3 steps to a more financially resilient future
January 5, 2022
It’s a new year with new opportunities for your not-for-profit to boost its financial resilience. Although COVID-19 continues to make forecasting difficult, your staff and your board’s finance committee can take steps to negotiate obstacles. Here are three.
1. Managing reserves and cash flow
Financial reserves have taken a hit across all types of nonprofits, and for some organizations, fundraising has fallen far short of expectations, too. These factors make effective cash flow management essential to survival.
Staff should prepare cash and expense projections for the quarter, the month and possibly even the week. To avoid being caught off guard, your finance committee should review regular reports on funding sources, especially those that have dropped significantly or are in jeopardy of vanishing altogether.
2. Calculating unrelated business income (UBI) separately
Proper compliance with UBI tax requirements is important if you’re to avoid issues later. Since passage of the Tax Cuts and Jobs Act (TCJA), nonprofits must calculate UBI separately for each unrelated business. Among other things, the regulations require nonprofits to identify each separate unrelated trade or business with the appropriate two-digit code in the North American Industry Classification System (NAICS).
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.
3. Scenario planning and benchmarking
If it isn’t already a customary part of your process, your finance committee (and appropriate staff) should initiate scenario planning. This involves assembling budgets for multiple revenue situations your organization could face — typically, best case, worst case and somewhere in between. Ask how your nonprofit could cover the projected expenses in each situation.
The budgeting process also often involves evaluating financial performance in the most recent fiscal year, usually by comparing metrics with previous years or other benchmarks. Bear in mind, though, that circumstances in 2020 and 2021 may render the data from these years of less value when it comes to projecting revenues and costs for a “normal” future.
Although charitable giving appears to be picking up and there are many positive macroeconomic signs that suggest 2022 will be less challenging for nonprofits, obstacles remain. To ensure your organization is doing everything it can to survive and prosper, contact us for advice.