Legal and financial information for the Community Action network
SUMMER 2012
Ready, Set, Go: Preparing for the New Head Start Renewal System
FINancial management
By: Anita Lichtblau, Esq., CAPLAW
By now, Head Start grantees are most likely familiar with the general parameters of the new grant renewal system that the Office of Head Start (OHS) established by regulation in November 2011.1 Some 130 of those grantees are even more familiar with the process because they received a letter in December notifying them that, based on at least one “deficiency” since June 2009, they must compete for continued funding. The first group of funding opportunity announcements was released by OHS on April 19, 2012. However, a lawsuit has been filed in federal district court seeking to stop the competitions and implementation of the renewal system as set out in the regulation in Kentucky, Tennessee, Mississippi, Alabama, Georgia, Florida, North Carolina, South Carolina, Massachusetts, and Ohio. Those are the states whose state or regional Community Action Agency and/or Head Start associations have joined the lawsuit as named plaintiffs. The court has not yet issued any decisions. Continued on page 6
Inside This Issue :
An Executive Director’s Guide to Financial Leadership By Kate Barr and Jeanne Bell, MNA, reprinted with permission from Nonprofit Quarterly, www.nonprofitquarterly.org
There is an important distinction between financial management and financial leadership. Financial management is the collecting of financial data, production of financial reports, and solution of Continued on page 8
Head Start Renewal System ● Guide to Financial Leadership ● Upcoming CAPLAW Events ● Records Management 101 ● Social Workers Exempt or Non-Exempt? ● DAB Decisions
CAPLAW Board Winston A. Ross, President Westchester Community Opportunity Program Patricia Steiger, Vice President Management Consultant Gale F. Hennessy, Treasurer Southern New Hampshire Services Catherine Caputo Hoskins, Secretary Salt Lake Community Action Program David Brightbill, Director Washington-Morgan Community Action John J. Drew, Director Action for Boston Community Development, Inc. Jerralynn Ness, Director Community Action Serving Washington County Douglas D. Rauthe, Director Community Action Partnership of Northwest Montana
Mark Your Calendar: Not to Miss Training Opportunities this Summer! Administrative Governance Webinar Series: Conflict of Interest Policies and Procedures August 1, 2012, 2 - 3 p.m. EDT Presented by: Eleanor Evans, Esq., CAPLAW Whistleblower Policies and Procedures August 8, 2012, 2 - 3 p.m. EDT Presented by: Anita Lichtblau, Esq., CAPLAW Records Management Policies and Procedures August 15, 2012, 2 - 3 p.m. EDT Presented by: Peggy Nagel, CAPLAW
Leonard Dawson, Board Member Emeritus Coastal Georgia Area Community Action Authority, Inc. David Bradley, CAPLAW Coordinator National Community Action Foundation
CAPLAW Staff Anita Lichtblau, Esq. Executive Director and General Counsel Eleanor A. Evans, Esq. Deputy Director and Senior Counsel R. Allison Ma’luf, Esq. Associate Counsel Peggy Nagel Project Director, National Nonprofit Financial and Grants Management Training Program Cara Loffredo Communications Manager Ashley Billingsley Administrative Coordinator/ Executive Assistant This report contains general information and is not intended to constitute legal advice. © 2012 Community Action Program Legal Services, Inc.
1 | CAPLAW Update Newsletter, Summer 2012
About CAPLAW CAPLAW is a nonprofit membership organization dedicated to providing the legal and financial resources necessary to sustain and strengthen the national Community Action Agency (CAA) network. For over 45 years CAAs have been fighting poverty, helping individuals become self-sufficient, building communities, and changing lives. Nationwide, approximately 1,000 CAAs leverage almost $10 billion in total funding, and provide a multitude of services, including job training, Head Start, economic development, energy assistance, and housing. Through its in-house legal and financial staff and a network of private attorneys and financial consultants, CAPLAW provides legal and financial consultations, training, and publications on a wide variety of legal and management topics. This assistance enables CAAs to operate legally and fiscally sound organizations and to promote the effective participation of low-income people in the planning and delivery of CAA programs and services, thereby enhancing CAAs’ ability to provide the nation’s poor with opportunities to improve their quality of life and to achieve their full potential. For membership information visit www.caplaw.org or call (617) 357-6915.
FINancial management
Determining What Is a Record Not all of the data and documents your organization receives or creates are records. For this reason, the first step to take in creating a Records Information Management (RIM) system is to determine what information you are creating, collecting, and storing, and how much of that information qualifies as records. A “record” is typically defined as any documentation or information created and stored at an organization that is essential to the functioning of that organization, regardless of the format or medium. Records are the evidence of what your organization does. Records control, support, or document the activities and transactions of your organization.
Records Management 101 By Peggy Nagel, CAPLAW
How many times have you gone looking for information that you know exists somewhere in your organization, spent hours looking for it and still can’t put your hands on it? If your CAA is like most organizations, it has more files and documents than it knows what to do with. Federal regulations require grantees to maintain records about even their most basic organizational activities and to be able to access and provide those records on demand. For example, the uniform administrative requirements for grants to nonprofit organizations (OMB Circular A-110, 2 C.F.R. § 215.53 (e)) state: The Federal awarding agency, the Inspector General, Comptroller General of the United States, or any of their duly authorized representatives, have the right of timely and unrestricted access to any books, documents, papers, or other records of recipients that are pertinent to the awards, in order to make audits, examinations, excerpts, transcripts and copies of such documents. This can be an almost impossible requirement to meet when federal monitors request records, unless you have a system for categorizing and storing your records so that you can easily access them. Compliance with these regulations is just one of the many good practical reasons to create a record information management system (RIM) for your CAA. Good records management is not just having a record retention policy (though that is an important step in the process and CAPLAW’s model policy page includes a sample record retention policy. A good record information management system allows you to organize and store your records in a manner that is easy to understand, simple to maintain, and offers immediate access to the information you need.
Remember that records come in many formats:
• Physical records on paper, such as memos, contracts, • • •
•
personnel files, time cards; Physical records such as video and audio recordings; Electronic messages, such as email content, email attachments, and instant messages; Content on your organization’s website, as well as the information that resides on servers, shared drives, computer desktops, portable computers and mobile devices; and/or Information captured in the organization’s various databases.
So how do you determine whether the documents and data you are storing are records? Using the following guidelines can help you to answer that basic question. Your document probably IS a record if you answer “yes” to any of the following questions:
• Is it evidence of a decision made or decision making process used to make a decision?
• Does it authenticate or affirm the truthfulness or • • • • • • •
accuracy of information about the organization, its activities or its employees or agents? Does it commit the organization to or document an action (payment, expenditure, work to be carried out)? Is it evidence of something for which the organization is accountable to the public? Is it evidence that can be used for audit or legal purposes to prove the organization complied with a policy, procedure or standard? Is there any law, regulation or other requirement that says the record must be kept? Is it part of a series of documents providing an evidentiary chain? Is it seeking or providing information that might be used for decision-making? Does it document, explain or clarify the history of the organization?
Continued on page 11
CAPLAW Update Newsletter, Summer 2012 | 2
But the court stated they were nonexempt not because of the job duties, but because the jobs did not require sufficient educational prerequisites.
“Exempt” compared to “non-exempt”
Are Social Workers Exempt or Nonexempt? Help! Reprinted from Ask Rita in HR with permission from Blue Avocado, www.blueavocado.org, September 19, 2011, By Ellen Aldridge
Dear Rita in HR: Should social workers be classified as exempt or nonexempt? In the process of updating our job descriptions I have looked at many from other agencies and am confused in particular about one issue: in some cases social workers are classified as exempt (exempt from overtime) and in other cases they are nonexempt. What are they? Signed, Dazed & Confused. Dear Dazed: Good news! We received some clear guidance
As a fast refresher: the FLSA (administered by the Department of Labor - DOL) is the federal law that requires employers to pay overtime compensation to employees who work more than 40 hours in a week. All employees must receive overtime pay unless the employer can prove that the position is exempt from the FLSA. When considering social workers there are three relevant exemptions - the so-called “white-collar” exemptions - executive, administrative, and professional. Social workers who supervise two or more employees may fall under the executive exemption, but they would not meet the criteria for the administrative exemption. Thus, if a social worker does not supervise two or more employees, the only other possible exemption for a social worker is “learned professional.” Under the DOL regulations, to be classified as an exempt learned professional the primary duties of the employee must require “knowledge of an advanced type in a field of science or learning customarily acquired by a prolonged course of specialized intellectual instruction.” The regulations go on to state that the professional exemption is not available for occupations that customarily may be performed with only the general knowledge acquired by an academic degree in any field, with knowledge acquired through experience. In the Solis case, the State of Washington required that its social workers have:
last week with the first federal appellate decision directly addressing the overtime exempt status of social workers in Solis v. State of Washington DSHS (9th Cir. 2011) No. 1035590. The quick answer is that some, but not all, social workers meet the professional exemption - and surprisingly, it doesn’t only depend on the job duties: it also depends on the educational prerequisites of the position.
• A college degree in “social services, human services,
The Solis court held that the Washington social workers were not exempt from the Fair Labor Standards Act (FLSA). The responsibilities of the social workers in the Solis case look at first glance as if they would make the positions exempt. For example, they were responsible for:
•
• Investigating child abuse and neglect • Developing and recommending treatment plans to
•
The court held that these educational prerequisites were not sufficient to meet the standard for the professional exemption because they did not amount to “specialized intellectual instruction.”
courts
When can social workers be classified as exempt?
treatment plans Placing children, and Recommending whether parental rights should be terminated.
So what would it take for a social worker’s educational requirement to satisfy the “advanced learning” requirement for the professional exemption? The Solis court looked favorably on the conclusions reached in two DOL opinion letters that found that the following educational
• Evaluating child and family progress in meeting • •
•
behavioral sciences or allied field,” or all three of the following: A degree and 30 semester credits or 45 quarter credits in social services A minimum of 18 months’ experience as a social worker Completed additional formal training provided by their employer.
Continued on page 12
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DAB DECISION
Background ACF’s Determination ACF based its disallowance determination on the following:
• Terms and conditions of the grant award requiring a •
•
DAB Decision Reinforces Importance of Meeting Non-Federal Share Requirements
•
match and disallowance if the match was not obtained; HHS uniform grants administration requirements (45 C.F.R. § 74.62(a)(2)) giving ACF the authority to disallow funds if a grantee materially failed to comply with the terms and conditions of an award; HHS uniform grants administration requirements (45 C.F.R. § 74.25) requiring grantees to report budget deviations and request prior approval for some budget revisions; and Circle of Parents’ acknowledgment that it failed to meet the 10% match requirement outlined in the grant award’s terms and conditions and to obtain the prior approval needed to reduce the match to less than 10%.
Circle of Parents, No. 2439 (2012)
Circle of Parents’ Appeal
By: Allison Ma’luf, Esq., CAPLAW
Circle of Parents appealed ACF’s decision to the DAB and requested that the DAB waive the disallowance. In support of its request, Circle of Parents explained that it had exercised its best efforts to meet the full required match and that it was successful in raising 85% of the required match in spite of the economic downturn and the prohibition in OMB Circular A-122, Appendix B (2 C.F.R. Part 230, Attachment B) against using federal grant funds for fundraising. Circle of Parents stated further that, on two separate occasions in the course of the grant year, its executive director informed ACF of the challenges the organization was experiencing in raising the full match amount and was told that it should continue to make a good faith effort to meet the full match. Circle of Parents explained that it did not formally seek to reduce the non-federal match because it remained hopeful that it would meet it by the end of the grant period and felt that the executive director’s communications with ACF were sufficient. Circle of Parents also noted that because of changes it instituted in response to findings and management recommendations it received, it was able to exceed its non-federal match for fiscal year 2011.
Meeting match requirements is not always easy, especially in tough economic times. A recent U.S. Department of Health and Human Services (HHS) Department of Appeals Board (DAB) decision acknowledges the struggle some organizations face in securing the non-federal share for their federal grants, but notes that these difficulties do not excuse an organization’s failure to comply with the law. In this decision1, the DAB upheld a determination by the Administration for Children and Families (ACF) to disallow $15,4322 in federal funds when a social services organization, Circle of Parents, provided only $93,964 of the $111,121 non-federal matching funds required under the terms and conditions of its Promoting Responsible Fatherhood Program award for fiscal year 2009. The funding announcement for the award specifically stated that “[f]ailure to provide the required amount [of non-federal share] will result in the disallowance of Federal funds.” The DAB concluded that Circle of Parents failed to provide adequate grounds for reversing ACF’s decision.
DAB’s Initial Response and Order to Show Cause In response to Circle of Parents’ appeal, the DAB explained that it did not have the authority to waive the non-federal share requirement. The DAB also received clarification that Circle of Parents was only seeking a retroactive waiver from ACF of its non-federal share requirement and was not challenging the underlying findings or the disallowance. Continued on page 12
CAPLAW Update Newsletter, Summer 2012 | 4
DAB DECISION
HHS regulations impose various financial management and other standards, including requirements for situations in which prior funding source approval is required. They also authorize termination of an award if the grantee materially fails to comply with the award’s terms and conditions.1 Key takeaways from the DAB’s analysis are as follows: Funding sources have broad rights of access to grant records and grantee personnel. Attempts to restrict this access can result in negative consequences. Therefore, it is important to be responsive to funding source requests for information and to be cooperative during site visits.
DAB Decision Focuses on Accountability and Transparency National AIDS Education & Services for Minorities, Inc., No. 2401 (2011) By: Eleanor Evans, Esq. and Allison Ma’luf, Esq., CAPLAW
A recent U.S. Department of Health and Human Services (HHS) Department of Appeals (DAB) decision emphasizes the importance of accountability and transparency regarding the use and management of federal funds. It underscores the fact that grant terms and conditions relating to financial and administrative matters are not mere technicalities. Failure to comply can result in serious consequences, including disallowance or termination of the full award amount. This DAB decision, which involved a nonprofit that received funding from the Centers for Disease Control (CDC) for HIV prevention activities, focused on the grantee’s failure to comply with the terms and conditions of two cooperative grant agreements. The DAB concluded that the grantee interfered with the funding source’s right of access to grant-related records and employees, shifted costs from one award to another in violation of Office of Management and Budget (OMB) cost principle circular requirements, and failed to comply with financial management standards and requirements for federal grantees, as well as with prior approval requirements. According to the DAB, these failures, both individually and collectively, provided ample grounds to uphold the funding terminations. The requirements at issue in this case were the terms and conditions of the grantee’s federal awards, HHS regulations (45 C.F.R. Part 74) codifying the uniform administrative requirements for awards to nonprofit organizations (OMB Circular A-110), and the OMB cost principles for nonprofit grantees (OMB Circular A-122, 2 C.F.R. Part 230), which the HHS regulations obligate nonprofit grantees to follow. The 5 | CAPLAW Update Newsletter, Summer 2012
Generally, a federal awarding agency has the right to timely and unrestricted access to any books, documents, papers, or other records of recipients that are pertinent to the award. An awarding agency also has a right to timely and reasonable access to a recipient’s employees for the purpose of interviews and discussions related to those documents. In this case, the funding source’s right to access grantrelated records was based in the HHS version of the uniform administrative requirements incorporated by reference in the terms and conditions of the organization’s cooperative agreements.2 Similar, if not identical, requirements apply to awards grantees receive directly from other federal agencies. In addition, state regulations and funding agreements generally contain similar access requirements. The grantee in this case contended that it was only required to provide financial information to an independent auditor and not to its federal funding source, that the funding source did not have a right to access records containing information about the use of non-federal funds, and that where records contained information about federal and non-federal funds, the grantee should be permitted to redact information not related to the funding source. The DAB found that the grantee restricted access by the funding source monitors to various business records, including bank and credit card statements, occupancy costs and back-up support for draw downs. According to the DAB, the organization also hindered monitors’ access to employees by excusing staff when the monitors planned to conduct interviews and to information about employees by providing redacted personnel information. The DAB determined that the funding source needed complete information about the organization’s expenditures and transactions to verify that its internal financial controls were capable of ensuring that costs were properly allocated among federal and non-federal funding sources and that federal funds were used only for purposes authorized by the cooperative agreements. The DAB concluded that failure to provide the funding source with access to records and employees was a material failure to comply with the terms of the awards, prevented the funding source from verifying that the grantee had spent its federal funds properly and had adequate internal controls Continued on page 13
Prevention of Deficiencies: Some General Observations All grantees would be well-advised to take whatever steps possible to avoid any “deficiency” findings. While some of the deficiencies that have already triggered recompetition letters were based on triennial monitoring reviews, many were not; they were based on self-reported or third-party reported single incident health and safety violations, such as a child left unattended on a bus. The Head Start Act’s definition of a “deficiency” is:
• A systemic or substantial material failure of a grantee in an area of performance that HHS determines involves:
• Threat to health, safety, or civil rights of children • •
Head Start Renewal System (continued from cover)
OHS also recently attempted to offer some guidance regarding the new system when it released answers to Frequently Asked Questions (FAQ) that have arisen since the system’s implementation. The questions address various aspects of the new system, such as: whether a grantee designated for competition will be disadvantaged, who will be reviewing the grant applications, and when the awards will be issued. Additionally, Yvette Sanchez Fuentes, Director of OHS, recently announced some modifications to and further details about the new system. These modifications and details, as reported by the National Head Start Association, revise some timelines stated in the FAQ and include the following:
• All 132 programs (which represent 204 separate
service areas) being re-competed will have the opportunity to continue operation through June 2013, providing for transition, if needed, over the summer before the school year begins.
• More than 2,000 applications were received from
potential reviewers. OHS will provide extensive inperson training to the final cohort of reviewers.
• The grant reviews will be complete and the successful grantees will be notified by December 2012.
• The grant application page limit has been increased to permit existing programs to include pertinent information from past reviews.
• •
•
or staff; Denial of parents’ right to participate in program governance; Failure to comply with standards related to early childhood development and health services, family and community partnerships, or program design and management; Misuse of Head Start funds; Failure to meet any other federal or state requirement that the grantee has shown an unwillingness or inability to correct, after notice from HHS, within the specified time period; Loss of legal status or financial viability, loss of permits, debarment from receiving federal grants, or improper use of federal funds;
• Systemic or material failure of the grantee’s board of directors to fully exercise its legal and fiduciary responsibilities; or
• An unresolved area of noncompliance.2 Although there is no fail-safe method for preventing a deficiency, particularly one based on a single incident, there are some systemic steps that will go a long way toward that goal. One is what auditors frequently refer to as “tone at the top.” It is critical for the grantee’s leadership, including both Head Start leadership and the management of the organization as a whole, to make clear that rigorous adherence to requirements at all levels will be the standard and that there will be little or no tolerance for anything less. But the leadership has to do more than make statements; it must “walk the talk” and well as “talk the talk.” When staff see that other staff are permitted to evade
As we have seen recently, many deficiencies will not be based on results from a review so it is more important than ever that systems and processes be in place at all times.
Continued on page 7
CAPLAW Update Newsletter, Summer 2012 | 6
Head Start Renewal System (continued from page 6)
requirements without consequences, they get the message that compliance is not all that important or that requirements are arbitrarily imposed. That is all part of individual staff accountability, including performance evaluations that examine an individual’s compliance with requirements. Of course, management’s hiring the right staff is necessary. This involves more than just hiring an individual with the credentials required by the Head Start Act and regulations. From the Head Start director on down, the individuals hired need to have the right mix of experience, education, organizational skills, good judgment, people skills, and more to carry out their responsibilities. Careful and complete background checks, including references, are essential. Establishment and implementation of strong and effective systems are also critical. It is not enough to be lucky and avoid a misstep one year; the Office of Head Start will be looking at whether there is a system in place to prevent problems, comply with requirements, etc. The system should be documented and tested with regular monitoring, not just immediately prior to the triennial review. As we have seen recently, many deficiencies will not be based on results from a review so it is more important than ever that systems and processes be in place at all times. Nonetheless, starting a self-assessment with the most recent Head Start monitoring tool is a good practice. This will lead you through the specific areas and questions on which the monitors will focus. Communication and training are also key. Policies should be carefully thought through, rather than just cut and paste jobs of generic policies found on the Internet. Make sure that they fit your organization, comply with your particular requirements, and are written clearly and in practical terms that staff can actually follow rather than just vague abstract statements. Don’t forget to review and update them periodically, particularly after legal requirements have changed. Remember that policies are only paper unless you ensure that all relevant staff receive the policies (via paper, email, and/or on your internal website) and participate in training to discuss implementation and ask and get answers to questions.
Last, but not least, of some of the overall issues, one to pay close attention to is documentation. Your organization may have a great system and great people, but if steps aren’t documented, they won’t be helpful to prove compliance. Documentation of things like staff background checks, education credentials, and income verification of families is obvious, but there are other matters that may be less so. For example, do minutes of the Policy Council and board of directors meetings reflect the information that must be shared, such as reports of meals provided through the USDA, under 42 U.S.C. § 9837(d)(2)? How about documentation of training provided to teachers and bus drivers on policies on not leaving children unsupervised? Or outreach to schools in which children will enroll after Head Start, pursuant to 42 U.S.C. § 9837(e)? Do vendor files show that cost or price analyses were conducted prior to purchasing goods or services, as required by 45 C.F.R. § 74.45? There are many other examples, but the point is that when someone says that a requirement is taken care of, the next question in any self-monitoring should be, where is the documentation? And, don’t forget that if your organization does receive notice that a deficiency has been found, make sure you understand what the basis for that finding is, and if you don’t agree, challenge it in writing, with supporting documentation, to the regional or national Office of Head Start. At the same time, of course, in order to prevent immediate termination proceedings (as opposed to notice of recompetition), you will need to propose and implement corrective action steps.
Your organization may have a great system and great people, but if steps aren’t documented, they won’t be helpful to prove compliance.
Prevention of Deficiencies: A Few Hot Spots Although this list is by no means complete, here are some areas to watch based on reports of Head Start compliance issues identified by OHS and the HHS Inspector General:
• Timely and/or complete criminal background checks; • Physical inventories of equipment every two years; • Physical health and safety, such as maintaining • • • • • •
playgrounds and buildings and ensuring constant supervision of children; Ongoing monitoring of grantee and delegate operations; Procurement rules; Cost allocation; Use of Head Start advances solely for Head Start purposes; Assistance to parents in bringing children up-to-date on health requirements; and Sharing of information with the Policy Council and board of directors.
See end notes on page 17. 7 | CAPLAW Update Newsletter, Summer 2012
Executive Director’s Guide
decisions — live on well beyond the fiscal year. For this reason, we recommend that organizations build the habit of rolling financial projection.
near-term financial issues. Financial leadership, on the other hand, is guiding a nonprofit organization to sustainability. This is the job of an executive director. He or she is responsible for developing and maintaining a business model that produces exceptional mission impact and sustained financial health. To do that successfully, the executive director has to be ever mindful of essential nonprofit business concepts and realities. The following is a guide to this way of thinking for an executive — a summary of what we see as the eight key business principles that should guide financial leadership practice.
Commit to financial projection. At least quarterly,
(continued from cover) an executive director... is responsible for developing and maintaining a business model that produces exceptional mission impact and sustained financial health.
1. Activate Your Annual Budget Strong annual budgeting is an essential element of financial leadership. The best annual budgets align to an annual plan — a written narrative that all staff and board understand about the core activities the organization will undertake in the coming year and how they will be financed. If the budget includes as-yet-unidentified income, which is standard for many organizations, that amount should be clear to all board and staff along with the plan to raise the funds during the year.
Achieve a net financial result. A classic mistake
executives make is allowing staff to spend all year on budget when income is not coming in as expected. In fact, it is critical to emphasize to your staff that an annual budget is a plan to reach a net financial result — to yield a specific surplus or to invest a specific amount of the organization’s reserves through a planned deficit. Whichever the financial goal for the year, if the organization is not running on pace to achieve that net financial result, then even budgeted expenses should be questioned and reconsidered. The budget is never permission to spend when income is not coming in as planned.
Anticipate the future. Given that many organizations
raise funds and encounter new risks and opportunities throughout the fiscal year, it is important not to stay overly focused on budget variance analysis to the exclusion of rolling analysis of your anticipated financial position. Budget variance is the difference between budgeted and actual results for a given period. While it is useful to understand why predictions were off, it is just as important to be actively anticipating the future. We see too many executives and boards focused on “hitting the budget” rather than anticipating and intentionally shaping their financial futures beyond the current fiscal year. Fiscal years are arbitrary units of time; in reality, the decisions we make — and the consequences of deferred
the management team should evaluate what they are learning about current and possible revenue streams, shifts in programming, and strategic opportunities, and there should be a means to capture that up-tothe moment thinking in a financial projection. Midway through the fiscal year, we recommend adding a projection column to the income statement, so that for the rest of the year it includes year-to-date actuals, yearto-date budget, and a column for management’s current projection of where the organization is likely to end the year. Even better, the projection can roll into the “fifth quarter”— that is, across the arbitrary finish line of the fiscal year and into the first quarter of next year.
2. Income Diversification or Not Income diversification is often touted as a tenet of sustainability—the idea being that having all of your eggs in one basket is by definition riskier than having them in multiple baskets—or in this case, multiple revenue streams. In fact, nonprofit business models vary considerably by field or service type.
Determine the degree of diversification you need. Income diversification is more possible and more
necessary in some models than in others. For instance, community mental health services are likely to be heavily government funded, and once a nonprofit has established a successful track record of providing these services, that government funding may remain in place for years. Even though the organization is technically dependent on one set of government contracts, it may not be in a riskier position than another kind of nonprofit struggling to raise small amounts of money from individuals, corporations, and foundations, for instance. The reliability and competitiveness of your revenue streams dictate the degree of diversification that you need.
Determine risk. Income diversification carries some
real risks. Evidence shows that more revenue streams don’t necessarily mean greater annual surpluses or organizational scale. To attract new revenue streams, an organization has to develop and sustain new capacities. As nonprofit finance expert Clara Miller has noted, “Maintaining multiple, highly diverse revenue streams can be problematic when each requires, in essence, a separate business. Each calls for specific skills, market connections, capital investment, and management capacity. Only then will each product attract reliable operating revenue, pay the full cost of operations, and deliver results.”1 And a recent analysis of high-growth nonprofits by the consulting firm Bridgespan Group found that 90 percent had a single, dominant source of Continued on page 9
CAPLAW Update Newsletter, Summer 2012 | 8
Executive Director’s Guide (continued from page 8)
funding. Bridgespan concluded that organizations get to scale by specializing in a certain type of funding, and that diversification, and thus risk management, happens by “securing multiple payers of the same type to support their work.”2
3. Make Cash Flow Your Priority Most financial reports are historical documents, useful to verify what has already happened and compare to budgets and plans.
Develop a cash flow projection. For looking
forward, one of the most important tools is a cash flow projection. Executive directors need to know how the organization’s cash flows, and what to do if the cash doesn’t flow. Unless your organization has built up a substantial base of operating cash, any nonprofit can run into cash flow problems. What causes them? A variety of factors, including seasonal fundraising, annual grant payments, reimbursement-based contracts, and start-up costs for new programs.
Anticipate—and resolve—cash flow issues. Cash
flow projections require knowledge and judgment that the accounting department may not have. Because of this, executive directors need to have a direct role in developing useful cash flow projections, agreeing on the assumptions to use, and reviewing the projections carefully. The earlier you anticipate cash flow issues, the easier it is to address them. As a first step, assess whether the cash flow shortfall is a problem with timing or is an indication of a deficit. The strategies used to solve the cash flow problem should match the cause of the shortfall.
Manage your shortfalls. Timing problems can be
prevented by managing the timing of payments and receipts, improving internal systems, or arranging for a line of credit. Shortfalls caused by deficits need to be solved by budget adjustments or strategic choices to absorb a near-term shortfall. All of these options need the input and support of senior management. Managing cash flow is not a one-time activity. Insist that projecting and discussing cash flow every month or quarter become routine practice.
4. Don’t Wish for Reserves—Plan Them “Building a reserve” is on the top of the financial wish list of just about every executive director. It’s an understandable goal—just read the preceding section about cash flow and you’ll understand why. Having a cushion of cash that can absorb an unexpected delay in receiving funds, a shortfall in revenue for a special event, or unbudgeted expenses can stabilize an organization. Nonprofits that have built up a good cash cushion have had options and opportunities 9 | CAPLAW Update Newsletter, Summer 2012
during the recession that have allowed them to respond to reduced income and increased demand more strategically and carefully than those organizations with few extra dollars in the bank.
Achieve a surplus. Wishing you had reserves is not
the same as planning for reserves. But where do reserves come from? For most nonprofits, reserves are built up over time by generating unrestricted surpluses and intentionally designating a portion of the excess cash as a reserve fund. On rare occasions a nonprofit will receive a grant to create an operating reserve fund. So step one in planning for reserves is to develop realistic income and expense budgets that are likely to result in a surplus. Step two is to make sure that achieving a surplus is a priority that is understood and supported by staff and board members. For some organizations, there is an earlier step, too. They have to stop operating with deficits before they can even dream of having a reserve.
Determine your reserve goal. How much should
you have? While there are some rules of thumb, generic target amounts don’t take some important variables into account, such as the stability of ongoing cash receipts. A commonly used reserve goal is three to six months’ expenses. At the low end, reserves should be enough to cover at least one payroll, including taxes.
Manage your cushion. Once a nonprofit has been
able to build a reserve, using it must be intentional and strategic. Using reserves to fill a long-term income gap is dangerous. A cash cushion allows you to weather serious bumps in the road by buying time to implement new strategies, but reserves should be prudently used to solve temporary problems, not structural financial problems. To maintain reliable reserves, it’s also important to have a realistic plan to replenish them from future surpluses.
5. Rethink Restricted Funding There is an ongoing debate among grantmakers about whether general operating funds are a better investment strategy than programmatically restricted grants. And frustration with funding restrictions is a common refrain among nonprofit executives. But at times this debate gets oversimplified to a notion that all restricted money is bad and inherently compromising of organizational sustainability, when this is not the case. As an executive, what you need to be concerned with is not whether a grant is restricted but what it is restricted to. A restricted grant for a program central to your desired impact and that covers a robust portion of that program’s cost is functionally the same thing as general operating support—it is funding a core piece of the work that you do. The two qualifiers are key, though: you are doing something that the organization would do anyway, and you are getting paid fairly to do it. What you need to avoid is chronic reliance on grants and contracts that As an executive, what you need to be concerned with is not whether a grant is restricted but what it is restricted to.
authors Jeanne Bell and Elizabeth Schaffer describe three functional aspects of the finance function: transactional, operational, and strategic. The transactional are the clerical tasks that support the accounting function, such as copying, filing, and making bank deposits; they require someone with excellent attention to detail and exposure to basic accounting principles. The operational are the range of accounting functions, such as paying bills and producing monthly financial statements; they require someone with strong nonprofit accounting knowledge, including managing grants and contracts. And the strategic are the systems development, financial analysis, planning, and communication about the organization’s financial position; they require what we think of as CFO-level knowledge and skills.3
Determine your optimal staffing approach. Every
pull the organization in unaligned directions or that refuse to pay fairly for the promised outcomes.
Develop effective grant proposals. Your
development of sophisticated grant proposals is essential to incorporating restricted funding in your business model effectively. Take a very broad view of any program you are proposing for funding by including as direct costs such elements as hiring program staff, marketing and outreach to clients, staff professional development, and program evaluation. These are the kinds of organizational expenses that directly benefit programs but for which we too rarely charge our investors. If you believe that program evaluation is essential to monitoring effectiveness of outcomes, it’s your obligation to force the issue with funders who classify the cost as “overhead.” Incorporating sophisticated language in your proposal narratives that links staff development to program design to strong program outcomes sets the stage for a budget that includes these critical expenses. Restricted funding from foundations and corporations that genuinely understand and value your organization’s work can be a very sustainable revenue stream if you are very selective about which funders to pursue, and if you pursue them with well-conceived programs and accompanying budgets.
6. Staff Your Finance Function Put simply, too many executives have not staffed their finance function properly, and they pay the price with chronically underdeveloped financial systems, low-grade financial reporting, and the lack of a trusted partner with whom to do analysis and projection. In Financial Leadership: Guiding Your Organization to Long-Term Success, co-
organization needs all three functions, but organizational size and complexity will determine how much time each requires and the optimal staffing approach. In general, it is income that makes nonprofits more or less complex. A $10,000,000 organization that gets all of its money from individual donors requires a very basic accounting system, while a $2,000,000 organization with government contracts and restricted foundation grants requires a very robust accounting system. As an executive, you seriously jeopardize your organization’s funding and reputation if you maintain inadequate systems for tracking contract and grant dollars—it’s a true nonnegotiable. If you have these funds in your business model, you should assume that you will need to fund a very experienced, senior finance staff role.
Invest in contract consultants. So how does an
organization with limited resources adequately attend to all three finance functions? Increasingly, we are seeing executives pair contract consultants with staff in the finance function. For instance, a small or midsize nonprofit might invest in an excellent full-time staff accountant who can handle the operational functions expertly and provide oversight to an administrative generalist—such as an office manager, who handles the transactional functions during the 50 percent of her workweek that is directed to the accounting function. Then the executive contracts with a CFO-level consultant who spends fifteen hours per month answering any questions the staff accountant may encounter, doing financial analysis for the management team and board finance committee, developing budgets and projections, and so forth. This way, the executive has a strategic financial partner without creating a fixed staffing cost that she can’t afford. Board members, including the treasurer, have a role that is distinct from the staff finance team. The executive needs an uncomplicated relationship to her finance team so that she can direct them in developing the analysis and reporting she needs as the organization’s financial leader. Continued on page 15
CAPLAW Update Newsletter, Summer 2012 | 10
Records Management 101 (continued from page 2)
Your document is probably NOT a record, if you answer “yes” to any of the following questions:
generate, and group them together. Records can be grouped together in many different ways.
Record Grouping Suggestions
• Is it a rough working paper and/or calculations created while preparing an official document?
• Is it a draft not intended for further use or reference? • Is it a duplicate copy of material retained for reference • •
• •
purposes only, where the official record is maintained in some other department? Is it published material that is not an integral part of the organization’s official activities or history? Is it a “printout” or “hard copy” of data that is maintained as a record in another format (unless a hard copy is either required or contains additional information)? Is it a word processing document or spreadsheet in electronic format that has been printed and filed as a record? Is it a brochure, catalogue, price list, promotional material, etc. received from external sources (except where this material is used as the basis for a purchasing decision)?
Storing and Organizing Records Once you have determined that the information is a record, the next step is to determine where it should be stored, and how to organize and label it so that you can find and access it when needed. Often this is clear - for example, paid invoices are clearly records, and they would typically be stored in the finance department and organized by fiscal year and then by vendor or supplier. But in many cases it is not so simple to determine how to organize your files – for example, a contract with a consultant for work on a federal grant is clearly a record, but it might logically be filed in several places; in the grant files, in the legal department, in the finance department, or in the procurement department. Sometimes filing copies of it in multiple places may make sense if different departments need access. This is why it is important to create a filing system that can be implemented across the organization. To develop a working filing system you need to identify your organization’s business activities and the records they generate, and group them together.
A filing system is a logical method to classify and organize records. The essential requirements of any filing system is that records are organized and grouped together in a manner that is logical, consistent and allows them to be easily found, used and eventually disposed of, or stored permanently. To develop a working filing system you need to identify your organization’s business activities and the records they 11 | CAPLAW Update Newsletter, Summer 2012
Alphabetically ................................ Personnel records, client files By Subject ........................................ Grant or program files Chronologically .............................. Accounting records, financial material (such as purchase orders and bills), year-end reports Geographically ............................... Appropriate if you have different office or program locations Tickler files ....................................... Good for tracking records that need to be reviewed and updated, such as background checks
Creating an Organization-Wide Filing System Once you have settled on a logical filing system for the records of each of your organization’s activities, the next step is to create a written records management policy that describes the organization-wide file and labeling plan (the master file plan) that everyone in your organization understands and can implement. If different departments or programs are unclear or inconsistent in how they label and file a record then any system that you set up will quickly deteriorate. For example, if your master file plan policy states that paid invoices should be labeled in the following manner, fiscal year, accounts payable or receivable, then alphabetical by vendor, then it is critical that this file plan is followed across all programs and departments, whether the invoice is for human resources’ office supplies or Head Start professional services. Unless everyone in your organization who handles records understands and uses the same clear and consistent labeling and filing system, it will be impossible to organize and store your records in a way that is easy to understand, simple to maintain, and allows easy access to the information you need. You may want to consider using a system like SharePoint or a shared drive to make certain records, like contracts, accessible to a select group of staff in a more formal manner than individual electronic files.
Are Social Workers Exempt (continued from page 3) requirements met the test:
• A master’s degree in social work, human services, drug •
and alcohol, education, counseling, psychology, or criminal justice, or A bachelor’s degree in human behavioral science which includes 30 semester or 45 quarter hours either in development of human behavior, child development, family intervention techniques, diagnostic measures, or therapeutic techniques, such as social work, psychology, sociology, guidance and counseling, and child development.
Alternatively, requiring a social worker to be licensed by the state, if the licensing procedure requires a specialized course of study, would also be sufficient. What is not sufficient are general degree requirements that can be satisfied with any number of diverse academic majors such as:
• A bachelor’s degree in social sciences • A bachelor’s degree in human services, behavioral sciences, or an allied field. Remember: you cannot use years of experience as a social worker alone to meet the professional exemption despite the vast knowledge that a non-degreed social worker may have. Simply stated, an employee cannot be an exempt professional unless the job requires the employee to have previously completed a course of specialized intellectual instruction. So go through your job descriptions and review the minimum educational qualifications in light of the primary duties of the position to evaluate whether the educational prerequisites are narrowly drafted to evidence specialization for the work that the employee will perform. Be as specific as possible about the number and type of courses that are required if the degree is not directly related to the position (for example, a biology degree for a biologist). Lastly, don’t forget that in addition to the educational requirement to qualify for the learned professional exemption, the employee’s primary duty must be the performance of work requiring advanced knowledge, defined as work which is “predominantly intellectual in character and which includes work requiring the consistent exercise of discretion and judgment.” For additional details on the professional exemption see the DOL’s fact sheet on the professional exemption.
On Reflection What is scary about the Solis case is that it was not a lawsuit filed by a group of disgruntled employees, but was an enforcement action filed by the DOL based on the complaint of a single employee . . . and it overturned the overtime exempt status of hundreds of employees in 44 field offices. Undertaking a proactive review of your job descriptions and overtime classifications is a great way to avoid this fate and steer clear of the Obama administration’s increased enforcement activities.
Non-Federal Share Decision (continued from page 4)
The DAB received further clarification that ACF did not have authority under the statute and regulations governing the Promoting Responsible Fatherhood Program to retroactively waive the matching fund requirement. Based on these clarifications, the DAB concluded that there was no basis to reverse ACF’s disallowance and ordered Circle of Parents to provide reasons why the DAB should not uphold the disallowance. The DAB also noted that Circle of Parents materially failed to meet the express terms of the grant and that nothing in the record supported retroactive relief, even if ACF had the authority to grant it. The DAB explained Make sure your further that ACF could have organization reasonably concluded that understands what the Circle of Parents’ arguments requirements are and, on appeal – its use of best if the funding source efforts, the bad economy, the permits waivers, how fundraising prohibition and its communications with ACF your organization may – were insufficient to support request one. a retroactive reduction of the non-federal share. The DAB observed that Circle of Parents’ ability to exceed the federal share requirement in fiscal year 2011 showed that challenges to raising non-federal funds were possible to overcome.
Circle of Parents’ Response to Order to Show Cause Circle of Parents argued that its communications with ACF, some of which were documented in emails submitted to the DAB, showed that ACF: (1) had the discretion as part of the grant closing process to proportionately reduce the grant or perform a “de-obligation” to compensate for the unmet match; and (2) had encouraged Circle of Parents to make a good faith effort to meet the match requirements. Based on these communications, Circle of Parents asserted that it was led to believe that ACF would reduce or de-obligate the match requirement when the grant ended since Circle of Parents was making every effort to meet the match requirement. Circle of Parents also requested that the excess it earned in meeting its fiscal year 2011 match should be used to cover the incomplete matches from prior fiscal years. Continued on page 13
CAPLAW Update Newsletter, Summer 2012 | 12
Non-Federal Share Decision
Accountability and Transparency
Circle of Parents Did Not Specify a Valid Basis for Reversing or Modifying the Disallowance
in place to safeguard those funds, and alone would have justified termination of the awards.
The DAB determined that Circle of Parents failed to provide a valid basis for reversing or modifying ACF’s disallowance. The Board explained that, contrary to Circle of Parents’ interpretation of its communications with ACF, ACF did not indicate that it might grant a retroactive waiver. Rather, ACF advised that, if Circle of Parents failed to meet the nonfederal share, ACF had the authority to reduce the federal funds previously awarded under the grant.
The grantee in this case appears to have been particularly uncooperative in responding to the CDC’s requests for documents and information. Nevertheless, the decision still offers valuable lessons for all grantees on preparing for and responding to monitoring. Where monitors request specific documents, it is important to be responsive to their requests. Either provide the documents requested or articulate a reason for not doing so and, where possible, offer to provide the underlying information the monitors are seeking in another format. For example, if monitors request documentation of volunteer hours counted toward matching requirements, it is best to provide contemporaneous documentation, such as actual sign-in sheets that provide the name of the volunteer, the date, hours worked, volunteer activities, and the volunteer’s signature. However, it may be possible instead to submit a summary compiled by staff that reports the number of hours each volunteer worked and the activities on which they worked during a specific period, with affidavits from each of the volunteers certifying that the information recorded on the summary sheets is true and accurate.3 Remember that grantees have the burden of demonstrating that costs they charge to their federal grants are allowable.4 Prepare for a monitoring visit by reviewing the monitoring checklist or similar tool that the monitors will be using (if available), anticipating what documents the monitors are likely to request onsite and what questions they are likely to ask, and ensuring that that those documents are readily available when the monitors arrive and that staff are prepared to answer their questions.
(continued from page 12)
The DAB also restated that it is bound by the applicable regulations requiring Circle of Parents to obtain prior approval for a budget revision and authorizing ACF to disallow funds if Circle of Parents failed to comply with the terms and conditions of the award.3 Circle of Parents had acknowledged that the federal share requirement was an express term of its award and that it had failed to seek the requisite prior approval to revise its budget. Lastly, the DAB explained that it did not have the authority to permit Circle of Parents to use the unspent balance of federal funds from the fiscal year 2011 award to meet the matching funds shortfall for fiscal year 2009.
Lessons Learned
• Do not assume that communications with your funding
•
source will support your organization’s failure to comply with the law. If clear legal requirements exist, your organization must comply with them, unless the law permits the funding source to waive those requirements and your organization requests and obtains a written waiver. Following match requirements is essential even in tough economic times. Make sure your organization understands what the requirements are and, if the funding source permits waivers, how your organization may request one. For Head Start grantees, ACF recently issued Program Instruction (PI)-HS-12-02 as a reminder of the importance of complying with the Head Start Act’s non-federal share requirement and of requesting a waiver if necessary.
See end notes on page 17.
13 | CAPLAW Update Newsletter, Summer 2012
(continued from page 5)
Costs cannot be shifted from one award to another to overcome funding deficiencies or to avoid restrictions imposed by law or by the award terms. Under the federal cost principles for nonprofit organizations, cost shifting from one federal award to another federal award is not permitted to overcome funding deficiencies or to avoid restrictions imposed by law or by the award terms.5 The organization in this case had exhausted the funds available under one of its cooperative agreements and had only $95 available under the other, even though the budget or project periods for those awards were to continue for three more months. The DAB found that the organization used funds from an extension of an unrelated CDC award to reimburse costs associated with the cooperative agreements without obtaining prior approval to redirect those funds. The DAB concluded that, in so doing, the grantee violated the OMB Circular A-122 (2 C.F.R. Part 230) prohibition against shifting costs from one award to another to overcome funding deficiencies, as well as the award terms, which required prior approval from the CDC before redirecting funds. However, even if the grantee had requested prior approval to redirect the funds, it seems unlikely that the CDC would have granted that request where redirecting the funds
sponsored activities; (2) effective control and accountability of all funds, property and other assets to ensure that such are used solely for authorized purposes; and (3) accounting records supported by source documentation.6 In short, federal grant recipients should be able to identify the source and application of funds for federally financed projects and to maintain effective control over and accountability of federal funds. The same is usually true of grantees receiving state funds. If information regarding the financial management standards applicable to an award is not in the award document or in the terms and conditions that accompany the award, follow up with the funding source to obtain the applicable standards. Then ensure that your organization’s financial systems are capable of complying with those standards and, if they are not, modify them as necessary to meet those standards.
threatened the grantee’s ability to achieve the goals of the award from which the funds were redirected. When experiencing cash flow difficulties, a grantee may be tempted to use funds on hand from one grant to pay costs associated with another grant and to “repay” the first grant when the funds from the second grant are received. However, this is a dangerous practice that violates the federal cost principle circulars. A better approach is to obtain a revolving line of credit or to use unrestricted funds to smooth out temporary cash flow issues. To the extent that a grantee seeks to redirect funds from one award to another for a reason other than overcoming funding deficiencies or avoiding award restrictions, the grantee should review the terms and conditions of the award to determine whether redirecting the funds is permitted, and, if so, obtain prior written approval from the funding source.
Under the federal cost principles for nonprofit organizations, cost shifting from one federal award to another federal award is not permitted to overcome funding deficiencies or to avoid restrictions imposed by law or by the award terms.
Grantees must understand and implement adequate financial management systems. Doing so is not a mere technicality, but is central to proper administration of the award.
Federal grantees are generally required to comply with some type of financial management standards. The uniform administrative requirements for nonprofits require nonprofit grantees to have financial management systems that provide for: (1) records that adequately identify the source and application for HHS-
The grantee in this case admitted to having “some issues” with its accounting systems, including a lack of qualified accounting personnel. The organization told the CDC that it did not keep cash receipts or disbursement journals and that its accounting system was incapable of performing reconciliations. Furthermore, the organization failed to maintain adequate funding to execute the projects associated with the awards at issue; it granted pay raises for its executive director and acting executive director without board approval; it failed to file timely, accurate or supportable payment requests after being placed on restricted payment status; and had a board of directors that did not exhibit the capacity to fulfill its role to oversee the use of financial and other organizational resources. The organization’s audit report also failed to describe in meaningful detail the audit methodology or address with specificity the legal requirements at issue. The DAB found that the funding source was justified in concluding that the grantee lacked the capacity to identify the source and application of funds for its federally funded projects and to maintain effective control over and accountability of its federal funds.
[a]n award recipient must do more than show that its work is beneficial and supported by the community’ in order to continue its relationship with the federal government. ‘The recipient must also manage itself to ensure that taxpayer money is spent properly, in compliance with federal requirements.
Grantees should be sure they understand the circumstances in which prior approval is required and obtain it in those circumstances. The uniform administrative requirements for nonprofits incorporated by reference in this organization’s terms and conditions obligated it to obtain the awarding agency’s approval for certain program and personnel changes, including a change in the project director or principal investigator or other key persons specified in the application Continued on page 15
CAPLAW Update Newsletter, Summer 2012 | 14
Accountability and Transparency (continued from page 14)
or award document.7 The organization in this case failed to obtain prior approval for the designation of the CEO and it frequently changed key program managers without notifying the awarding agency or seeking prior approval. The DAB explained that the necessity for funding source oversight was especially critical in this case because the success of the organization’s programs depended heavily on the hiring and retention of qualified staff and because of unrefuted evidence of personnel practices that cast doubt on the organization’s capacity to fulfill its mission (e.g., personnel records that showed that “professional boundaries were crossed, staff were demoted and/or terminated without cause, and staff were placed in technical positions…without having the technical expertise to carry out the functions of the position.” The Importance of a Grantee’s Mission Does Not Excuse Legal Non-Compliance The grantee argued that its funding should not have been terminated because organizations like it are urgently needed to prevent the spread of HIV in populations targeted by its work. The DAB rejected this argument as irrelevant observing that, “[a]n award recipient must do more than show that its work is beneficial and supported by the community in order to continue its relationship with the federal government. The recipient must also manage itself to ensure that taxpayer money is spent properly, in compliance with federal requirements.”8 See end notes on page 17.
Executive Director’s Guide (continued from page 10)
7. Help Your Board to Help You Boards have a governing role in assessing and planning an organization’s finances. In too many cases, though, executive directors expect their boards to stay high-level and strategic without equipping them for the role. It is the executive director’s responsibility to provide the board with information that is appropriate to members’ roles and responsibilities.
Design your financial reports thoughtfully. The
board is responsible for short- and long-term planning of the organization, and its members must ensure that systems are in place for effectively using resources and guarding against misuse. The board has legal responsibility for financial integrity but board members are not the accountants, so don’t inundate the board with pages of detailed accounting records and then wonder why the board can’t see the “big picture.” Boards need analysis and interpretation more than they need the numbers. There is no one-size-fits-all financial report. 15 | CAPLAW Update Newsletter, Summer 2012
Reports must be designed to communicate information specific to the organization’s size, complexity, and program structure in a format that matches the knowledge level and role of board members.
Understand how boards use financial information. The format and content of reports for the board should be determined by their intended purpose. Boards actually use financial information for four distinct purposes: compliance with financial standards, evaluation of effectiveness, planning, and immediate action.
Compliance. Most nonprofits do pretty well with
providing the board with financial reports that comply with the board’s legal fiduciary role to know how much the organization has received and expended. Historical financial reports, audits, and 990s are the common reports.
Evaluation. For the board to evaluate how well the
organization has used financial resources, different information is needed. Comparisons are needed to measure progress toward goals, assess the financial aspect of programs, and consider financial strategies.
Planning. When the board is engaged in planning to
project future needs and changes or to develop budget guidelines, they need a big-picture understanding of the organization’s history and of the external environment and financial drivers.
Taking action. Sometimes the board needs to make
a key financial decision to implement a strategic plan, react to a sudden change, or respond to an opportunity. In order to make a wise but timely decision, the board needs to understand the background and situation and scenarios based on one or two possible actions. And form should follow function: before developing financial reports for the board, ask what type of actions or decisions the board will need to make, and provide them with the right amount of information and analysis in a format that fits the purpose. Don’t ask your board to maintain a top-level focus on strategy while submitting financial reports better suited to the auditors.
8. Manage the Right Risks To reduce and manage risks, most nonprofits develop policies and procedures for each area of the organization. The facilities manager maintains controls over keys, access, and insurance coverage. The finance director assures appropriate segregation of duties, internal controls, and checks and balances. Program managers compile information and data to run background checks, keep licenses up to date, and maintain required reporting. If we put them all together in a binder, these policies make up the organization’s risk management process.
Assess your organization’s risks holistically. If
each area assesses and formulates its own risks, who is responsible for deciding which risks have the most magnitude and impact on the organization? Put another way, if a nonprofit decided that at least one of its policies had to be eliminated for some reason, how would you decide which one the organization could do without? For example, which of these possible events pose the greatest risk to the organization’s ability to achieve its mission, programmatic, and financial goals: theft of a laptop computer, loss of confidential client data on that computer, or damage to the organization’s reputation if client data were made public?
Consider enterprise risk management. Many
nonprofits do a better job of managing the risk of a small theft than they do of identifying and reducing these other two, much greater, risks. Enterprise risk management (ERM) is a term that your auditors may have brought up recently. ERM is essentially the process of assessing all of the risks that the organization faces with a comprehensive, enterprise-wide view and making decisions about managing risk in the same way. An ERM process considers both risks that are evident today and those that are will emerge as operational and strategic plans are implemented. Some organizations need to complete a formal, extensive internal assessment with a staff team and outside consultants. Smaller organizations can complete their own organization-wide review of risks through brainstorming and discussions. The most important step is to start thinking about all the parts as a whole. In the case of the stolen laptop, for example, too much emphasis on limiting access to the office on weekends might have led a program staff member to store confidential data to take home to complete a needed report. Balanced together, these risks would probably have been managed differently than if looked at separately. With the big-picture view of the organization always in mind, the executive director is the right person to advocate ERM by asking members of his or her team to think beyond their own area to the wider enterprise. What’s old is new again. These principles are both longstanding practices and emerging trends for nonprofits. Some of these business principles are undoubtedly familiar to you. Others may run counter to what you may believe to be a “best practice.” Executive directors learn that leading a nonprofit requires a constant balancing of current needs, external demands, and long-term vision. Financial leadership is fundamental to the role and cannot be fully delegated. These principles will help executive directors adapt to the demands of the changing environment and maintain the balance needed for mission impact and sustained financial health. Kate Barr is the executive director of the Nonprofits Assistance Fund; Jeanne Bell, MNA, is the CEO of CompassPoint Nonprofit Services, a nonprofit leadership development organization.
The Executive Director’s Finance Cheat Sheet A SUMMARY OF THE EIGHT MUST-DO’S FROM THIS ARTICLE Develop your annual budget with a commitment to its
net financial result—whether surplus or planned deficit— and then adjust spending during the year if income is not coming in on pace to yield that net result. Then, complement your annual budget with rolling financial projections that incorporate your most current information about probable future financial results.
Diversify your income cautiously, ensuring you have
the capacity to develop and sustain the programmatic and operational requirements of attracting each new resource type well.
Develop cash flow projections along with the budget
and rolling projections so that you can anticipate any cash flow problems well in advance, when you have more options.
Plan goals for financial reserves based on your typical
cash flow cycles and risks and incorporate reserves into all financial plans and policies. Be sure to foster a financial culture for staff and board that promotes the importance of a regular operating profit or surplus.
Pursue restricted funding from those foundations and
corporations that understand and value your organization’s mission and particular strategies for achieving impact. When pursuing restricted funding, develop proposal narratives and accompanying budgets that link staff development to program design to superior outcomes, including all related costs as direct.
Ensure that your finance function is always properly staffed; if necessary, use a mix of staff and expert contract consultants to achieve this.
Discuss expectations for financial roles and responsibilities with board leadership to create
accountability and information flow that matches the size and life stage of the organization. Make sure to invest time in developing meaningful financial report formats for the board that reinforce organizational strategies and goals and support the board in fulfilling their responsibilities.
Introduce the concept of enterprise risk management to your team and initiate an internal assessment of a full range of risks.
See end notes on page 17. CAPLAW Update Newsletter, Summer 2012 | 16
Article End Notes Ready, Set, Go: Preparing for the New Head Start Renewal System
1. 45 C.F.R. Part 1307. 2. 42 U.S.C. § 9832(2) (emphasis added). DAB Decision Reinforces Importance of Meeting NonFederal Share Requirements
3. Circle of Parents, Decision No. 2439 (2012) 4. For an explanation of how the a disallowance resulting from a grantee’s failure to meet a non-federal share requirement was calculated by the Administration for Children and Families (ACF), see ACF Grants Policy Note No. 11-01: Computation of Disallowances for Deficient Grantee Payment of the Non-Federal Share Requirement
5. See 45 C.F.R. §§ 74.25, 74.62(a)(2). It is important to
note that 45 C.F.R. § 74.25 requires a grant recipient to seek prior approval for budget and program revisions only in certain situations. The DAB in this decision did not offer any information regarding what actions on the part of Circle of Friends triggered the need for prior approval under 45 C.F.R. § 74.25.
DAB Decision Focuses on Accountability and Transparency
1. See 45 C.F.R. § 74.62(a)(3). 2. See 45 C.F.R. § 74.53(e). 3. See, e.g., Philadelphia Parent Child Center, DAB No. 2297 (2009)
4. See., e.g., Marie Detty Parent and Family Service Center, Inc., DAB No. 2024 (2006).
5. 2 C.F.R. Part 230, App. A ¶ 4.a.3. and 2 C.F.R. Part 225, App.
6. See 45 C.F.R. § 74.21(b)(2), (3) and (7). 7. See 45 C.F.R. § 74.25(c). 8. Renaissance III, DAB No. 2034 at 13 (2006).
17 | CAPLAW Update Newsletter, Summer 2012
An Executive Director’s Guide to Financial Leadership
1. The Chronicle of Philanthropy; Money and Mission;
“Shattering the Myth about Diversified Revenue,” blog entry by Clara Miller, September 2, 2010
2. William Foster and Gail Fine [Perreault], “How Nonprofits Get Really Big,” Stanford Social Innovation Review (Spring 2007): 46.
3. Jeanne Bell and Elizabeth Schaffer, Financial Leadership: Guiding Your Organization to Long-Term Success (New York: Turner Publishing / Fieldstone Alliance, 2005), 21.