Nonprofit leaders face an array of challenges, from navigating economic fluctuations to grappling with cybersecurity concerns. In an environment where financial forecasting can be more uncertain than ever, it's crucial for nonprofits to take proactive steps to safeguard their financial stability.
In the wake of the pandemic and changes in tax laws, many nonprofits find themselves grappling with diminished reserves and reduced donations. Effective cash flow management is paramount in such circumstances. Nonprofits should regularly project cash flows and expenses on a quarterly, monthly, or even weekly basis. Keeping a close eye on funding sources, especially those experiencing significant declines, is essential. Regular review by the finance committee ensures timely identification of potential funding shortfalls.
Compliance with unrelated business income tax (UBIT) rules is critical to avoid costly repercussions. Since the enactment of the Tax Cuts and Jobs Act, nonprofits must calculate UBIT separately for each unrelated business activity. Among other things, the regulations require meticulous identification of each unrelated trade or business with the appropriate two-digit code in the North American Industry Classification System.
If your organization has multiple unrelated trades or businesses, you must allocate deductions among them using a "reasonable basis" standard. Certain types of investments can be treated as single trades or businesses.
Developing and analyzing various financial scenarios is a proactive approach to risk management. Nonprofits should create budgets for best-case, worst-case, and intermediate revenue scenarios to assess their financial resilience. Scrutinizing past financial performance, particularly in challenging years, provides valuable insights into potential future risks. By identifying historical trends and addressing persistent challenges, nonprofits can better prepare for future uncertainties.
While the current economic landscape may be favorable, maintaining operational efficiency remains paramount for nonprofits. In addition to the aforementioned strategies, nonprofits should focus on minimizing expenses and closely monitoring budgets. Operating efficiently not only ensures financial sustainability but also enhances the organization's ability to weather unforeseen challenges.
In conclusion, safeguarding against financial threats requires proactive planning and vigilant oversight. By implementing robust financial management practices, prioritizing compliance, and fostering a culture of preparedness, nonprofits can fortify their financial foundation and thrive in an unpredictable environment.
The HoganTaylor Nonprofit team of business advisors and CPAs is comprised of former CFOs, controllers, and industry experts with extensive experience providing the guidance organizations need to lean forward again in their leadership. If you have any questions about this content, or if you would like more information about HoganTaylor’s Nonprofit practice, please contact Jack Murray, CPA, Nonprofit Practice Lead.
INFORMATIONAL PURPOSE ONLY. This content is for informational purposes only. This content does not constitute professional advice and should not be relied upon by you or any third party, including to operate or promote your business, secure financing or capital in any form, obtain any regulatory or governmental approvals, or otherwise be used in connection with procuring services or other benefits from any entity. Before making any decision or taking any action, you should consult with professional advisors.