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Annual Reports – Bringing Creativity to the Year-End Ritual

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For most Americans, the date June 30 represents the early days of summer and the promise of warmer weather. But for many nonprofit organizations, it marks the end of the fiscal year. Like fireworks in July or turkey in November, this milestone also comes with its own set of traditions—most of them financial in nature.

Here is a partial fiscal year end checklist:

  • complete next year’s budget
  • process expense reports
  • make sure that all payments are out and all receivables are in
  • complete and print grant forms and financial statements
  • prepare your form 990

But before you completely turn the page on your fiscal year, there is one more item you’ll need to check off your list—your annual report.

Unlike the other year-end responsibilities, your annual report allows you the opportunity to break from the routine and get more creative. It is, in reality, a marketing piece, loaded with enormous potential to inspire your donors, volunteers and employees. It is where you describe all that you achieved during the year and illustrate exactly why your mission matters. So why not create a report that really shines?

Here are four tips to help you take this year’s annual report to a new level:

  • Write an engaging, executive message. In 300 to 400 words, start with the overall focus of the year. Perhaps you had a theme that tied all of your accomplishments together. Use a conversational tone that is to the point, easy to read, and grabs the reader’s attention. Express gratitude for the people who helped you reach your goals, and briefly describe your aspirations for the coming year. Include a clear and compelling call to action.
  • Consider an alternative format. You don’t have to stick with the standard PDF file on your website. Instead, a short video may be a more effective medium for sharing success stories and communicating with your constituents. Click here for an example of a video report from VolutneerMatch.com that really demonstrates all they are doing to build a stronger community. Videos take more time and effort to produce, but are more likely to be seen than traditional formats. You could also condense your report into a postcard (example) or expand it into its own microsite (example) depending on the needs and preferences of your audience.
  • Use dynamic visuals. Colorful graphs and charts will more effectively convey the data than running text. Where your revenue comes from, where it is spent, and information from your financial statements are all good topics to communicate with visuals. In fact, your entire report can be delivered as an infographic. A quick search on Pinterest reveals a number of examples that demonstrate how—in the hands of a skilled graphic designer—your annual report can really come to life. Click here to see.
  • Tell stories. Nothing is more inspiring than the real-life stories of the people and the communities you have served. Their faces, their words, their experiences are the most powerful tools for engaging donors and showing the impact that your organization is having. In this report from the Girls Inc. national office, participants describe how the program has positively changed their lives, giving donors a clear view of what their contributions mean to people in their community.

If you need more inspiration, here are some additional examples that might spark your imagination:

Transparency – A Delicate Balancing Act for Nonprofits

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In today’s nonprofit landscape, charitable organizations are under tremendous pressure to maintain a high level of transparency in their operations. By sharing information, a nonprofit is perceived to be more trustworthy, more accountable to its constituents, and hopefully, more deserving of donations.

Also part of the landscape, are organizations like GuideStar and the Foundation Center that collect detailed information about nonprofits and offer their findings to the public at no cost. Their goal is to collect and present detailed information about nonprofits in an organized way so that donors can make informed decisions and comparisons to guide their giving. So for the nonprofit, there is a lot at stake when it comes to building a reputation of openness and transparency.

But how do you ensure that you are providing enough information to the public without going too far? How do you ensure your transparency doesn’t backfire? Where is the balance? Here are some basic guidelines that can help:

DO: Post a complete and accurate Form 990 on your website. Besides being a legal requirement, your Form 990 is the single most important tool for building trust and confidence among your constituents.
DON’T: Publicize the names of the donors that are listed on your Form 990—this information is confidential. Your donors have the right to remain anonymous until you have their express permission to share their identities.
DO: Share your Form 1023 that states your organization’s mission. It also lists the name, title, address and compensation of your officers, directors, trustees, employees, or contractors that receive greater than $50,000 per year.
DON’T: Provide the private street address for the individuals you list on your Form 1023. The IRS now allows the use of a mailing address in lieu of a street address in order to protect the privacy of employees.
DO: Disclose the minutes of board meetings as well as meeting notices if your organization operates in a state that has sunshine laws.
DON’T: Share the minutes of your executive meetings as these sessions often include discussions about confidential matters.
DO: Provide all audited financial statements per your state requirements.
DON’T: Disclose your organization’s financial budgets. A budget is merely a plan—a projection for the future that may or may not come to fruition. It is more important to share your year-end financial statements that reflect how your nonprofit ACTUALLY performed.

“I find that when you open the door toward openness and transparency, a lot of people will follow you through.” Kirsten Gillibrand, US Senator

A 360-Degree Look at Giving Circles

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“It is one of the beautiful compensations of life that no man can sincerely try to help another without helping himself.” This quote by Ralph Waldo Emerson eloquently highlights the internal reward that we naturally experience as a consequence of helping others. Perhaps this internal reward is the reason that more than ever, people are looking for opportunities to be engaged on a deeper, more meaningful level with the issues that matter to them. And perhaps it also explains the rising popularity of giving circles over the last decade, particularly among minority donors.

What are giving circles?

Giving circles are a relatively new form of philanthropy where groups of people pool their financial resources together in order to have a greater impact on a specific cause such as education, environmental protection, or women’s health. Collectively, the members decide how the money will be distributed to best achieve their goals. More so than other types of philanthropy, giving circles focus on providing members with a rewarding, hands-on, communal experience through collective decision making and educational activities. This personalized approach to philanthropy appeals to many donors who want to do more than write a check. These donors wish to actively participate in the circle’s grant making functions and build social networks of like-minded individuals.

How do giving circles fit into the nonprofit landscape?

Giving circles may be large or small, formal or informal, and are typically hosted by a nonprofit foundation. For a fee, the host organization provides support such as administrative resources, operational guidance, and instant credibility within the community. More importantly, the host organization lends its 501(c) status, thereby eliminating the need for the giving circle to establish its own nonprofit structure with the IRS. This contribution alone significantly reduces the administrative burden on the members of the giving circle, allowing them to focus more on more fulfilling, mission-related activities.

Should my nonprofit host a giving circle?

Giving circles have the potential to bring value to the nonprofit in a number of ways including: access to new volunteers, a renewed sense of enthusiasm and awareness in the community, and the ability to have a broader impact in its mission. In an article by Angela M. Eikenberry, nonprofit professionals reported that beyond financial contributions, the members of the giving circles and their connections to more qualified leads can improve the overall caliber of the host organization. (Source)

There are however, a number of issues that nonprofit boards need to consider to ensure that hosting a circle is a positive, mutually beneficial experience. Here are some important questions nonprofit leaders should raise:

  • Does this align with our mission?

Every nonprofit has an official mission statement that appears on their Form 1023, a document that is submitted to the IRS to achieve nonprofit status. In order to maintain nonprofit status, the organization’s activities must align with its stated mission. Activities that fall outside the scope of the mission (no matter how noble the intention) can put the nonprofit at risk with the IRS with penalties that can range from unexpected taxes to loss of exempt status. In addition, engaging in activities unrelated to the mission statement can jeopardize a nonprofit’s good standing among its constituents.

  • What is the full nature of the commitment?

It is important for the leaders of the nonprofit and giving circle to clearly communicate the agreed upon level of support in terms of resources, data management, communication, and decision making authority. Documenting the roles and responsibilities will go a long way to ensure the success of the relationship.

  • What are the financial implications?

While many host organizations collect an administrative fee, these typically do not fully cover operating expenses of hosting a circle. In addition, some hosts offer matching funds to either seed a new giving circle or to support a circle on an ongoing basis. These and any other financial commitments should be clearly defined for the benefit of both groups.

The good news for the philanthropic community is that there is a trove of people who are looking for more meaningful giving experiences in the context of their 21st century lives. Giving circles, when supported by host organizations, provide a unique outlet that benefits the donor, the nonprofit, and the community—a win-win-win all around.

Additional Reading:

Seven Tips That Make Creating a Budget a Little Easier

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Seven Tips That Make Creating a Budget a Little Easier

June 30 marks the end of the fiscal year for many nonprofits. In the weeks prior, these organizations are busy setting the strategy for the year ahead and creating a budget that will help them achieve their mission goals. But creating (and passing) a budget in a timely manner isn’t as easy as it may seem. It requires strategic planning, resources, and project management skills that many organizations fail to employ. If you are in the middle of your budget season, or want to make some improvements to your process next year, here are seven tips to consider that will simplify the process for everyone involved:

  1. Give yourself plenty of lead time. Plan to have the final budget approved at least two months before the beginning of the new fiscal year, and give yourself at least two to three months to create the new budget. It is important to allow enough time to carefully research current expenses and contracts, seek competitive bids from suppliers, and bring leaders together for review, feedback, and discussion.
  2. Document roles and responsibilities. This is where your project management skills come into play. Develop a spreadsheet to track all of the tasks that are required for your budget process along with the names of those responsible for each task and their deadlines. A formal, socialized document will keep everyone accountable for providing their deliverables according to the project timeline and will keep you on schedule.
  3. Engage the right people. Naturally, budget committees should be comprised of financial leaders and senior staff, but your program directors can also provide invaluable insight on how budget cuts or increases will impact the quality of your programs, and ultimately, your organization’s ability to achieve your mission goals. Their input provides a perspective beyond dollars and cents, so it is a good idea to allow program directors to provide budget worksheets that can later be reviewed and vetted by budget committee members. Engaging staff at all levels will go a long way in gaining buy-in and developing good will on your team.
  4. Be realistic about revenue projections. Create detailed worksheets that outline the different kinds of revenue by source: earned revenue, contributed revenue, grants, contracts, in-kind contributions, etc. and identify whether these sources of income are reliable or transient. It is a best practice to establish “what-if scenarios” to map out how you will modify your programs if any of these forms of revenue are lower (or higher) than expected.
  5. Carefully evaluate expenses. Look at last year’s documents to identify excesses or shortages and how these will be managed in the new fiscal year. Determine fixed versus variable expenses and how your reliable income aligns to fixed expenses. A financial consultant can help you decide if and when a deficit, a surplus, or a balanced budget is the best strategy for your unique, organizational goals.
  6. Develop a summary budget. It isn’t always necessary or expedient to provide your board of directors with a detailed budget that gets too deep “into the weeds.” Consider creating a high-level version of the budget where items like auto insurance, liability insurance, etc. can be lumped into a single category. These items can be linked in a spreadsheet to the detailed budget when more granular information is required.
  7. Summarize your approach. Provide a summary statement that explains the approach your budget committee took in creating the budget – your assumptions, your expectations, and your plans for dealing with variances. This context will ensure that your budget is perceived as more than just numbers on a spreadsheet, but as a carefully constructed, strategic plan for achieving the goals you’ve set for the upcoming year.

Hopefully, by July 1 your staff will have begun implementing your new budget and will have refocused their attention to executing the new year’s programs. By becoming operationally efficient at creating a budget (or any other administrative task) you empower your team to do more in the communities you serve. Take some time to review your budget process and how these recommendations translate to greater impact for your mission.

The Three Essential Duties of a Nonprofit Board Member

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In the first few weeks of any new year, there is a ritual among nonprofit organizations that is as regular as the changing of the guards at Buckingham Palace.  Boards of directors come together to map out the year ahead, review budgets, and welcome their newly elected members.  Typically, new members have been selected because of their potential fundraising abilities or their expertise in a particular field. It is the board’s hope that the new director will bring a fresh perspective and help further the organization’s mission. But as power is transferred from the old directors to the new, it is important for the newcomers to fully understand the responsibilities behind the roles they are accepting—i.e., how to effectively guard their posts.

There are three basic principles of nonprofit corporate law that can help serve as a moral compass and govern the decisions of a board member throughout his or her term.

  1. Duty of care. Duty of care refers to a board member’s responsibility to act in the same manner that any other “reasonable” person might act in the same circumstances. It implies that a person must make decisions in good faith and use rational judgment. This can also include taking precautions to avoid any reasonably foreseeable harm that might come to others or to the organization.
  2. Duty of loyalty. Board members have a duty of loyalty, or a responsibility to always act in the best interest of the organization without any conflicts of interest. This can become a gray area for many board members who own businesses or hold positions in companies that stand to gain from the activities of the nonprofit. It is always a best practice to make any potential conflicts of interest known to the board so that the appropriate approval processes can take place and there is never a perception of self-dealing.
  3. Duty of obedience. The duty of obedience refers to a board member’s obligation to remain faithful to the organization’s mission statement. Board members have been entrusted by their constituents to ensure that resources are being used to accomplish the organization’s stated goals and not being diverted to other purposes. The mission statement of any 501(c) organization can be found on their Form 1023.

The first meeting of a new year is an excellent time for boards to dust off their Form 1023 and make sure that all of their planned activities align with their original mission statement. It is also a time for reviewing the legal and fiduciary responsibilities of the board so that they can effectively guard and protect the organizations they serve—just like the guards at Buckingham Palace, but without the bearskin caps.

 

Five Tips for Greater Financial Sustainability in 2015

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It is an incontrovertible truth. Nonprofits cannot survive on good intentions alone. No matter how noble the cause, every nonprofit must first establish a certain level of ongoing, financial sustainability to support their operations. But this isn’t always as easy as it seems; many leaders will attest that more of their working hours are spent finding ways to fund their missions than in executing the missions themselves.

Unfortunately, the challenge of achieving financial sustainability is even greater for organizations that serve the neediest communities. Those located in poorer neighborhoods have fewer donors and greater competition for limited resources. There are however, some simple strategies that will go a long way in helping any nonprofit improve their long-term financial viability.

A recent study by the RAND Corporation examined some of the major challenges that nonprofits in low income communities face in regards to financial sustainability. They also offer recommendations that any nonprofit, regardless of size, location, or mission should think about during their strategic planning for 2015.

  1. Minimize your dependence on traditional sources of funding. While state and federal agencies provide enormous support for many nonprofits, their funding is subject to cutbacks during economic lows. In addition, nonprofits that accept state and federal funding are required to comply with guidelines on how the money is used and provide extensive documentation as proof of their compliance. This can become a costly administrative burden for the organization. Instead, nonprofits need to supplement their portfolios with their own, innovative fundraising campaigns that tap into their unique assets and leverage the networks of board members. Some examples include establishing giving circles and nurturing relationships with private investors.
  2. Build your brand Any organization that competes for resources must have clear and consistent messaging about who they are, the value they provide, and why they are better than their competition. A strong brand identity is a powerful tool that not only builds trust in the community, but also provides a framework for prioritizing organizational activities and preventing mission drift. Much like for-profit organizations, nonprofits need to utilize an arsenal of marketing tools to promote their brands to new audiences—websites, social media, public relations—while ensuring that their messaging stays true to their identity.
  3. Partner with other nonprofits. There are countless ways that nonprofits can help each other by sharing resources, expenses, and expertise. Whether it is in fundraising, grant writing, or purchasing in bulk, strategic partnerships between nonprofits means that everyone achieves more, with less.
  4. Demonstrate the ROI of your programs. Tracking and reporting on the effectiveness of your organizational activities is not only a legal and ethical obligation, it also supports your case for asking funders for additional money year after year. Establish a formalized measurement system to demonstrate the impact of each dollar that is used in your programs. Provide this data in annual reports and other channels of communication to reflect your accountability. This will help garner trust and credibility among your constituents.
  5. Promote community involvement. Encouraging members of your community to accept roles as board members or volunteers can open the doors to new resources and areas of expertise that you would not otherwise have. A pool of highly motivated volunteers can be one of the greatest long-term assets a nonprofit can achieve. Research indicates that when members of the community have a sense of ownership toward a nonprofit and its mission, the organization is less vulnerable to downturns in the economy.

Improving your financial sustainability is a complex and continual process. These are just a few strategies to consider, and if you’ve already put them in place, stop for a moment to evaluate how well are you executing. You are likely to find small ways to improve in each area that will make a lasting, measurable difference over time. Here’s to your success in 2015!

Self-Dealing in St. Louis and Lessons Learned

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In April of this year, the news outlets in St. Louis, Missouri turned their attention to a story about the Zoo-Museum District board that awarded a multi-million dollar contract to a design firm to build a pavilion within the St. Louis Science Center. The contract, ranging from $1.2 to $2.5 million was, unbeknownst to the board, awarded to a design firm that was owned by one of their very own directors. Once this became known to the public it sparked a heated debate in the media, and was promptly followed by the resignation of the board member.

This serves as the perfect illustration of what nonprofits must work to guard against—the real (or perceived) conflict of interest that takes place when a board member stands to gain personally from their relationship with the organization.  The story in St. Louis involves a public organization that receives taxpayer dollars and is governed by a different set of rules than the ones that govern nonprofits, but conflict of interest issues arise from the same set of circumstances. Both types of entities need strong boards, comprised of members who are knowledgeable in their fields and able to provide expert guidance and direction. In many cases, the best candidates for board positions also have a financial interest in businesses that can help advance the mission—but therein lies the danger.

The IRS offers some guidelines for nonprofits that are designed prevent board members from unethically profiting from their positions. First, the IRS requires the completion of a Form 990 in which nonprofits must disclose the compensation and potential conflicts associated with officers, directors, trustees and key employees. Second, they encourage nonprofits to establish a formal conflict of interest policy and have ongoing reviews of the policy with its staff. But the guidelines they recommend leave some wiggle room for board members to do business with the nonprofit. The IRS’s sample policy states: “A financial interest is not necessarily a conflict of interest.  Under Article III, Section 2, a person who has a financial interest may have a conflict of interest only if the appropriate governing board or committee decides that a conflict of interest exists.”

From this policy, a board member (or a company they have a financial stake in) can still ethically bid for contracts with the nonprofit, but ideally, they would be offering below-market rates of their goods and services, creating a win-win for both parties.  In the real world, things don’t always work out that way. In 2007, the Urban Institute did a survey of over 5,100 nonprofits and found that more than 41 percent of nonprofits with at least $10 million in annual expenses purchased goods and services from board members. The study also showed that only 39 percent of the larger nonprofits that did business with board members received below-market rates. The other 61 percent may not be in outright violation IRS regulations, but they are taking an enormous risk with regard to public opinion and loss of support from contributors if it becomes the public perception that a board member is taking undue advantage of their position.

Many financial consultants would advise against letting board members bid on contracts because it puts the nonprofit’s reputation at too great of a risk. Even where there is no impropriety, the mere perception of impropriety can have a damaging impact on their name, their donations, and their ability to fulfill their mission. Others might argue that the very reason board members volunteer their time and expertise is because of the financial opportunities that come from the relationship with the organization, and without these opportunities, nonprofits won’t be able to properly staff their boards.

It’s a slippery slope that each nonprofit should manage carefully according to their own code of ethics and risk tolerance. The best course for mitigating some of the risk is to create a clear conflict of interest policy, outlining precisely what behaviors and relationships are allowed, and socialize it regularly among the board and the public. If a conflict does arise, the nonprofit needs to deal with it openly and swiftly to maintain its credibility. Establishing, socializing and enforcing a strong conflict of interest policy will go a long way toward protecting your nonprofit organization from scandals like the one in St. Louis, so that when you do end up in the press, it’s for all the right reasons.

Does Your Bookkeeper Drive an Airbus?

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Fifty billion dollars. It’s a staggering sum of money that most people can only fantasize about, and when asked, what you would do with such an outrageous amount of money, there is  a struggle to translate into everyday terms.

To provide some perspective, here’s a fun shopping list of things you could buy if you had $50 billion:  33 Yankee Stadiums, 25 percent of the Microsoft Corporation, 520 Neverland Ranches, or 120 Airbus 380s (these are the cool double-deckers that Saudi princes buy.)

What is even more unfathomable than owning just one Yankee Stadium, is the fact that $50 billion is  the estimated amount that is lost each year to fraud in nonprofit organizations (according to the New York Times). One might assume that most fraud takes place in  large global charities with deep pockets similar to the Red Cross or UNICEF.  In reality, most embezzlement takes place in smaller organizations with fewer than 100 employees due to the fact that these organizations are less likely to have adequate internal controls in place.

When it comes to embezzlement, it is a sad irony that nonprofits are founded on the noble intention of improving the state of mankind, and unfortunately can become the easiest targets for  fraud.  Small nonprofits are even more vulnerable because their environments are very personal, more intimate, and nurture a false sense of security that “it could never happen here.” But it isn’t too hard to imagine how an employee, facing their own financial pressures and temptations, might begin to skim a little cash here or there. If you are watching the news headlines,  there have been multiple reports on   how  cash skimming  soon evolves into falsified time sheets, expense reports, and more, until the nonprofit is losing huge amounts of money – one Airbus seat cushion at a time.

What to do:  to protect the mission and the reputation of a nonprofit? Leaders can implement best practices that will go a long way toward preventing “fraud,” “embezzlement,” “larceny,” “and other charges” that are often described in the news. Conducting surprise audits, requiring regular job rotations, enforcing cross-checking and review processes for all financial transactions, and providing hotlines for anonymous whistleblowers are just a few of the precautions that can be taken. These policies are not meant to be a burden to your operations, but a way to preserve both your financial resources and the public’s trust in your good name.

If you are not sure whether or not you have enough checks and balances in place to protect against fraud, external auditors, industry experienced consultants can offer some important insight into where you may be at risk. With so much at stake, you want to ensure that the  donations that are generously made to your organization are used for their intended purpose and not for an employee’s personal gain.

Why Understanding Your Form 1023 is “Mission Critical”

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Last month I gave a seminar on revenue diversification to a group of people who serve on the boards of a wide variety of nonprofit organizations. In my work, I have the pleasure of meeting dynamic leaders who are dedicated to serving others and to providing their organizations with the oversight that will help them achieve the missions for which they were created.

What I found surprising and potentially problematic was that the vast majority of my audience, though passionate about their missions, could not tell me anything about the real mission statements on which their charities were founded. The one that appears on their Form 1023 and that is submitted to the IRS to gain the service approval for a tax-exempt status. Most of my audience had never heard of, nor seen, nor read their Form 1023.

In order to gain tax exempt status under the IRS Section 501(c), nonprofits are required to complete a Form 1023, stating the intended mission of the organization such as charitable, religious, educational, or scientific purposes. They are also required to provide a detailed narrative of all past, present and planned activities that support this purpose. Gaining tax exempt status saves the organization from paying a host of taxes such as federal income tax, federal unemployment tax, state tax, and more. The danger arises when a nonprofit begins to engage in activities that fall outside the parameters of what they originally listed on their Form 1023. Then, they could be at risk of losing their tax exempt status and all of the financial benefits that come with it.

For example, if a nonprofit earns income through activities that are not related to those on the Form 1023, they could be required to pay taxes on that income. More importantly, if a nonprofit participated in political campaigns, lobbying, or engaged in activities that benefited an individual’s private interest, they could be stripped of their tax exempt status altogether. No matter how well intentioned these actives might seem, the IRS may take a completely different view.

Whenever I to talk with people who are thinking of assuming a position of leadership within a nonprofit, I strongly recommend that they first gain a clear understanding of the organization’s mission, and that includes the important information of the mission detailed in their Form 1023. One of the most important things that you can do to protect the interests of your nonprofit is to know and embrace the real mission statement and all of the rules that apply to it. And this mission, should you choose to accept it, will ensure that you, your donors, and your volunteers can continue to serve the causes that are nearest and dearest to your hearts.

This blog will self-destruct in sixty seconds.

Peeling Back the Covers of Your Finance Department

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I recently delivered a presentation at the Essex County Institute for Trustees, a full day conference for board members and executive directors of nonprofit organizations. While the subject I covered, nonprofit finance, is by no means a new subject, many organizations still struggle to optimize their operations in order to make the most impact with limited financial resources.
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