Strengthen Your Nonprofit’s Financial Resilience
Posted by Cathleen Karpik on February 21, 2024
Amidst concerns ranging from inflationary pressures to staffing shortages and cybersecurity risks, nonprofit leaders find themselves navigating a complex landscape. When financial forecasting becomes particularly challenging, it becomes imperative to implement strategies that bolster the financial standing of your organization, irrespective of the hurdles.
Vigilance in Cash Management
Many nonprofits continue to grapple with the aftermath of the pandemic, compounded by potential reductions in individual donations due to tax law changes. Financial reserves have been depleted across the board, with fundraising efforts falling short for some. In such a climate, effective cash flow management becomes paramount.
Quarterly, monthly, and even weekly cash and expense projections should be prepared to anticipate and mitigate potential cash flow disruptions. Regular reviews by the finance committee of funding sources, especially those experiencing significant declines or facing imminent threats, are essential to avoid being caught off guard.
Compliance with UBIT Regulations
Ensuring proper compliance with unrelated business income tax (UBIT) rules is crucial to avoid costly complications down the line. Following the enactment of the Tax Cuts and Jobs Act, nonprofits must calculate UBIT separately for each unrelated business activity. This entails identifying each distinct unrelated trade or business using the appropriate classification codes.
For organizations engaged in multiple unrelated activities, deductions must be allocated among them using a "reasonable basis" standard. Certain investment activities may be treated as single trades or businesses, simplifying compliance efforts.
Scenario Planning
The finance committee, in collaboration with relevant staff, should incorporate scenario planning into their processes. By envisioning and preparing for various financial scenarios – ranging from best-case to worst-case and everything in between – nonprofits can strategize how to cover projected expenses under different revenue circumstances.
Additionally, a retrospective analysis of the nonprofit's recent financial performance, compared against historical benchmarks, can unveil negative trends and inform proactive measures. Given the unconventional nature of 2020 and 2021, considering longer-term trends beyond these years provides a more comprehensive understanding of financial dynamics and potential risks.
Efficient Operations
While the current economic landscape appears stable, prioritizing operational efficiency remains prudent. Alongside the aforementioned strategies, nonprofits should focus on minimizing expenses and maintaining vigilant budgetary oversight. If you need assistance, reach out to us for support.
By proactively addressing financial vulnerabilities and implementing robust financial management practices, nonprofits can safeguard their mission and navigate uncertainties with resilience.
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Cathy is responsible for engagement management and coordination of services to various exempt organizations. She has experience working with community and private colleges, nonprofit organizations, various governmental entities, and school districts in the areas of auditing, single audits, taxation, information returns, and financial reporting. Cathy has extensive experience with private and community colleges and regularly receives specialized training and updates on federal student financial aid programs by recognized national experts.