one person, no matter how honorable and trustworthy, all of these duties is a recipe for fraud or error. The idea behind segregation of duties is to avoid putting an employee in a position where he or she could both perpetrate and conceal fraudulent acts or make mistakes that could easily go undetected.

In this case, the auditor’s recommendations might include asking the bank to directly mail the monthly statements (with images of the cleared checks) to the executive director or treasurer. The recipient would then open and review the statements before giving them to the office manager. An alternative is to offer those with oversight responsibilities “read-only” access for online banking records.

Better documentation

Sometimes, an audit might show that an organization has adequate internal controls, including various checks and balances. However, documentation of these controls may not be sufficient.

For example, an audit might reveal that an organization isn’t properly documenting its authorization of expenditures. Auditors could recommend, among other measures, that the nonprofit’s managers sign off on monthly bank reconciliations.

Look for ideas

Your executives and board should carefully review your auditors’ findings after an annual audit and correct any deficiencies or weaknesses they identify. But even if the auditors don’t specifically mandate changes, you should pay attention to recommendations and mine the report for policies or procedures that could use improvement. Contact us for help bolstering your internal controls.

Should your nonprofit outsource to an AMC?

Non-Profits|May 8, 2025

If you’re like most nonprofit leaders, you want to dedicate your time to mission-critical work. But if you run a relatively new nonprofit with a bare-bones staff, you probably need to pay considerable attention to administrative and business tasks. Hiring an association management company (AMC) could be a cost-effective solution for your time- and staffing-challenged organization.

Sharing overhead costs

AMCs are paid to manage a nonprofit’s business, leaving executives and staffers to take care of their organization’s mission. An AMC’s clients — generally an array of nonprofits, including trade associations, professional societies and charitable organizations — share overhead costs.

Many AMCs serve as the contracting nonprofit’s headquarters, providing it with significant savings on space and equipment costs. Perhaps your nonprofit has employees to fill essential operations roles, but you need regular attention paid to other critical functions. These could include strategic planning, membership development, employee benefits administration or IT management. You pay only for the services you need, generally as a flat fee or monthly retainer.

How do you know if your nonprofit might benefit from engaging an AMC? First, conduct an organizational audit to evaluate whether your nonprofit keeps up with its administrative needs. If your current staff doesn’t have the time, skills or tools to address these needs, you have a few options: Hire additional employees, reduce activities or engage an AMC that offers the expertise you need.

Meet the candidates

If you decide to go the AMC route, you’ll need to identify potential candidates. One possible starting point is the AMC Institute, which provides accreditation to qualified AMCs and has a search tool for finding them on its website.

To simplify the evaluation process, choose the top three or four firms based on the types of services they provide, years of experience and cost. Also determine if one AMC can handle all of your nonprofit’s needs.

Then conduct interviews in person or via video conference. Ask the AMCs about their work with current clients and the length of those relationships. Also question potential AMCs about the specific services you require and their level of experience and expertise managing such services. Be sure to review each AMC’s references — paying special attention to references from organizations similar to your own — before engaging one.

Help making the decision

AMCs are particularly useful for nonprofits that are growing rapidly. Maybe you intend to hire an employee to manage a specific function but are unable to justify the expense right now. An AMC might fulfill your short-term need. We can help you conduct an organizational audit to determine where such needs lie and how an AMC might help.

“Privacy, please” when your nonprofit stores sensitive data

Non-Profits|May 1, 2025

How well does your nonprofit protect the privacy of donors, staffers, clients and volunteers? It’s an important question because failure to protect personal data can expose your organization to costly lawsuits, regulatory fines and reputational damage.

Initial assessment

There are two main types of risks associated with inadequately protected personal data. One is cybercriminals hacking your IT network and stealing data to perpetrate identity theft or other fraud. Another is dishonest employees or contractors having inappropriate access to data such as donors’ credit card numbers or colleagues’ HR records. At a minimum, you must protect against these threats. Depending on your mission, you may need to safeguard additional sensitive personal information.

Start by reviewing your current operating practices to understand how, where and why personal data is collected, used, disclosed and retained. A thorough review that includes HR and IT managers should highlight ways you may be putting information at risk. For example:

Are you retaining unnecessary or outdated personal data?
Are you adequately restricting access to confidential details, such as the financial information of supporters or medical records of patients (in the case of a health care charity)?
Do you store both physical and digital data in a secure location and properly dispose of them when you should?

Answers to such questions can help you identify areas for improvement.

Enhanced efforts

Your organization needs robust cybersecurity software that you update as soon as new versions become available. You also need to educate staffers about phishing scams and other techniques fraudsters might use to gain entry to your network. To further enhance your privacy efforts:

Always use encryption. When collecting, storing or transferring sensitive data, employ HTTPS and SSL/TLS encryption protocols to keep unauthorized eyes from viewing it.

Collect only what you need. Many nonprofits capture more data with their various apps than they actually require. If, for instance, your analytics software retains extensive tracking data from website visitors, review the data to ensure such collection is necessary. If not, turn off that feature or use aggregated or anonymized data tools. Be sure to disclose what data you collect and enable visitors to opt out.

Properly destroy it. Establish a policy that outlines how long you’ll store certain data. The Privacy Management Framework of the American Institute of CPAs suggests keeping data only “for the time necessary to fulfill the stated purposes” of any agreement. Paper records should be shredded and digital records should be “erased” or “wiped” using reliable software.

Develop a donor policy. Post a privacy policy prominently on your website and in solicitation materials that explicitly states you won’t sell or trade a donor’s personal information without their consent. Even in cases where it’s legal or acceptable to share donor lists, for the sake of trust and goodwill, offer supporters a simple method to opt out.

Take other steps. Your nonprofit may need to consult legal counsel to ensure compliance with state-specific and international data collection laws. And, depending on your nonprofit’s niche, you may be subject to other laws, as in the case of health care organizations and HIPAA.

Financial costs

The stakes couldn’t be higher. If your nonprofit is found to have irresponsibly handled private information, it could result in regulatory fines, litigation and withdrawal of donor support. Contact us for more information about reducing such risk.

Who does what in your nonprofit organization?

NEWS|April 22, 2025

Large, long-established not-for-profits generally know where the duties of their staffers end and those of their board members begin. But smaller or newer organizations don’t always understand the limits of each “lane.” To avoid confusion and misunderstandings — and help ensure efficient operations — employees and board members need explicit guidelines about their roles and responsibilities.

A good start

Begin educating staffers and board members at the onboarding stage. A thorough orientation process helps them understand their place in the big picture. Provide individuals in each group with written descriptions of their responsibilities and offer specific examples that illustrate the scope of their duties.

For example, board members generally provide financial oversight and ensure resources are used responsibly to further the organization’s mission. In practical terms, this means your board should regularly review financial statements for accuracy and approve budgets, ensuring they align with your nonprofit’s strategic objectives.

Staff responsibilities vary according to their positions, of course. But in general, nonprofit employees carry out the mission with programs and projects, communicate with stakeholders, and raise funds. They might, for example, be responsible for preparing financial statements and budgets for the board, but they can’t approve them or put them into action without board input.

Reporting structure

Board members need to keep in mind that they don’t have the authority to direct staffers. Staffers are partners with board members and they report to their nonprofit’s executive director.

If, for instance, a board member wants an employee to compile a report, the request should go through the executive director. The executive director ultimately manages staff workflow and usually is aware of any competing priorities — or can communicate with the employee’s manager to assess workload. Similarly, board members with employee-related suggestions or complaints should direct them to the executive director, not the staff.

Walking in their shoes

This doesn’t mean board members should have no contact with staffers! To the contrary, board members should take steps to glean a better understanding of staffers’ activities. For example, they can temporarily shadow employees as they go about their duties. (Just make sure staffers and the staffers’ managers approve any “shadowing” plan first).

Program managers and other senior staff can enhance their understanding of the board’s role by attending board meetings. There they can discuss developments in their areas and answer board questions. Such direct interaction helps board members get to know employees and gain insight into the challenges they face and opportunities that might merit future board action.

Act before an incident

Sometimes nonprofits don’t realize they have a roles and responsibilities problem until there’s an incident — such as an executive director making a unilateral strategic decision or a board member assuming a staffer “won’t mind” helping on a board project. Before that happens, clearly establish boundaries between these two critical groups. Contact us with questions about the financial aspects of nonprofit governance and management.

7 ways to cut nonprofit costs rather than staffers

Non-Profits|April 8, 2025

It wasn’t long ago that the not-for-profit sector was struggling to find enough staffers to hire. Now that many organizations are losing federal grants and facing budget shortfalls, they may be considering layoffs. If you’re in this situation, you probably don’t want to lose valuable employees — and the mission-critical programs they help run.

There may be another option — cut expenses. Here are seven ideas to consider:

1. Suspend benefits and wages. Before laying off workers, consider reducing hours or suspending some employee benefits. You might trim wages or management-level salaries. Staffers may object to such measures, so be careful to explain that you’re trying to prevent layoffs. If possible, provide a timeline or benchmarks that will potentially trigger a “return to normal.”

2. Send staffers home. Allowing employees to work remotely may lower overhead costs for the leased space, utilities, insurance and maintenance you’ll no longer need to pay for.

3. Renegotiate your lease. If you rent and need your workers on-site, approach your landlord about renegotiating better lease terms, especially if you’re nearing the end of the lease’s term. Many commercial real estate markets have failed to recover from COVID-19 vacancies, and landlords may be more amenable to rent reductions, abatements or holidays.

4. Consolidate sites. Nonprofits that run more than one site might be able to consolidate facilities into a single location and shutter the rest.

5. Monetize real estate. If your nonprofit owns office buildings or other facilities, consider selling, downsizing or renting unused space to other organizations.

6. Review vendor contracts. If you’ve consolidated worksites or shifted to remote work, your organization may have less need for some goods and services. But before you terminate any contracts, check for penalty or fee provisions that could make canceling costly. Look into consolidating purchases of goods and services with fewer vendors to obtain discounts. Also, be assertive and ask vendors to offer nonprofit discounts or donate their services.

7. Partner up. Think about entering cost-sharing agreements with other organizations, nonprofit or not. You might also want to merge with another charity that shares or complements your mission and programming.

If you’re facing funding cuts and a possible budget crisis, now isn’t the time to go it alone. We can help you slash expenses as well as find new revenue sources. Contact us.

Nonprofit board members: Watch for financial warning signs

Non-Profits|April 1, 2025

In addition to widespread federal funding cuts, many not-for-profit leaders are concerned about a possible economic downturn. If you’re a on the board of directors for an organization whose finances aren’t in good shape, its ability to fund critical programs — or even remain operational — could be severely undermined. You and the rest of the board play a vital role in keeping your nonprofit in fighting shape. So keep your eyes open for such warning signs as:

No budget — or a poor one. Having no budget shows an undisciplined approach to fiscal matters. Your board should require a budget and ensure it’s in line with board-developed and approved strategies.

Unexplained variances. After the budget has been approved, the board needs to compare it to actual results to identify discrepancies. Some variances are bound to happen, but your nonprofit’s staff should have reasonable explanations for them.

Unusual spending. Board members must be wary of overspending in one program that’s funded by another. Dips into your nonprofit’s reserves, unplanned borrowing or raiding your endowment might mark the beginning of a financially unsustainable cycle.

Sloppy statements. Inconsistent financial statements — or statements that aren’t prepared using U.S. Generally Accepted Accounting Principles (GAAP) or another accounting basis — can lead to poor decision-making. They can also undermine your nonprofit’s reputation because they may be read as a sign of lax internal controls, mismanagement or fraud. Your board must make sure statements are prepared properly.

Late financials. Ideally, board members should receive financial statements within 30 days of the close of a period. Larger organizations should generally engage outside CPAs to perform annual audits, with the whole board or audit committee selecting the auditing firm.

Stakeholder misgivings. Not all red flags are found in a nonprofit’s numbers. For example, if long-standing, passionate supporters express doubts about your organization’s finances, board members need to take them seriously. Your board also should note if the development staff is reaching out to historically major donors outside of the usual fundraising cycle.

Executive director overreach. Sometimes, an executive might insist on choosing an auditor or might make strategic or spending decisions without board input and guidance. Such power grabs could signal dishonesty or financial instability.

If you’re a board member, keep in mind your fiduciary responsibilities, which require identifying and acting on financial warning signs. Contact us for assistance. We can review your budget and financial statements and suggest strategies for dealing with an unpredictable future.

Making cost-allocation decisions for your nonprofit

Non-Profits|March 25, 2025

Cost allocation probably isn’t your favorite task — particularly if your not-for-profit has many activities. Yet the process is critical because donors and funders want to know how your organization uses its financial resources. In addition, you likely need to comply with Generally Accepted Accounting Principles (GAAP), which are determined by the Financial Accounting Standards Board (FASB). Let’s look at some FASB standards that might apply to your cost allocation.

Nature and function

FASB standards require nonprofits to include in their financial statements an analysis of expenses by nature (such as salaries, rent and utilities) and function (program services and supporting activities). Your organization must present information about expenses in one location on its statement of activities, either in the financial statement notes or a separate financial statement.

Properly allocating costs between program services and supporting activities is critical. According to FASB standards, program services are activities that result in goods and services being distributed to beneficiaries, customers or members that fulfill your nonprofit’s purpose or mission. They’re your nonprofit’s major priority.

3 categories

Activities that don’t qualify as program services are supporting activities. You need to break down these activities into three categories:

1. Management and general services. These items aren’t identifiable with a single program, fundraising activity or membership activity, but are indispensable to your nonprofit’s existence. They generally include oversight and administration, budgeting, human resources and obtaining fee-based revenues.

2. Fundraising. This encompasses activities involved in soliciting donations from individuals, foundations, government agencies and others.

3. Membership development. This refers to recruiting prospective members, collecting membership dues and managing member relationships. You should state membership development separately in your financial statements if significant benefits or duties are associated with membership.

Nonprofits often engage in fundraising activities that also have elements of another function. For example, a special event or direct mail campaign might include both fundraising and program components. In this case, you would allocate such costs between fundraising and the other functions if certain criteria related to purpose, audience and content are met. If those criteria aren’t met, you’re required to report all costs of the joint activity as fundraising.

When it comes to the management and general category, don’t treat it as a catchall. Some expenses that might seem like overhead — such as mortgage interest on a building — should be allocated to specific programs or supporting services whenever possible. Also, certain costs that appear to relate to management and general function might belong to more than one function. For instance, insurance could cover property that houses multiple functions or a single program. What’s more, recording too much expense to management and general can result in under-allocation to other functions.

A complicated process simplified

FASB standards require nonprofits to disclose the method they use to allocate expenses. But guessing and estimates aren’t allowed. That’s why it’s important to work with knowledgeable accounting professionals. Contact us. We can help you simplify the process with an effective cost-allocation plan.

Preparing for a financial crisis? Build up operating reserves

Non-Profits|March 13, 2025

You never know when your not-for-profit might experience a financial blow. With the current efforts in Washington to slash expenses, some nonprofits have already lost federal funding and more may lose it in the near future. But that’s not the only risk. A significant grant from a foundation or state government might not be renewed, or a major donor could decide to stop supporting your organization. If such uncertainty has ever forced you to suspend services and scramble to implement Plan B, you probably understand how important operating reserves can be.

This financial cushion can help you manage acute shortfalls. If your nonprofit’s operating reserves are low or nonexistent, start looking for ways to build them.

Written reserves policy

A formal written reserves policy is a crucial first step. Among other things, your policy should set the target amount to hold in a separate fund. Although no universal benchmark applies, six months of operating expenses will be sufficient for many organizations. Incorporate your risk appetite and current financial position into the target calculation. In general, greater risk calls for higher reserves. So, for example, if your organization heavily relies on a handful of funding sources, assess the shortfall if one or more sources were to disappear overnight.

Avoid setting your reserves target too high, though. Donors and grant-makers generally don’t favor stockpiling when funds might otherwise be used to pursue your mission. Your policy also should establish triggers for when your organization can dip into its reserves.

Windfalls and budget items

Next, consider how you’ll reach — and maintain — your target amount. If you’ve received increased donations over the past couple of years, you might be able to fully fund your reserves with unrestricted net assets. Other sources include unexpected windfalls such as large bequests.

Most nonprofits, however, need to include a line item for reserves in their budgets. This amount shouldn’t hinder day-to-day operations, but it will help you begin to make real progress toward your reserves goal. It may be necessary to cut expenses, cancel projects or divest investments to free up funds.

Remember to leave illiquid fixed assets (buildings and equipment), endowments and temporarily restricted funds out of the equation. Keep in mind that budget surpluses aren’t necessarily available to fund reserves because they might include funds already earmarked for future expenses.

Enlist support

How long it will take to build your nonprofit’s reserves depends on your goals and resources. But it’s critical to enlist the support of your board and leadership team so that contributions to the reserves fund become a priority. We can help educate decision-makers, as well as advise your organization on an effective operating reserves policy.

Lost and found: Regaining your nonprofit’s tax-exempt status

Non-Profits|March 4, 2025

The IRS regularly revokes the tax-exempt status of not-for-profits — mostly for failing to file annual information returns. Losing your exempt status can be devastating. Donors won’t be eligible to deduct contributions to your organization, grant-makers probably won’t even consider your applications and you may become retroactively liable for taxes. So the sooner you regain your status, the better. Here’s how.

Filing for exemption recognition

If your nonprofit is required to file an annual Form 990, 990-EZ or 990-N (e-postcard) and it fails to do so for three consecutive years, your exempt status will automatically be revoked. However, you can potentially regain it. First, make sure your organization is registered with pay.gov.

Then, you’ll likely need to submit one of these electronic forms:

Form 1023, “Application for Recognition of Exemption Under Section 501(c)(3) of the Internal Revenue Code,” or
Form 1024, “Application for Recognition of Exemption Under Section 501(a) or Section 521 of the Internal Revenue Code.”

Smaller organizations may be able to have their status retroactively reinstated effective from the revocation date. To qualify, your nonprofit must have been eligible to file either Form 990-EZ or 990-N for each of the three consecutive years and not have previously had its tax-exempt status automatically revoked. To apply for retroactive reinstatement, file the applicable form within 15 months or the later date of 1) the IRS revocation letter, or 2) when the IRS posted your nonprofit’s name on its website.

If you aren’t eligible for retroactive reinstatement, your organization’s activities between the revocation date and reinstatement date will be considered taxable. This includes donors’ contributions.

Supporting your request

When you file for recognition of exemption, you’ll attach a detailed statement that provides reasonable cause for failing to file required returns in each of the three consecutive years. You should state the facts that led to each failure, the continual failures and the discovery of the failures, and describe the steps taken to avoid or mitigate them.

In addition, you’ll need to include:

Statements that describe safeguards put in place and steps taken to avoid future failures,
Evidence that supports all material aspects of those two statements,
Properly completed and executed tax returns for all taxable years during and after the three-year period your organization failed to file, and
An original declaration dated and signed by an authorized person in your organization such as an officer or director.

Finally, you’ll be required to pay a filing fee.

Qualifying again

Assuming you file correctly and submit all required paperwork that shows your organization qualifies, it’s likely to regain its tax-exempt status. At that point, the IRS will issue a new determination letter and update its records that confirm your eligibility to receive tax-deductible contributions.

If you don’t qualify for retroactive reinstatement, generally, the effective date of reinstatement will be the date your exemption application was submitted. But if your nonprofit is retroactively reinstated, you may be able to request an abatement of any penalty the IRS may have assessed.

Essential help

If your tax-exempt status is revoked and you’re unsure how to proceed, contact us. In addition to helping you file for reinstatement, we’ll assist you in establishing procedures for future compliance.

Promoting good governance with a board policy

Mine your nonprofit’s audit report for good suggestions

Should your nonprofit outsource to an AMC?

“Privacy, please” when your nonprofit stores sensitive data

Who does what in your nonprofit organization?

7 ways to cut nonprofit costs rather than staffers

Nonprofit board members: Watch for financial warning signs

Making cost-allocation decisions for your nonprofit

Preparing for a financial crisis? Build up operating reserves

Lost and found: Regaining your nonprofit’s tax-exempt status

Our Services

Our Industry Expertise

Hunt Valley Office

Bel Air Office

Elkton Office

Latest Tweets