Arm your nonprofit against financial threats

Arm your nonprofit against financial threats

February 22, 2024

Whether it’s inflation, trouble finding staffers in a tight labor market, or cybersecurity, nonprofit leaders have a lot to worry about. If making financial forecasts is more difficult than usual, consider taking measures that will fortify your not-for-profit’s position, regardless of the challenges.

Keep an eye on cash

Your organization may still be struggling following the pandemic. Or perhaps tax law changes have led to reduced donations from individuals. The fact is, financial reserves have taken a hit across all types of nonprofits. And, for some organizations, fundraising is falling short of expectations. These factors make effective cash flow management essential.

Nonprofits should prepare cash and expense projections quarterly, monthly, and possibly even weekly. To avoid being caught off guard, your finance committee needs to review regular reports on funding sources — particularly those that have dropped significantly or are in jeopardy of vanishing altogether.

Prioritize UBIT compliance

Proper compliance with unrelated business income tax (UBIT) rules is important if you’re to avoid costly issues later. Since the passage of the Tax Cuts and Jobs Act, nonprofits must calculate UBIT separately for each unrelated business. Among other things, the regulations require you to identify each separate unrelated trade or business with the appropriate two-digit code in the North American Industry Classification System.

If your organization has multiple unrelated trades or businesses, you must allocate deductions among them using a “reasonable basis” standard. Certain types of investments can be treated as single trades or businesses.

Game potential scenarios

If it isn’t already part of your process, your finance committee (and appropriate staff) should initiate or “game” different financial scenarios. Assemble budgets for multiple revenue situations your organization could face — typically, best case, worst case, and somewhere in between. Ask how your nonprofit could cover the projected expenses in each situation.

You also should scrutinize your nonprofit’s recent fiscal year’s financial performance for negative indicators by comparing metrics with previous years or other benchmarks. Because 2020 and 2021 were “unusual” years, you may want to reach back farther when preparing five- and 10-year averages. Review conditions that were present in the years your nonprofit seemed to have struggled and determine whether they still threaten your organization and could be a problem in the future.

Run efficiently 

For now, the U.S. economy is generally healthy and there’s no reason to assume that your nonprofit will face new economic-related challenges soon. But you should always try to operate efficiently, which, in addition to the previous three suggestions, means minimizing expenses and monitoring budgets closely. If you need help, contact us.

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