Nonprofit Risk management

Editor's Notes

• #3: The nature of nonprofits is that the volunteers want to spend their time doing their thing – whatever that thing may be – and are less mindful of the responsibilities of running a nonprofit organization. Over time, changes in officers and lead to missed deadlines for government reports, drift off of mission, and lost of managerial capacity. The turn of the 21st Century saw a gradual decline in the historic robust nature of nonprofit organizations with older members leaving and fewer new members coming on board. What was a gradual decline became an acute situation in 2020, when COVID shut down a lot of nonprofits and made a lot of members re-think their level of involvement. The younger generations are less inclined to embrace the older formats of nonprofit organization and are less schooled in how organizations function because of the lack of mentors in that arena. Nonprofits (meaning their volunteers) will need to learn to live and thrive in a new environment. As nonprofit boards and members evaluate how they will operate in this post-2020 world, they need to be mindful of the risks that face every organization. Today, we will take a look at the most-often missed risks in nonprofits, and we will discuss the consequences of ignoring those risks. I realized when I completed the slide deck that this is more of a “what not to do” instruction manual (which is a bit of a downer), but I hope that you can take away some good practices along with the cautions. Here’s a summary of what we will be discussing: Let’s dig in.
• #4: Because nonprofit organizations are more interested in their programs than in keeping up with government paperwork, this is one of the most frequent issues that I see. Organizations either ignore government paperwork or don’t keep their address current with the government, and paperwork is lost. Failing to keep minutes or summaries of meetings means that nonprofits lose track of projects, who volunteered for what, and who is responsible for what. Minutes or notes remind everyone, and leadership has a written record to help remind volunteers and keep projects on track.
• #5: As computers are more sophisticated at the government level, there is less human oversight of marginal issues – like failing to keep up with the required paperwork. Computers note a deadline, sent out a letter of noncompliance or a notice of penalty. Particularly with the IRS, it is very difficult to call their offices and get results. It’s far easier to stay ahead of the paperwork than to correct issues after you receive a notice of penalty or dissolution.
• #6: Using a organizational email address and having a PO Box ensures that the government will find you even when officers change. For $100/year, you can have a PO Box, and a Gmail Account is free. It can take *years* for the government to correct old addresses (sometimes, never). Take all government mail seriously, but if you aren’t sure, find a professional to ask. I don’t charge my clients to review government letters, and about 25% of these so-called government letters are scams. You WILL lose nonprofits status if you fail to file your 501(c) 990N report every year (for nonprofits with less than $50K income per year). Not required if you are small enough to not have 501(c) status. Meeting notes are important from meeting to meeting, but also from year to year as a record of how you conducted operations, what worked, what didn’t and what you wish you would have done.
• #7: I have a situation now with a nonprofit that had a long-time treasurer “retire” from the Board. The organization had difficulty getting a new treasurer, and the person who finally agreed should not have agreed out of guilt or obligation. The new treasurer refuses to use a computer to keep financial records and has completely abandoned the robust budget reporting that was used by the previous treasurer. Unfortunately, the membership is having trouble understanding that the record keeping is important for their project budgets, grant applications, and year-end reporting. This complete regression into the pre-computer age for keeping records opens the Treasurer up to mistakes and mismanagement (deliberate or accidental) of funds. The organization takes in more than $50K per year and can well-afford the software. I am completely frustrated with this client.
• #8: This bad example organization will no longer qualify for grants because they cannot produce the required income/expense reports. The membership cannot see where their spending is for the year, because the treasurer only reports on the income and expenses for the previous month and the total in the bank account. This organization is part of a larger nonprofit and is required to have a CPA review the books every year. The CPA will either decline to review the poorly=kept books or will charge a lot more for the significant additional time needed to reconstruct the financial records.
• #9: Use a basic bookkeeping program – there are several online programs available, which will allow easy transfer of the books from one Treasurer to the next and will be easy for a CPA to review. You can import credit card and banking information directly into the software, and most have good basic reports built-in, with the ability to customize the reports. Someone should review the books at the close of every year – if you are a small nonprofit, a team of 2-3 members can review the books. If you are a larger nonprofit, a CPA can be hired for this review. This protects the Treasurer and the organization and provides confidence in the data. Granting organizations require good financial reports, so it’s a good idea to already be in the habit.
• #10: It’s difficult to get people to volunteer to be board members and officers. When recruiting volunteers and members, keep an eye out for people with leadership skills and be assertive in training future leaders. Be transparent in your culture and operational structure so that people know how the organization operates and are more confident in stepping up to leadership. What do your bylaws say about officers, members, and board members? Are you in compliance with the bylaws? If not – what needs to change; the bylaws or your operations? The 21st Century brought a different mindset to volunteer organizations, which was increased by COVID. You cannot assume you will be able to get volunteers and members by previous paths. If you want to engage younger populations as volunteers and members, you will need to appeal to their particular sense. Getting the “next generation” of volunteers, members, and officers will require more effort in recruiting and educating, and you will have to have a well-run organization that is not mysterious or intimidating to newcomers.
• #11: If you can’t recruit good leaders, you might need to think about restructuring, reducing, or winding down your organization. Alternatively, don’t burn out your current leadership because you can’t find replacements. Good succession planning is an ongoing process – always be on the look out to develop the next leaders. The best time for this is while your current leadership is enthusiastic and engaged. Rogue members need to be dealt with before they drive away other members and volunteers. Rogue members think they know best, they act on behalf of the organization without consulting the leadership, they challenge everything the board does, and they enjoy causing conflict in a meeting by arguing about nonessential matters. The leadership needs to structure the meeting to reduce open comment and consider going to the rogue member in private (but never alone) to discuss behavior. Ghost board members or project leaders need to be replaced as soon as possible. Don’t let programs languish because of a board member who doesn’t participate, and don’t waste a board space with a member who is not interested in attending regular meetings and volunteering for meaningful leadership roles. Many organizations struggle to field all the historic programs and activities because of lack of members and volunteers. Consider reducing or eliminating programs that draw marginal attendance or participation so you can focus your energy on the projects and programs that draw more engagement and interest.
• #12: Make sure your operational documents align with your practices – if you need to update your operational documents, think carefully about whether your current operational structure is the right form for your organization. Think creatively, but make sure there is (1) transparency (2) integrity and (3) accountability built into your documents. Make sure your operational documents give you the authority to remove ghost board members (fail to attend meetings or participate).
• #13: All nonprofit should have liability insurance if they (a) have activities open to the public (b) sell product (more than minor sales or sales to members) or (c) host events. General liability insurance should be less than $500 for a small nonprofit D&O – Directors and Officers – also known as “Errors and Omissions” protects the board and executive staff in the event of a lawsuit for a decision made by the Board. Generally only needed if your organization affects vulnerable populations (children, elderly, disabled) or benefits (housing, food, entitlements). MG organizations probably do not need D&O – but check with your insurance agent. NOTE – Indiana law covers board members of nonprofit corporations for activities in the normal course of the nonprofit mission. Property Insurance – what “property” do you have to insure? Building, furniture, computers, activity supplies? Insurance for loss or damage if it would be a hardship to replace. NOTE – be sure you keep up the inventory of property with the insurance company so they aren’t insuring something that doesn’t exist – or aren’t insuring something that does exist! Event Insurance – needed if you host an event that has some liability – Fairs, Carnivals, Car Shows, Tractor Pulls. Check with your insurance agent. If you have a lot of events, you can get event insurance, and they pay a separate small premium for each event.
• #14: Most organizations that (a) have activities and (b) earn money should have insurance. As long as your activities are not risky, general liability insurance will cover claims (less a deductible, in some cases). You also need to insure property that you might have and use in your operations. NOT NEEDED – cyber insurance, hacker insurance, terrorism insurance. If you see an “included” insurance that you are paying for, ask the agent what it covers. If that risk is not you, ask them to remove it.
• #15: Most organizations that (a) have activities and (b) earn money should have insurance. As long as your activities are not risky, general liability insurance will cover claims (less a deductible, in some cases). You also need to insure property that you might have and use in your operations. NOT NEEDED – cyber insurance, hacker insurance, terrorism insurance. If you see an “included” insurance that you are paying for, ask the agent what it covers. If that risk is not you, ask them to remove it.
• #17: There may come a point where the nonprofit must seriously consider winding down. Some interim options(1) Partner with a similar organization for larger volunteer base (2) Discontinue outdated or nonproductive projects – or seek another home for them (3) Evaluate your “critical mass” where you need to consider closing (4) Are there any options for growth?
• #18: You should review and critically analyze your programs, mission, and operations – but that doesn’t mean that you need to throw everything out and start over. Sometimes small changes can bring big results. What works, what doesn’t work? For every marginal program you have, you spending time and resources which might be better spent on a new or updated activity. Watch “mission-drift” – be sure that your activities align with your mission. Don’t take on new activities just because they might bring in more funds. Example – Brand-new animal rescue organization taking on a large, well-established, community festival because the previous show-runners were closing operations. This is not a good fit, and distracts from the mission of rescuing animals. Will take hundreds of hours to deploy the festival, and those hours are not being used for the animal rescue mission.