Nonprofit 411: Is Your Nonprofit Ready for the Unexpected?

By Barbara Andrews, CPA, Senior Audit Manager, KPM & Associatesbarbara-andrews2

The executive director of a nonprofit organization recently informed me that the agency’s landlord is selling the building that houses their operating facility. The lease ends in a year and there is now an organized scramble to find a new location. This recent chain of events has moved the organization into a ‘reactive’ mode which is disruptive to their regular operations. There are many types of unforeseen events that can happen to an organization, however there are steps organizations can take to prepare for the unexpected.

Does your organization have a healthy operating reserve?
An operating reserve allows for flexibility and strengthens an organization’s ability to adapt to changes.  The Nonprofit Operative Reserves Toolkit developed by the Nonprofit Operating Reserves Initiative Workgroup (NORI) is a valuable resource available to organizations.  NORI recommends that organizations establish a minimum operating reserve ratio policy.  The ratio can be calculated in terms of a percentage (operating reserves divided by the annual expense budget) or number of months (operating reserves divided by the average monthly expense budget).  The minimum operating reserve ratio at the lowest point of the year should be 25%, or 3 months, of the annual expense budget.

Does the Organization’s Board of Directors have the right mix of professional experience?
There is no magic formula but the more active and vibrant Boards that I have encountered consist of members with complementary skillsets.  Is the organization looking forward or is it operating with a day-to-day mindset? The organization that is looking forward will be better equipped to respond to changing environments. The latter will likely be stagnant or fall into ‘crisis mode’ when challenges arise.

Are you using your network?
Do the organization’s leaders and Board have a pulse on the industry?  Organizations that engage with leaders within their industry are more informed.  This can be accomplished through direct interaction or indirectly through such means as social media.

Is the Organization’s financial information reliable and timely?
One tool to help gauge the reliability of financial information provided to the Board is the organization’s annual operating budget to actual comparison reporting.  This simple tool evaluates if management understands both the organization’s perceived and actual operations. An unreliable budget is of no value.  The organization should also incorporate pro-forma data, such as future cash flows, in the financial reporting package provided to the Board.  This forward thinking will assist the organization and its Board in making informed decisions.

Does your Organization have a strategic plan?
The National Council of Nonprofits has made available tools and resources to be used by an organization when developing its strategic plan.  The Council states “that many nonprofits start the process by identifying the nonprofit’s strengths, weaknesses, opportunities, and threats, in what is commonly called a “SWOT” analysis.  Looking at external as well as internal factors (such as your own nonprofit’s staff capacity to accomplish its goals) is important.”

No matter the tools utilized, the organization should share the information and results with the entire organization.  When employees are aware of the organization’s goals and how they align with the mission, it empowers them to learn from setbacks and to share and celebrate the organization’s accomplishments.   The organization, as a whole, will be better equipped to respond to the unexpected.