5 Red Flags For Nonprofits To Watch For
5 Red Flags For Nonprofits To Watch For
05/2/2022 Tags: Announcements
If you're managing a nonprofit, you already know there are a lot of responsibilities to juggle. And keeping on top of your organization's finances is likely at the top of your list.
When you're watching for indications that something might be wrong, certain financial benchmarks — like recurring losses or declining net assets — are easy to spot.
But others are less obvious.
Below, we've highlighted some indicators that may signal that the health of your nonprofit's finance, operations, or governance isn't what it should be.
1. Current ratio: To calculate this indicator, you divide your organization's current assets (assets you expect to use within a year) by current liabilities (liabilities that are due within a year). A result less than one may indicate financial distress. If your organization doesn't have enough current assets to pay its current liabilities, it could have problems continuing operations.
Including indicators like the current ratio, the quick ratio (cash, cash equivalents, and accounts receivable divided by current liabilities), and the reserve ratio (net assets without donor restrictions divided by total annual expenses) in dashboards is helpful so that management can monitor these metrics regularly.
2. Deferred maintenance on assets or lack of investment in technology: A lot of nonprofits have
assets that require significant maintenance, like buildings or equipment. Delaying
maintenance might save you money in the short term. In the long term though, it can make problems and expenses worse.
Required maintenance that isn't done can be a red flag. However, it's not one that's easy to identify since it's not on your organization's financial statements.
A similar issue is a lack of investment in technology. The longer you wait to invest in technology for accounting and operations, the more expensive and time-consuming the implementation could be.
One way to address these issues is a maintenance checklist for assets and technology so that you or your board can consider those needs annually.
3. Delay in financial statement preparation: A continual lag of multiple-month delays in financial statement preparation might indicate issues in your organization's operational efficiency or internal control processes.
Your auditor shouldn't jump to conclusions in those situations. But you, your auditor, and your board will need to understand your nonprofit's period-close process to make the right conclusions and decisions.
4. Not addressing internal control comments promptly: Your auditor's internal control comments are meant to help you improve your processes. But if you keep seeing the same comments year after year, there might be a larger issue.
When you get your internal control or management letter, try to identify the root cause of the auditor's comments. Then, set a detailed timeline for addressing them.
5. Lack of board engagement: An active and engaged board is essential to making sure your nonprofit stays on track operationally and financially.
You can take steps to make sure that your board's engaged. Consider assigning mentors to new board members, structuring meeting agendas to facilitate feedback, and using an evaluation process for board members.
If you have questions about your nonprofit organization's financial health, please let us know.
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