Lost and found: Regaining your nonprofit’s tax-exempt status
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 will not be eligible to deduct contributions to your organization, grant-makers probably will not even consider your applications, and you may become retroactively liable for taxes. So, the sooner you regain your status, the better. Here is 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 will 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 are not 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 will 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 will 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 will be required to pay a filing fee. Qualifying again Assuming you file correctly and submit all required paperwork that shows your organization qualifies, it is 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 do not 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.
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 will 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 are not 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 will 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 will 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 will be required to pay a filing fee. Qualifying again Assuming you file correctly and submit all required paperwork that shows your organization qualifies, it is 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 do not 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.
Companies can shine a light on financial uncertainty with flash reports
Managing the financial performance of your business may sometimes seem like steering a ship through treacherous waters. Perhaps your voyage goes smoothly for a while until, quite suddenly, you hit a concerning dip or abrupt swell — either of which creates considerable operational pressure. Your financial statements should provide keen insights into how your company is performing and where it is headed.
However, you probably generate them only monthly, quarterly, or annually. That leaves lots of time in between when you may be sailing through a fog of uncertainty. Creating flash reports is one way to shine a light on the situation. Take a snapshot A flash report is a brief summary of a business’s current financial performance based on a few carefully selected metrics. The word “flash” is meant to evoke a camera taking a snapshot of key figures, such as cash balances, receivables aging, collections, and payroll. During seasonal peaks or when undertaking a turnaround, some companies create daily flash reports to track key activities such as sales, shipments, and deposits.
Otherwise, businesses generally create weekly or monthly reports, depending on their needs. Flash reports should be as simple as possible. Those that take longer than an hour to prepare or take up more than one page are likely too complex. Flash reports should also be comparative — that is, they need to note significant trends or budgetary deviations that may call for corrective action. Including graphs or tables can help nonfinancial staff who receive the reports, such as marketing and operations managers, read them more easily. Use as directed Flash reports can help you and your leadership team better catch and respond to financial performance developments that demand your attention. However, they have limitations. First and foremost, flash reports provide a rough measure of financial performance within a short period.
Therefore, they may not give a completely accurate picture of where your business stands. It is common for items such as cash balances and collections to ebb and flow throughout the month, depending on billing cycles. So, you and your fellow report users must guard against overreaction. Because of their “quick and dirty” nature, flash reports are best used for internal purposes only. Most companies do not share them with investors, creditors or franchisors unless required under a bankruptcy or franchise agreement. The risk is real: If shared flash reports deviate from what is subsequently reported on your financial statements, stakeholders may wonder whether you are: Exaggerating financial performance, running into serious problems, or mismanaging your financial reporting.
That said, some lenders may ask for flash reports if a borrower fails to meet liquidity, profitability, or leverage covenants. Should you decide to share reports for any reason, consider adding a disclaimer that the results are preliminary, may contain errors or omissions, and have not been prepared in accordance with U.S. Generally Accepted Accounting Principles (if you normally do so). Get the info you need Although you can probably find some flash report templates online, proceed cautiously. It is imperative to design yours to provide the most relevant data for your company in the most readable format for your users. You may also need to occasionally revise the content and look of reports to keep up with changes to your business. Contact us for help developing flash reports, evaluating your current ones or improving any aspect of your financial reporting.
However, you probably generate them only monthly, quarterly, or annually. That leaves lots of time in between when you may be sailing through a fog of uncertainty. Creating flash reports is one way to shine a light on the situation. Take a snapshot A flash report is a brief summary of a business’s current financial performance based on a few carefully selected metrics. The word “flash” is meant to evoke a camera taking a snapshot of key figures, such as cash balances, receivables aging, collections, and payroll. During seasonal peaks or when undertaking a turnaround, some companies create daily flash reports to track key activities such as sales, shipments, and deposits.
Otherwise, businesses generally create weekly or monthly reports, depending on their needs. Flash reports should be as simple as possible. Those that take longer than an hour to prepare or take up more than one page are likely too complex. Flash reports should also be comparative — that is, they need to note significant trends or budgetary deviations that may call for corrective action. Including graphs or tables can help nonfinancial staff who receive the reports, such as marketing and operations managers, read them more easily. Use as directed Flash reports can help you and your leadership team better catch and respond to financial performance developments that demand your attention. However, they have limitations. First and foremost, flash reports provide a rough measure of financial performance within a short period.
Therefore, they may not give a completely accurate picture of where your business stands. It is common for items such as cash balances and collections to ebb and flow throughout the month, depending on billing cycles. So, you and your fellow report users must guard against overreaction. Because of their “quick and dirty” nature, flash reports are best used for internal purposes only. Most companies do not share them with investors, creditors or franchisors unless required under a bankruptcy or franchise agreement. The risk is real: If shared flash reports deviate from what is subsequently reported on your financial statements, stakeholders may wonder whether you are: Exaggerating financial performance, running into serious problems, or mismanaging your financial reporting.
That said, some lenders may ask for flash reports if a borrower fails to meet liquidity, profitability, or leverage covenants. Should you decide to share reports for any reason, consider adding a disclaimer that the results are preliminary, may contain errors or omissions, and have not been prepared in accordance with U.S. Generally Accepted Accounting Principles (if you normally do so). Get the info you need Although you can probably find some flash report templates online, proceed cautiously. It is imperative to design yours to provide the most relevant data for your company in the most readable format for your users. You may also need to occasionally revise the content and look of reports to keep up with changes to your business. Contact us for help developing flash reports, evaluating your current ones or improving any aspect of your financial reporting.
Nonprofit start-ups: Form 1023 or 1023-EZ?
If you are starting up a new 501(c)(3) not-for-profit organization, you likely face many decisions. One of them is which form to use when applying to the IRS for recognition of your tax-exempt status. There are two — Form 1023 and 1023-EZ, a newer, streamlined version of the original form.
Traditional route vs. EZ way Many nonprofits still use the longer Form 1023 because it is available to every 501(c)(3) organization and there are virtually no restrictions on its use. However, Form 1023 takes time and money to complete. It is dozens of pages long and accompanied by lengthy instructions. The instructions explain how to fill out the form and list the documents you will need. If you decide to use Form 1023, do your homework first. Also know that it will cost $600 to file it. You will need to set up a pay.gov account first.
Form 1023-EZ is aimed at smaller nonprofits and is cheaper to file — only $275 (also via pay.gov). It is only three pages and completing it should take less than half the time it would take to fill out Form 1023. Work the worksheet Eligibility for filing Form 1023-EZ is not automatic. You first must complete an eligibility worksheet to verify that your organization qualifies to use the form. Note that it only takes one “yes” answer to eliminate Form 1023-EZ as an option. For example, your organization cannot expect to accumulate annual gross receipts of more than $50,000 during the next three-year period. This includes receipts from all sources.
You will also be disqualified from using the EZ form if your nonprofit’s assets are valued at more than $250,000. Cash and the fair market value of bank accounts and loans receivable, inventories, bonds, stocks, equipment, and buildings all count toward the limit. Among other eligibility requirements, your organization must: Have been formed in 1) the United States, its states, territories, or possessions; 2) federally recognized Indian tribal or Alaskan native governments; or 3) the District of Columbia; and Be organized as a corporation, unincorporated association, or trust. Be sure to complete the entire worksheet. Getting off on the right foot So long as your organization passes all the tests on the 1023-EZ eligibility worksheet, you should be safe submitting that form. Using Form 1023-EZ if you are ineligible could make your new nonprofit more vulnerable to audits and other IRS scrutiny. But if you have questions or concerns, contact us and legal professionals for additional information.
Traditional route vs. EZ way Many nonprofits still use the longer Form 1023 because it is available to every 501(c)(3) organization and there are virtually no restrictions on its use. However, Form 1023 takes time and money to complete. It is dozens of pages long and accompanied by lengthy instructions. The instructions explain how to fill out the form and list the documents you will need. If you decide to use Form 1023, do your homework first. Also know that it will cost $600 to file it. You will need to set up a pay.gov account first.
Form 1023-EZ is aimed at smaller nonprofits and is cheaper to file — only $275 (also via pay.gov). It is only three pages and completing it should take less than half the time it would take to fill out Form 1023. Work the worksheet Eligibility for filing Form 1023-EZ is not automatic. You first must complete an eligibility worksheet to verify that your organization qualifies to use the form. Note that it only takes one “yes” answer to eliminate Form 1023-EZ as an option. For example, your organization cannot expect to accumulate annual gross receipts of more than $50,000 during the next three-year period. This includes receipts from all sources.
You will also be disqualified from using the EZ form if your nonprofit’s assets are valued at more than $250,000. Cash and the fair market value of bank accounts and loans receivable, inventories, bonds, stocks, equipment, and buildings all count toward the limit. Among other eligibility requirements, your organization must: Have been formed in 1) the United States, its states, territories, or possessions; 2) federally recognized Indian tribal or Alaskan native governments; or 3) the District of Columbia; and Be organized as a corporation, unincorporated association, or trust. Be sure to complete the entire worksheet. Getting off on the right foot So long as your organization passes all the tests on the 1023-EZ eligibility worksheet, you should be safe submitting that form. Using Form 1023-EZ if you are ineligible could make your new nonprofit more vulnerable to audits and other IRS scrutiny. But if you have questions or concerns, contact us and legal professionals for additional information.
Keep your nonprofit’s special event safe and successful
Your not-for-profit organization likely has at least one special event planned for 2025. Whether it is a formal dinner dance, holiday gift market, 5K run, industry conference or other type of event, you want to avoid everything from week-of snafus to day-of emergencies. Unfortunately, even well-planned events can experience hitches. Here is how to be prepared — for anything.
Creating a crisis management plan is probably the best way to prepare for special event problems. So, review all potential exposures for the event, from fire to bad weather to technology failures, and determine how to address them. Also consider potential special needs of attendees — for example, mobility issues, dietary restrictions, or language barriers — and how you will keep exhibitors and sponsors (if applicable) happy. Although you will want to prioritize preparation for emergencies that are more likely to happen, do not ignore the fact that even remote possibilities are, in fact, possible.
Insurance can help you manage some of your event’s risks. Review your nonprofit’s insurance policies and determine whether you have adequate coverage for special events. If you will be auctioning donated items, for example, you may need to cover them against theft. Also review contracts with vendors, hotels, facilities, and performers for possible liabilities. Be sure to ask vendors to provide proof of insurance with liability coverage amounts. Most regions of the country experience bad weather at least part of the year. Your community may also contend with daily traffic jams and other transportation problems. Such circumstances make it critical to anticipate possible travel delays. If you will have out-of-town attendees, encourage them to make plans through a preferred travel agency. Be sure to include emergency contact numbers on all itineraries and confirmations so that guests can easily reach you. Also make a general contact list containing the phone numbers and email addresses of staffers, volunteers, vendors, and others involved in setting up and running your event. Distribute this list to all relevant participants.
You may be the most organized nonprofit event planner in the world and still overlook a minor issue or get walloped with a major crisis. If it happens, do not panic. Refer to your crisis management plan and reach out to staffers, board members and other supporters for help. Keep the lines of communication open between organizers and attendees by providing as much information as your guests need when they need it. And if, due to events beyond your control, your fundraiser falls short of your target amount, talk to us. We can suggest ways to adjust for budget shortfalls.
Creating a crisis management plan is probably the best way to prepare for special event problems. So, review all potential exposures for the event, from fire to bad weather to technology failures, and determine how to address them. Also consider potential special needs of attendees — for example, mobility issues, dietary restrictions, or language barriers — and how you will keep exhibitors and sponsors (if applicable) happy. Although you will want to prioritize preparation for emergencies that are more likely to happen, do not ignore the fact that even remote possibilities are, in fact, possible.
Insurance can help you manage some of your event’s risks. Review your nonprofit’s insurance policies and determine whether you have adequate coverage for special events. If you will be auctioning donated items, for example, you may need to cover them against theft. Also review contracts with vendors, hotels, facilities, and performers for possible liabilities. Be sure to ask vendors to provide proof of insurance with liability coverage amounts. Most regions of the country experience bad weather at least part of the year. Your community may also contend with daily traffic jams and other transportation problems. Such circumstances make it critical to anticipate possible travel delays. If you will have out-of-town attendees, encourage them to make plans through a preferred travel agency. Be sure to include emergency contact numbers on all itineraries and confirmations so that guests can easily reach you. Also make a general contact list containing the phone numbers and email addresses of staffers, volunteers, vendors, and others involved in setting up and running your event. Distribute this list to all relevant participants.
You may be the most organized nonprofit event planner in the world and still overlook a minor issue or get walloped with a major crisis. If it happens, do not panic. Refer to your crisis management plan and reach out to staffers, board members and other supporters for help. Keep the lines of communication open between organizers and attendees by providing as much information as your guests need when they need it. And if, due to events beyond your control, your fundraiser falls short of your target amount, talk to us. We can suggest ways to adjust for budget shortfalls.
ESOPs can help business owners with succession planning
Devising and executing the right succession plan is challenging for most business owners. In worst-case scenarios, succession planning is left to chance until the last minute. Chaos, or at least much confusion and uncertainty, often follows. The most foolproof way to make succession planning easier is to give yourself plenty of time to develop a plan that suits the intricacies of your situation and then gradually implement it. One vehicle that can help “slow your roll” into retirement or whatever your next stage of life may be is an employee stock ownership plan (ESOP). Little by little An ESOP is a type of qualified retirement plan that invests solely or mainly in your company’s stock. Because it is qualified, an ESOP comes with tax advantages as long as you follow the federally enforced rules.
These include requirements related to minimum coverage and contribution limits. Generally, the company sets up an ESOP trust and funds the plan by contributing shares or cash to buy existing shares. Distributions to eligible participants are made in stock or cash. For closely held companies, employees who receive stock have the right to sell it back to the company — exercising “put options” or an “option to sell” — at fair market value during certain time windows. Although an ESOP involves transferring ownership to employees, it is different from a management or employee buyout. Unlike a buyout, an ESOP allows owners to cash out and transfer control little by little. During the transfer period, owners’ shares are held in the ESOP trust and voting rights on most issues other than mergers, dissolutions and other major transactions are exercised by the trustees, who may be officers or other company insiders. Appraisals required One big difference between ESOPs and other qualified retirement plans, such as 401(k)s, is mandated valuations.
The Employee Retirement Income Security Act requires trustees to obtain appraisals by independent valuation professionals to support ESOP transactions. Specifically, an appraisal is needed when the ESOP initially acquires shares from the company’s owners and every year thereafter that the business contributes to the plan. The fair market value of the sponsoring company’s stock is important because the U.S. Department of Labor specifically prohibits ESOPs from paying more than “adequate consideration” when investing in employer securities. In addition, because employees who receive ESOP shares typically have the right to sell them back to the company at fair market value, the ESOP provides a limited market for its shares. Drawbacks to consider An ESOP can play a helpful role in a well-designed succession plan with an appropriately long timeline.
However, there are potential drawbacks to consider. You will incur costs and considerable responsibilities related to plan administration and compliance. Costs are also associated with annual stock valuations and the need to repurchase stock from employees who exercise put options. Another potential disadvantage is that ESOPs are available only to corporations of either the C or S variety. Limited liability companies, partnerships and sole proprietorships must convert to one of these two entity types to establish an ESOP. Doing so will raise a variety of tax and financial issues. In addition, it is important to explore the potential negative impact of ESOP debt and other expenses on your financial statements and ability to qualify for loans. Not a no-brainer ESOPs have become fairly popular among small to midsize businesses. However, the decision to create, launch and administer one is far from a no-brainer. You will need to do a deep dive into all the details involved, discuss the concept with your leadership team and get professional advice. Contact us for help evaluating whether an ESOP would be a good fit for your business and succession plan.
These include requirements related to minimum coverage and contribution limits. Generally, the company sets up an ESOP trust and funds the plan by contributing shares or cash to buy existing shares. Distributions to eligible participants are made in stock or cash. For closely held companies, employees who receive stock have the right to sell it back to the company — exercising “put options” or an “option to sell” — at fair market value during certain time windows. Although an ESOP involves transferring ownership to employees, it is different from a management or employee buyout. Unlike a buyout, an ESOP allows owners to cash out and transfer control little by little. During the transfer period, owners’ shares are held in the ESOP trust and voting rights on most issues other than mergers, dissolutions and other major transactions are exercised by the trustees, who may be officers or other company insiders. Appraisals required One big difference between ESOPs and other qualified retirement plans, such as 401(k)s, is mandated valuations.
The Employee Retirement Income Security Act requires trustees to obtain appraisals by independent valuation professionals to support ESOP transactions. Specifically, an appraisal is needed when the ESOP initially acquires shares from the company’s owners and every year thereafter that the business contributes to the plan. The fair market value of the sponsoring company’s stock is important because the U.S. Department of Labor specifically prohibits ESOPs from paying more than “adequate consideration” when investing in employer securities. In addition, because employees who receive ESOP shares typically have the right to sell them back to the company at fair market value, the ESOP provides a limited market for its shares. Drawbacks to consider An ESOP can play a helpful role in a well-designed succession plan with an appropriately long timeline.
However, there are potential drawbacks to consider. You will incur costs and considerable responsibilities related to plan administration and compliance. Costs are also associated with annual stock valuations and the need to repurchase stock from employees who exercise put options. Another potential disadvantage is that ESOPs are available only to corporations of either the C or S variety. Limited liability companies, partnerships and sole proprietorships must convert to one of these two entity types to establish an ESOP. Doing so will raise a variety of tax and financial issues. In addition, it is important to explore the potential negative impact of ESOP debt and other expenses on your financial statements and ability to qualify for loans. Not a no-brainer ESOPs have become fairly popular among small to midsize businesses. However, the decision to create, launch and administer one is far from a no-brainer. You will need to do a deep dive into all the details involved, discuss the concept with your leadership team and get professional advice. Contact us for help evaluating whether an ESOP would be a good fit for your business and succession plan.
Family business focus: Taking it to the next level
Family businesses often start out small, with casual operational approaches. However, informal (or nonexistent) policies and procedures can become problematic as such companies grow. Employees may grumble about unclear, inconsistent rules. Lenders and investors might frown on suboptimal accounting practices. Perhaps worst of all, customers can become disenfranchised by slow or unsatisfying service. Simply put, there may come a time when you have to take it to the next level. Has your family-owned company reached the point where it needs to expand its operational infrastructure to handle a larger customer base, manage higher revenue volumes and capitalize on new market opportunities? If so, look to strengthen these four critical areas:
1. Performance management. Family business owners often get used to putting out fires and tying up loose ends. However, as the company grows, doing so can get increasingly difficult and frustrating. Sound familiar? The problem may not lie entirely with your employees. If you haven’t already done so, write formal job descriptions. Then, provide proper training to teach staff members how to fulfill the stated duties. From there, implement a formal performance management system to evaluate employees, give constructive feedback, and help determine promotions and pay raises. Effective performance management not only helps employees improve, but also contributes to motivation and retention. It’s particularly important for nonfamily staff, who may feel like they’re not being evaluated the same way as working family members. In addition, if you don’t yet have an employee handbook, write one. Work with a qualified employment attorney to refine the language and ask everyone to sign an acknowledgment that they received and read it.
2. Business processes. Think of your business processes as the pistons of the engine that drives your family-owned company. We’re talking about things such as: Production of goods or services, Sales and marketing, Customer support, Accounting and financial management, and Human resources. The more you document and enhance these and other processes, the easier it is to train staff and improve their performances. Bear in mind that enhancing business processes usually involves streamlining them to reduce manual effort and redundancies.
3. Strategic planning. Many family business owners keep their company visions to themselves. If they do share them, it’s impromptu, around the dinner table or during family gatherings. As your company grows, formalize your approach to strategic planning. This starts with building a solid leadership team with whom you can share your thoughts and listen to their opinions and ideas. From there, hold regular strategic-planning meetings and perhaps even an annual retreat. When ready, share company goals with employees and ask for their feedback. Keeping staff in the loop empowers them and helps ensure they buy into the direction you’re taking.
4. Information technology. Nowadays, the systems and software your family business uses to operate can make or break its success. As your company grows, outdated or unscalable solutions will likely inhibit efficiency, undercut competitiveness, and expose you to fraud or hackers. Running a professional, process-oriented business generally requires integration. This means all your various systems and software should work together seamlessly. You want your authorized users to be able to get to information quickly and easily. You also want to automate as many processes as possible to improve efficiency and productivity. Last but certainly not least, you must address cybersecurity. Growing family businesses are prime targets for criminals looking to steal data or abduct it for ransom. Internal fraud is an ever-present threat as well. Change and adapt
Perhaps the most dangerous thing any family business owner can say is, “But we’ve always done it that way!” A growing company is a testament to your hard work, but you’ll need to be adaptable and willing to change to keep it moving forward. We can help you reevaluate and improve all your business processes related to accounting, financial management and tax planning.
1. Performance management. Family business owners often get used to putting out fires and tying up loose ends. However, as the company grows, doing so can get increasingly difficult and frustrating. Sound familiar? The problem may not lie entirely with your employees. If you haven’t already done so, write formal job descriptions. Then, provide proper training to teach staff members how to fulfill the stated duties. From there, implement a formal performance management system to evaluate employees, give constructive feedback, and help determine promotions and pay raises. Effective performance management not only helps employees improve, but also contributes to motivation and retention. It’s particularly important for nonfamily staff, who may feel like they’re not being evaluated the same way as working family members. In addition, if you don’t yet have an employee handbook, write one. Work with a qualified employment attorney to refine the language and ask everyone to sign an acknowledgment that they received and read it.
2. Business processes. Think of your business processes as the pistons of the engine that drives your family-owned company. We’re talking about things such as: Production of goods or services, Sales and marketing, Customer support, Accounting and financial management, and Human resources. The more you document and enhance these and other processes, the easier it is to train staff and improve their performances. Bear in mind that enhancing business processes usually involves streamlining them to reduce manual effort and redundancies.
3. Strategic planning. Many family business owners keep their company visions to themselves. If they do share them, it’s impromptu, around the dinner table or during family gatherings. As your company grows, formalize your approach to strategic planning. This starts with building a solid leadership team with whom you can share your thoughts and listen to their opinions and ideas. From there, hold regular strategic-planning meetings and perhaps even an annual retreat. When ready, share company goals with employees and ask for their feedback. Keeping staff in the loop empowers them and helps ensure they buy into the direction you’re taking.
4. Information technology. Nowadays, the systems and software your family business uses to operate can make or break its success. As your company grows, outdated or unscalable solutions will likely inhibit efficiency, undercut competitiveness, and expose you to fraud or hackers. Running a professional, process-oriented business generally requires integration. This means all your various systems and software should work together seamlessly. You want your authorized users to be able to get to information quickly and easily. You also want to automate as many processes as possible to improve efficiency and productivity. Last but certainly not least, you must address cybersecurity. Growing family businesses are prime targets for criminals looking to steal data or abduct it for ransom. Internal fraud is an ever-present threat as well. Change and adapt
Perhaps the most dangerous thing any family business owner can say is, “But we’ve always done it that way!” A growing company is a testament to your hard work, but you’ll need to be adaptable and willing to change to keep it moving forward. We can help you reevaluate and improve all your business processes related to accounting, financial management and tax planning.
How to get foundations to say “yes” to your grant proposals
There are many thousands of charitable foundations in the United States. And, according to technology company Foundation Source, U.S. foundations awarded an average of 33 grants averaging between $25,000 and $28,000 each in 2022 (the most recent year for which data is available). So a lot of grant money is out there for not-for-profit organizations that know where to look and how to qualify for it. Here are some suggestions. Match your mission with their interests. Probably the most important thing to remember about foundations is that they tend to specialize, making grants to certain types of charities or in specific geographic regions. It’s not enough to be a 501(c)(3) organization — though your exempt status is important. For your nonprofit to succeed at obtaining a grant, its mission and programs must align with the foundation’s interests.
Before you apply for a grant, review the foundation’s annual reports, tax filings, press releases and any other information you can get your hands on. One place to start is the nonprofit data organization Candid’s online directory of foundations. Once you have a list of matches, don’t just start sending out long, detailed proposals. Call your target foundations and talk to staff members about the information they need and their communication preferences. Most will be happy to provide insights into their decision-making process and shed light on your chances of securing a grant. Finish what you start. The most successful foundation grant proposals have several qualities in common. For example, foundations tend to like projects that are well-defined and data-driven with specific goals. They also want to know that their gifts are effective, so achievement of goals needs to be measurable. In your grant proposals, make sure you outline the project’s life cycle and how you plan to fund it to completion. Many foundations provide the money to initiate projects but expect nonprofits to use their own funds and other grants to continue them. In fact, if you hope to establish a long-term relationship with a foundation that has given you a grant, you must successfully finish what you started.
Just because a grant proposal is rejected doesn’t mean the same foundation won’t welcome future applications — and say “yes” to them. Call the decision-maker and ask that person to explain why your application was rejected. Foundation personnel may be able to provide tips on making your proposals stronger. Many organizations are competing for the same foundation funds, so tenacity is crucial. Many priorities If you’re worried about funding your nonprofit’s many priorities, contact us.
Before you apply for a grant, review the foundation’s annual reports, tax filings, press releases and any other information you can get your hands on. One place to start is the nonprofit data organization Candid’s online directory of foundations. Once you have a list of matches, don’t just start sending out long, detailed proposals. Call your target foundations and talk to staff members about the information they need and their communication preferences. Most will be happy to provide insights into their decision-making process and shed light on your chances of securing a grant. Finish what you start. The most successful foundation grant proposals have several qualities in common. For example, foundations tend to like projects that are well-defined and data-driven with specific goals. They also want to know that their gifts are effective, so achievement of goals needs to be measurable. In your grant proposals, make sure you outline the project’s life cycle and how you plan to fund it to completion. Many foundations provide the money to initiate projects but expect nonprofits to use their own funds and other grants to continue them. In fact, if you hope to establish a long-term relationship with a foundation that has given you a grant, you must successfully finish what you started.
Just because a grant proposal is rejected doesn’t mean the same foundation won’t welcome future applications — and say “yes” to them. Call the decision-maker and ask that person to explain why your application was rejected. Foundation personnel may be able to provide tips on making your proposals stronger. Many organizations are competing for the same foundation funds, so tenacity is crucial. Many priorities If you’re worried about funding your nonprofit’s many priorities, contact us.
3 types of retirement plans for growing businesses
When start-ups launch, their focus is often on tightly controlling expenses. Most need to establish a brand and some semblance of stability before funding anything other than essential operating activities. For companies that make it past that tenuous initial stage, there comes a time when they must loosen up the purse strings and start investing in, among other things, their employees. One way to do so is to sponsor a retirement plan. Offering this fringe benefit lets staff know the business cares about them and their financial futures. Has your company reached this point? Or is it almost there? If so, let’s review three of the most popular plan types that growing businesses should consider.
1. Traditional 401(k) plans. These are available to any employer with one or more employees. Under the plan, participants are given accounts that they own. This means their contributions are immediately vested, and they retain ownership even if they leave their jobs. Participants typically contribute via pretax payroll deductions, which reduce their taxable income. Distributions, however, are taxable. For 2025, 401(k) participants can contribute up to $23,500 (up from $23,000 in 2024). Those age 50 or older by the end of the year can make additional “catch-up” contributions of $7,500 (the same amount as in 2024). Your business may also opt to contribute to participants’ accounts under a vesting schedule of your choosing. In 2025, the total combined limit for employee and employer contributions is $70,000. Within limits, your company can deduct contributions made on behalf of eligible employees. Many companies’ plans now have Roth 401(k) features. This means participants can choose to make some contributions with compensation that’s already been taxed. The upside is that qualified distributions are tax-free. Establishing a 401(k) plan typically requires, among other steps, adopting a written plan and arranging a trust fund for plan assets. Annually, employers must file Form 5500 and perform discrimination testing to ensure the plan doesn’t favor highly compensated employees. However, with a “safe harbor” 401(k), the plan isn’t subject to discrimination testing. There are also several other 401(k) variations worth considering.
2. SEP-IRAs. If choosing a 401(k) plan and administering it seems a bit overwhelming, there are simpler options. Case in point: Simplified Employee Pension Individual Retirement Accounts (SEP-IRAs). Businesses of any size can establish a plan to offer these accounts by completing Form 5305-SEP, “Simplified Employee Pension — Individual Retirement Accounts Contribution Agreement.” But there’s no annual filing requirement. From there, you set up and wholly fund a SEP-IRA for each participant. Employer contributions immediately vest with participants, who own their respective accounts. What’s nice is you can decide each year whether and how much to contribute. In 2025, contribution limits will be 25% of an employee’s compensation, up to $70,000 (up from $69,000 in 2024).
3. SIMPLE IRAs. Another less complex approach is sponsoring Savings Incentive Match Plan for Employees (SIMPLE) IRAs. However, only businesses with 100 or fewer employees can offer them. Like SEP-IRAs, these are accounts you set up for each participant. They may choose to contribute to their SIMPLE IRAs but don’t have to. Employer contributions are required, but you can opt to either: Match employee contributions up to 3% of compensation, which can be reduced to as low as 1% in two of five years, or make a 2% nonelective contribution, including to employees who don’t contribute. Participants are immediately 100% vested in contributions, whether those funds come from you or their own paychecks. The contribution limit in 2025 will be $16,500 (up from $16,000 in 2024).
Many options to be clear, these are but three options among many different retirement plan types that growing businesses can sponsor for their employees. Our firm can help you weigh the pros and cons of all of them, including forecasting the costs involved and understanding the tax implications.
1. Traditional 401(k) plans. These are available to any employer with one or more employees. Under the plan, participants are given accounts that they own. This means their contributions are immediately vested, and they retain ownership even if they leave their jobs. Participants typically contribute via pretax payroll deductions, which reduce their taxable income. Distributions, however, are taxable. For 2025, 401(k) participants can contribute up to $23,500 (up from $23,000 in 2024). Those age 50 or older by the end of the year can make additional “catch-up” contributions of $7,500 (the same amount as in 2024). Your business may also opt to contribute to participants’ accounts under a vesting schedule of your choosing. In 2025, the total combined limit for employee and employer contributions is $70,000. Within limits, your company can deduct contributions made on behalf of eligible employees. Many companies’ plans now have Roth 401(k) features. This means participants can choose to make some contributions with compensation that’s already been taxed. The upside is that qualified distributions are tax-free. Establishing a 401(k) plan typically requires, among other steps, adopting a written plan and arranging a trust fund for plan assets. Annually, employers must file Form 5500 and perform discrimination testing to ensure the plan doesn’t favor highly compensated employees. However, with a “safe harbor” 401(k), the plan isn’t subject to discrimination testing. There are also several other 401(k) variations worth considering.
2. SEP-IRAs. If choosing a 401(k) plan and administering it seems a bit overwhelming, there are simpler options. Case in point: Simplified Employee Pension Individual Retirement Accounts (SEP-IRAs). Businesses of any size can establish a plan to offer these accounts by completing Form 5305-SEP, “Simplified Employee Pension — Individual Retirement Accounts Contribution Agreement.” But there’s no annual filing requirement. From there, you set up and wholly fund a SEP-IRA for each participant. Employer contributions immediately vest with participants, who own their respective accounts. What’s nice is you can decide each year whether and how much to contribute. In 2025, contribution limits will be 25% of an employee’s compensation, up to $70,000 (up from $69,000 in 2024).
3. SIMPLE IRAs. Another less complex approach is sponsoring Savings Incentive Match Plan for Employees (SIMPLE) IRAs. However, only businesses with 100 or fewer employees can offer them. Like SEP-IRAs, these are accounts you set up for each participant. They may choose to contribute to their SIMPLE IRAs but don’t have to. Employer contributions are required, but you can opt to either: Match employee contributions up to 3% of compensation, which can be reduced to as low as 1% in two of five years, or make a 2% nonelective contribution, including to employees who don’t contribute. Participants are immediately 100% vested in contributions, whether those funds come from you or their own paychecks. The contribution limit in 2025 will be $16,500 (up from $16,000 in 2024).
Many options to be clear, these are but three options among many different retirement plan types that growing businesses can sponsor for their employees. Our firm can help you weigh the pros and cons of all of them, including forecasting the costs involved and understanding the tax implications.
Business owners: Be sure you’re properly classifying cash flows
Properly prepared financial statements provide a wealth of information about your company. But the operative words there are “properly prepared.” Classifying information accurately isn’t always easy — especially as the business grows and its financial transactions become more complex. Case in point: your statement of cash flows. Customarily, it shows the sources (money entering) and uses (money exiting) of cash. That may sound simple enough, but optimally classifying different cash flows can be complicated.
Under U.S. Generally Accepted Accounting Principles (GAAP), statements of cash flows are typically organized into three sections: 1) cash flows from operating activities, 2) cash flows from investing activities, and 3) cash flows from financing activities. Let’s take a closer look at each. Operating activities This section of the statement of cash flows usually starts with accrual-basis net income. Then, it’s adjusted for items related to normal business operations. Examples include income taxes; stock-based compensation; gains or losses on asset sales; and net changes in accounts receivable, inventory, prepaid assets, accrued expenses and payables. The cash flows from operating activities section is also adjusted for depreciation and amortization. These noncash expenses reflect wear and tear on equipment and other fixed assets. The bottom of the section shows the cash used in producing and delivering goods or providing services. Several successive years of negative operating cash flows can signal that a business is struggling and may be headed toward liquidation or a forced sale. Investing activities If your company buys or sells property, equipment or marketable securities, such transactions should show up in the cash flows from investing activities section. It reveals whether a business is reinvesting in its future operations — or divesting assets for emergency funds. Business acquisitions and disposals are generally reported in this section, too.
However, contingent payments from an acquisition are classified as cash flows from investing activities only if they’re paid soon after the acquisition date. Later contingent payments are classified as financing outflows. Any payment over the liability is classified as an operations outflow. Financing activities This third section of the statement of cash flows shows your company’s ability to obtain funds from either debt from lenders or equity from investors. It includes new loan proceeds, principal repayments, dividends paid, issuances of securities or bonds, additional capital contributions by owners, and stock repurchases. Noncash transactions are reported in a separate schedule at the bottom of the statement of cash flows or in a narrative footnote disclosure. For example, suppose a business buys equipment using loan proceeds. In such a case, the transaction would typically appear at the bottom of the statement rather than as a cash outflow from investing activities and an inflow from financing activities. Other examples of noncash financing transactions are: Issuing stock to pay off long-term debt, and Converting preferred stock to common stock. In those two instances and others, no cash changes hands.
Nonetheless, financial statement users, such as investors and lenders, want to know about and understand these transactions. Help is available As you can see, deciding how to classify some transactions to comply with GAAP can be tricky. Whenever confusion or uncertainty arises, give us a call. We can work with you and your accounting team to make the best decision. We can also help you improve your financial reporting in other ways.
Under U.S. Generally Accepted Accounting Principles (GAAP), statements of cash flows are typically organized into three sections: 1) cash flows from operating activities, 2) cash flows from investing activities, and 3) cash flows from financing activities. Let’s take a closer look at each. Operating activities This section of the statement of cash flows usually starts with accrual-basis net income. Then, it’s adjusted for items related to normal business operations. Examples include income taxes; stock-based compensation; gains or losses on asset sales; and net changes in accounts receivable, inventory, prepaid assets, accrued expenses and payables. The cash flows from operating activities section is also adjusted for depreciation and amortization. These noncash expenses reflect wear and tear on equipment and other fixed assets. The bottom of the section shows the cash used in producing and delivering goods or providing services. Several successive years of negative operating cash flows can signal that a business is struggling and may be headed toward liquidation or a forced sale. Investing activities If your company buys or sells property, equipment or marketable securities, such transactions should show up in the cash flows from investing activities section. It reveals whether a business is reinvesting in its future operations — or divesting assets for emergency funds. Business acquisitions and disposals are generally reported in this section, too.
However, contingent payments from an acquisition are classified as cash flows from investing activities only if they’re paid soon after the acquisition date. Later contingent payments are classified as financing outflows. Any payment over the liability is classified as an operations outflow. Financing activities This third section of the statement of cash flows shows your company’s ability to obtain funds from either debt from lenders or equity from investors. It includes new loan proceeds, principal repayments, dividends paid, issuances of securities or bonds, additional capital contributions by owners, and stock repurchases. Noncash transactions are reported in a separate schedule at the bottom of the statement of cash flows or in a narrative footnote disclosure. For example, suppose a business buys equipment using loan proceeds. In such a case, the transaction would typically appear at the bottom of the statement rather than as a cash outflow from investing activities and an inflow from financing activities. Other examples of noncash financing transactions are: Issuing stock to pay off long-term debt, and Converting preferred stock to common stock. In those two instances and others, no cash changes hands.
Nonetheless, financial statement users, such as investors and lenders, want to know about and understand these transactions. Help is available As you can see, deciding how to classify some transactions to comply with GAAP can be tricky. Whenever confusion or uncertainty arises, give us a call. We can work with you and your accounting team to make the best decision. We can also help you improve your financial reporting in other ways.
Giving season’s here! It’s time to engage donors
The end of 2024 is rapidly approaching, and you know what that means: You need to fundraise in earnest. According to Double the Donation, 30% of all charitable giving occurs in December. Make sure your not-for-profit organization is top of mind when people pull out their credit cards and checkbooks. Improve visibility Only donors who itemize deductions on their 2024 federal income tax return can deduct donations made by Dec. 31.
But plenty of others are motivated by the “holiday spirit” to give. And some prospective donors may simply use the calendar as a reminder to make their charitable contributions for the year. To help ensure the charitably minded know you want — and need — their support: Take part in Giving Tuesday. Since launching in 2012, Giving Tuesday has grown swiftly to become one of the world’s biggest fundraisers. The online event is held on the first Tuesday after Thanksgiving — Dec. 3 in 2024.
In 2023, 34 million Americans participated by volunteering and donating, including giving $3.1 billion to nonprofits. If you aren’t set up to participate, go to givingtuesday.org for information. Focus on a theme or goal. Create a giving campaign around a fun participatory theme (one example being the ALS Association’s Ice Bucket Challenge). Or focus on a specific goal, such as constructing a new facility or introducing a new program. Check your records. Reach out to supporters whom your records reveal have habitually made year-end contributions. You can also segment your donor database according to gift size and other characteristics that suggest some past donors may be more willing to give now. Share your stats. Analytics can engage and motivate nonprofit stakeholders, so use statistics and infographics in your year-end appeals. Stats can illustrate your organization’s historical fundraising patterns and current goals. If you update them on your website, supporters will be able to follow your progress through a particular season or campaign.
Be prepared. Attracting support is only part of a successful fundraising season. You also have to make sure you’re equipped to handle donations. To that end, test the donation page on your website to confirm it’s easy to navigate and ready for donors to input financial information. Your site should adhere to the highest security protocols, load quickly, and be free of dead links and error messages. Ensure your donation app sends emails to thank donors and provide them with a record for tax purposes. Also critical: being ready to process any available matching gifts.
According to Double the Donation, most companies that offer to match their employees’ charitable gifts donate at a 1:1 ratio — but some are known to go as high as 4:1. You can’t afford to miss out! Provide contributors with instructions on how to request matches. Also, set up automated emails to remind donors if you don’t receive a match. Learn from success Finally, be sure you document everything you learn — including what works and what doesn’t — this giving season.
But plenty of others are motivated by the “holiday spirit” to give. And some prospective donors may simply use the calendar as a reminder to make their charitable contributions for the year. To help ensure the charitably minded know you want — and need — their support: Take part in Giving Tuesday. Since launching in 2012, Giving Tuesday has grown swiftly to become one of the world’s biggest fundraisers. The online event is held on the first Tuesday after Thanksgiving — Dec. 3 in 2024.
In 2023, 34 million Americans participated by volunteering and donating, including giving $3.1 billion to nonprofits. If you aren’t set up to participate, go to givingtuesday.org for information. Focus on a theme or goal. Create a giving campaign around a fun participatory theme (one example being the ALS Association’s Ice Bucket Challenge). Or focus on a specific goal, such as constructing a new facility or introducing a new program. Check your records. Reach out to supporters whom your records reveal have habitually made year-end contributions. You can also segment your donor database according to gift size and other characteristics that suggest some past donors may be more willing to give now. Share your stats. Analytics can engage and motivate nonprofit stakeholders, so use statistics and infographics in your year-end appeals. Stats can illustrate your organization’s historical fundraising patterns and current goals. If you update them on your website, supporters will be able to follow your progress through a particular season or campaign.
Be prepared. Attracting support is only part of a successful fundraising season. You also have to make sure you’re equipped to handle donations. To that end, test the donation page on your website to confirm it’s easy to navigate and ready for donors to input financial information. Your site should adhere to the highest security protocols, load quickly, and be free of dead links and error messages. Ensure your donation app sends emails to thank donors and provide them with a record for tax purposes. Also critical: being ready to process any available matching gifts.
According to Double the Donation, most companies that offer to match their employees’ charitable gifts donate at a 1:1 ratio — but some are known to go as high as 4:1. You can’t afford to miss out! Provide contributors with instructions on how to request matches. Also, set up automated emails to remind donors if you don’t receive a match. Learn from success Finally, be sure you document everything you learn — including what works and what doesn’t — this giving season.
Sharing space can mean sharing costs and more
If your not-for-profit is looking for significant ways to cut costs, one of the best ideas is to target your workspace. Sharing an office or other facility can help you slash rent or pay a mortgage, as well as cut utilities expenses. These arrangements can also provide other, less obvious cost-busting benefits, such as enabling you to share equipment, supplies, services and even staffers. But before you jump at this opportunity, consider potential snags. Exploring options shared space usually refers to workspaces shared by nonprofits, small businesses, freelancers, consultants and others.
Depending on their needs, tenants can pay for short- or long-term access to private offices, conference rooms and common areas. Office equipment and services, such as internet, copiers/printers/scanners, and coffee are shared. You may have access to several types of arrangements. For example, you might join forces with another nonprofit — perhaps one that serves the same population. Together, you could rent a shared facility, enjoy cost synergies and even improve services you offer clients. You might rent additional unused space to other organizations, generating revenue to offset your rent obligations. Other options include: Dedicated shared workspaces.
These commercial arrangements generally welcome a variety of organizations, but some cater primarily to nonprofits. In addition to other shared items, they might offer “back-office” services such as HR and IT. Private foundation offices. Some private foundations have more space than they require and lease out the excess to charities. By leasing to tax-exempt organizations, they avoid steep property taxes and pass the savings along to their tenants in the form of reduced rent. Donated space. A for-profit business in your community or an individual supporter of your nonprofit might be willing to donate space. Mixed blessing The most obvious benefit of sharing space lies in the cost savings compared with renting or buying your own space. But you may encounter obstacles when looking for a satisfactory arrangement. Some nonprofits, for example, might not want to share space with “competing” organizations that serve the same population or go after the same funding sources.
A culture clash after you’ve committed to sharing space with other organizations and have moved in is another possibility. Also think about potential legal issues, including lease obligations, compliance requirements and possible liabilities. You may be able to head off such problems by making site visits, both scheduled (to get the sales pitch) and unscheduled (to get a more realistic lay of the land) and by getting to know potential officemates before signing on the dotted line. Your best move Depending on location, your nonprofit may feel it’s being squeezed by rising rents. On the other hand, the opposite may be true and you’ve seen plenty of empty spaces in your community renting or selling for a song. If you’re ready to reconsider your current workspace, contact us for help determining the best move.
Depending on their needs, tenants can pay for short- or long-term access to private offices, conference rooms and common areas. Office equipment and services, such as internet, copiers/printers/scanners, and coffee are shared. You may have access to several types of arrangements. For example, you might join forces with another nonprofit — perhaps one that serves the same population. Together, you could rent a shared facility, enjoy cost synergies and even improve services you offer clients. You might rent additional unused space to other organizations, generating revenue to offset your rent obligations. Other options include: Dedicated shared workspaces.
These commercial arrangements generally welcome a variety of organizations, but some cater primarily to nonprofits. In addition to other shared items, they might offer “back-office” services such as HR and IT. Private foundation offices. Some private foundations have more space than they require and lease out the excess to charities. By leasing to tax-exempt organizations, they avoid steep property taxes and pass the savings along to their tenants in the form of reduced rent. Donated space. A for-profit business in your community or an individual supporter of your nonprofit might be willing to donate space. Mixed blessing The most obvious benefit of sharing space lies in the cost savings compared with renting or buying your own space. But you may encounter obstacles when looking for a satisfactory arrangement. Some nonprofits, for example, might not want to share space with “competing” organizations that serve the same population or go after the same funding sources.
A culture clash after you’ve committed to sharing space with other organizations and have moved in is another possibility. Also think about potential legal issues, including lease obligations, compliance requirements and possible liabilities. You may be able to head off such problems by making site visits, both scheduled (to get the sales pitch) and unscheduled (to get a more realistic lay of the land) and by getting to know potential officemates before signing on the dotted line. Your best move Depending on location, your nonprofit may feel it’s being squeezed by rising rents. On the other hand, the opposite may be true and you’ve seen plenty of empty spaces in your community renting or selling for a song. If you’re ready to reconsider your current workspace, contact us for help determining the best move.
Board independence is about more than avoiding conflicts of interest
Are your not-for-profit’s board members independent? Your immediate response is probably, “of course!” But contrary to what many nonprofit leaders and staffers might think, director independence goes beyond avoiding conflicts of interest. In fact, the IRS has a four-part definition of independence. If a majority of your organization’s board members don’t meet all four criteria, the IRS, donors and other stakeholders could call your governance into question.
4 criteria the IRS stipulates a four-part definition of independence for members of 501(c)(3) boards. To be considered independent, your directors can’t: Be compensated as officers or employees of your organization or a related organization. Receive more than $10,000 in compensation for work as independent contractors from your organization or a related organization during the tax year (excluding reasonable compensation for services provided as a board member). Be involved in — or have close family members involved in — transactions with your organization that provide material financial benefits and that must be reported on Form 990, Schedule L, “Transactions with Interested Persons.” Be involved in — or have close family members involved in — a transaction with a taxable or tax-exempt related organization that must be reported on Schedule L. You’re also required to disclose on Form 990 whether any of your current officers, directors, trustees or key employees had a family or business relationship with each other at any time during the tax year.
Gathering information Your organization is expected to make a “reasonable effort” to obtain information for Form 990 disclosures about independent directors’ family and business relationships. You might, for example, distribute an annual questionnaire to your officers, directors, trustees and key employees asking for the relevant information. It’s important to note that board members can be considered independent even if they receive financial benefits as members of the group your organization serves. What’s more, a religious exception may apply if a board member has taken a vow of poverty and belongs to a religious order that receives sponsorship or payments from your organization or a related organization — so long as the payments don’t qualify as taxable income to that person.
Some Non independent members are allowed Not all of your board members are required to be independent. For example, you may have on your board an employee or an individual who has lent your organization money. But watchdog groups generally advise donors to support only organizations with a majority of independent directors. And some states (for example, California) mandate that at least half of a charitable board’s members be independent. The IRS requires that at least 51% of a charitable board be made up of people with no familial relationship. Avoiding conflicts To avoid improprieties (as well as the appearance of improprieties), maintain a board composed of at least two-thirds independent members. Also make sure all members of your audit and compensation committees are independent and that independent members are represented on — or, better yet, make up a majority of — your governance and nominating committees. Contact us for details.
4 criteria the IRS stipulates a four-part definition of independence for members of 501(c)(3) boards. To be considered independent, your directors can’t: Be compensated as officers or employees of your organization or a related organization. Receive more than $10,000 in compensation for work as independent contractors from your organization or a related organization during the tax year (excluding reasonable compensation for services provided as a board member). Be involved in — or have close family members involved in — transactions with your organization that provide material financial benefits and that must be reported on Form 990, Schedule L, “Transactions with Interested Persons.” Be involved in — or have close family members involved in — a transaction with a taxable or tax-exempt related organization that must be reported on Schedule L. You’re also required to disclose on Form 990 whether any of your current officers, directors, trustees or key employees had a family or business relationship with each other at any time during the tax year.
Gathering information Your organization is expected to make a “reasonable effort” to obtain information for Form 990 disclosures about independent directors’ family and business relationships. You might, for example, distribute an annual questionnaire to your officers, directors, trustees and key employees asking for the relevant information. It’s important to note that board members can be considered independent even if they receive financial benefits as members of the group your organization serves. What’s more, a religious exception may apply if a board member has taken a vow of poverty and belongs to a religious order that receives sponsorship or payments from your organization or a related organization — so long as the payments don’t qualify as taxable income to that person.
Some Non independent members are allowed Not all of your board members are required to be independent. For example, you may have on your board an employee or an individual who has lent your organization money. But watchdog groups generally advise donors to support only organizations with a majority of independent directors. And some states (for example, California) mandate that at least half of a charitable board’s members be independent. The IRS requires that at least 51% of a charitable board be made up of people with no familial relationship. Avoiding conflicts To avoid improprieties (as well as the appearance of improprieties), maintain a board composed of at least two-thirds independent members. Also make sure all members of your audit and compensation committees are independent and that independent members are represented on — or, better yet, make up a majority of — your governance and nominating committees. Contact us for details.
Working capital management is critical to business success
Success in business is often measured in profitability — and that’s hard to argue with. However, liquidity is critical to reaching the point where a company can consistently turn a profit. Even if you pile up sales to the sky, your bottom line won’t flourish unless you have the cash to fund operations to fulfill all those orders. The good news is there’s a tried-and-true way to stay liquid while you grow your company. It’s called working capital management. Multifunctional metric Working capital is a metric — current assets minus current liabilities — that’s traditionally used to measure liquidity.
Essentially, it’s the amount of accessible cash you need to support short-term business operations. Regularly calculating working capital can help you and your leadership team answer questions such as: Do we have enough current assets to cover current obligations? How fast could we convert those assets to cash if we needed to? What short-term assets are available for loan collateral? Another way to evaluate liquidity is the working capital ratio: current assets divided by current liabilities. A healthy working capital ratio varies from industry to industry, but it’s generally considered to be 1.5 to 2. A ratio below 1.0 typically signals impending liquidity problems.
For yet another perspective on working capital, compare it to total assets and annual revenue. From this angle, working capital becomes a measure of efficiency. Working capital requirement, The amount of working capital your company needs, known as its working capital requirement, depends on the costs of your sales cycle, operational expenses and current debt payments. Fundamentally, you need enough working capital to finance the gap between payments from customers and payments to suppliers, vendors, lenders and others.
To optimize your business’s working capital requirement, focus primarily on three key areas: 1) accounts receivable, 2) accounts payable and 3) inventory. High liquidity generally equates with low credit risk. But having too much cash tied up in working capital may detract from important growth initiatives such as: Expanding into new markets, Buying better equipment or technology, launching new products or services, and paying down debt. Failure to pursue capital investment opportunities can also compromise business value over the long run.
3 critical areas the right approach to working capital management will obviously vary from company to company depending on factors such as size, industry, mission and market. However, as mentioned, there are three primary areas of the business to focus on:
1. Accounts receivable. The faster your company collects from customers, the more readily it can manage debt and capitalize on opportunities. Possible solutions include tighter credit policies, early bird discounts and collections-based sales compensation. Also, continuously improve your administrative processes to eliminate inefficiencies.
2. Accounts payable. From a working capital perspective, you generally want to delay paying bills as long as possible — particularly those from noncritical suppliers, vendors or other parties. One exception to this is when you can qualify for early bird discounts. Naturally, delaying payments should never drift into late payments or nonpayment, which can damage your business credit rating.
3. Inventory. If your company maintains inventory, recognize the challenge it presents to working capital management. Excessive inventory levels may dangerously reduce liquidity because of restocking, storage, obsolescence, insurance and security costs. Then again, insufficient inventory levels can frustrate customers and hurt sales. Be sure to give your inventory the “TLC” it deserves — including regular technology upgrades and strategic reconsideration of optimal levels.
The right balance It isn’t easy to strike the right balance of maintaining enough liquidity to operate smoothly while also saving funds for capital investments and an emergency cash reserve. Our firm can help you assess precisely where your working capital stands and identify ways to manage it better.
Essentially, it’s the amount of accessible cash you need to support short-term business operations. Regularly calculating working capital can help you and your leadership team answer questions such as: Do we have enough current assets to cover current obligations? How fast could we convert those assets to cash if we needed to? What short-term assets are available for loan collateral? Another way to evaluate liquidity is the working capital ratio: current assets divided by current liabilities. A healthy working capital ratio varies from industry to industry, but it’s generally considered to be 1.5 to 2. A ratio below 1.0 typically signals impending liquidity problems.
For yet another perspective on working capital, compare it to total assets and annual revenue. From this angle, working capital becomes a measure of efficiency. Working capital requirement, The amount of working capital your company needs, known as its working capital requirement, depends on the costs of your sales cycle, operational expenses and current debt payments. Fundamentally, you need enough working capital to finance the gap between payments from customers and payments to suppliers, vendors, lenders and others.
To optimize your business’s working capital requirement, focus primarily on three key areas: 1) accounts receivable, 2) accounts payable and 3) inventory. High liquidity generally equates with low credit risk. But having too much cash tied up in working capital may detract from important growth initiatives such as: Expanding into new markets, Buying better equipment or technology, launching new products or services, and paying down debt. Failure to pursue capital investment opportunities can also compromise business value over the long run.
3 critical areas the right approach to working capital management will obviously vary from company to company depending on factors such as size, industry, mission and market. However, as mentioned, there are three primary areas of the business to focus on:
1. Accounts receivable. The faster your company collects from customers, the more readily it can manage debt and capitalize on opportunities. Possible solutions include tighter credit policies, early bird discounts and collections-based sales compensation. Also, continuously improve your administrative processes to eliminate inefficiencies.
2. Accounts payable. From a working capital perspective, you generally want to delay paying bills as long as possible — particularly those from noncritical suppliers, vendors or other parties. One exception to this is when you can qualify for early bird discounts. Naturally, delaying payments should never drift into late payments or nonpayment, which can damage your business credit rating.
3. Inventory. If your company maintains inventory, recognize the challenge it presents to working capital management. Excessive inventory levels may dangerously reduce liquidity because of restocking, storage, obsolescence, insurance and security costs. Then again, insufficient inventory levels can frustrate customers and hurt sales. Be sure to give your inventory the “TLC” it deserves — including regular technology upgrades and strategic reconsideration of optimal levels.
The right balance It isn’t easy to strike the right balance of maintaining enough liquidity to operate smoothly while also saving funds for capital investments and an emergency cash reserve. Our firm can help you assess precisely where your working capital stands and identify ways to manage it better.
Work-issued credit cards: How to prevent staffer abuse
Let’s say that one of your not-for-profit’s employees makes significant personal purchases on a credit card you’ve provided for work-related expenses. You may think the outcome is relatively straightforward: The individual is fired and referred to law enforcement for prosecution, and you recover the funds. Unfortunately, obtaining a criminal conviction may be difficult. Plus, you might not want the negative publicity. Your credit card issuer is unlikely to credit you for the unauthorized charges unless you can prove the card was actually stolen, and your insurance may or may not cover the loss. The best way to prevent this situation is to craft and enforce a clearly worded credit card policy. Who needs a card? Your policy should start with who is authorized to have or use a card.
Nonprofits commonly issue cards to their executive directors, program directors and office managers. Before issuing one to an employee — or temporarily handing one to other staffers — consider whether that person really needs it. Most people can pay out of pocket and submit reimbursement requests. However, if employees travel or entertain donors regularly on your nonprofit’s behalf, giving them cards may make sense. Rules for use It’s also important to clearly communicate the rules for credit card use.
Explicitly state in writing that cardholders can’t use the card for personal expenses, and list other prohibited uses such as cash advances, electronic cash transfers and charges over a specified amount. State that reimbursement for returns of goods or services must be credited directly to the card account. Employees should never accept cash or refunds directly. Supervisor and staffer responsibilities Manager involvement is essential to helping prevent credit card abuse. Require employees to seek preapproval for any credit card charge and provide documentation, such as itemized receipts, to their authorizing supervisor for review. State that unauthorized purchases (and any related late fees and interest) will become the employee’s responsibility. Supervisors need to indicate their approval of the charges by a signature and date on the receipts or a standardized expense form. Your accounting department should reconcile monthly credit card statements, and an executive or board member should review the statements.
Employers often terminate and sometimes pursue criminal prosecution against staffers who misuse credit cards. Make sure your policies are clear and that every employee understands the potential repercussions. At the same time, let employees know they should talk to you if they’re in financial straits. Resist your initial impulse If a staffer makes an unauthorized charge to your organization’s credit card, your first impulse may be to deduct the amount from that person’s paycheck. But be careful: Federal and state labor and wage laws generally prohibit making such deductions. Instead, ask the employee to repay the amount, arranging for a repayment plan if necessary. Discuss such actions, and other potential responses, with legal counsel and financial advisors.
Nonprofits commonly issue cards to their executive directors, program directors and office managers. Before issuing one to an employee — or temporarily handing one to other staffers — consider whether that person really needs it. Most people can pay out of pocket and submit reimbursement requests. However, if employees travel or entertain donors regularly on your nonprofit’s behalf, giving them cards may make sense. Rules for use It’s also important to clearly communicate the rules for credit card use.
Explicitly state in writing that cardholders can’t use the card for personal expenses, and list other prohibited uses such as cash advances, electronic cash transfers and charges over a specified amount. State that reimbursement for returns of goods or services must be credited directly to the card account. Employees should never accept cash or refunds directly. Supervisor and staffer responsibilities Manager involvement is essential to helping prevent credit card abuse. Require employees to seek preapproval for any credit card charge and provide documentation, such as itemized receipts, to their authorizing supervisor for review. State that unauthorized purchases (and any related late fees and interest) will become the employee’s responsibility. Supervisors need to indicate their approval of the charges by a signature and date on the receipts or a standardized expense form. Your accounting department should reconcile monthly credit card statements, and an executive or board member should review the statements.
Employers often terminate and sometimes pursue criminal prosecution against staffers who misuse credit cards. Make sure your policies are clear and that every employee understands the potential repercussions. At the same time, let employees know they should talk to you if they’re in financial straits. Resist your initial impulse If a staffer makes an unauthorized charge to your organization’s credit card, your first impulse may be to deduct the amount from that person’s paycheck. But be careful: Federal and state labor and wage laws generally prohibit making such deductions. Instead, ask the employee to repay the amount, arranging for a repayment plan if necessary. Discuss such actions, and other potential responses, with legal counsel and financial advisors.
Get the word out about IRA qualified charitable distributions
The SECURE 2.0 Act made some enhancements to IRA qualified charitable distributions (QCDs) that may benefit your not-for-profit organization — so long as donors know about them. You can encourage your supporters to contribute more by boning up on the new rules and communicating their tax advantages. QCDs to RMDs First, the basics: QCDs were established in 2006 and became permanent in 2015. Taxpayers age 70½ or older are allowed to make QCDs up to an annual limit from their IRAs directly to a qualified charity. A charitable deduction can’t be claimed for a QCD, but the QCD amount is excluded from the donor’s taxable income. And the QCD can be used to satisfy the IRA owner’s required minimum distribution (RMD), if applicable. SECURE 2.0 enhancements SECURE 2.0, signed into law in 2022, includes some significant QCD enhancements. Beginning this year, what was previously a $100,000 annual distribution limit is now indexed annually for inflation — $105,000 in 2024.
SECURE 2.0 also created a new QCD opportunity starting in 2023. Taxpayers can make a once-per-lifetime QCD of up to $50,000, annually indexed for inflation ($53,000 in 2024), through a split-interest entity. These include charitable gift annuities, charitable remainder annuity trusts and charitable remainder unitrusts. Split-interest entities generally allow donors to make gifts to your nonprofit while creating an income stream for themselves. After a designated period of time, the balance goes to your organization. As with regular QCDs, the amount of a split-interest entity QCD isn’t deductible, but it counts toward RMDs and isn’t included in the donor’s taxable income. Spouses can each make a QCD to the same split-interest entity to double the gift. Split-interest entities must pay a 5% minimum fixed percentage annually for the life of the donor or the donor’s spouse, and these payments are taxed as ordinary income. Boost donations How can you get the word out and boost donations? Consider preparing a presentation, brochure or both on how QCDs work, stressing the tax advantages for donors.
A QCD might be especially tax-smart for donors who: Can’t benefit from the charitable deduction because their total itemized deductions for the year won’t exceed the standard deduction for their filing status, or Want to donate more to charity during the year than they can deduct due to adjusted gross income (AGI)-based limits on their charitable deduction. In general, deductions for cash gifts to public charities can’t exceed 60% of AGI and deductions for donations of long-term capital gains property to charities can’t exceed 30% of AGI. But don’t limit your education campaign to these technicalities. Supporters increasingly are interested in outcomes. Be as specific as possible about how you’ll apply a donor’s QCD — for example, to fund a new program or facility or pay for additional staff. Qualified recipients Note that donor-advised fund sponsors, private foundations and supporting organizations continue to be ineligible as QCD recipients. Indeed, you should make certain that your nonprofit is allowed to accept — and is set up to receive — QCDs.
SECURE 2.0 also created a new QCD opportunity starting in 2023. Taxpayers can make a once-per-lifetime QCD of up to $50,000, annually indexed for inflation ($53,000 in 2024), through a split-interest entity. These include charitable gift annuities, charitable remainder annuity trusts and charitable remainder unitrusts. Split-interest entities generally allow donors to make gifts to your nonprofit while creating an income stream for themselves. After a designated period of time, the balance goes to your organization. As with regular QCDs, the amount of a split-interest entity QCD isn’t deductible, but it counts toward RMDs and isn’t included in the donor’s taxable income. Spouses can each make a QCD to the same split-interest entity to double the gift. Split-interest entities must pay a 5% minimum fixed percentage annually for the life of the donor or the donor’s spouse, and these payments are taxed as ordinary income. Boost donations How can you get the word out and boost donations? Consider preparing a presentation, brochure or both on how QCDs work, stressing the tax advantages for donors.
A QCD might be especially tax-smart for donors who: Can’t benefit from the charitable deduction because their total itemized deductions for the year won’t exceed the standard deduction for their filing status, or Want to donate more to charity during the year than they can deduct due to adjusted gross income (AGI)-based limits on their charitable deduction. In general, deductions for cash gifts to public charities can’t exceed 60% of AGI and deductions for donations of long-term capital gains property to charities can’t exceed 30% of AGI. But don’t limit your education campaign to these technicalities. Supporters increasingly are interested in outcomes. Be as specific as possible about how you’ll apply a donor’s QCD — for example, to fund a new program or facility or pay for additional staff. Qualified recipients Note that donor-advised fund sponsors, private foundations and supporting organizations continue to be ineligible as QCD recipients. Indeed, you should make certain that your nonprofit is allowed to accept — and is set up to receive — QCDs.
When your nonprofit’s debt-financed income is subject to tax
If your nonprofit has investment income, dividends, interest, rents and annuities, they’re generally excluded when calculating unrelated business income tax (UBIT). However, income from debt-financed property typically is taxable. So it’s important to segregate income from such property and include it in UBIT calculations to help ensure you don’t trigger unwanted IRS attention. What counts as UB I? Income produced from debt-financed property generally is taxable unrelated business income (UBI) in the same percentage as the debt is to the full acquisition cost.
This means that 75% of any income or gain from a property with a loan for 75% of its cost will usually be taxable UBI. The most common type of income-producing debt-financed property for nonprofits is probably real estate — for example, an office building with income from rents unrelated to your nonprofit’s mission. But such property might also include stocks or other investments purchased with borrowed funds. Income-producing property generally is treated as debt-financed for UBIT purposes if, at any time during the tax year, it had outstanding “acquisition indebtedness.” So if your nonprofit incurred debt before, during or shortly after it acquired or improved property (but wouldn’t otherwise have incurred debt), the property may be considered acquisition indebted. What doesn’t count? Some types of debt-financed property aren’t considered when calculating UBIT: Property related to your exempt purpose. If 85% or more of the use of the property is substantially related to your nonprofit’s exempt purposes, it won’t be considered debt-financed property.
Therefore, income from the property won’t be taxable. Simply using the income to support your programs doesn’t make the property related to your organization’s exempt purpose. The property must be used in providing program services. Property used in certain excluded activities. This is property used in a trade or business that’s excluded from the definition of “unrelated trade or business.” That’s either because it’s used in research activities or because the activity has a volunteer workforce, is conducted for the convenience of members, or operates to sell donated merchandise. Real property covered by the neighborhood land rule. Your nonprofit must acquire the real estate intending to use it for exempt purposes within 10 years.
Also, the property usually must be connected to other property your organization uses for exempt purposes. Favorable treatment will no longer apply if you abandon your intention to use the land for exempt purposes. Who should you ask? There are other circumstances when dividends, interest, rents, annuities and other investment income may be taxable — for example, if it’s paid directly from a subsidiary your nonprofit controls. Determining if and when income is subject to UBIT can be difficult. We encourage you to contact us for information and help.
This means that 75% of any income or gain from a property with a loan for 75% of its cost will usually be taxable UBI. The most common type of income-producing debt-financed property for nonprofits is probably real estate — for example, an office building with income from rents unrelated to your nonprofit’s mission. But such property might also include stocks or other investments purchased with borrowed funds. Income-producing property generally is treated as debt-financed for UBIT purposes if, at any time during the tax year, it had outstanding “acquisition indebtedness.” So if your nonprofit incurred debt before, during or shortly after it acquired or improved property (but wouldn’t otherwise have incurred debt), the property may be considered acquisition indebted. What doesn’t count? Some types of debt-financed property aren’t considered when calculating UBIT: Property related to your exempt purpose. If 85% or more of the use of the property is substantially related to your nonprofit’s exempt purposes, it won’t be considered debt-financed property.
Therefore, income from the property won’t be taxable. Simply using the income to support your programs doesn’t make the property related to your organization’s exempt purpose. The property must be used in providing program services. Property used in certain excluded activities. This is property used in a trade or business that’s excluded from the definition of “unrelated trade or business.” That’s either because it’s used in research activities or because the activity has a volunteer workforce, is conducted for the convenience of members, or operates to sell donated merchandise. Real property covered by the neighborhood land rule. Your nonprofit must acquire the real estate intending to use it for exempt purposes within 10 years.
Also, the property usually must be connected to other property your organization uses for exempt purposes. Favorable treatment will no longer apply if you abandon your intention to use the land for exempt purposes. Who should you ask? There are other circumstances when dividends, interest, rents, annuities and other investment income may be taxable — for example, if it’s paid directly from a subsidiary your nonprofit controls. Determining if and when income is subject to UBIT can be difficult. We encourage you to contact us for information and help.
6 key elements of a business budget
Every business needs a budget, but not every budget looks the same. Some companies have intricately detailed ones, others rely on simple templates generated with off-the shelf software, and still others forego formal budgets in favor of a “fly by the seat of your pants” approach. (That last option isn’t recommended.) Because budgeting is such an essential part of running a business, it’s easy to take for granted. You may fall into a routine that, over time, doesn’t keep up with your company’s evolving needs.
To identify areas of improvement, here are six key elements of a business budget and some best practices to consider:
1. Current overview. You may think you’ve created a sound budget, but its usefulness will be limited if it’s based on what your business looked like and how it operated five years ago. Compose an up-to-date description of your business. This should include its strategic goals, sales targets, the state of your industry and market, and impactful economic factors.
2. Budget rationale. Explain in clear language how the budget supports your company’s mission, vision, values, goals and objectives. To be included in the budget, every line item (see below) must support all five of those factors. If one doesn’t, question its merit.
3. Detailed line items. Naturally, the “meat” of every budget is its line items. These typically include: Revenue, such as sales income and interest income, Expenses, such as salaries and wages, rent, and utilities, Capital expenditures, such as equipment purchases and property improvements, and Contingency funds, such as a cash reserve. An important question to ask is: Are we including everything the business spends money on? Although maintaining a detailed budget can be tedious, it’s imperative to managing cash flow.
4. Selected performance metrics. Among the primary purposes of a budget is to compare projected spending to actual spending — making adjustments as necessary. As part of the budgeting process, establish precisely which metrics you’ll use to determine whether you’re making, breaking or beating the budget.
5. Supporting appendices. Discuss with your leadership team whether your budget would be more useful with additional information. Commonly attached supporting appendices include historical budget and results analyses, department spending summaries, tables and graphs depicting market and cost trends, organizational charts, and glossaries of terminology.
6. Executive summary. This brief written snapshot, which usually appears at the very top of the budget report, is intended to provide a concise overview of the chief objectives and major sections of the budget. If you’re not already using one, consider it. For you and other internal users, an executive summary can serve as a quick reference and help you set your expectations. Perhaps more important, it can make your budget easier to understand for outside parties such as lenders and investors.
Your current budget may not include all six of these elements — and that’s OK. As mentioned, companies are free to create budgets in whatever format suits their size and needs. But you should approach budgeting with an eye on continuous improvement. And to that end, please contact us. We can assess your budgeting process from start to finish and suggest ways to perform this critical business function more efficiently and effectively.
To identify areas of improvement, here are six key elements of a business budget and some best practices to consider:
1. Current overview. You may think you’ve created a sound budget, but its usefulness will be limited if it’s based on what your business looked like and how it operated five years ago. Compose an up-to-date description of your business. This should include its strategic goals, sales targets, the state of your industry and market, and impactful economic factors.
2. Budget rationale. Explain in clear language how the budget supports your company’s mission, vision, values, goals and objectives. To be included in the budget, every line item (see below) must support all five of those factors. If one doesn’t, question its merit.
3. Detailed line items. Naturally, the “meat” of every budget is its line items. These typically include: Revenue, such as sales income and interest income, Expenses, such as salaries and wages, rent, and utilities, Capital expenditures, such as equipment purchases and property improvements, and Contingency funds, such as a cash reserve. An important question to ask is: Are we including everything the business spends money on? Although maintaining a detailed budget can be tedious, it’s imperative to managing cash flow.
4. Selected performance metrics. Among the primary purposes of a budget is to compare projected spending to actual spending — making adjustments as necessary. As part of the budgeting process, establish precisely which metrics you’ll use to determine whether you’re making, breaking or beating the budget.
5. Supporting appendices. Discuss with your leadership team whether your budget would be more useful with additional information. Commonly attached supporting appendices include historical budget and results analyses, department spending summaries, tables and graphs depicting market and cost trends, organizational charts, and glossaries of terminology.
6. Executive summary. This brief written snapshot, which usually appears at the very top of the budget report, is intended to provide a concise overview of the chief objectives and major sections of the budget. If you’re not already using one, consider it. For you and other internal users, an executive summary can serve as a quick reference and help you set your expectations. Perhaps more important, it can make your budget easier to understand for outside parties such as lenders and investors.
Your current budget may not include all six of these elements — and that’s OK. As mentioned, companies are free to create budgets in whatever format suits their size and needs. But you should approach budgeting with an eye on continuous improvement. And to that end, please contact us. We can assess your budgeting process from start to finish and suggest ways to perform this critical business function more efficiently and effectively.
Fundamental differences between nonprofit and for-profit accounting
You may know the difference between nonprofit and for-profit accounting systems, but do your newest employees and board members? Not-for-profits and businesses share certain similarities. For example, both must carefully track transactions and produce accurate, timely financial statements. But there are enough differences between the two that you may want to provide training for new board members and staffers who come from corporate backgrounds. Profit vs. charitable mission For-profit companies are driven to maximize profits for their owners. Nonprofits, on the other hand, generally want revenue to cover the costs of fulfilling their mission now and in the future. Their respective financial statements reflect this difference. For-profits report mainly on profitability and increasing assets, which correlate with future dividends and return on investment to owners and shareholders.
Nonprofits report on their financial position, stability and expenditures to funders, board members, the community and tax authorities. Balance sheet vs. statement of financial position For-profits and nonprofits use different financial statements to report assets and liabilities. For-profit companies prepare a balance sheet that lists the owners’ or shareholders’ equity, which is based on the company’s assets, liabilities and prior profits.
Nonprofits, which have no owners, prepare a statement of financial position, which also looks at assets, liabilities and prior earnings. Resulting net assets are classified as those without donor restrictions and those with donor restrictions. Nonprofits usually are more focused on transparency than are for-profit companies. Therefore, their financial statements and footnotes generally include disclosures about the nature and amount of donor-imposed restrictions on net assets, as well as internal limits set by the board. Income statement vs. statement of activities For-profits and nonprofits also take different reporting approaches to revenues and expenses. For-profits produce an income statement (also known as a profit and loss statement), listing revenues, gains, expenses and losses, to help evaluate financial performance. Nonprofits often rely on grants and donations, in addition to fees-for-service income. So they prepare a statement of activities, which lists all revenues less expenses, and classifies the impact on each net asset class.
Unlike for-profit businesses, nonprofits also prepare a statement of functional expenses. Here, they break down their expenditures (such as salaries and benefits, rent and utilities, and office supplies) into functional categories — program, administration (also referred to as management) and fundraising. This statement often is used to help nonprofits prepare their annual Forms 990 and can provide greater transparency to their donors and supporters. Other differences There are other nonprofit financial reporting and accounting concepts that may be important for staffers and board members to learn, depending on their responsibilities. If you have questions or need help educating your stakeholders, contact us.
Nonprofits report on their financial position, stability and expenditures to funders, board members, the community and tax authorities. Balance sheet vs. statement of financial position For-profits and nonprofits use different financial statements to report assets and liabilities. For-profit companies prepare a balance sheet that lists the owners’ or shareholders’ equity, which is based on the company’s assets, liabilities and prior profits.
Nonprofits, which have no owners, prepare a statement of financial position, which also looks at assets, liabilities and prior earnings. Resulting net assets are classified as those without donor restrictions and those with donor restrictions. Nonprofits usually are more focused on transparency than are for-profit companies. Therefore, their financial statements and footnotes generally include disclosures about the nature and amount of donor-imposed restrictions on net assets, as well as internal limits set by the board. Income statement vs. statement of activities For-profits and nonprofits also take different reporting approaches to revenues and expenses. For-profits produce an income statement (also known as a profit and loss statement), listing revenues, gains, expenses and losses, to help evaluate financial performance. Nonprofits often rely on grants and donations, in addition to fees-for-service income. So they prepare a statement of activities, which lists all revenues less expenses, and classifies the impact on each net asset class.
Unlike for-profit businesses, nonprofits also prepare a statement of functional expenses. Here, they break down their expenditures (such as salaries and benefits, rent and utilities, and office supplies) into functional categories — program, administration (also referred to as management) and fundraising. This statement often is used to help nonprofits prepare their annual Forms 990 and can provide greater transparency to their donors and supporters. Other differences There are other nonprofit financial reporting and accounting concepts that may be important for staffers and board members to learn, depending on their responsibilities. If you have questions or need help educating your stakeholders, contact us.
Restricted gifts: What to do when strings are attached
Brad, the development director of an international environmental charity, was thrilled to learn from a fundraising staffer that one of the charity’s past supporters was promising to make a new, six-figure donation. But there was a catch: The donor was going to attach restrictions to her gift. She didn’t, for example, want her money used in various countries where the charity had operations. Although Brad was excited about the donation, he was also wary because he knew that restricted gifts require careful handling.
Your not-for-profit organization also needs to be careful with donations that come with strings attached. Apply well-defined procedures Restricted gift donors pay close attention to whether nonprofits strictly adhere to the small print included with their contributions. Donors have sued nonprofits they believe used their restricted gifts for other purposes. Even if donors don’t pursue litigation, the misuse of funds — fraudulent or not — can generate negative publicity for charities. For these reasons, proper tracking of restricted donations is a vital part of the accountability and transparency your supporters expect. There’s no one-size-fits-all approach for tracking restricted contributions. You need to develop and consistently apply well-defined procedures that suit your circumstances. However, in general, you should train employees to properly identify and label incoming restricted contributions and deliver the paperwork to the appropriate staffers. Those designated staffers then should document the restrictions and how they’ll be fulfilled.
Your nonprofit should also record all expenditures allocated to a restricted contribution. Use a simple spreadsheet or track restricted contributions as individual funds in your organization’s general ledger. To minimize the risk of errors, implement a process for regular review to confirm the proper use of restricted funds and — in the event of inadvertent misuse — prompt remediation. Additionally, put in place a “tickler” system to remind you of any donor-imposed reporting requirements. Finally, track the outcomes of such spending. The ability to demonstrate everything that a contribution accomplished can prove powerful in soliciting more contributions from the original donor — as well as others concerned about the outcomes of their gift-giving. Encourage unrestricted contributions Your nonprofit may find complying with restrictions difficult — and in some circumstances, impossible. For example, if a donor offers your healthcare nonprofit a work of art and stipulates that you can’t sell it, you might be better off refusing the donation.
But first, invite the donor for a one-on-one discussion where you express gratitude for the offer, explain your reasoning for declining it, and explore other ways for the donor to support your cause. Finally, to provide the greatest amount of flexibility, encourage donors to make unrestricted gifts. Donors are more likely to agree if your message is communicated well and they trust you. Contact us for more information on handling restricted gifts and encouraging unrestricted ones.
Your not-for-profit organization also needs to be careful with donations that come with strings attached. Apply well-defined procedures Restricted gift donors pay close attention to whether nonprofits strictly adhere to the small print included with their contributions. Donors have sued nonprofits they believe used their restricted gifts for other purposes. Even if donors don’t pursue litigation, the misuse of funds — fraudulent or not — can generate negative publicity for charities. For these reasons, proper tracking of restricted donations is a vital part of the accountability and transparency your supporters expect. There’s no one-size-fits-all approach for tracking restricted contributions. You need to develop and consistently apply well-defined procedures that suit your circumstances. However, in general, you should train employees to properly identify and label incoming restricted contributions and deliver the paperwork to the appropriate staffers. Those designated staffers then should document the restrictions and how they’ll be fulfilled.
Your nonprofit should also record all expenditures allocated to a restricted contribution. Use a simple spreadsheet or track restricted contributions as individual funds in your organization’s general ledger. To minimize the risk of errors, implement a process for regular review to confirm the proper use of restricted funds and — in the event of inadvertent misuse — prompt remediation. Additionally, put in place a “tickler” system to remind you of any donor-imposed reporting requirements. Finally, track the outcomes of such spending. The ability to demonstrate everything that a contribution accomplished can prove powerful in soliciting more contributions from the original donor — as well as others concerned about the outcomes of their gift-giving. Encourage unrestricted contributions Your nonprofit may find complying with restrictions difficult — and in some circumstances, impossible. For example, if a donor offers your healthcare nonprofit a work of art and stipulates that you can’t sell it, you might be better off refusing the donation.
But first, invite the donor for a one-on-one discussion where you express gratitude for the offer, explain your reasoning for declining it, and explore other ways for the donor to support your cause. Finally, to provide the greatest amount of flexibility, encourage donors to make unrestricted gifts. Donors are more likely to agree if your message is communicated well and they trust you. Contact us for more information on handling restricted gifts and encouraging unrestricted ones.
Business owners sometimes need to switch successors
For many business owners, choosing a successor is the most difficult task related to succession planning. Owners of family-owned businesses, who may have multiple children or other relatives to consider, particularly tend to struggle with this tough choice. What’s worse, many business owners’ initial picks for successor don’t work out. Over time, the chosen person can prove to be unqualified, incapable or unwilling to fulfill a leadership role. If you find yourself in this situation, don’t panic. There are some measured steps you can take to resolve the matter.
Ask around Before you dismiss your chosen successor, discuss the situation with several objective parties. These might include professional advisors, such as your CPA and attorney, as well as trusted family members, friends or colleagues with business experience. Your goal is to determine whether your perception is off the mark. You may think, for instance, that your successor lacks the necessary skills to run your company. But the person might simply have a different leadership style than you do. Talking with others may help you put things in perspective. Look for ways to help If you come to believe that, with some work, your successor may still be capable of running the business after all, meet with the person. State your concerns and outline what must change. And don’t forget to listen. Ask why your successor is having the difficulties you’ve pointed out. Perhaps it’s a lack of formal training in one aspect of the job. In such cases, there may be a class that can help provide the needed education, or maybe more mentoring from you might solve the problem. It’s also possible your successor is facing personal issues that are getting in the way of work. For example, the person may be having financial problems, battling an addiction, or struggling in a marriage or other personal relationship. By listening, you can find out what the specific issues are and how you may be able to help.
Avoid past mistakes after talking with others, and perhaps your successor, you may still feel the person needs to be replaced. If you decide to move on to someone else, tell your successor as soon as possible and explain why. Being honest and forthright, though difficult, will help settle the matter efficiently. As part of the conversation, ask whether there’s anything you could’ve done differently to avoid the impasse that developed. Following that discussion, reconstruct the succession planning process to determine what led you to choose your initial successor. Review personal notes, memos and emails. Speak again with your professional advisors as well as trusted employees, family members, friends and colleagues about picking someone new. Ultimately, you want to develop objective criteria for your new successor and eliminate the impediments that kept your initial choice from working out. Finally, if your second choice also doesn’t work out, stay open to the possibility that the problem may not lie with your prospective successors. It’s possible that the demands you’re placing on a successor may be somewhat unreasonable, or that you’re inadequately communicating your wishes and expectations. Prepare for contingencies Many business owners choose successors, work diligently to mentor them and transition smoothly into retirement with their companies in safe hands. But, as you well know, rarely does everything go exactly as planned in the business world. Preparing for contingencies is key in succession planning. As part of that effort, we can help you integrate savvy tax and financial strategies into your plan.
Ask around Before you dismiss your chosen successor, discuss the situation with several objective parties. These might include professional advisors, such as your CPA and attorney, as well as trusted family members, friends or colleagues with business experience. Your goal is to determine whether your perception is off the mark. You may think, for instance, that your successor lacks the necessary skills to run your company. But the person might simply have a different leadership style than you do. Talking with others may help you put things in perspective. Look for ways to help If you come to believe that, with some work, your successor may still be capable of running the business after all, meet with the person. State your concerns and outline what must change. And don’t forget to listen. Ask why your successor is having the difficulties you’ve pointed out. Perhaps it’s a lack of formal training in one aspect of the job. In such cases, there may be a class that can help provide the needed education, or maybe more mentoring from you might solve the problem. It’s also possible your successor is facing personal issues that are getting in the way of work. For example, the person may be having financial problems, battling an addiction, or struggling in a marriage or other personal relationship. By listening, you can find out what the specific issues are and how you may be able to help.
Avoid past mistakes after talking with others, and perhaps your successor, you may still feel the person needs to be replaced. If you decide to move on to someone else, tell your successor as soon as possible and explain why. Being honest and forthright, though difficult, will help settle the matter efficiently. As part of the conversation, ask whether there’s anything you could’ve done differently to avoid the impasse that developed. Following that discussion, reconstruct the succession planning process to determine what led you to choose your initial successor. Review personal notes, memos and emails. Speak again with your professional advisors as well as trusted employees, family members, friends and colleagues about picking someone new. Ultimately, you want to develop objective criteria for your new successor and eliminate the impediments that kept your initial choice from working out. Finally, if your second choice also doesn’t work out, stay open to the possibility that the problem may not lie with your prospective successors. It’s possible that the demands you’re placing on a successor may be somewhat unreasonable, or that you’re inadequately communicating your wishes and expectations. Prepare for contingencies Many business owners choose successors, work diligently to mentor them and transition smoothly into retirement with their companies in safe hands. But, as you well know, rarely does everything go exactly as planned in the business world. Preparing for contingencies is key in succession planning. As part of that effort, we can help you integrate savvy tax and financial strategies into your plan.
Update on a possible universal charitable deduction
During the COVID-19 pandemic, Congress temporarily enabled individual charitable donors who didn’t itemize federal income tax deductions to deduct up to $300 in contributions in both 2020 and 2021. This universal charitable deduction galvanized many donors who might not otherwise have supported charities in those years. However, the deduction expired after 2021. A bipartisan group of U.S. senators , with support from many in the not-for-profit sector, are attempting to revive this tax break. Donations drop, then rise the approximate doubling of the standard deduction under the Tax Cuts and Jobs Act encouraged many donors who previously had itemized deductions and deducted charitable gifts to instead take the standard deduction. Researchers at Indiana University and the University of Notre Dame have found that this change resulted in a $20 billion drop in donations to charity in 2018, the year the higher standard deduction went into effect. Many nonprofits suffered from this pullback.
Although pandemic disruptions generally made giving data less reliable starting in 2020, the temporary universal charitable deduction appears to have motivated donors in middle and lower income brackets to give. According to the National Conference of State Legislatures, over 47 million U.S. households used the tax incentive in 2021 — and more than 21% of these donors had adjusted gross incomes under $30,000. Potential congressional action In early 2023, a bipartisan group of U.S. senators introduced the Charitable Act. (A similar bill was introduced in the U.S. House in May 2023.) This bill would expand and extend the nonitemized deduction for charitable giving by reviving and increasing the $300 deduction permitted in 2020 and 2021 ($600 for married couples filing jointly in 2021). Non itemizing individual taxpayers would potentially be able to deduct about $4,500 (double that for joint filers) in donations annually.
Not surprisingly, many nonprofits and sector advocacy groups, including the National Council of Nonprofits and Charitable Giving Coalition, support the legislation. The most recent Giving USA survey (released by The Giving Institute) reported that charitable donations dropped by an inflation-adjusted 2.1% in 2023, which researchers believe is part of a longer-term trend toward donating less to charity. Future of the bill Although the Charitable Act was referred to the Senate Finance Committee, it hasn’t been taken up and its future in its current incarnation is in doubt. Organizations such as the Association of Fundraising Professionals are encouraging members to contact their legislators to revive the bill. And the nonprofit sector is likely to continue to lobby for legislation it believes will raise charitable giving levels.
Although pandemic disruptions generally made giving data less reliable starting in 2020, the temporary universal charitable deduction appears to have motivated donors in middle and lower income brackets to give. According to the National Conference of State Legislatures, over 47 million U.S. households used the tax incentive in 2021 — and more than 21% of these donors had adjusted gross incomes under $30,000. Potential congressional action In early 2023, a bipartisan group of U.S. senators introduced the Charitable Act. (A similar bill was introduced in the U.S. House in May 2023.) This bill would expand and extend the nonitemized deduction for charitable giving by reviving and increasing the $300 deduction permitted in 2020 and 2021 ($600 for married couples filing jointly in 2021). Non itemizing individual taxpayers would potentially be able to deduct about $4,500 (double that for joint filers) in donations annually.
Not surprisingly, many nonprofits and sector advocacy groups, including the National Council of Nonprofits and Charitable Giving Coalition, support the legislation. The most recent Giving USA survey (released by The Giving Institute) reported that charitable donations dropped by an inflation-adjusted 2.1% in 2023, which researchers believe is part of a longer-term trend toward donating less to charity. Future of the bill Although the Charitable Act was referred to the Senate Finance Committee, it hasn’t been taken up and its future in its current incarnation is in doubt. Organizations such as the Association of Fundraising Professionals are encouraging members to contact their legislators to revive the bill. And the nonprofit sector is likely to continue to lobby for legislation it believes will raise charitable giving levels.
Does your company have an EAP? If so, be mindful of compliance
Many businesses have established employee assistance programs (EAPs) to help their workforces deal with the mental health, substance abuse and financial challenges that have become so widely recognized in modern society. EAPs are voluntary and confidential work-based intervention programs designed to help employees and their dependents deal with issues that may be affecting their mental health and job performance. These may include workplace stress, grief, depression, marriage/family problems, psychological disorders, financial troubles, and alcohol and drug dependency.
Whether your company is considering an EAP or already offers one, among the most important factors to keep in mind is compliance. Start with ERISA Several different federal laws may come into play with EAPs. A good place to start when studying your compliance risks is the Employee Retirement Income Security Act (ERISA). The law’s provisions address critical compliance matters such as creating a plan document and Summary Plan Description, performing fiduciary duties, following claims procedures, and filing IRS Form 5500, “Annual Return/Report of Employee Benefit Plan.” Although most people associate ERISA with qualified health care and retirement plans, the law can be applicable to EAPs depending on how a particular program is structured and what benefits it provides. Generally, a fringe benefit is considered an ERISA welfare benefit plan if it’s a plan, fund or program established or maintained by an employer to provide ERISA-listed benefits, which include medical services. The category of ERISA-listed benefits most likely to be provided by an EAP is medical care or benefits. Mental health counseling — whether for substance abuse, stress, or other issues — is considered medical care.
Accordingly, an EAP providing mental health counseling will probably be subject to ERISA. On the other hand, an EAP that provides only referrals and general information, and isn’t staffed by trained counselors, likely isn’t an ERISA plan. Bear in mind that EAPs that primarily use referrals could still be considered to provide medical benefits if the individuals handling initial phone consultations and making the referrals are trained in an applicable field, such as psychology or social work. If an EAP provides any benefit subject to ERISA, then the entire program must comply with the law — even if it also provides non-ERISA benefits. Check up on other laws EAPs considered to be group health plans are also typically subject to the Consolidated Omnibus Budget Reconciliation Act (commonly known as “COBRA”) and certain other group health plan mandates, including mental health parity. Also, keep in mind that EAPs that receive medical information from participants — even if the programs only make referrals and don’t provide medical care — must comply with privacy and security rules under the Health Insurance Portability and Accountability Act (HIPAA). In addition, EAPs providing medical care or treatment could trigger certain provisions of the Affordable Care Act (ACA). EAPs meeting specified criteria, however, can be defined as an “excepted benefit” not subject to HIPAA portability or certain ACA requirements. Cover all bases given the rising awareness and acceptance of mental health care alone, EAPs could become as common as health insurance and retirement plans in many companies’ employee benefit packages.
Whether you’re thinking about one or already have an EAP up and running, it’s a good idea to consult an attorney regarding your company’s compliance risks. Meanwhile, please contact us for help identifying and tracking the costs involved, as well as understanding the tax impact.
Whether your company is considering an EAP or already offers one, among the most important factors to keep in mind is compliance. Start with ERISA Several different federal laws may come into play with EAPs. A good place to start when studying your compliance risks is the Employee Retirement Income Security Act (ERISA). The law’s provisions address critical compliance matters such as creating a plan document and Summary Plan Description, performing fiduciary duties, following claims procedures, and filing IRS Form 5500, “Annual Return/Report of Employee Benefit Plan.” Although most people associate ERISA with qualified health care and retirement plans, the law can be applicable to EAPs depending on how a particular program is structured and what benefits it provides. Generally, a fringe benefit is considered an ERISA welfare benefit plan if it’s a plan, fund or program established or maintained by an employer to provide ERISA-listed benefits, which include medical services. The category of ERISA-listed benefits most likely to be provided by an EAP is medical care or benefits. Mental health counseling — whether for substance abuse, stress, or other issues — is considered medical care.
Accordingly, an EAP providing mental health counseling will probably be subject to ERISA. On the other hand, an EAP that provides only referrals and general information, and isn’t staffed by trained counselors, likely isn’t an ERISA plan. Bear in mind that EAPs that primarily use referrals could still be considered to provide medical benefits if the individuals handling initial phone consultations and making the referrals are trained in an applicable field, such as psychology or social work. If an EAP provides any benefit subject to ERISA, then the entire program must comply with the law — even if it also provides non-ERISA benefits. Check up on other laws EAPs considered to be group health plans are also typically subject to the Consolidated Omnibus Budget Reconciliation Act (commonly known as “COBRA”) and certain other group health plan mandates, including mental health parity. Also, keep in mind that EAPs that receive medical information from participants — even if the programs only make referrals and don’t provide medical care — must comply with privacy and security rules under the Health Insurance Portability and Accountability Act (HIPAA). In addition, EAPs providing medical care or treatment could trigger certain provisions of the Affordable Care Act (ACA). EAPs meeting specified criteria, however, can be defined as an “excepted benefit” not subject to HIPAA portability or certain ACA requirements. Cover all bases given the rising awareness and acceptance of mental health care alone, EAPs could become as common as health insurance and retirement plans in many companies’ employee benefit packages.
Whether you’re thinking about one or already have an EAP up and running, it’s a good idea to consult an attorney regarding your company’s compliance risks. Meanwhile, please contact us for help identifying and tracking the costs involved, as well as understanding the tax impact.
Don’t let myths and self-doubt thwart your capital campaign plan
It’s understandable if your not-for-profit has been putting off launching a capital campaign — despite having grand plans to build a new facility, make major purchases or expand a key program. After all, myths abound about the risks of pursuing such large fundraising projects. According to the Association of Fundraising Professionals, included in these myths are that only big, established nonpro fits can hope to be successful and that capital campaigns aways cannibalize on annual fundraising. Neither of these are necessarily true. So long as you plan carefully, choose the right leaders and communicate your goals forcefully, you can execute a rewarding capital campaign.
Vision and stamina required Capital campaigns typically are long-term projects of three or more years. To carry out yours, you’ll need a champion with vision and stamina. Consider board members or look to leaders in your greater community with: A fundraising track record, Knowledge of your nonprofit’s mission, Familiarity with current issues that affect your organization’s work, The ability to motivate others, and time to manage projects and attend meetings and fundraising events. Your leader will need a small army to achieve capital campaign goals. Volunteers, board members and staffers will be required to raise funds through direct mail, email solicitations, direct solicitations and special events.
If you need more help, look to like-minded community groups and clients who have benefited from your services. Securing significant gifts early Traditional fundraising wisdom holds that you shouldn’t go public with your campaign until you’ve secured significant “lead gifts” from major donors. It’s generally easier to solicit donations under $1,000 from the public after you’ve already landed several large gifts —typically equal to 50% to 65% of your total fundraising goals. To secure these initial gifts, identify a large group (for example, 1,000 individuals) to solicit. Draw your list from past donors and event attendees, local business owners, board members, volunteers and other likely prospects. Then narrow that list to the 50 or 100 largest potential donors and talk to them before reaching out to the rest of your list. The right message Pay particular attention to how you craft your message. Make sure your financial goal is achievable and your plan for spending the funds raised can capture the imagination of supporters. Potential donors must see your organization as strong and capable of innovating and thriving well into the future. However, they also need to know that your nonprofit is the same, steady group they’ve championed for years.
Instead of focusing on what donations will do for your nonprofit, show potential donors the impact on their community. Regularly report gifts, track your progress toward reaching your ultimate campaign goal and measure the effectiveness of your activities on your website and social media accounts. Analyze financial aspects first The Association of Fundraising Professionals argues that “unfounded fears and self-doubt” may be the most serious obstacles to launching a capital campaign. Contact us if you need help analyzing the financial aspects of such a project.
Vision and stamina required Capital campaigns typically are long-term projects of three or more years. To carry out yours, you’ll need a champion with vision and stamina. Consider board members or look to leaders in your greater community with: A fundraising track record, Knowledge of your nonprofit’s mission, Familiarity with current issues that affect your organization’s work, The ability to motivate others, and time to manage projects and attend meetings and fundraising events. Your leader will need a small army to achieve capital campaign goals. Volunteers, board members and staffers will be required to raise funds through direct mail, email solicitations, direct solicitations and special events.
If you need more help, look to like-minded community groups and clients who have benefited from your services. Securing significant gifts early Traditional fundraising wisdom holds that you shouldn’t go public with your campaign until you’ve secured significant “lead gifts” from major donors. It’s generally easier to solicit donations under $1,000 from the public after you’ve already landed several large gifts —typically equal to 50% to 65% of your total fundraising goals. To secure these initial gifts, identify a large group (for example, 1,000 individuals) to solicit. Draw your list from past donors and event attendees, local business owners, board members, volunteers and other likely prospects. Then narrow that list to the 50 or 100 largest potential donors and talk to them before reaching out to the rest of your list. The right message Pay particular attention to how you craft your message. Make sure your financial goal is achievable and your plan for spending the funds raised can capture the imagination of supporters. Potential donors must see your organization as strong and capable of innovating and thriving well into the future. However, they also need to know that your nonprofit is the same, steady group they’ve championed for years.
Instead of focusing on what donations will do for your nonprofit, show potential donors the impact on their community. Regularly report gifts, track your progress toward reaching your ultimate campaign goal and measure the effectiveness of your activities on your website and social media accounts. Analyze financial aspects first The Association of Fundraising Professionals argues that “unfounded fears and self-doubt” may be the most serious obstacles to launching a capital campaign. Contact us if you need help analyzing the financial aspects of such a project.
Nonprofit refresher course: Excess benefit transactions
Most not-for-profit leaders are familiar with the concept of excess benefit transactions and the need to avoid them. But a refresher course may be in order, particularly when you consider that 501(c)(3) organizations determined by the IRS to have violated the rules may risk a revocation of their tax-exempt status — and, as a result, the loss of donor and community support. Private inurement
To understand excess benefit transactions, you also need to comprehend the concept of private inurement. A private benefit is any payment or transfer of assets made, directly or indirectly, by your nonprofit that is: Beyond reasonable compensation for the services provided or goods sold to your organization, or For services or products that don’t further your tax-exempt purpose. If any of your net earnings inure to the private benefit of an individual, the IRS won’t view your nonprofit as operating primarily to further its tax-exempt purpose. Private inurement rules extend the private benefit prohibition to “insiders” or “disqualified persons” — generally any officer, director, individual or organization (including major donors and donor advised funds) in a position to exert significant influence over your nonprofit’s activities and finances. The rules also cover their family members and organizations they control.
A violation occurs when a transaction that ultimately benefits the insider is approved. Be reasonable The rules don’t prohibit all payments, such as salaries and wages, to an insider. You simply need to make sure that any payment is reasonable relative to the services or goods provided. In other words, the payment must be made with your nonprofit’s tax-exempt purpose in mind. To ensure you can later prove that any transaction was reasonable and made for a valid exempt purpose, formally document all payments made to insiders. Also ensure that board members understand their duty of care.
This refers to a board member’s responsibility to act in good faith; in your organization’s best interest; and with such care that proper inquiry, skill and diligence has been exercised in the performance of duties. One best practice is to ask all board members to review and sign a conflict-of-interest policy. Appearance matters Some states prohibit nonprofits from making loans to insiders (such as officers and directors) while others allow it. In general, you’re safer to avoid such transactions — regardless of your state’s law — because they often trigger IRS scrutiny. Contact us to discuss the best ways to avoid both excess benefit transactions and the appearance of them in your organization.
To understand excess benefit transactions, you also need to comprehend the concept of private inurement. A private benefit is any payment or transfer of assets made, directly or indirectly, by your nonprofit that is: Beyond reasonable compensation for the services provided or goods sold to your organization, or For services or products that don’t further your tax-exempt purpose. If any of your net earnings inure to the private benefit of an individual, the IRS won’t view your nonprofit as operating primarily to further its tax-exempt purpose. Private inurement rules extend the private benefit prohibition to “insiders” or “disqualified persons” — generally any officer, director, individual or organization (including major donors and donor advised funds) in a position to exert significant influence over your nonprofit’s activities and finances. The rules also cover their family members and organizations they control.
A violation occurs when a transaction that ultimately benefits the insider is approved. Be reasonable The rules don’t prohibit all payments, such as salaries and wages, to an insider. You simply need to make sure that any payment is reasonable relative to the services or goods provided. In other words, the payment must be made with your nonprofit’s tax-exempt purpose in mind. To ensure you can later prove that any transaction was reasonable and made for a valid exempt purpose, formally document all payments made to insiders. Also ensure that board members understand their duty of care.
This refers to a board member’s responsibility to act in good faith; in your organization’s best interest; and with such care that proper inquiry, skill and diligence has been exercised in the performance of duties. One best practice is to ask all board members to review and sign a conflict-of-interest policy. Appearance matters Some states prohibit nonprofits from making loans to insiders (such as officers and directors) while others allow it. In general, you’re safer to avoid such transactions — regardless of your state’s law — because they often trigger IRS scrutiny. Contact us to discuss the best ways to avoid both excess benefit transactions and the appearance of them in your organization.
Planning an event? Don’t neglect sponsorships
There are many ways to evaluate the success of a not-for-profit event. But for most nonprofit leaders, financial success — how much did we raise? — is the metric that ultimately matters. To be financially fruitful, nonprofit events need sponsors (companies and individuals) to cover a portion of expenses. Be sure to make securing sponsorships central to planning your organization’s events. Best practices Depending on your organization, your special event might be a dinner gala, a conference, an auction, a golf tournament, a concert, or a combination (or none) of these. But finding solid sponsorship largely follows the same process, regardless of the event’s format. For example, you want time on your side. Nonprofits often compete with peer organizations for the same philanthropic dollars, so start early. It is not overly ambitious to have a fundraising plan in place a year in advance. And it is a good practice to lock in sponsors four to six months before your special event. To develop a list of supporters most likely to step up as sponsors, hold a magnifying glass to your organization’s mission statement. Think in terms of appropriateness and quality. For example, an athletic clothing manufacturer could be an excellent sponsor for a youth soccer league tournament. A local grocer might be just the right target for a food bank’s silent auction. Using teamwork, you are more likely to be successful if you assemble a team with strong community connections. Ask your executives, board members and volunteers to reach out to members of their personal and professional networks to solicit sponsorship help. These ambassadors should be well prepared with information about the benefits each sponsor will receive. This includes the event’s likely attendees. You will want to convince potential sponsors that your attendees belong to the same demographic they target for their products and services. Include data on where attendees live, along with their age, sex and buying power. Be factual in your approach — do not exaggerate. Exposure opportunities Sponsors generally help finance nonprofit events in exchange for exposure to your audience. What does such exposure look like? You might offer to put the sponsor’s name on event materials — including signs, banners, brochures, tickets, newsletters, and program books — and to recognize the sponsor verbally at the event. To help obtain the greatest amount of support from both large and small sponsors, develop multiple sponsorship options. In general, those companies paying the most should receive the most visibility at your event. Also offer free attendance to at least one representative (and a guest) of any sponsoring company so the sponsor will get a chance to mingle with attendees, gather information and build connections. If you are hosting an annual conference or meeting, you might want to provide the sponsor a speaking opportunity. Long-term relationship Do not forget that sponsorships ideally mark the start of a long-term relationship between your nonprofit and the sponsor. After your event, for example, you may want to get your sponsor’s employees involved in your organization’s work by hosting a company volunteer day. And, of course, you should solicit the sponsor’s support again when you plan your next event. Finally, be careful: In some circumstances, the IRS may consider corporate sponsorships paid advertising. In such cases, nonprofits can be liable for unrelated business income tax (UBIT). Contact us for information about finding sponsors while navigating complex UBIT rules.
3 areas of focus for companies looking to control costs
Controlling costs is fundamental for every business. But where and how to address this challenge can change over time based on various economic and logistical factors. Earlier this year, global consultancy Boston Consulting Group published a report entitled The CEO’s Guide to Costs and Growth. Within it were the results of a survey of 600 C-suite executives that found, among other things, cost management was a top priority for respondents heading into 2024. According to the survey, three of the top categories for cost-cutting initiatives were:
1. Supply chain / manufacturing. Not every company incurs manufacturing costs, but most have a supply chain. Costs and delays in this area soared during the pandemic because of global disruptions and backups. Since then, some sense of normalcy has returned, though that doesn’t mean managing supply chain costs has become easy. Many companies find that most of their spending is done with just a few vendors. By identifying these vendors and consolidating spending with them, you may be able to put yourself in a stronger position to negotiate volume discounts. Consolidating your supplier base also tends to streamline the administrative work associated with purchasing. It also pays to really know your suppliers. One way to gather an abundance of relevant information is to conduct a supplier audit. This is a formal process for collecting key data regarding each supplier’s performance to manage quality control and ensure you’re getting an acceptable return on investment.
2. Labor/nonlabor overhead. Controlling labor costs is tricky in today’s environment. Many industries are facing skilled labor shortages, meaning businesses would love to spend more on labor if they could find people to fill those positions. Nevertheless, with payroll being such a dominant expense category for most companies, it’s critical to monitor these costs and prevent overspending. A logical first step in managing labor costs is to know how much you’re spending. And the answer isn’t as simple as looking at the total gross wages you pay out every month or year. You need to know the actual and total amount of these costs. Fortunately, there’s a metric for that. Labor burden rate reflects the additional costs that companies incur beyond gross wages. These generally include expenses such as payroll taxes, workers’ compensation insurance and fringe benefits. Knowing your labor burden rate can enable you to truly “right-size” your workforce. Beyond that, outsourcing remains an option for mitigating labor costs — especially given the vast pool of independent contractors now available. Although you’ll obviously incur costs when outsourcing, the time and labor cost that it saves you could end up a net gain. Carefully chosen and implemented technology upgrades can provide similar results.
3. Marketing/sales. Much like labor, strong marketing and sales are critical to most businesses operating today. So, skimping on their related costs typically isn’t going to pay off. But, of course, you also need to ensure a strong return on investment. Again, choosing and monitoring the right metrics can prove useful here. The optimal ones tend to vary by industry and company type, but some of the most widely used for marketing purposes include lead conversion rate, click-through rate for online ads and cost per lead. Popular sales metrics include total revenue, year-over-year growth and average customer lifetime value. Whether it’s sales metrics, labor burden rate or supply chain management, getting objective, professional advice can help you and your leadership team obtain an accurate picture of what’s going on with your costs and target feasible solutions. Please consider our firm for assistance.
1. Supply chain / manufacturing. Not every company incurs manufacturing costs, but most have a supply chain. Costs and delays in this area soared during the pandemic because of global disruptions and backups. Since then, some sense of normalcy has returned, though that doesn’t mean managing supply chain costs has become easy. Many companies find that most of their spending is done with just a few vendors. By identifying these vendors and consolidating spending with them, you may be able to put yourself in a stronger position to negotiate volume discounts. Consolidating your supplier base also tends to streamline the administrative work associated with purchasing. It also pays to really know your suppliers. One way to gather an abundance of relevant information is to conduct a supplier audit. This is a formal process for collecting key data regarding each supplier’s performance to manage quality control and ensure you’re getting an acceptable return on investment.
2. Labor/nonlabor overhead. Controlling labor costs is tricky in today’s environment. Many industries are facing skilled labor shortages, meaning businesses would love to spend more on labor if they could find people to fill those positions. Nevertheless, with payroll being such a dominant expense category for most companies, it’s critical to monitor these costs and prevent overspending. A logical first step in managing labor costs is to know how much you’re spending. And the answer isn’t as simple as looking at the total gross wages you pay out every month or year. You need to know the actual and total amount of these costs. Fortunately, there’s a metric for that. Labor burden rate reflects the additional costs that companies incur beyond gross wages. These generally include expenses such as payroll taxes, workers’ compensation insurance and fringe benefits. Knowing your labor burden rate can enable you to truly “right-size” your workforce. Beyond that, outsourcing remains an option for mitigating labor costs — especially given the vast pool of independent contractors now available. Although you’ll obviously incur costs when outsourcing, the time and labor cost that it saves you could end up a net gain. Carefully chosen and implemented technology upgrades can provide similar results.
3. Marketing/sales. Much like labor, strong marketing and sales are critical to most businesses operating today. So, skimping on their related costs typically isn’t going to pay off. But, of course, you also need to ensure a strong return on investment. Again, choosing and monitoring the right metrics can prove useful here. The optimal ones tend to vary by industry and company type, but some of the most widely used for marketing purposes include lead conversion rate, click-through rate for online ads and cost per lead. Popular sales metrics include total revenue, year-over-year growth and average customer lifetime value. Whether it’s sales metrics, labor burden rate or supply chain management, getting objective, professional advice can help you and your leadership team obtain an accurate picture of what’s going on with your costs and target feasible solutions. Please consider our firm for assistance.
Could a 412(e)(3) retirement plan suit your business?
When companies reach the point where they’re ready to sponsor a qualified retirement plan, the first one that may come to mind is the 401(k). But there are other, lesser-used options that could suit the distinctive needs of some business owners. Case in point: the 412(e)(3) plan. Nuts and bolts Unlike 401(k)s, which are defined contribution plans, 412(e)(3) plans are defined benefit plans. This means they provide fixed benefits under a formula based on factors such as each participant’s compensation, age and years of service.
For 2024, the annual benefit provided by 412(e)(3)s can’t exceed the lesser of 100% of a participant’s highest three-year average compensation or $275,000. As with other defined benefit plans, 412(e)(3)s are funded only by employers. They don’t accept participant contributions. But unlike other defined benefit plans, which are funded through a variety of investments, 412(e)(3)s are funded with annuity contracts and insurance. In fact, the IRS refers to them as “fully insured” plans. The name “412(e)(3)” refers to Section 412(e)(3) of the Internal Revenue Code, which authorizes the plan type’s qualified status.
Under Sec. 412(e)(3), defined benefit plans funded with annuity contracts and insurance aren’t subject to minimum funding requirements — so long as certain conditions are met. Companies sponsoring these plans don’t have to make annual actuarial calculations or mandatory contributions. However, they risk penalties if a plan’s insurer doesn’t satisfy certain obligations. In other words, the plan needs to be safely insured. Potential benefits Some experts advise relatively older business owners who want to maximize retirement savings in a short period to consider 412(e)(3)s because of the way defined benefit plans differ from defined contribution plans.
That is, business owners who sponsor and participate in defined benefit plans can take a bigger share of the pie — particularly if they have few, if any, highly compensated employees. Meanwhile, they can also enjoy substantial tax deductions for plan contributions. In addition, 412(e)(3)s may be more attractive than other defined benefit plans for some small business owners. Although they tend to sacrifice potentially higher investment returns, these plans offer greater flexibility by using potentially lower-risk and easy-to-administer annuity contracts and insurance. They might also appeal to closely held business owners who want to maximize tax-deductible contributions to a retirement plan in the early years of ownership. As is the case with all defined benefit plans, however, sponsors must have the financial stability to support their plans indefinitely.
So, 412(e)(3)s usually aren’t appropriate for start-ups. Administrative requirements Tax-favored treatment for 412(e)(3)s isn’t automatic. These plans must meet various requirements as spelled out in the tax code. For example, as mentioned, 412(e)(3)s must be funded exclusively by the purchase of annuity contracts or a combination of annuity contracts and insurance. Sponsors must buy the contracts and/or insurance from insurers licensed by at least one of the 50 states or the District of Columbia. Also, the contracts must provide for level annual (or more frequent) premium payments starting on the date each participant joins the plan. Premium payments need to end no later than the normal retirement age of a participant — or by the date the individual ceases participation in the plan, if earlier.
These are just a couple examples of the rules involved. It’s critical to fully understand all the requirements before sponsoring a plan. An intriguing possibility A 412(e)(3) plan may be an under-the-radar choice for some businesses under the right circumstances. For help choosing the best plan for your company, contact us.
For 2024, the annual benefit provided by 412(e)(3)s can’t exceed the lesser of 100% of a participant’s highest three-year average compensation or $275,000. As with other defined benefit plans, 412(e)(3)s are funded only by employers. They don’t accept participant contributions. But unlike other defined benefit plans, which are funded through a variety of investments, 412(e)(3)s are funded with annuity contracts and insurance. In fact, the IRS refers to them as “fully insured” plans. The name “412(e)(3)” refers to Section 412(e)(3) of the Internal Revenue Code, which authorizes the plan type’s qualified status.
Under Sec. 412(e)(3), defined benefit plans funded with annuity contracts and insurance aren’t subject to minimum funding requirements — so long as certain conditions are met. Companies sponsoring these plans don’t have to make annual actuarial calculations or mandatory contributions. However, they risk penalties if a plan’s insurer doesn’t satisfy certain obligations. In other words, the plan needs to be safely insured. Potential benefits Some experts advise relatively older business owners who want to maximize retirement savings in a short period to consider 412(e)(3)s because of the way defined benefit plans differ from defined contribution plans.
That is, business owners who sponsor and participate in defined benefit plans can take a bigger share of the pie — particularly if they have few, if any, highly compensated employees. Meanwhile, they can also enjoy substantial tax deductions for plan contributions. In addition, 412(e)(3)s may be more attractive than other defined benefit plans for some small business owners. Although they tend to sacrifice potentially higher investment returns, these plans offer greater flexibility by using potentially lower-risk and easy-to-administer annuity contracts and insurance. They might also appeal to closely held business owners who want to maximize tax-deductible contributions to a retirement plan in the early years of ownership. As is the case with all defined benefit plans, however, sponsors must have the financial stability to support their plans indefinitely.
So, 412(e)(3)s usually aren’t appropriate for start-ups. Administrative requirements Tax-favored treatment for 412(e)(3)s isn’t automatic. These plans must meet various requirements as spelled out in the tax code. For example, as mentioned, 412(e)(3)s must be funded exclusively by the purchase of annuity contracts or a combination of annuity contracts and insurance. Sponsors must buy the contracts and/or insurance from insurers licensed by at least one of the 50 states or the District of Columbia. Also, the contracts must provide for level annual (or more frequent) premium payments starting on the date each participant joins the plan. Premium payments need to end no later than the normal retirement age of a participant — or by the date the individual ceases participation in the plan, if earlier.
These are just a couple examples of the rules involved. It’s critical to fully understand all the requirements before sponsoring a plan. An intriguing possibility A 412(e)(3) plan may be an under-the-radar choice for some businesses under the right circumstances. For help choosing the best plan for your company, contact us.
Even a lower-cost benefits menu can help you attract talent
Some job candidates assume that not-for-profit organizations offer lower compensation than for-profit companies do. If your nonprofit has open positions, this can be a difficult hurdle to overcome — particularly if you don’t have the budget to compete with for-profit businesses. However, you may be able to offer fringe benefits that won’t take a big bite out of your budget. Review your benefits me nu to see if it could use some enhancements. Competitive advantage A comprehensive fringe benefits package can be worth its weight in gold. In fact, a survey by workplace review site Glassdoor found that 80% of employees prefer additional benefits to comparable pay hikes, and 60% say benefits played a big role in accepting a job. Workers indicate they favor better benefits because they provide greater flexibility and job satisfaction in the long run. Your benefits may also enable you to distinguish your organization from nonprofits with similar missions. An applicant inclined to work for an organization that supports a worthy cause may opt to accept one nonprofit over another if it furnishes more benefits and more flexibility to use them. Saving on traditional benefits When asked to name a common employee benefit, most people probably would name health insurance.
This benefit is also typically the most expensive for employers to offer. You can help defray your organization’s costs by asking staffers to pay a greater share of the premiums, but then help make up for it by offering greater wellness benefits, such as discounted gym membership and cash incentives for healthy living. These tend to be affordable add-ons to health care plans. Retirement savings plans can also be costly to sponsor. However, nonprofits are no longer limited to offering 403(b) plans, they can also adopt 401(k) plans. Traditionally provided by for-profit entities, 401(k) plans tend to have lower expenses and fees for both employers and employees. One of the most cost-effective plans is the Safe Harbor 401(k), which has lower administrative burdens.
Talk to a benefits expert to learn more. Alternative offerings According to data-analysis nonprofit Candid, almost 70% of nonprofit staffers are female. Because women are more likely than men to be tasked with child and elder care, consider offering a dependent care FSA (if you don’t already). This pre-tax account allows employees to save for dependent care expenses. Also think about offering parental and adoption leave, and short-term disability insurance. These can help staffers and their families maintain financial stability during stressful times. And you might want to consider training and education reimbursement programs and other career advancement initiatives.
Finally, don’t overlook time off incentives. Many employees rank work/life balance as their top priority. Your organization may want to grant employees extra time off to handle personal matters or simply to enjoy R&R. Such benefits usually can be offered as paid time off, personal time, sick leave or vacation time. No magic formula The “magic” formula that enables you to land and retain the best talent can be elusive. Some workers simply want higher compensation, and there’s probably nothing you can do about it. But if you spiff up your benefits menu (keeping an eye on costs) and highlight it when recruiting staffers, you’re more likely to attract the attention of job candidates. Contact us for more information.
This benefit is also typically the most expensive for employers to offer. You can help defray your organization’s costs by asking staffers to pay a greater share of the premiums, but then help make up for it by offering greater wellness benefits, such as discounted gym membership and cash incentives for healthy living. These tend to be affordable add-ons to health care plans. Retirement savings plans can also be costly to sponsor. However, nonprofits are no longer limited to offering 403(b) plans, they can also adopt 401(k) plans. Traditionally provided by for-profit entities, 401(k) plans tend to have lower expenses and fees for both employers and employees. One of the most cost-effective plans is the Safe Harbor 401(k), which has lower administrative burdens.
Talk to a benefits expert to learn more. Alternative offerings According to data-analysis nonprofit Candid, almost 70% of nonprofit staffers are female. Because women are more likely than men to be tasked with child and elder care, consider offering a dependent care FSA (if you don’t already). This pre-tax account allows employees to save for dependent care expenses. Also think about offering parental and adoption leave, and short-term disability insurance. These can help staffers and their families maintain financial stability during stressful times. And you might want to consider training and education reimbursement programs and other career advancement initiatives.
Finally, don’t overlook time off incentives. Many employees rank work/life balance as their top priority. Your organization may want to grant employees extra time off to handle personal matters or simply to enjoy R&R. Such benefits usually can be offered as paid time off, personal time, sick leave or vacation time. No magic formula The “magic” formula that enables you to land and retain the best talent can be elusive. Some workers simply want higher compensation, and there’s probably nothing you can do about it. But if you spiff up your benefits menu (keeping an eye on costs) and highlight it when recruiting staffers, you’re more likely to attract the attention of job candidates. Contact us for more information.
Why private foundations need to avoid self-dealing
If you are a leader of a private foundation, you are probably aware of the prohibition against self-dealing transactions between foundations and “disqualified persons.” But what constitutes self-dealing? And who exactly counts as disqualified in this context? It is important for you to know because financial repercussions for violating the rules can be severe. Who is disqualified?
The IRS defines disqualified persons as substantial contributors (generally, large donors), foundation managers, owners of more than 20% of certain organizations that are substantial contributors and family members of any of these. Also disqualified are corporations or partnerships in which any of the previously listed parties hold more than 35% voting power and trusts or estates in which they hold more than a 35% beneficial interest. In addition, persons effectively in control of a foundation are disqualified, as are government officials. What are they prohibited from doing?
In general, a disqualified person cannot participate in acts of “self-dealing.” According to the IRS, these include selling, exchanging, or leasing the foundation’s property. Lending money or extending credit to the foundation as well as furnishing it with goods, services or facilities are also off-limits. Foundations are not allowed to pay compensation or expenses to a disqualified person. Nor can they allow the transfer or use of the foundation’s income or assets by or for the benefit of disqualified persons. Certain payments to government officials and transactions between organizations controlled by a private foundation may also be taxable self-dealing. What happens if the rules are violated? Internal Revenue Code Section 4941 imposes a minimum 10% excise tax on most disqualified persons on the amount involved in each self-dealing transaction. Foundation managers — officers, directors, or trustees — who knowingly participate in acts of self-dealing face a 5% tax on the amount involved.
Notably, participation on the part of foundation managers includes not only affirmative acts, but also silence or inaction where they have a duty to speak or act. If a violation is not corrected, the tax on a self-dealing transaction on disqualified persons other than foundation managers soars to 200%. When this extra tax is imposed, an excise tax of 50% of the amount involved is also imposed on any foundation manager who refuses to agree to part or all of the correction of the self-dealing act. Are there exceptions? There are some exceptions to these rules. For example, compensation paid to disqualified persons is not an act of self-dealing if the payments are for reasonable and necessary services to carry on the foundation’s exempt purposes. However, you should not count on self-dealing to be allowed or forgiven.
The IRS defines disqualified persons as substantial contributors (generally, large donors), foundation managers, owners of more than 20% of certain organizations that are substantial contributors and family members of any of these. Also disqualified are corporations or partnerships in which any of the previously listed parties hold more than 35% voting power and trusts or estates in which they hold more than a 35% beneficial interest. In addition, persons effectively in control of a foundation are disqualified, as are government officials. What are they prohibited from doing?
In general, a disqualified person cannot participate in acts of “self-dealing.” According to the IRS, these include selling, exchanging, or leasing the foundation’s property. Lending money or extending credit to the foundation as well as furnishing it with goods, services or facilities are also off-limits. Foundations are not allowed to pay compensation or expenses to a disqualified person. Nor can they allow the transfer or use of the foundation’s income or assets by or for the benefit of disqualified persons. Certain payments to government officials and transactions between organizations controlled by a private foundation may also be taxable self-dealing. What happens if the rules are violated? Internal Revenue Code Section 4941 imposes a minimum 10% excise tax on most disqualified persons on the amount involved in each self-dealing transaction. Foundation managers — officers, directors, or trustees — who knowingly participate in acts of self-dealing face a 5% tax on the amount involved.
Notably, participation on the part of foundation managers includes not only affirmative acts, but also silence or inaction where they have a duty to speak or act. If a violation is not corrected, the tax on a self-dealing transaction on disqualified persons other than foundation managers soars to 200%. When this extra tax is imposed, an excise tax of 50% of the amount involved is also imposed on any foundation manager who refuses to agree to part or all of the correction of the self-dealing act. Are there exceptions? There are some exceptions to these rules. For example, compensation paid to disqualified persons is not an act of self-dealing if the payments are for reasonable and necessary services to carry on the foundation’s exempt purposes. However, you should not count on self-dealing to be allowed or forgiven.
How family businesses can solve the compensation puzzle
Every type of company needs to devise a philosophy, strategy, and various policies regarding compensation. Family businesses, however, face additional challenges — largely because they employ both family and nonfamily staff. If your company is family-owned, you have probably encountered some puzzling difficulties in this area. The good news is solutions can be found.
Perspectives to consider: Compensation issues in family businesses are often two-pronged because they can arise both 1) within the family and 2) between family and nonfamily employees. Salary inequities among siblings, for example, can breed resentment and fighting. However, simply paying them all the same salary can also create problems if one works harder and contributes more than the others. Second, family business owners may feel it is their prerogative to pay working family members more than their nonfamily counterparts — even if they are performing the same job.
Although owners naturally have the best interests of their loved ones at heart, these decisions may inadvertently lower morale among essential nonfamily employees and risk losing them. Nonfamily staff may tolerate some preferential treatment for family employees, but they could become disgruntled over untenable differences. For instance, nonfamily employees often reach a breaking point when they feel working family members are underperforming and getting away with it, or when they believe family employees are behaving counterproductively or unethically. Ideas to ponder Effectively addressing compensation in a family business calls for a clear, objective understanding of the company’s distinctive traits, culture, and strategic goals. A healthy dash of creativity helps, too. There is no one right way of handling the matter. But there are some commonly used strategies that may be helpful in determining compensation for the two major groups involved. When it comes to family employees, think beyond salary. Many family businesses intentionally keep salaries for these individuals low and make up the difference in equity. Because working family members are generally in the company for the long haul, they will receive increasing benefits as their equity shares grow in value. But you also must ensure their compensation is adequate to meet their lifestyle needs and keep up with inflation. Incentives are usually a key motivator for family employees. You might consider a combination of short-term rewards paid annually to encourage ongoing accomplishments and long-term rewards to keep them driving the business forward.
On the other hand, nonfamily employees typically recognize that their opportunities for advancement and ownership are generally more limited in a family business. So, higher salaries and a strong benefits package can be important to attracting and retaining top talent. Another way to keep key nonfamily staff satisfied is by giving them significant financial benefits for staying with the company long term. There are various arrangements to consider, including phantom stock or nonqualified deferred compensation plans. You can do it If your family business has been operating for a while, overhauling its approach to compensation may seem overwhelming. Just know that there are ways to tackle the challenges objectively and analytically to arrive at an overall strategy that is reasonable and equitable for everyone. Our firm can help you identify and quantify all the factors involved.
Perspectives to consider: Compensation issues in family businesses are often two-pronged because they can arise both 1) within the family and 2) between family and nonfamily employees. Salary inequities among siblings, for example, can breed resentment and fighting. However, simply paying them all the same salary can also create problems if one works harder and contributes more than the others. Second, family business owners may feel it is their prerogative to pay working family members more than their nonfamily counterparts — even if they are performing the same job.
Although owners naturally have the best interests of their loved ones at heart, these decisions may inadvertently lower morale among essential nonfamily employees and risk losing them. Nonfamily staff may tolerate some preferential treatment for family employees, but they could become disgruntled over untenable differences. For instance, nonfamily employees often reach a breaking point when they feel working family members are underperforming and getting away with it, or when they believe family employees are behaving counterproductively or unethically. Ideas to ponder Effectively addressing compensation in a family business calls for a clear, objective understanding of the company’s distinctive traits, culture, and strategic goals. A healthy dash of creativity helps, too. There is no one right way of handling the matter. But there are some commonly used strategies that may be helpful in determining compensation for the two major groups involved. When it comes to family employees, think beyond salary. Many family businesses intentionally keep salaries for these individuals low and make up the difference in equity. Because working family members are generally in the company for the long haul, they will receive increasing benefits as their equity shares grow in value. But you also must ensure their compensation is adequate to meet their lifestyle needs and keep up with inflation. Incentives are usually a key motivator for family employees. You might consider a combination of short-term rewards paid annually to encourage ongoing accomplishments and long-term rewards to keep them driving the business forward.
On the other hand, nonfamily employees typically recognize that their opportunities for advancement and ownership are generally more limited in a family business. So, higher salaries and a strong benefits package can be important to attracting and retaining top talent. Another way to keep key nonfamily staff satisfied is by giving them significant financial benefits for staying with the company long term. There are various arrangements to consider, including phantom stock or nonqualified deferred compensation plans. You can do it If your family business has been operating for a while, overhauling its approach to compensation may seem overwhelming. Just know that there are ways to tackle the challenges objectively and analytically to arrive at an overall strategy that is reasonable and equitable for everyone. Our firm can help you identify and quantify all the factors involved.
4 ways businesses can better control cash flow
From the minute they open their doors, business owners are urged to keep a close eye on cash flow. And for good reason — even companies with booming sales can get into serious trouble if they lack the liquidity to compensate employees and pay their bills. Here are four ways businesses can better control cash flow.
1. Stick with the budget Although creating and maintaining a detailed annual budget can be tedious and contentious, it’s fundamental to good cash flow management. Items in your budget should align with your stated strategic goals for the year. If you can’t effectively argue how an item enables a particular goal, question its merit. Doing so will help you avoid unnecessary spending and keep funds available for valid business needs. Also bear in mind that, for analytical purposes, a budget is useful only if you update it regularly to accurately reflect actual spending. For example, you may have overbudgeted or underbudgeted on some items and, thus, spent more or less than anticipated.
2. Check your statement of cash flows Most companies should generate financial statements, preferably those that conform to Generally Accepted Accounting Principles (GAAP). Financial statements that comply with GAAP typically have three major parts: The income statement, The balance sheet, and the statement of cash flows. Naturally, when monitoring cash flow, you’ll want to focus on that last one. The purpose of this document is to report your business’s net increase or decrease in cash. The statement factors in the cash inflows and outflows of daily operations, asset purchases, sale proceeds, and financing activities. Because it excludes noncash accounting items, you can use it to catch potential cash flow problems. If you want to get the most from your statement of cash flows, generate one monthly. But quarterly or, at the very least, annual statements can be useful for identifying cash flow trends.
3. Exercise expense management Maintaining accurate, up-to-date expense records will keep you in a strong position to effectively manage cash flow and strive for profitability. As you review the data, look for ways to reduce day-to-day operating expenses. For example, you may save money by outsourcing areas of the business such as human resources, payroll and benefits management, or information technology support. If you have inventory, reconsider your approach to its management. Under the “just-in-time” approach, for instance, businesses buy items or materials only when necessary. As a result, your carrying costs for storage, insurance, interest payments and other factors are lowered. This approach isn’t feasible for every company. But if logistical support in your market has improved in recent years, it may be a beneficial option.
4. Mind your timing at the end of the day, cash flow is all about the timing of revenue coming in and payments going out. Look for ways to stabilize the two. For instance, conduct credit and reference checks on new customers to validate their payment histories and minimize collection risks. Also, prevent invoicing errors and costly collection delays by maintaining current and accurate customer account data. Send invoices promptly, using electronic billing methods as much as possible. Establish sound, methodical procedures for following up on past-due accounts. Don’t wait until they’re 60 or 90 days late. Watch your payables, too.
Generally, you shouldn’t pay invoices earlier than required unless offered a discount. As feasible, use your buying power for large-volume or frequent purchases as leverage to negotiate discounts, free or low-cost financing, or extended payment terms. Go with the flow Effective cash flow management is something many small to midsize businesses struggle with. But there are ways to put and keep the odds in your favor. For help succeeding at this mission-critical task, contact us.
1. Stick with the budget Although creating and maintaining a detailed annual budget can be tedious and contentious, it’s fundamental to good cash flow management. Items in your budget should align with your stated strategic goals for the year. If you can’t effectively argue how an item enables a particular goal, question its merit. Doing so will help you avoid unnecessary spending and keep funds available for valid business needs. Also bear in mind that, for analytical purposes, a budget is useful only if you update it regularly to accurately reflect actual spending. For example, you may have overbudgeted or underbudgeted on some items and, thus, spent more or less than anticipated.
2. Check your statement of cash flows Most companies should generate financial statements, preferably those that conform to Generally Accepted Accounting Principles (GAAP). Financial statements that comply with GAAP typically have three major parts: The income statement, The balance sheet, and the statement of cash flows. Naturally, when monitoring cash flow, you’ll want to focus on that last one. The purpose of this document is to report your business’s net increase or decrease in cash. The statement factors in the cash inflows and outflows of daily operations, asset purchases, sale proceeds, and financing activities. Because it excludes noncash accounting items, you can use it to catch potential cash flow problems. If you want to get the most from your statement of cash flows, generate one monthly. But quarterly or, at the very least, annual statements can be useful for identifying cash flow trends.
3. Exercise expense management Maintaining accurate, up-to-date expense records will keep you in a strong position to effectively manage cash flow and strive for profitability. As you review the data, look for ways to reduce day-to-day operating expenses. For example, you may save money by outsourcing areas of the business such as human resources, payroll and benefits management, or information technology support. If you have inventory, reconsider your approach to its management. Under the “just-in-time” approach, for instance, businesses buy items or materials only when necessary. As a result, your carrying costs for storage, insurance, interest payments and other factors are lowered. This approach isn’t feasible for every company. But if logistical support in your market has improved in recent years, it may be a beneficial option.
4. Mind your timing at the end of the day, cash flow is all about the timing of revenue coming in and payments going out. Look for ways to stabilize the two. For instance, conduct credit and reference checks on new customers to validate their payment histories and minimize collection risks. Also, prevent invoicing errors and costly collection delays by maintaining current and accurate customer account data. Send invoices promptly, using electronic billing methods as much as possible. Establish sound, methodical procedures for following up on past-due accounts. Don’t wait until they’re 60 or 90 days late. Watch your payables, too.
Generally, you shouldn’t pay invoices earlier than required unless offered a discount. As feasible, use your buying power for large-volume or frequent purchases as leverage to negotiate discounts, free or low-cost financing, or extended payment terms. Go with the flow Effective cash flow management is something many small to midsize businesses struggle with. But there are ways to put and keep the odds in your favor. For help succeeding at this mission-critical task, contact us.
Thinking ahead to your next Form 990
The deadline for most not-for-profits to file Form 990 with the IRS (May 15, 2024) has come and gone. Assuming your organization operates on a calendar-year tax basis and filed its Form 990 on time, you probably don’t want to think about tax reporting again until next spring. However, it’s important to keep your future Form 990 in mind as your organization carries out its programs and events this year. 4 overlooked issues You’re probably already alert to issues such as unrelated business income and the risks potentially posed by political participation, excess benefit transactions and excessive compensation (and the need to report some of them). But you may not be paying as much attention to the following four:
1. Fundraising expenses. Your not-for-profit must report its income from fundraising activities, as well as its expenses, on Schedule G of Form 990. The IRS is always on the lookout for events that produce a relatively small amount of income compared with claimed expenses. In such situations, make sure you keep good records to withstand any potential IRS challenge.
2. Operations abroad. Nonprofits are permitted to operate outside the United States without penalty. But your organization is required to answer questions on Form 990 relating to foreign bank accounts, activities in foreign countries and grants by foreign entities. The IRS will likely ratchet up its scrutiny if it finds inconsistencies or evidence of activities that don’t measure up to U.S. standards. If you operate abroad, professional tax advice is essential.
3. Diverted assets. Form 990 asks whether there has been any “diversion” of assets during the past year. Essentially, “diversion” means that funds have been misappropriated for personal reasons. If you answer “yes” to this question, you’ll need to provide a detailed explanation of the diversion and its resolution. However, even if you’ve provided a plausible explanation, a “yes” answer to this question may lead to an IRS audit. If you fail to attach an explanation, your audit exposure increases exponentially. To avoid the issue altogether, take every step (including implementing robust internal controls) to prevent fraud and other illegal asset diversions.
4. Loans to disqualified persons. Generally, loans from a tax-exempt organization to a disqualified person are prohibited on the state level. Form 990 asks if your nonprofit has made such loans. In the event your nonprofit has made a prohibited loan, your Form 990 will need to reflect a declining balance. Otherwise, it may look as though the loan isn’t being paid off in time — a certain red flag for the IRS. Again, if you don’t allow this activity, you won’t have anything to report.
Of course, if you engage a professional tax advisor to prepare your Form 990, your advisor will ask about all these subjects to ensure your organization properly reports its activities. But you can help your nonprofit minimize audit risk by keeping possible pitfalls top of mind.
1. Fundraising expenses. Your not-for-profit must report its income from fundraising activities, as well as its expenses, on Schedule G of Form 990. The IRS is always on the lookout for events that produce a relatively small amount of income compared with claimed expenses. In such situations, make sure you keep good records to withstand any potential IRS challenge.
2. Operations abroad. Nonprofits are permitted to operate outside the United States without penalty. But your organization is required to answer questions on Form 990 relating to foreign bank accounts, activities in foreign countries and grants by foreign entities. The IRS will likely ratchet up its scrutiny if it finds inconsistencies or evidence of activities that don’t measure up to U.S. standards. If you operate abroad, professional tax advice is essential.
3. Diverted assets. Form 990 asks whether there has been any “diversion” of assets during the past year. Essentially, “diversion” means that funds have been misappropriated for personal reasons. If you answer “yes” to this question, you’ll need to provide a detailed explanation of the diversion and its resolution. However, even if you’ve provided a plausible explanation, a “yes” answer to this question may lead to an IRS audit. If you fail to attach an explanation, your audit exposure increases exponentially. To avoid the issue altogether, take every step (including implementing robust internal controls) to prevent fraud and other illegal asset diversions.
4. Loans to disqualified persons. Generally, loans from a tax-exempt organization to a disqualified person are prohibited on the state level. Form 990 asks if your nonprofit has made such loans. In the event your nonprofit has made a prohibited loan, your Form 990 will need to reflect a declining balance. Otherwise, it may look as though the loan isn’t being paid off in time — a certain red flag for the IRS. Again, if you don’t allow this activity, you won’t have anything to report.
Of course, if you engage a professional tax advisor to prepare your Form 990, your advisor will ask about all these subjects to ensure your organization properly reports its activities. But you can help your nonprofit minimize audit risk by keeping possible pitfalls top of mind.
Be sure to stay current with tax deadlines and ever changing tax information.
Click here for additional tax resources.
Click here for additional tax resources.
Disaster relief charities: Know the rules before providing aid
The United States is entering the most natural-disaster-prone time of the year. Tornadoes are most likely to occur in May, and the Atlantic hurricane season starts on June 1. Not-for-profits that provide aid to disaster victims — whether it’s medical care, food, clothing, shelter, cash or rebuilding assistance — are gearing up for potential emergencies. But if your organization operates in this space, know that when dispensing aid you must observe certain IRS rules.
Defining charitable activities Disaster relief organizations are allowed to provide short-term emergency assistance and long-term aid to help ensure victims have necessities. Relief may also come in the form of cash grants or vouchers. Providing such relief to individuals qualifies as a charitable activity because it aims to relieve human suffering. However, your nonprofit must assist a “charitable class.”
A charitable class should be either large enough that the potential beneficiaries can’t be individually identified or sufficiently indefinite that the community as a whole, rather than a pre-selected group of people, benefits. In addition, you must apply needs-based tests, meaning you can’t distribute aid to individuals just because they’re disaster victims. Decisions about how funds will be distributed must be based on an objective evaluation of needs at the time grants are made. But practicality and sympathy for victims’ immediate plight can be considered. For example, take a charity that distributes blankets and hot meals to natural disaster victims. In the immediate aftermath of a storm, the charity doesn’t ask victims for proof of financial need.
However, as time goes on and victims and their community begin to recover, it may be appropriate to conduct individual financial needs assessments. Aiding businesses In addition to helping individuals, your charity generally can provide disaster aid to businesses, so long as two conditions are met: 1. Assistance must be reasonably related to the accomplishment of a tax-exempt purpose. Businesses aren’t members of a charitable class and can’t, therefore, be appropriate charitable objects. However, distributing aid to them can achieve charitable purposes, such as preventing community deterioration or reducing the burden on local government. 2. Any private benefit to businesses must be incidental. An eligible business might not have adequate resources, conventional financing or insurance coverage that would enable it to recover from a disaster. Disaster aid organizations also need to determine that businesses they assist wouldn’t be able to remain in the community without their intervention.
Maintaining records To prove your organization’s compliance with IRS rules, maintain good records. Document amounts paid, the purpose of payments and evidence that payments were made to meet charitable purposes and victims’ needs. In addition, document: Your organization’s objective criteria for disbursing assistance, How specific recipients were selected, Names and addresses of recipients and the amounts supplied to them, Any relationship between recipients and your charity’s officers, directors, key employees or substantial donors, and The composition of the selection committee approving assistance.
Note an exception: Organizations distributing short-term emergency assistance aren’t expected to record the names, addresses and amounts provided. Instead, document the date, place and estimated number of victims assisted. Other rules may apply There are other IRS rules that might apply to your nonprofit’s situation. Contact us if you have questions about complying with rules for tax-exempt organizations.
Defining charitable activities Disaster relief organizations are allowed to provide short-term emergency assistance and long-term aid to help ensure victims have necessities. Relief may also come in the form of cash grants or vouchers. Providing such relief to individuals qualifies as a charitable activity because it aims to relieve human suffering. However, your nonprofit must assist a “charitable class.”
A charitable class should be either large enough that the potential beneficiaries can’t be individually identified or sufficiently indefinite that the community as a whole, rather than a pre-selected group of people, benefits. In addition, you must apply needs-based tests, meaning you can’t distribute aid to individuals just because they’re disaster victims. Decisions about how funds will be distributed must be based on an objective evaluation of needs at the time grants are made. But practicality and sympathy for victims’ immediate plight can be considered. For example, take a charity that distributes blankets and hot meals to natural disaster victims. In the immediate aftermath of a storm, the charity doesn’t ask victims for proof of financial need.
However, as time goes on and victims and their community begin to recover, it may be appropriate to conduct individual financial needs assessments. Aiding businesses In addition to helping individuals, your charity generally can provide disaster aid to businesses, so long as two conditions are met: 1. Assistance must be reasonably related to the accomplishment of a tax-exempt purpose. Businesses aren’t members of a charitable class and can’t, therefore, be appropriate charitable objects. However, distributing aid to them can achieve charitable purposes, such as preventing community deterioration or reducing the burden on local government. 2. Any private benefit to businesses must be incidental. An eligible business might not have adequate resources, conventional financing or insurance coverage that would enable it to recover from a disaster. Disaster aid organizations also need to determine that businesses they assist wouldn’t be able to remain in the community without their intervention.
Maintaining records To prove your organization’s compliance with IRS rules, maintain good records. Document amounts paid, the purpose of payments and evidence that payments were made to meet charitable purposes and victims’ needs. In addition, document: Your organization’s objective criteria for disbursing assistance, How specific recipients were selected, Names and addresses of recipients and the amounts supplied to them, Any relationship between recipients and your charity’s officers, directors, key employees or substantial donors, and The composition of the selection committee approving assistance.
Note an exception: Organizations distributing short-term emergency assistance aren’t expected to record the names, addresses and amounts provided. Instead, document the date, place and estimated number of victims assisted. Other rules may apply There are other IRS rules that might apply to your nonprofit’s situation. Contact us if you have questions about complying with rules for tax-exempt organizations.
Timelines: 3 ways business owners should look at succession planning
Business owners are rightly urged to develop succession plans so their companies will pass on to the next generation, or another iteration of ownership, in a manner that best ensures continued success. Ideally, the succession plan you develop for your company will play out over a long period that allows everyone plenty of time to adjust to the changes involved. But, as many business owners learned during the pandemic, life comes at you fast. That’s why succession planning should best be viewed from three separate but parallel timelines:
1. Long term. If you have many years to work with, use this gift of time to identify one or more talented individuals who share your values and have the aptitude to successfully run the company. This is especially important for keeping a family-owned business in the family. As soon as you’ve identified a successor, and that person is ready, you can begin mentoring the incoming leader to competently run the company and preserve your legacy. Meanwhile, you can carefully determine how to best fund your retirement and structure your estate plan.
2. Short term. Many business owners wake up one day and realize that they’re almost ready to retire, or move on to another professional endeavor, but they’ve spent little or no time putting together a succession plan. In such a case, you may still be able to choose and train a successor. However, you’ll likely also want to explore alternatives such as selling the company to a competitor or other buyer. Sometimes, even a planned liquidation is the optimal move financially. In any case, the objective here is less about maintaining the strategic direction of the company and more about ensuring you receive an equitable payout for your ownership share. If you’re a co-owner, drafting a buy-sell agreement is highly advisable. It’s also critical to set a firm departure date and work with a qualified team of professional advisors.
3. In case of emergency. As mentioned, the pandemic brought renewed attention to emergency succession planning. True to its name, this approach emphasizes enabling businesses to maintain operations immediately after unforeseen events such as an owner’s death or disability. If your company doesn’t yet have an emergency succession plan, you should probably create one before you move on to a longer-term plan. Name someone who can take on a credible leadership role if you become seriously ill or injured. Formulate a plan for communicating and delegating duties during a crisis.
Make sure everyone knows about the emergency succession plan and how it will affect day-to-day operations, if executed. As with any important task, the more time you give yourself to create a succession plan, the fewer mistakes or oversights you’re likely to make. Our firm can help you create or refine a plan that suits your financial needs, personal wishes and vision for your company.
1. Long term. If you have many years to work with, use this gift of time to identify one or more talented individuals who share your values and have the aptitude to successfully run the company. This is especially important for keeping a family-owned business in the family. As soon as you’ve identified a successor, and that person is ready, you can begin mentoring the incoming leader to competently run the company and preserve your legacy. Meanwhile, you can carefully determine how to best fund your retirement and structure your estate plan.
2. Short term. Many business owners wake up one day and realize that they’re almost ready to retire, or move on to another professional endeavor, but they’ve spent little or no time putting together a succession plan. In such a case, you may still be able to choose and train a successor. However, you’ll likely also want to explore alternatives such as selling the company to a competitor or other buyer. Sometimes, even a planned liquidation is the optimal move financially. In any case, the objective here is less about maintaining the strategic direction of the company and more about ensuring you receive an equitable payout for your ownership share. If you’re a co-owner, drafting a buy-sell agreement is highly advisable. It’s also critical to set a firm departure date and work with a qualified team of professional advisors.
3. In case of emergency. As mentioned, the pandemic brought renewed attention to emergency succession planning. True to its name, this approach emphasizes enabling businesses to maintain operations immediately after unforeseen events such as an owner’s death or disability. If your company doesn’t yet have an emergency succession plan, you should probably create one before you move on to a longer-term plan. Name someone who can take on a credible leadership role if you become seriously ill or injured. Formulate a plan for communicating and delegating duties during a crisis.
Make sure everyone knows about the emergency succession plan and how it will affect day-to-day operations, if executed. As with any important task, the more time you give yourself to create a succession plan, the fewer mistakes or oversights you’re likely to make. Our firm can help you create or refine a plan that suits your financial needs, personal wishes and vision for your company.
Nonprofits: Act thoroughly on audit findings
External audits can help assure your not-for-profit’s stakeholders that your financial statements are fairly presented according to U.S. Generally Accepted Accounting Principles. They can also help prevent occupational fraud. Often, audit reports contain recommendations for organizations to act on. And if you fail to make changes that respond to risks or concerns discovered in an audit, it could threaten your nonprofit’s future.
Discuss the report when auditors complete an engagement, they typically present a draft report to their subject’s audit committee, executive director and senior financial staff. Those individuals need to review the draft before it’s presented to their full board of directors. Your audit committee and management should meet with auditors before their board presentation. Often auditors provide a management letter highlighting operational areas and controls that need improvement. Your team should explain how your organization plans to improve operations and controls, and this explanation can be included in the report’s final management letter. Your audit committee also can use the meeting to ensure the audit is properly comprehensive.
Auditors will provide a governance letter, which should confirm cooperation from your nonprofit’s staff and whether the auditors received all requested documentation. The letter also will disclose any difficulties or limitations encountered during the process, accounting adjustments required, and significant audit plan changes (and the reasons for such changes).
Finally, the auditors will list any unresolved matters. Your audit committee should determine whether there were any conflicts of interest between the auditors and your team and how they might have affected the audit’s scope. Taking next steps the final audit report will state whether your organization’s financial statements are fairly presented in accordance with U.S. Generally Accepted Accounting Principles. The statements must be presented without any material — meaning significant — inaccuracies or misrepresentation. As noted above, the auditors also may identify, in a separate management letter, specific concerns about material internal control issues.
Adequate internal controls are critical for preventing, catching and remedying misstatements that could compromise the integrity of financial statements, whether due to error or fraud. If the auditors find your internal controls weak, your organization must promptly shore them up. You could, for instance, set up new controls, such as segregating financial duties or implementing new accounting practices or software. These measures can reduce the odds of fraud, improve the accuracy of your financial statements and help reduce future audit costs.
Make your audit effective Audit reports are only as effective as their reception — and the action subject organizations take in response to their findings. Contact us for help implementing new internal controls and addressing other issues.
Discuss the report when auditors complete an engagement, they typically present a draft report to their subject’s audit committee, executive director and senior financial staff. Those individuals need to review the draft before it’s presented to their full board of directors. Your audit committee and management should meet with auditors before their board presentation. Often auditors provide a management letter highlighting operational areas and controls that need improvement. Your team should explain how your organization plans to improve operations and controls, and this explanation can be included in the report’s final management letter. Your audit committee also can use the meeting to ensure the audit is properly comprehensive.
Auditors will provide a governance letter, which should confirm cooperation from your nonprofit’s staff and whether the auditors received all requested documentation. The letter also will disclose any difficulties or limitations encountered during the process, accounting adjustments required, and significant audit plan changes (and the reasons for such changes).
Finally, the auditors will list any unresolved matters. Your audit committee should determine whether there were any conflicts of interest between the auditors and your team and how they might have affected the audit’s scope. Taking next steps the final audit report will state whether your organization’s financial statements are fairly presented in accordance with U.S. Generally Accepted Accounting Principles. The statements must be presented without any material — meaning significant — inaccuracies or misrepresentation. As noted above, the auditors also may identify, in a separate management letter, specific concerns about material internal control issues.
Adequate internal controls are critical for preventing, catching and remedying misstatements that could compromise the integrity of financial statements, whether due to error or fraud. If the auditors find your internal controls weak, your organization must promptly shore them up. You could, for instance, set up new controls, such as segregating financial duties or implementing new accounting practices or software. These measures can reduce the odds of fraud, improve the accuracy of your financial statements and help reduce future audit costs.
Make your audit effective Audit reports are only as effective as their reception — and the action subject organizations take in response to their findings. Contact us for help implementing new internal controls and addressing other issues.
Businesses must face the reality of cyberattacks and continue fighting back
With each passing year, as networked technology becomes more and more integral to how companies do business, a simple yet grim reality comes further into focus: The cyberattacks will continue. In fact, many experts are now urging business owners and their leadership teams to view malicious cyberactivity as more of a certainty than a possibility. Why? Because it seems to be happening to just about every company in one way or another.
A 2023 study by U.K.-based software and hardware company Sophos found that, of 3,000 business leaders surveyed across 14 countries (including 500 in the United States), a whopping 94% reported experiencing a cyberattack within the preceding year. Creating a comprehensive strategy What can your small-to-midsize business do to protect itself? First and foremost, you need a comprehensive cybersecurity strategy that accounts for not only your technology, but also your people, processes and as many known external threats as possible.
Some of the primary elements of a comprehensive cybersecurity strategy are: Clearly written and widely distributed cybersecurity policies, A cybersecurity program framework that lays out how your company: 1) identifies risks, 2) implements safeguards, 3) monitors its systems to detect incidents, 4) responds to incidents, and 5) recovers data and restores operations after incidents, Employee training, upskilling, testing and regular reminders about cybersecurity, Cyberinsurance suited to your company’s size, operations and risk level, and A business continuity plan that addresses what you’ll do if you’re hit by a major cyberattack. That last point should include deciding, in consultation with an attorney, how you’ll communicate with customers and vendors about incidents.
Getting help All of that may sound a bit overwhelming if you’re starting from scratch or working off a largely improvised set of cybersecurity practices developed over time. The good news is there’s plenty of help available. For businesses looking for cost-effective starting points, cybersecurity policy templates are available from organizations such as the SANS Institute. Meanwhile, there are established, widely accessible cybersecurity program frameworks such as the: National Institute of Standards and Technology’s Cybersecurity Framework, Center for Internet Security’s Critical Security Controls, and Information Systems Audit and Control Association’s Control Objectives for Information and Related Technologies. Plug any of those terms into your favorite search engine and you should be able to get started. Of course, free help will only get you so far.
For customized assistance, businesses always have the option of engaging a cybersecurity consultant for an assessment and help implementing any elements of a comprehensive cybersecurity strategy. Naturally, you’ll need to vet providers carefully, set a feasible budget, and be prepared to dedicate the time and resources to get the most out of the relationship. Investing in safety If your business decides to invest further in cybersecurity, you won’t be alone.
Tech researcher Gartner has projected global spending on cybersecurity and risk management to reach $210 billion this year, a 13% increase from last year. It may be a competitive necessity to allocate more dollars to keeping your company safe. For help organizing, analyzing and budgeting for all your technology costs, including for cybersecurity, contact us.
A 2023 study by U.K.-based software and hardware company Sophos found that, of 3,000 business leaders surveyed across 14 countries (including 500 in the United States), a whopping 94% reported experiencing a cyberattack within the preceding year. Creating a comprehensive strategy What can your small-to-midsize business do to protect itself? First and foremost, you need a comprehensive cybersecurity strategy that accounts for not only your technology, but also your people, processes and as many known external threats as possible.
Some of the primary elements of a comprehensive cybersecurity strategy are: Clearly written and widely distributed cybersecurity policies, A cybersecurity program framework that lays out how your company: 1) identifies risks, 2) implements safeguards, 3) monitors its systems to detect incidents, 4) responds to incidents, and 5) recovers data and restores operations after incidents, Employee training, upskilling, testing and regular reminders about cybersecurity, Cyberinsurance suited to your company’s size, operations and risk level, and A business continuity plan that addresses what you’ll do if you’re hit by a major cyberattack. That last point should include deciding, in consultation with an attorney, how you’ll communicate with customers and vendors about incidents.
Getting help All of that may sound a bit overwhelming if you’re starting from scratch or working off a largely improvised set of cybersecurity practices developed over time. The good news is there’s plenty of help available. For businesses looking for cost-effective starting points, cybersecurity policy templates are available from organizations such as the SANS Institute. Meanwhile, there are established, widely accessible cybersecurity program frameworks such as the: National Institute of Standards and Technology’s Cybersecurity Framework, Center for Internet Security’s Critical Security Controls, and Information Systems Audit and Control Association’s Control Objectives for Information and Related Technologies. Plug any of those terms into your favorite search engine and you should be able to get started. Of course, free help will only get you so far.
For customized assistance, businesses always have the option of engaging a cybersecurity consultant for an assessment and help implementing any elements of a comprehensive cybersecurity strategy. Naturally, you’ll need to vet providers carefully, set a feasible budget, and be prepared to dedicate the time and resources to get the most out of the relationship. Investing in safety If your business decides to invest further in cybersecurity, you won’t be alone.
Tech researcher Gartner has projected global spending on cybersecurity and risk management to reach $210 billion this year, a 13% increase from last year. It may be a competitive necessity to allocate more dollars to keeping your company safe. For help organizing, analyzing and budgeting for all your technology costs, including for cybersecurity, contact us.
Health care self-insurance and stop-loss coverage: What business owners need to know
For businesses, cost-effectively sponsoring a health insurance plan for employees is an ongoing battle. In the broadest sense, you have two options: fully insured or self-funded. A fully insured plan is simply one you buy from an insurer. Doing so limits your financial risk while offering the most predictable costs.
The other option is what’s commonly known as “self-insurance.” Under this approach h, your company funds and manages the plan, usually with the help of a third-party administrator. If you’re tired of dealing with big insurers, and you’re prepared to design your own plan and handle the claims process, self-insurance may be for you. However, bear in mind that your business will incur the full financial risk of a self-funded plan — and health care costs can be unpredictable and potentially catastrophic. That’s why, if you’re seriously considering self-insurance, you’ll also need to familiarize yourself with stop-loss coverage.
Basic features Stop-loss coverage is essentially insurance for your health insurance. These high-deductible policies help protect against unpredictably high or catastrophic losses. More specifically, stop-loss coverage kicks in once an individual claim and, if the self-insured policy is so designed, annual aggregate claims reach a contracted threshold known as the “attachment point.” Some stop-loss policies cover only individual claims — known as “specific” coverage — instead of providing both specific and aggregate claims protection. Typically, the larger and more profitable the business, the higher the stop-loss deductible and attachment point. This is because larger companies are usually less financially vulnerable to an occasionally catastrophic medical claim.
Self-insurance generally isn’t economically advantageous for companies with fewer than about 75 employees. Claims and coverage Aggregate claims protection typically works like this: You and your broker or claims administrator agree on an estimate of what total claims will be in the upcoming year, based on your recent claims experience. Let’s say it’s $1 million. The aggregate attachment point generally will be set at 125% of that amount — that is, claims will be covered when you have already paid out $1.25 million. There can be a complicating factor, however, known as a “laser.” A stop-loss carrier, or you, might decide that an employee with a high medical risk profile needs to be “lasered” out of the terms that apply to other employees covered by the stop-loss policy. Instead, you’ll remain on the hook for a much higher amount before stop-loss protection kicks in. You might request a laser to lower your premium, or the stop-loss carrier might demand it to manage its risk. What’s a typical specific coverage amount? As with the decision of whether to include an aggregate claims limit on your stop-loss coverage, the answer generally varies according to business size. Many stop-loss buyers pick an attachment point for individual claims at below $250,000, with some businesses setting the limit below $75,000.
However, some set higher limits as well. Basically, it’s a question of how much financial protection you’re willing to pay for. Going with a higher attachment gets you lower premiums. For example, a premium per covered employee with a $100,000 deductible might be around twice as high as it would be for one with a $200,000 deductible, and more than five times as high as one with a $500,000 attachment point.
Many challenges as you can see, self-insurance has many challenges — starting with stop-loss coverage, which is a necessity. Nevertheless, it can be an effective approach under the right circumstances. We can help you assess the costs, risks and potential advantages of self-insuring vs. fully insuring.
The other option is what’s commonly known as “self-insurance.” Under this approach h, your company funds and manages the plan, usually with the help of a third-party administrator. If you’re tired of dealing with big insurers, and you’re prepared to design your own plan and handle the claims process, self-insurance may be for you. However, bear in mind that your business will incur the full financial risk of a self-funded plan — and health care costs can be unpredictable and potentially catastrophic. That’s why, if you’re seriously considering self-insurance, you’ll also need to familiarize yourself with stop-loss coverage.
Basic features Stop-loss coverage is essentially insurance for your health insurance. These high-deductible policies help protect against unpredictably high or catastrophic losses. More specifically, stop-loss coverage kicks in once an individual claim and, if the self-insured policy is so designed, annual aggregate claims reach a contracted threshold known as the “attachment point.” Some stop-loss policies cover only individual claims — known as “specific” coverage — instead of providing both specific and aggregate claims protection. Typically, the larger and more profitable the business, the higher the stop-loss deductible and attachment point. This is because larger companies are usually less financially vulnerable to an occasionally catastrophic medical claim.
Self-insurance generally isn’t economically advantageous for companies with fewer than about 75 employees. Claims and coverage Aggregate claims protection typically works like this: You and your broker or claims administrator agree on an estimate of what total claims will be in the upcoming year, based on your recent claims experience. Let’s say it’s $1 million. The aggregate attachment point generally will be set at 125% of that amount — that is, claims will be covered when you have already paid out $1.25 million. There can be a complicating factor, however, known as a “laser.” A stop-loss carrier, or you, might decide that an employee with a high medical risk profile needs to be “lasered” out of the terms that apply to other employees covered by the stop-loss policy. Instead, you’ll remain on the hook for a much higher amount before stop-loss protection kicks in. You might request a laser to lower your premium, or the stop-loss carrier might demand it to manage its risk. What’s a typical specific coverage amount? As with the decision of whether to include an aggregate claims limit on your stop-loss coverage, the answer generally varies according to business size. Many stop-loss buyers pick an attachment point for individual claims at below $250,000, with some businesses setting the limit below $75,000.
However, some set higher limits as well. Basically, it’s a question of how much financial protection you’re willing to pay for. Going with a higher attachment gets you lower premiums. For example, a premium per covered employee with a $100,000 deductible might be around twice as high as it would be for one with a $200,000 deductible, and more than five times as high as one with a $500,000 attachment point.
Many challenges as you can see, self-insurance has many challenges — starting with stop-loss coverage, which is a necessity. Nevertheless, it can be an effective approach under the right circumstances. We can help you assess the costs, risks and potential advantages of self-insuring vs. fully insuring.
Weighing potential risks and returns of alternative investments
Alternative investments may appeal to your not-for-profit because they often offer higher long-term performance than traditional securities do. But these investments can come with tax liabilities. They also typically are riskier, which may not be appropriate for your organization.
Here’s what you need to know. No easily ascertained value Alternative investments generally are defined in contrast to more traditional securities, such as stocks, bonds and mutual funds. They generally don’t have an easily ascertained fair market value. Examples include hedge funds, private equity, real estate, venture capital and cryptocurrency investments.
Alternative investments may provide investors with access to high-growth companies in cutting-edge industries. However, because alternative investments may be illiquid, investors typically can’t easily cash out or shift their allocations. This can be a substantial risk to nonprofits without other sources of available operating capital. The complex nature of such assets also increases risk to the investor, which is why returns may be higher. Pay attention to fees Alternative investment funds generally are formed as partnerships or limited liability companies (LLCs). Both are types of pass-through entities, meaning the income and the tax liability pass through to investors, who are considered partners or members.
Manager selection is crucial — you want someone with a proven track record and access to the best investments. Pay attention to management fees. In addition to a base management fee (generally about 1.5% to 2% of the fund’s capital or net asset value), managers generally charge performance-based fees known as carried interest. These fees can reach as high as 20% or more of an alternative investment’s profits. Unrelated business income Although investment income (for example, dividends, gains and interest) typically is excluded from taxable unrelated business income (UBI), investors in partnerships or LLCs are treated as though they’re conducting that entity’s business. As a result, distributions of income may be treated as taxable UBI.
In addition, UBI includes unrelated debt-financed income from investment property in proportion to the debt acquired to purchase it. The IRS defines debt-financed property as any property held to produce income (including gain from its disposition) for which there’s an acquisition indebtedness. If you use financing to invest in a fund — or, if the fund has financed the purchase of an income-producing asset — some of the associated income may be taxable. Pass-through entities report each partner’s or member’s share of income, dividends, losses, deductions and credits on IRS Schedule K-1.
Nonprofits can use the schedule to determine if they’ve received UBI income that must be reported. State taxes may also apply. Right for your organization? We can help you decide whether alternative investments might be right for your organization. If you choose to adopt this investment strategy, we can also help you determine any tax liability.
Here’s what you need to know. No easily ascertained value Alternative investments generally are defined in contrast to more traditional securities, such as stocks, bonds and mutual funds. They generally don’t have an easily ascertained fair market value. Examples include hedge funds, private equity, real estate, venture capital and cryptocurrency investments.
Alternative investments may provide investors with access to high-growth companies in cutting-edge industries. However, because alternative investments may be illiquid, investors typically can’t easily cash out or shift their allocations. This can be a substantial risk to nonprofits without other sources of available operating capital. The complex nature of such assets also increases risk to the investor, which is why returns may be higher. Pay attention to fees Alternative investment funds generally are formed as partnerships or limited liability companies (LLCs). Both are types of pass-through entities, meaning the income and the tax liability pass through to investors, who are considered partners or members.
Manager selection is crucial — you want someone with a proven track record and access to the best investments. Pay attention to management fees. In addition to a base management fee (generally about 1.5% to 2% of the fund’s capital or net asset value), managers generally charge performance-based fees known as carried interest. These fees can reach as high as 20% or more of an alternative investment’s profits. Unrelated business income Although investment income (for example, dividends, gains and interest) typically is excluded from taxable unrelated business income (UBI), investors in partnerships or LLCs are treated as though they’re conducting that entity’s business. As a result, distributions of income may be treated as taxable UBI.
In addition, UBI includes unrelated debt-financed income from investment property in proportion to the debt acquired to purchase it. The IRS defines debt-financed property as any property held to produce income (including gain from its disposition) for which there’s an acquisition indebtedness. If you use financing to invest in a fund — or, if the fund has financed the purchase of an income-producing asset — some of the associated income may be taxable. Pass-through entities report each partner’s or member’s share of income, dividends, losses, deductions and credits on IRS Schedule K-1.
Nonprofits can use the schedule to determine if they’ve received UBI income that must be reported. State taxes may also apply. Right for your organization? We can help you decide whether alternative investments might be right for your organization. If you choose to adopt this investment strategy, we can also help you determine any tax liability.
B2B businesses need a cohesive strategy for collections
If your company operates in the business-to-business (B2B) marketplace, you’ve probably experienced some collections challenges.
Every company, whether buyer or seller, is trying to manage cash flow. That means customers will often push off payments as long as possible to retain those dollars. Meanwhile, your business, as the seller, needs the money to meet its revenue and cash flow goals.
There’s no easy solution, of course. But you can “grease the wheels,” so to speak, by strategically devising and continuously improving a methodical collections process.
Payment terms
Getting paid promptly depends, at least in part, on the terms you set forth and customers agree to. Be sure payment terms for your company’s products or services are written in unambiguous language that includes specific due dates, payment methods and late-payment penalties. To the extent feasible, use contracts or signed payment agreements to ensure both parties understand their obligations.
If your business operates on a project basis, try to negotiate installment payments for completion of specific stages of the work. This approach may not be necessary for shorter jobs but, for longer ones, it helps assure you’ll at least receive some revenue if the customer runs into financial trouble or a dispute arises before completion.
Effective invoicing
Invoice promptly and accurately. This may seem obvious, but invoicing procedures can break down gradually over time, or even suddenly, when a company gets very busy or goes through staffing changes. Monitor relevant metrics such as days sales outstanding, revenue leakage and average days delinquent. Act immediately when collections fall below acceptable levels.
Also, don’t let the essential details of invoicing fall by the wayside. Ensure that you’re sending invoices to the right people at the right addresses. If a customer requires a purchase order number to issue payment, be sure that this requirement is built into your invoicing process.
In today’s world of high-tech money transfers, offering multiple payment options on invoices is critical as well. Customers may pay more quickly when they can use their optimal method.
Reminders and follow-ups
Once you’ve sent an invoice, your company should have a step-by-step process for reminders and follow-ups. A simple “Thank you for your business!” email sent before payment is due can reiterate the due date with customers. From there, automated reminders sent via accounts receivable (AR) or customer relationship management (CRM) software can be helpful.
If you notice that a payment is late, contact the customer right away. Again, you can now automate this to begin with texts or emails or even prerecorded phone calls. Should the problem persist, the next logical step would be a call from someone on your staff. If that person is unable to get a satisfactory response, elevate the matter to a manager.
These steps should all occur according to an established timeline. What’s more, each step should be documented in your AR or CRM software so you can measure and improve your company’s late-payment collections efforts.
Typically, the absolute last step is to send an outstanding invoice to a collection agency or a law firm that handles debt collection. However, doing so will usually lower the amount you’re able to collect and typically ends the business relationship. So, it’s best viewed as a last resort.
What works for you
If your B2B company has been operational for a while, you no doubt know that collections aren’t always as simple as “send invoice, receive payment.” It often involves interpersonal relationships with customers and being able to exercise flexibility at times and assertiveness at others. For help analyzing your collections process, identifying key metrics and measuring all the costs involved, contact us.
Every company, whether buyer or seller, is trying to manage cash flow. That means customers will often push off payments as long as possible to retain those dollars. Meanwhile, your business, as the seller, needs the money to meet its revenue and cash flow goals.
There’s no easy solution, of course. But you can “grease the wheels,” so to speak, by strategically devising and continuously improving a methodical collections process.
Payment terms
Getting paid promptly depends, at least in part, on the terms you set forth and customers agree to. Be sure payment terms for your company’s products or services are written in unambiguous language that includes specific due dates, payment methods and late-payment penalties. To the extent feasible, use contracts or signed payment agreements to ensure both parties understand their obligations.
If your business operates on a project basis, try to negotiate installment payments for completion of specific stages of the work. This approach may not be necessary for shorter jobs but, for longer ones, it helps assure you’ll at least receive some revenue if the customer runs into financial trouble or a dispute arises before completion.
Effective invoicing
Invoice promptly and accurately. This may seem obvious, but invoicing procedures can break down gradually over time, or even suddenly, when a company gets very busy or goes through staffing changes. Monitor relevant metrics such as days sales outstanding, revenue leakage and average days delinquent. Act immediately when collections fall below acceptable levels.
Also, don’t let the essential details of invoicing fall by the wayside. Ensure that you’re sending invoices to the right people at the right addresses. If a customer requires a purchase order number to issue payment, be sure that this requirement is built into your invoicing process.
In today’s world of high-tech money transfers, offering multiple payment options on invoices is critical as well. Customers may pay more quickly when they can use their optimal method.
Reminders and follow-ups
Once you’ve sent an invoice, your company should have a step-by-step process for reminders and follow-ups. A simple “Thank you for your business!” email sent before payment is due can reiterate the due date with customers. From there, automated reminders sent via accounts receivable (AR) or customer relationship management (CRM) software can be helpful.
If you notice that a payment is late, contact the customer right away. Again, you can now automate this to begin with texts or emails or even prerecorded phone calls. Should the problem persist, the next logical step would be a call from someone on your staff. If that person is unable to get a satisfactory response, elevate the matter to a manager.
These steps should all occur according to an established timeline. What’s more, each step should be documented in your AR or CRM software so you can measure and improve your company’s late-payment collections efforts.
Typically, the absolute last step is to send an outstanding invoice to a collection agency or a law firm that handles debt collection. However, doing so will usually lower the amount you’re able to collect and typically ends the business relationship. So, it’s best viewed as a last resort.
What works for you
If your B2B company has been operational for a while, you no doubt know that collections aren’t always as simple as “send invoice, receive payment.” It often involves interpersonal relationships with customers and being able to exercise flexibility at times and assertiveness at others. For help analyzing your collections process, identifying key metrics and measuring all the costs involved, contact us.
Why some businesses choose to execute a pivot strategy
When you encounter the word “pivot,” you may think of a politician changing course on a certain issue or perhaps a group of friends trying to move a couch down a steep flight of stairs. But businesses sometimes choose to pivot, too.
Under a formal pivot strategy, a company consciously changes its strategic focus in a series of carefully considered and executed moves. Obviously, this is an endeavor that should never be undertaken lightly or suddenly. But there’s no harm in keeping it in mind and even exploring the feasibility of a pivot strategy under certain circumstances.
5 common situations
For many businesses, five common situations often prompt a pivot:
1. Financial distress. When revenue streams dwindle and cash flow slows, it’s critical to pinpoint the cause(s) as soon as possible. In some cases, you may be able to blame temporary market conditions or a seasonal decline. But, in others, you may be looking at the irrevocable loss of a “unique selling proposition.”
In the latter case, a pivot strategy may be in order. This is one reason why companies are well-advised to regularly generate proper financial statements and projections. Only with the right data in hand can you make a sound decision on whether to pivot.
2. Lack of identity. Does your business offer a wide variety of products or services but have only one that clearly stands out? If so, you may want to pivot to focus primarily on that product or service — or even make it your sole offering.
Doing so typically involves cost-cutting and streamlining of processes to boost efficiency. In a best-case scenario, you might end up having to invest less in the business and get more out of it.
3. Weak demand. Sometimes the market tells you to pivot. If demand for your products or services has been steadily declining, it may be time to reimagine your strategic goals and pivot to something that will generate more dependable revenue.
Pivoting doesn’t always mean going all the way back to square one and completely rewriting your business plan. More often, it calls for targeted changes to production, pricing and marketing. For example, you might redefine your target audience and position your products or services as no hassle, budget-friendly alternatives. Or you could take the opposite approach and position yourself as a high-end “boutique” option.
4. Tougher competition. Many industries have seen “disrupters” emerge that upend the playing field. There’s also the age-old threat of a large company rolling in and simply being too big to beat.
A pivot can help set you apart from the dominant forces in your market. For example, you might seek to compete in a completely different niche. Or you may be able to pivot to exploit the weaknesses of your competitors — perhaps providing more personalized service or quicker delivery or response times.
5. Change of heart. In some cases, a pivot strategy may originate inside you. Maybe you’ve experienced a shift in your values or perspective. Or perhaps you have a new vision for your business that you feel passionate about and simply must pursue.
This type of pivot tends to involve considerable risk — especially if your company has been profitable. You should also think about the contributions and well-being of your employees. Nevertheless, one benefit of owning your own business is the freedom to call the shots.
Never a whim
Again, a pivot strategy should never be a whim. It must be carefully researched, discussed and implemented. For help applying thorough financial analyses to any strategic planning move you’re considering, contact us.
Under a formal pivot strategy, a company consciously changes its strategic focus in a series of carefully considered and executed moves. Obviously, this is an endeavor that should never be undertaken lightly or suddenly. But there’s no harm in keeping it in mind and even exploring the feasibility of a pivot strategy under certain circumstances.
5 common situations
For many businesses, five common situations often prompt a pivot:
1. Financial distress. When revenue streams dwindle and cash flow slows, it’s critical to pinpoint the cause(s) as soon as possible. In some cases, you may be able to blame temporary market conditions or a seasonal decline. But, in others, you may be looking at the irrevocable loss of a “unique selling proposition.”
In the latter case, a pivot strategy may be in order. This is one reason why companies are well-advised to regularly generate proper financial statements and projections. Only with the right data in hand can you make a sound decision on whether to pivot.
2. Lack of identity. Does your business offer a wide variety of products or services but have only one that clearly stands out? If so, you may want to pivot to focus primarily on that product or service — or even make it your sole offering.
Doing so typically involves cost-cutting and streamlining of processes to boost efficiency. In a best-case scenario, you might end up having to invest less in the business and get more out of it.
3. Weak demand. Sometimes the market tells you to pivot. If demand for your products or services has been steadily declining, it may be time to reimagine your strategic goals and pivot to something that will generate more dependable revenue.
Pivoting doesn’t always mean going all the way back to square one and completely rewriting your business plan. More often, it calls for targeted changes to production, pricing and marketing. For example, you might redefine your target audience and position your products or services as no hassle, budget-friendly alternatives. Or you could take the opposite approach and position yourself as a high-end “boutique” option.
4. Tougher competition. Many industries have seen “disrupters” emerge that upend the playing field. There’s also the age-old threat of a large company rolling in and simply being too big to beat.
A pivot can help set you apart from the dominant forces in your market. For example, you might seek to compete in a completely different niche. Or you may be able to pivot to exploit the weaknesses of your competitors — perhaps providing more personalized service or quicker delivery or response times.
5. Change of heart. In some cases, a pivot strategy may originate inside you. Maybe you’ve experienced a shift in your values or perspective. Or perhaps you have a new vision for your business that you feel passionate about and simply must pursue.
This type of pivot tends to involve considerable risk — especially if your company has been profitable. You should also think about the contributions and well-being of your employees. Nevertheless, one benefit of owning your own business is the freedom to call the shots.
Never a whim
Again, a pivot strategy should never be a whim. It must be carefully researched, discussed and implemented. For help applying thorough financial analyses to any strategic planning move you’re considering, contact us.
Don’t be surprised by a sudden influx of support
When a Category 5 hurricane struck a coastal community, its most prominent health and human services charity was prepared to act with rescue plans, supplies, emergency shelters and well-trained staffers. What the not-for-profit wasn’t prepared for was a sudden influx of support, including donations.
Too much support may not sound like a problem, but for nonprofits that aren’t prepared for a flood of attention and new funds, it can be difficult to handle. Right now, when you aren’t contending with an emergency, consider what your organization would do if the status quo were upended.
Keep your site online
Disaster-relief charities, such as the Red Cross, have long dealt with periodic spikes in attention and donation inflows. For example, during major natural disasters in recent years, some inundated nonprofit websites have gone offline because so many users were visiting them.
To prevent this from potentially happening to your nonprofit, know your system’s (particularly your donation app’s) ultimate capacity and create an IT contingency plan you can enact should it approach critical mass. While your nonprofit is in a period of relative calm, track website hits, as well as phone, text and email inquiries, to set a baseline. That way, you’ll be able to recognize a surge of interest if it begins and be ready to quickly enact your contingency plan if needed.
Establish a notification process
Having an early warning system for your website is only one part of being prepared. You also need to be able to mobilize your troops in a hurry. Do you know how to reach all of your board members at any time? Make sure you have an up-to-date contact list. You also can benefit from having a process, such as a phone tree or group text distribution list, to communicate with your board quickly and efficiently, should they need to vote on critical decisions.
Also assign a volunteer coordinator to take charge in an emergency. The coordinator should be able to contact and quickly train new volunteers to deploy where they’ll be most needed.
Build long-term support
A surge in donor and volunteer interest could mean a surge in media attention. Although it might be tempting to say, “not now, we’re busy,” don’t pass up the opportunity to publicize your organization’s mission and the work that’s garnering all the attention.
In most cases, the surge of interest eventually wanes. Before that happens, start to build lasting relationships with new donors, volunteers and media contacts. Inform them about the work your organization does under normal circumstances and suggest ways to get them involved long-term.
Use donations wisely
Finally, know how you’ll put new funds to work. Most donors will probably want their contributions to be used for immediate needs, so give them an option to earmark them for the current challenge. However, if supporters don’t specify how their donations should be used, you may want to place them in a fund for capital improvements and other initiatives. Contact us to discuss donation management.
Too much support may not sound like a problem, but for nonprofits that aren’t prepared for a flood of attention and new funds, it can be difficult to handle. Right now, when you aren’t contending with an emergency, consider what your organization would do if the status quo were upended.
Keep your site online
Disaster-relief charities, such as the Red Cross, have long dealt with periodic spikes in attention and donation inflows. For example, during major natural disasters in recent years, some inundated nonprofit websites have gone offline because so many users were visiting them.
To prevent this from potentially happening to your nonprofit, know your system’s (particularly your donation app’s) ultimate capacity and create an IT contingency plan you can enact should it approach critical mass. While your nonprofit is in a period of relative calm, track website hits, as well as phone, text and email inquiries, to set a baseline. That way, you’ll be able to recognize a surge of interest if it begins and be ready to quickly enact your contingency plan if needed.
Establish a notification process
Having an early warning system for your website is only one part of being prepared. You also need to be able to mobilize your troops in a hurry. Do you know how to reach all of your board members at any time? Make sure you have an up-to-date contact list. You also can benefit from having a process, such as a phone tree or group text distribution list, to communicate with your board quickly and efficiently, should they need to vote on critical decisions.
Also assign a volunteer coordinator to take charge in an emergency. The coordinator should be able to contact and quickly train new volunteers to deploy where they’ll be most needed.
Build long-term support
A surge in donor and volunteer interest could mean a surge in media attention. Although it might be tempting to say, “not now, we’re busy,” don’t pass up the opportunity to publicize your organization’s mission and the work that’s garnering all the attention.
In most cases, the surge of interest eventually wanes. Before that happens, start to build lasting relationships with new donors, volunteers and media contacts. Inform them about the work your organization does under normal circumstances and suggest ways to get them involved long-term.
Use donations wisely
Finally, know how you’ll put new funds to work. Most donors will probably want their contributions to be used for immediate needs, so give them an option to earmark them for the current challenge. However, if supporters don’t specify how their donations should be used, you may want to place them in a fund for capital improvements and other initiatives. Contact us to discuss donation management.
7 common payroll risks for small to midsize businesses
If your company has been in business for a while, you may not pay much attention to your payroll system so long as it’s running smoothly. But don’t get too complacent. Major payroll errors can pop up unexpectedly — creating huge disruptions costing time and money to fix, and, perhaps worst of all, compromising the trust of your employees.
For these reasons, businesses are well-advised to conduct payroll audits at least once annually to guard against the many risks inherent to payroll management. Here are seven such risks to be aware of:
1. Inaccurate recordkeeping.
If you don’t keep detailed and accurate records, it will probably come back to haunt you. For example, the Fair Labor Standards Act (FLSA) requires businesses to maintain records of employees’ earnings for at least three years. Violations of the FLSA can trigger severe penalties. Be sure you and your staff know what records to keep and have sound policies and procedures in place for keeping them.
2. Employee misclassification.
Given the widespread use of “gig workers” in today’s economy, companies are at high risk for employee misclassification. This occurs when a business engages independent contractors but, in the view of federal authorities, the company treats them like employees. Violating the applicable rules can leave you owing back taxes and penalties, plus you may have to restore expensive fringe benefits.
3. Manual processes.
More than likely, if your business prepares its own payroll, it uses some form of payroll software. That’s good. Today’s products are widely available, relatively inexpensive and generally easy to use. However, some companies — particularly small ones — may still rely on manual processes to record or input critical data. Be careful about this, as it’s a major source of errors. To the extent feasible, automate as much as you can.
4. Privacy violations.
You generally can’t manage payroll without data such as Social Security numbers, home addresses, birth dates and bank account numbers. Unfortunately, possessing such information puts you squarely in the sights of hackers and those pernicious purveyors of ransomware. Invest thoroughly in proper cybersecurity measures and regularly update these safeguards.
5. Internal fraud.
Occupational (or internal) fraud remains a major threat to businesses. Schemes can range from “cheating” on timesheets by rank-and-file workers to embezzlement by those higher on the organizational chart. Among the most fundamental ways to protect your payroll function from fraud is to require segregation of duties. In other words, one employee, no matter how trusted, should never completely control the process. If you don’t have enough employees to segregate duties, consider outsourcing.
6. Legal compliance.
As a business owner, you’re probably not an expert on the latest regulatory payroll developments affecting your industry. That’s OK; laws and regulations are constantly evolving. However, failing to comply with the current rules could cost you money and hurt your company’s reputation. So, be sure to have a trustworthy attorney on speed dial that you can turn to for assistance when necessary.
7. Tax compliance.
Employers are responsible for calculating tax withholding on employee wages. In addition to deducting federal payroll tax from paychecks, your organization must contribute its own share of payroll tax. If you get it wrong, the IRS could investigate and potentially assess additional tax liability and penalties. That’s where we come in. For help conducting a payroll audit, reviewing your payroll costs and, of course, managing your tax obligations, contact us.
For these reasons, businesses are well-advised to conduct payroll audits at least once annually to guard against the many risks inherent to payroll management. Here are seven such risks to be aware of:
1. Inaccurate recordkeeping.
If you don’t keep detailed and accurate records, it will probably come back to haunt you. For example, the Fair Labor Standards Act (FLSA) requires businesses to maintain records of employees’ earnings for at least three years. Violations of the FLSA can trigger severe penalties. Be sure you and your staff know what records to keep and have sound policies and procedures in place for keeping them.
2. Employee misclassification.
Given the widespread use of “gig workers” in today’s economy, companies are at high risk for employee misclassification. This occurs when a business engages independent contractors but, in the view of federal authorities, the company treats them like employees. Violating the applicable rules can leave you owing back taxes and penalties, plus you may have to restore expensive fringe benefits.
3. Manual processes.
More than likely, if your business prepares its own payroll, it uses some form of payroll software. That’s good. Today’s products are widely available, relatively inexpensive and generally easy to use. However, some companies — particularly small ones — may still rely on manual processes to record or input critical data. Be careful about this, as it’s a major source of errors. To the extent feasible, automate as much as you can.
4. Privacy violations.
You generally can’t manage payroll without data such as Social Security numbers, home addresses, birth dates and bank account numbers. Unfortunately, possessing such information puts you squarely in the sights of hackers and those pernicious purveyors of ransomware. Invest thoroughly in proper cybersecurity measures and regularly update these safeguards.
5. Internal fraud.
Occupational (or internal) fraud remains a major threat to businesses. Schemes can range from “cheating” on timesheets by rank-and-file workers to embezzlement by those higher on the organizational chart. Among the most fundamental ways to protect your payroll function from fraud is to require segregation of duties. In other words, one employee, no matter how trusted, should never completely control the process. If you don’t have enough employees to segregate duties, consider outsourcing.
6. Legal compliance.
As a business owner, you’re probably not an expert on the latest regulatory payroll developments affecting your industry. That’s OK; laws and regulations are constantly evolving. However, failing to comply with the current rules could cost you money and hurt your company’s reputation. So, be sure to have a trustworthy attorney on speed dial that you can turn to for assistance when necessary.
7. Tax compliance.
Employers are responsible for calculating tax withholding on employee wages. In addition to deducting federal payroll tax from paychecks, your organization must contribute its own share of payroll tax. If you get it wrong, the IRS could investigate and potentially assess additional tax liability and penalties. That’s where we come in. For help conducting a payroll audit, reviewing your payroll costs and, of course, managing your tax obligations, contact us.
Business owners, your financial statements are trying to tell you something
Business owners are commonly and rightfully urged to regularly generate financial statements in compliance with Generally Accepted Accounting Principles (GAAP). One reason why is external users of financial statements, such as lenders and investors, place greater trust in financial reporting done under the rigorous standards of GAAP.
But that’s not the only reason. GAAP-compliant financial statements can reveal details of your company’s financial performance that you and your leadership team may otherwise not notice until a major problem has developed.
Earnings are only the beginning
Let’s begin with the income statement (also known as the profit and loss statement). It provides an overview of revenue, expenses and earnings over a given period.
Many business owners focus only on earnings in the income statement, which is understandable. You presumably went into business to make money. However, though revenue and profit trends are certainly important, they aren’t the only metrics that matter.
For example, high-growth companies may report healthy top and bottom lines but not have enough cash on hand to pay their bills. So, be sure to look beyond your income statement.
A snapshot is just that
The second key part of GAAP-compliant financial statements is the balance sheet (also known as the statement of financial position). It provides a snapshot of your company’s financial health by tallying assets, liabilities and equity.
For instance, intangible assets — such as patents, customer lists and goodwill — can provide significant value to businesses. But internally developed intangibles aren’t reported on the balance sheet. Intangible assets are reported only when they’ve been acquired externally.
Similarly, owners’ equity (or net worth) is the extent to which the book value of assets exceeds liabilities. If liabilities exceed assets, net worth will be negative. However, book value may not necessarily reflect market value. Some companies provide the details of owners’ equity in a separate statement called the statement of retained earnings. It covers sales or repurchases of stock, dividend payments, and changes caused by reported profits or losses.
Ultimately, your balance sheet can tell you a lot about what you’ve got, what you owe and how much equity you truly have in your company. But it doesn’t tell you everything, so it’s important to read the balance sheet in the context of the other two parts of your financial statements.
Cash is (you guessed it) king
The third key part of GAAP-compliant financial statements is the statement of cash flows. True to the name, it shows all the cash flowing in and out of your business. Cash inflows aren’t necessarily limited to sales; they can also include loans and stock sales. Outflows typically result from paying expenses, investing in capital equipment and repaying debt.
Typically, statements of cash flow are organized in three categories: operating, investing and financing activities. The bottom of the statement shows the net change in cash during the period.
Read your statement of cash flows closely as soon it’s available. It’s essentially telling you how much liquidity your business had during the reporting period. A sudden slow down in cash flow can quickly lead to a crisis if you aren’t generating enough cash to pay creditors, vendors and employees.
Detailed picture
In the day-to-day commotion of running a company, it can be easy to think of your financial statements solely as paperwork for the purposes of obtaining loans or other capital infusions. But these documents paint a detailed picture of the financial performance of your business. Use them wisely. For help generating GAAP-compliant financial statements, or just understanding them better, contact us.
But that’s not the only reason. GAAP-compliant financial statements can reveal details of your company’s financial performance that you and your leadership team may otherwise not notice until a major problem has developed.
Earnings are only the beginning
Let’s begin with the income statement (also known as the profit and loss statement). It provides an overview of revenue, expenses and earnings over a given period.
Many business owners focus only on earnings in the income statement, which is understandable. You presumably went into business to make money. However, though revenue and profit trends are certainly important, they aren’t the only metrics that matter.
For example, high-growth companies may report healthy top and bottom lines but not have enough cash on hand to pay their bills. So, be sure to look beyond your income statement.
A snapshot is just that
The second key part of GAAP-compliant financial statements is the balance sheet (also known as the statement of financial position). It provides a snapshot of your company’s financial health by tallying assets, liabilities and equity.
For instance, intangible assets — such as patents, customer lists and goodwill — can provide significant value to businesses. But internally developed intangibles aren’t reported on the balance sheet. Intangible assets are reported only when they’ve been acquired externally.
Similarly, owners’ equity (or net worth) is the extent to which the book value of assets exceeds liabilities. If liabilities exceed assets, net worth will be negative. However, book value may not necessarily reflect market value. Some companies provide the details of owners’ equity in a separate statement called the statement of retained earnings. It covers sales or repurchases of stock, dividend payments, and changes caused by reported profits or losses.
Ultimately, your balance sheet can tell you a lot about what you’ve got, what you owe and how much equity you truly have in your company. But it doesn’t tell you everything, so it’s important to read the balance sheet in the context of the other two parts of your financial statements.
Cash is (you guessed it) king
The third key part of GAAP-compliant financial statements is the statement of cash flows. True to the name, it shows all the cash flowing in and out of your business. Cash inflows aren’t necessarily limited to sales; they can also include loans and stock sales. Outflows typically result from paying expenses, investing in capital equipment and repaying debt.
Typically, statements of cash flow are organized in three categories: operating, investing and financing activities. The bottom of the statement shows the net change in cash during the period.
Read your statement of cash flows closely as soon it’s available. It’s essentially telling you how much liquidity your business had during the reporting period. A sudden slow down in cash flow can quickly lead to a crisis if you aren’t generating enough cash to pay creditors, vendors and employees.
Detailed picture
In the day-to-day commotion of running a company, it can be easy to think of your financial statements solely as paperwork for the purposes of obtaining loans or other capital infusions. But these documents paint a detailed picture of the financial performance of your business. Use them wisely. For help generating GAAP-compliant financial statements, or just understanding them better, contact us.
Nonprofits: Take another look at Inflation Reduction Act tax breaks
When the Inflation Reduction Act (IRA) became law in late 2022, you might have assumed that the tax breaks it contained wouldn’t affect your tax-exempt organization. That’s not the case. One IRA provision could help reduce construction project costs if you use energy-efficient materials and qualified labor. Another could provide direct cash payouts of certain tax credits. It’s time to take a second look at the IRA.
All tax-exempt entities included
After the Consolidated Appropriations Act of 2021 made the IRC Section 179D tax deduction for energy-efficient buildings permanent, commercial property and certain residential property owners could use the deduction by assigning it to qualified “designers.” Eligible owners included some government entities, but not the vast majority of nonprofits.
With the IRA’s passage, all tax-exempt entities became entitled to allocate their building tax deductions to qualified designers. You may already prioritize energy efficiency because it aligns with your mission and values — or simply to cut future utility expenses. Now, the Sec. 179D deduction may help you reduce up-front costs on construction projects that incorporate sustainable materials.
Qualified designers create technical specifications for the installation of energy-efficient commercial building property. Installation, repair or maintenance of such property isn’t sufficient to qualify for the deduction. Designers may include architects, engineers, contractors, environmental consultants and energy services providers.
A look at the process
To see how the allocation process works, let’s look at an example. Say that your nonprofit plans to build a 40,000 square foot, LEED-certified building and that you have $200,000 in tax deductions to allocate to qualified architects, engineers and other construction professionals. You may allocate the entire Sec. 179D deduction to a single designer or make proportional allocations to multiple designers. This can help you negotiate a better overall price for the project.
The exact deduction amount will be determined through a Sec. 179D study obtained by the designer. The study is performed by a qualified contractor or professional engineer who will make a site visit to your property to confirm that it has met or will meet energy savings requirements. You’ll also need to sign an allocation letter that includes the cost of the energy-efficient property (including labor); the date the property is placed in service; the amount of the Sec. 179D deduction allocated to the designer; and a declaration that the information presented is true and complete.
Note that you’re prohibited from seeking or accepting payments from a designer in exchange for providing an allocation letter. And you can’t require a designer to pay you a portion of the deduction’s value.
Cash refunds for tax credits
In addition to expanding availability of the Sec. 179D tax deduction, the IRA allows eligible tax-exempt organizations to receive certain tax credits as cash payments from the IRS. Previously, most tax credits were of no use to nonprofits.
The “direct pay” provision allows organizations to participate in clean energy benefits related to such credits as the Investment Tax Credit, Production Tax Credit, Advanced Manufacturing Production Credit, Commercial Clean Vehicle Credit and Alternative Fuel Vehicle Refueling Property Credit. The IRS makes credit payments after an eligible nonprofit files its return for the applicable year.
Seek advice
Contact us for a full list of federal tax credits that can potentially allow your nonprofit to receive cash payouts. And if you’re contemplating a building project, ask us about qualifying for Sec. 179D deductions.
All tax-exempt entities included
After the Consolidated Appropriations Act of 2021 made the IRC Section 179D tax deduction for energy-efficient buildings permanent, commercial property and certain residential property owners could use the deduction by assigning it to qualified “designers.” Eligible owners included some government entities, but not the vast majority of nonprofits.
With the IRA’s passage, all tax-exempt entities became entitled to allocate their building tax deductions to qualified designers. You may already prioritize energy efficiency because it aligns with your mission and values — or simply to cut future utility expenses. Now, the Sec. 179D deduction may help you reduce up-front costs on construction projects that incorporate sustainable materials.
Qualified designers create technical specifications for the installation of energy-efficient commercial building property. Installation, repair or maintenance of such property isn’t sufficient to qualify for the deduction. Designers may include architects, engineers, contractors, environmental consultants and energy services providers.
A look at the process
To see how the allocation process works, let’s look at an example. Say that your nonprofit plans to build a 40,000 square foot, LEED-certified building and that you have $200,000 in tax deductions to allocate to qualified architects, engineers and other construction professionals. You may allocate the entire Sec. 179D deduction to a single designer or make proportional allocations to multiple designers. This can help you negotiate a better overall price for the project.
The exact deduction amount will be determined through a Sec. 179D study obtained by the designer. The study is performed by a qualified contractor or professional engineer who will make a site visit to your property to confirm that it has met or will meet energy savings requirements. You’ll also need to sign an allocation letter that includes the cost of the energy-efficient property (including labor); the date the property is placed in service; the amount of the Sec. 179D deduction allocated to the designer; and a declaration that the information presented is true and complete.
Note that you’re prohibited from seeking or accepting payments from a designer in exchange for providing an allocation letter. And you can’t require a designer to pay you a portion of the deduction’s value.
Cash refunds for tax credits
In addition to expanding availability of the Sec. 179D tax deduction, the IRA allows eligible tax-exempt organizations to receive certain tax credits as cash payments from the IRS. Previously, most tax credits were of no use to nonprofits.
The “direct pay” provision allows organizations to participate in clean energy benefits related to such credits as the Investment Tax Credit, Production Tax Credit, Advanced Manufacturing Production Credit, Commercial Clean Vehicle Credit and Alternative Fuel Vehicle Refueling Property Credit. The IRS makes credit payments after an eligible nonprofit files its return for the applicable year.
Seek advice
Contact us for a full list of federal tax credits that can potentially allow your nonprofit to receive cash payouts. And if you’re contemplating a building project, ask us about qualifying for Sec. 179D deductions.
Making the most of your nonprofit’s social media accounts
When’s the last time you evaluated your not-for-profit’s social media strategy? Are you using the right platforms in the most effective way, given your mission, audience and staffing resources? Do you have controls to protect your nonprofit from reputation-damaging content?
These are important questions — and it’s critical you review them regularly. At the very least, you need a social media policy that sets some ground rules.
Annual reviews
As you know, the social media landscape changes quickly. The platform that’s hot today may be decidedly not hot tomorrow. So review your online presence at least once a year to help ensure you’re dedicating resources to the right spaces. Most nonprofits maintain a presence on Facebook and LinkedIn because that’s where likely donors tend to be. But if you’re an arts nonprofit or visually oriented, Instagram may be a better venue. And if your constituents are teenagers or young adults, you’re most likely to find them on TikTok.
In general, fresher, frequently updated accounts get more traffic and engagement. So try not to overextend your organization by posting on multiple platforms with only limited staff resources. Determine where you’ll get the most bang for your buck by surveying supporters and observing where peer nonprofits post.
Content monitoring
Social media is 24/7, and incidents can escalate quickly. So closely monitor your accounts, as well as conversations that refer to your nonprofit. A “social listening” tool that scans the web for your nonprofit’s name can be extremely helpful.
But the best defense against reputation-busting events is a formal social media policy. Your policy should set clear boundaries about the types of material that are and aren’t permissible on your nonprofit’s official accounts and those of staffers.
For example, it should prohibit employees, board members and volunteers from discussing nonpublic information about your organization on their personal accounts. With organizational accounts, limit access to passwords and regularly check posts and comments. Content from your feeds can easily go viral and create controversy. Make sure your staff knows when to engage with visitors, particularly difficult ones, and maintains a zero-tolerance policy for offensive comments.
Crisis plan
Mistakes, or even intentionally damaging posts, can occur despite comprehensive policies. Create a formal response plan so you’ll be able to weather such events. The plan should assign responsibilities and include contact information for multiple spokespersons, such as your executive director and board president. Identify specific triggers and a menu of potential responses, such as issuing a press release or bringing in a crisis management expert. Be sure to include IP staffers or consultants on your list.
Hopefully, a crisis won’t occur. But if it does, you’ll want to sit down and review your plan’s effectiveness after the situation has been resolved.
Select and protect
These days, no nonprofit can afford to ignore social media. Just make sure you’re applying your time and effort to the right platforms and protecting your accounts from those who would harm your organization.
These are important questions — and it’s critical you review them regularly. At the very least, you need a social media policy that sets some ground rules.
Annual reviews
As you know, the social media landscape changes quickly. The platform that’s hot today may be decidedly not hot tomorrow. So review your online presence at least once a year to help ensure you’re dedicating resources to the right spaces. Most nonprofits maintain a presence on Facebook and LinkedIn because that’s where likely donors tend to be. But if you’re an arts nonprofit or visually oriented, Instagram may be a better venue. And if your constituents are teenagers or young adults, you’re most likely to find them on TikTok.
In general, fresher, frequently updated accounts get more traffic and engagement. So try not to overextend your organization by posting on multiple platforms with only limited staff resources. Determine where you’ll get the most bang for your buck by surveying supporters and observing where peer nonprofits post.
Content monitoring
Social media is 24/7, and incidents can escalate quickly. So closely monitor your accounts, as well as conversations that refer to your nonprofit. A “social listening” tool that scans the web for your nonprofit’s name can be extremely helpful.
But the best defense against reputation-busting events is a formal social media policy. Your policy should set clear boundaries about the types of material that are and aren’t permissible on your nonprofit’s official accounts and those of staffers.
For example, it should prohibit employees, board members and volunteers from discussing nonpublic information about your organization on their personal accounts. With organizational accounts, limit access to passwords and regularly check posts and comments. Content from your feeds can easily go viral and create controversy. Make sure your staff knows when to engage with visitors, particularly difficult ones, and maintains a zero-tolerance policy for offensive comments.
Crisis plan
Mistakes, or even intentionally damaging posts, can occur despite comprehensive policies. Create a formal response plan so you’ll be able to weather such events. The plan should assign responsibilities and include contact information for multiple spokespersons, such as your executive director and board president. Identify specific triggers and a menu of potential responses, such as issuing a press release or bringing in a crisis management expert. Be sure to include IP staffers or consultants on your list.
Hopefully, a crisis won’t occur. But if it does, you’ll want to sit down and review your plan’s effectiveness after the situation has been resolved.
Select and protect
These days, no nonprofit can afford to ignore social media. Just make sure you’re applying your time and effort to the right platforms and protecting your accounts from those who would harm your organization.
How businesses can reinvigorate strategic planning
For businesses, and people for that matter, the beginning of the calendar year can be a bit of a grind. The holidays have passed, summer vacations are relatively far off and everyone is trying to build momentum for a strong, healthy year.
Amongst all the nose-to-the-grindstone stick-to-itiveness, however, you and your leadership team shouldn’t lose sight of strategic planning. Your competitors probably haven’t, and the business landscape is always shifting in ways large and small. If you’ve let strategic planning slide a bit recently, here are some ways to reinvigorate it.
Push back against procrastination
Ideally, most companies should engage in an active strategic planning initiative at least once a year. This would involve doing research and holding meetings that eventually result in actionable, measurable goals.
However, some businesses may get so caught up in day-to-day operations that strategic planning goes by the wayside. Sometimes, this is a positive sign. Perhaps the company is so busy and profitable that it must focus on maximizing the opportunities at hand.
But it can be dangerous as well. A sudden market shift or disruptive competitor may leave the business flat-footed. Generally, companies shouldn’t let more than three years pass without productively engaging in strategic planning.
Go to your happy place
Because strategic planning is all about the big picture rather than the day-to-day, the process tends to work best when you put the people involved in a fresh setting. This is why the company retreat has long been an iconic undertaking, often depicted in movies and TV shows.
Granted, there is the potential for excessive spending and counterproductive distractions when organizing and holding one of these events. But if planned carefully and undertaken mindfully, getting your strategic planning team out of the office, or away from their computer screens at home, may pay off.
Engage an outside facilitator
Intuitively, it may seem like a business owner or CEO should lead a strategic planning session. And this can certainly be a cost-effective approach. But the objectivity of an outside professional may be worth investing in.
First, a facilitator may be able to better create a “there are no bad ideas” environment. Team members are often more willing to speak freely when they’re not directly addressing the owner or chief executive of the company. Plus, experienced facilitators are usually good at “working the room” (making people feel at ease), as well as adhering to a productive agenda.
Devise an action plan
Strategic planning should never be all talk and no action. Typically, the first session will review the business’s mission (what it does), vision (where it’s going), current financial results, and perhaps some of its recent notable successes and setbacks. It’s critical, however, to be results oriented.
This means:
Helpful voices
One last point: Don’t restrict strategic planning to only internal voices. Your professional advisors can also lend their expertise to the process, whether by attending a session or reviewing an action plan. For help with the financial side of strategic planning, contact us.
Amongst all the nose-to-the-grindstone stick-to-itiveness, however, you and your leadership team shouldn’t lose sight of strategic planning. Your competitors probably haven’t, and the business landscape is always shifting in ways large and small. If you’ve let strategic planning slide a bit recently, here are some ways to reinvigorate it.
Push back against procrastination
Ideally, most companies should engage in an active strategic planning initiative at least once a year. This would involve doing research and holding meetings that eventually result in actionable, measurable goals.
However, some businesses may get so caught up in day-to-day operations that strategic planning goes by the wayside. Sometimes, this is a positive sign. Perhaps the company is so busy and profitable that it must focus on maximizing the opportunities at hand.
But it can be dangerous as well. A sudden market shift or disruptive competitor may leave the business flat-footed. Generally, companies shouldn’t let more than three years pass without productively engaging in strategic planning.
Go to your happy place
Because strategic planning is all about the big picture rather than the day-to-day, the process tends to work best when you put the people involved in a fresh setting. This is why the company retreat has long been an iconic undertaking, often depicted in movies and TV shows.
Granted, there is the potential for excessive spending and counterproductive distractions when organizing and holding one of these events. But if planned carefully and undertaken mindfully, getting your strategic planning team out of the office, or away from their computer screens at home, may pay off.
Engage an outside facilitator
Intuitively, it may seem like a business owner or CEO should lead a strategic planning session. And this can certainly be a cost-effective approach. But the objectivity of an outside professional may be worth investing in.
First, a facilitator may be able to better create a “there are no bad ideas” environment. Team members are often more willing to speak freely when they’re not directly addressing the owner or chief executive of the company. Plus, experienced facilitators are usually good at “working the room” (making people feel at ease), as well as adhering to a productive agenda.
Devise an action plan
Strategic planning should never be all talk and no action. Typically, the first session will review the business’s mission (what it does), vision (where it’s going), current financial results, and perhaps some of its recent notable successes and setbacks. It’s critical, however, to be results oriented.
This means:
- Setting several clearly worded goals,
- Devising reasonable strategies for pursuing those goals, and
- Identifying the specific objectives that will enable you to accomplish the goals.
Helpful voices
One last point: Don’t restrict strategic planning to only internal voices. Your professional advisors can also lend their expertise to the process, whether by attending a session or reviewing an action plan. For help with the financial side of strategic planning, contact us.
Making a nonprofit mission drift official
Mission drift is common in not-for-profit organizations, particularly if they’ve been active for a long time. Your local community probably has grown, the issues surrounding your mission may have evolved and new nonprofits may be addressing some of the same problems. In such circumstances, it makes sense to shift your focus and use your funds where they’ll do the most good. But don’t drift too far without formalizing the changes. You’ll need to notify your stakeholders, as well as the IRS, about a significant mission shift.
Taking a long, hard look
Sometimes organizations have no choice but to shift their mission. For example, perhaps you’ve championed a cause that has been successfully resolved. Or maybe the population you’ve served is no longer present in your community.
Other times, the decision isn’t as clear-cut. Your board should look at where you’ve been and where you’re heading. Members should ask whether the services you currently provide are still needed and, if your mission has drifted, whether it’s now focusing on what you consider the most critical issues. Your board may decide to expand, contract or modify your nonprofit’s existing mission.
Drawing up a new statement
It’s generally easy for 501(c)(3) organizations to change their mission statements without major disruption. You just need to make sure your new mission qualifies as tax-exempt.
Your board should develop a new mission statement following procedures similar to the ones used at inception. The statement should be descriptive, but not so detailed that it limits your nonprofit and its growth. Once the board approves the new mission statement, your bylaws and Articles of Incorporation should be amended according to your existing bylaws. Unless otherwise stated, bylaws may be amended by a vote of at least a two-thirds majority.
Notifying supporters and the IRS
You can notify the IRS immediately about a change in your organization’s mission or bylaws, but there’s no legal requirement to do so. You can instead wait until you file your annual Form 990. At that point, the IRS will contact you if it has any questions.
On the other hand, don’t delay notifying donors and grant makers. In general, nonprofits must use donations for the purpose specified by donors. If you’ve accepted a large donation intended for a program that’s discontinued after you change your mission, contact the donor immediately. After you explain the change, this supporter may allow you to use the donation for another purpose consistent with your new mission. If not, you’ll need to return the funds.
To get the word out to stakeholders and your community, use your website, newsletter and social media accounts. Large nonprofits with wide regional or national appeals generally distribute formal press releases. Smaller nonprofits may want to contact local media outlets. Finally, review and, potentially, revise all public communications to ensure they reflect your new mission statement.
Avoiding old attitudes
You’re not done yet! You’ll need to monitor your programs and initiatives to ensure they’re consistent with your new mission. To that end, you may want to provide retraining for staffers to help ensure they all understand the current focus and are carrying out your mission with a fresh attitude.
Taking a long, hard look
Sometimes organizations have no choice but to shift their mission. For example, perhaps you’ve championed a cause that has been successfully resolved. Or maybe the population you’ve served is no longer present in your community.
Other times, the decision isn’t as clear-cut. Your board should look at where you’ve been and where you’re heading. Members should ask whether the services you currently provide are still needed and, if your mission has drifted, whether it’s now focusing on what you consider the most critical issues. Your board may decide to expand, contract or modify your nonprofit’s existing mission.
Drawing up a new statement
It’s generally easy for 501(c)(3) organizations to change their mission statements without major disruption. You just need to make sure your new mission qualifies as tax-exempt.
Your board should develop a new mission statement following procedures similar to the ones used at inception. The statement should be descriptive, but not so detailed that it limits your nonprofit and its growth. Once the board approves the new mission statement, your bylaws and Articles of Incorporation should be amended according to your existing bylaws. Unless otherwise stated, bylaws may be amended by a vote of at least a two-thirds majority.
Notifying supporters and the IRS
You can notify the IRS immediately about a change in your organization’s mission or bylaws, but there’s no legal requirement to do so. You can instead wait until you file your annual Form 990. At that point, the IRS will contact you if it has any questions.
On the other hand, don’t delay notifying donors and grant makers. In general, nonprofits must use donations for the purpose specified by donors. If you’ve accepted a large donation intended for a program that’s discontinued after you change your mission, contact the donor immediately. After you explain the change, this supporter may allow you to use the donation for another purpose consistent with your new mission. If not, you’ll need to return the funds.
To get the word out to stakeholders and your community, use your website, newsletter and social media accounts. Large nonprofits with wide regional or national appeals generally distribute formal press releases. Smaller nonprofits may want to contact local media outlets. Finally, review and, potentially, revise all public communications to ensure they reflect your new mission statement.
Avoiding old attitudes
You’re not done yet! You’ll need to monitor your programs and initiatives to ensure they’re consistent with your new mission. To that end, you may want to provide retraining for staffers to help ensure they all understand the current focus and are carrying out your mission with a fresh attitude.
Applying for a commercial loan with confidence
Few and far between are businesses that can either launch or grow without an infusion of outside capital. In some cases, that capital comes in the form of a commercial loan from a bank or some other type of lender.
If you and your company’s leadership team believe a loan will soon be necessary, it’s important to approach the endeavor with confidence. That starts with having valid, well-considered strategic reasons for borrowing. From there, you need to engage your bank or a prospective lender with a strong air of professionalism and certainty.
Essential questions
First, familiarize yourself with how the process works. It’s essentially built on four basic questions: How much money do you want? How do you plan to use the loan proceeds? When do you need the funds? How soon can you repay the loan?
Your loan officer will also likely ask about your business’s previous sources of financing. So, be ready to explain how you’ve financed your company to date. Methods may include personal cash infusions, forgone salaries and sweat equity, as well as any equity contributions from friends, family members and outside investors.
Loan products
As you’re probably aware, banks and lenders offer a variety of commercial loan products. Another way of expressing confidence is to know what you want. Common options include:
Lines of credit. One of these gives you access to an agreed-upon amount of funds that you can draw on as needed. As is the case with a credit card, you pay interest only on the outstanding balance.
Traditional term loans. These are what most people likely envision when they see the term “commercial loan.” You receive a lump sum with repayment terms, which include a payment schedule and interest rate.
Asset-based loans. True to the name, asset-based loans typically fund equipment purchases or plant expansions. The length of the loan is usually tied to the life of the asset being financed, and that asset is usually pledged as collateral.
Supporting documents
No matter the product, banks and lenders want to work with serious borrowers who are deeply knowledgeable about the financial condition and projected performance of their businesses. To this end, don’t go into the initial meeting empty-handed. Prepare a comprehensive loan application package that includes:
If your bank or lender finds your business a viable borrower, your application will be given to an underwriting committee or department. Underwriters will have greater confidence in your financial statements if they’re prepared by a CPA and conform to U.S. Generally Accepted Accounting Principles. Professionally prepared financial projections are also recommended.
Shop around
Underwriters don’t approve every loan application, so don’t give up if a bank or lender turns you down. In fact, it’s a good idea to shop around. For help preparing to apply for a commercial loan and managing the approval process, contact us.
If you and your company’s leadership team believe a loan will soon be necessary, it’s important to approach the endeavor with confidence. That starts with having valid, well-considered strategic reasons for borrowing. From there, you need to engage your bank or a prospective lender with a strong air of professionalism and certainty.
Essential questions
First, familiarize yourself with how the process works. It’s essentially built on four basic questions: How much money do you want? How do you plan to use the loan proceeds? When do you need the funds? How soon can you repay the loan?
Your loan officer will also likely ask about your business’s previous sources of financing. So, be ready to explain how you’ve financed your company to date. Methods may include personal cash infusions, forgone salaries and sweat equity, as well as any equity contributions from friends, family members and outside investors.
Loan products
As you’re probably aware, banks and lenders offer a variety of commercial loan products. Another way of expressing confidence is to know what you want. Common options include:
Lines of credit. One of these gives you access to an agreed-upon amount of funds that you can draw on as needed. As is the case with a credit card, you pay interest only on the outstanding balance.
Traditional term loans. These are what most people likely envision when they see the term “commercial loan.” You receive a lump sum with repayment terms, which include a payment schedule and interest rate.
Asset-based loans. True to the name, asset-based loans typically fund equipment purchases or plant expansions. The length of the loan is usually tied to the life of the asset being financed, and that asset is usually pledged as collateral.
Supporting documents
No matter the product, banks and lenders want to work with serious borrowers who are deeply knowledgeable about the financial condition and projected performance of their businesses. To this end, don’t go into the initial meeting empty-handed. Prepare a comprehensive loan application package that includes:
- A “statement of purpose” explaining your strategic plans for the funds,
- Your business plan,
- Three years of financial statements, if available,
- Three years of business tax returns, if available,
- Personal financial statements and tax returns for all owners,
- Appraisals of any assets pledged as collateral, and
- Carefully prepared, reasonable financial projections.
If your bank or lender finds your business a viable borrower, your application will be given to an underwriting committee or department. Underwriters will have greater confidence in your financial statements if they’re prepared by a CPA and conform to U.S. Generally Accepted Accounting Principles. Professionally prepared financial projections are also recommended.
Shop around
Underwriters don’t approve every loan application, so don’t give up if a bank or lender turns you down. In fact, it’s a good idea to shop around. For help preparing to apply for a commercial loan and managing the approval process, contact us.