Archive | November, 2012

When is free too expensive? (for example: the volunteer board member)

11 Nov

Who wouldn’t like to save money?

Nonprofit organizations, typically strapped for cash, are always looking for ways to save money on essential services. Who can blame them?

But is it possible for a less expensive option, even a free one, to actually cost an organization more than if they had paid for the service?

Let’s take one example to illustrate this dilemma: the volunteer board member.

Have you ever had a board member volunteer to perform a service for free for your organization in lieu of you having to pay someone?

At first, this seems like a wonderful deal. Your board member cares about your organization, otherwise presumably she/he would not be serving on your board. And, they agree to work for free. Sounds like a win-win situation.

But let’s look at the reality. The board member may not have the requisite experience to perform the tasks that they volunteered for. For example, a non-accountant board member may have volunteered to keep your records and prepare your financial reports. But how accurate will your records be? What is the cost to your organization of late or inaccurate financial reporting?

Even if your board member is skilled at the task at hand, chances are they have a full-time job elsewhere which requires their immediate attention. They get to your work when they have time. Your work is now late. What is the true cost to you of work done late? Have you as the executive director or other key staff member ever tried to tell a volunteer board member they are working too slowly?

What if your board member is just not doing a good job? How do you, if you are the executive director, fire a board member?

There is the additional question of a possible conflict of interest. Board members have a fiduciary responsibility to the organization. They have a potential conflict of interest if they are also acting as your controller or accountant. How can they effectively discharge their fiduciary responsibilities if they are also your record keepers?

“Free” services will cost you more if the work is done late, poorly or not at all.

My recommendation: avoid, if at all possible, having a board member perform work for free. This is not a long-term strategy for success.

Comments welcome.

Eric Fraint, President and Founder
Your Part-Time Controller, LLC

Have restricted funds disappeared?

4 Nov

If I had to pick one area where nonprofits most often go astray, it would be mishandling their restricted funds.

To put it bluntly: they spend their restricted funds on things that they should not be spending them on.

The organizations that do this are of two types: those that knowingly misuse their restricted funds, and those that don’t realize what they are doing.

Those that knowingly misspend their restricted funds, in terms of the good, the bad, and the ugly, are in the ugly category.  They might justify this when faced with a cash flow emergency.  If the choice, for example, is to let funds restricted for the after school program to sit in the bank while the roof leaks, or dip into the money to fix the roof, I understand the pressure the executive director feels to take the money and fix the roof.  Nevertheless, there might have been some better options (write me for some ideas).

Those that are unaware that they are misspending their restricted funds raise some interesting questions.  Why don’t they realize they are misusing their funds?  Are they not sufficiently financially astute to recognize the situation, or are their internal financial reports unclear making it difficult to spot the problem?

More often than not, I find that the problem is inadequate financial reporting.  Nonprofit managements and boards everywhere are receiving inferior internally generated financial reports that make it difficult if not impossible for them to fully discharge their fiduciary responsibilities.

Managing a nonprofit organization with inadequate financial reports is like driving a car with a coat of paint on the windshield: you can’t see where you are going!

Interestingly, this problem of misspending restricted funds can sometimes be spotted just by looking at the balance sheet.  Here is a very simple example.

Imagine an organization that has the following two lines on its balance sheet (this example is taken from a real organization’s 990):

Total assets                             $60k

Restricted net assets             $85k

According to their balance sheet, this organization should have $85k of restricted assets.  However, they only have $60k of assets.  What happened to the other $25k?  Barring an accounting irregularity, the money is gone.  Maybe they took the $25k to fix the roof.

Moral of the story:  if an organization accepts a pledge, donation, or a grant, etc., with restrictions attached to it, the organization is obligated to honor those restrictions.  If their financial reporting is such that they cannot tell whether they have dipped into this money in violation of a restriction, then they need to get professional help to fix the situation.

Comments welcome.

Eric Fraint, President and Founder
Your Part-Time Controller, LLC

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