5 Financial Red Flags Your Nonprofit Board Can’t Ignore

Hey, welcome back everybody. It's another important day on the nonprofit show because we kick off nonprofit power week with our friends over at your part-time controller and we're doing this with the amazing Deanna Peterson. She's a director at YPTC. Hey, welcome back my friend. >> Hi Julia. It's great to be here again. I always love joining the show. >> Well, we are excited to have you on. Um Diana Peterson, we are delighted to have you on. Um again, nonprofit power week is super important for us here um on the nonprofit show. we don't do very often. Uh just a couple times a year, but it's a big thing for us and so we're very excited. Uh along with our presenting sponsors who support this includes Bloomerang, American Nonprofit Academy, Staffing Boutique, JMT Consulting, Third Sector Company, of course, our friends at your part-time controller, and then one of our newest partners, Martis. So, we are super excited to have everyone with us uh for this really important week. I'm Julia C. Patrick, CEO of the American Nonprofit Academy. Okay. Deanna Peterson, even though we razed you at the very beginning of the show. Um, you're a director at your part-time controller, which is a really important job. Talk to us about what it is that you are doing and how you lead within um, YPTC. >> Yeah, so I am in charge of all of our sub sector specializations. So, all of the different types of nonprofits that we serve. I lead our subject matter experts in ways to connect with the public and then also ways to resource our staff so that we can best serve those types of organizations. We have 19 different subsectors that we specialize in here at YPTC. >> So can you kind of give me an idea of what that means? like what does a sub sub sector look like to then the somebody like who might be like what what does that mean >> right of course so the nonprofit sector is just as diverse as a for-profit sector and a lot of companies want to serve nonprofits and they kind of put them all in one bucket however universities and colleges are going to be very different from theaters and museums which are very different from associations membership organizations so those kind of the types of subsectors I'm talking about. Not just are their programs different, but also their finances, their accounting rules, and everything like that, too. >> Wow. I love that you talked about this because I think to the uninitiated, we do lump everybody together. And I see this a lot where uh even just in the HR world where people are like, "Oh, you've been in the nonprofit business? No problem." home. It's like, yeah, but I worked at a dog shelter and let it and we were very successful. Could I run an opera company? Maybe not. But for some reason, a lot of times we just throw everybody together. So, this is really interesting. Thank you for explaining that to us. Well, we know, Deanna, that boards are really one of those groups that have to make major financial decisions and yet they're not in the thick of things every day. and you've identified some red flags that we should be thinking about if we're a board member, if we're working with our board, um if we're just looking at the health of our organization. And so, let's kick off red flag number one. And that means a big thing that is consistent budget deficits. And uh that that dword kind of freaks me out. What does this mean or what should it mean? >> So, it's not really if one year you have a budget deficit that's a red flag. It's if year after year after year you have budget deficits and the organization just says, "Well, this is just what we have to spend in order to get the programs accomplished like we want to." Well, we also need to have the funding that it takes to have these programs be effective. So really in my opinion whether a budget should be a surplus which should be most years by the way or if one off year you need to have a deficit that needs to be done in the strategic planning process. So when you're looking at your 3 to five year strategic plan, when you're thinking about okay, these is what this is what we want to accomplish, maybe you identify that year three needs to be a deficit for that key growth initiative in order to actually implement it. But then that also means that obviously year one and two need to be a surplus. You have to have more money coming in than you're spending so that you can strategically invest in the years that you need to invest. But a consistent deficit year-over-year is not sustainable and it's not helpful for the organization to just be around as long as you want it to be. Okay, you're frying my brain a little bit because I'm thinking about the hours and the hours and the days and the days that I've been involved as a board member with strategic planning. I've never heard anyone speak about taking that approach and putting it into the strategic plan. Um, it's brilliant and it would have caused a lot less upset if we had kind of been thinking about it because for most organizations it's not a shock. It's a shock when you don't plan for it, right? But I mean, it's not like, oh, the building burnt down and so we're going to run a deficit. A lot of times you can see this coming. Is that fair to say? >> Exactly. You should be able to see it coming because you should know where you are financially. And again, when you're in that five-year plan, you know, okay, I am going to we want to build this building. We want to launch a new program. This is our five-year plan. Well, how what is that going to take financially? So instead of budgeting for the entire five years, you should at least be able to know holistically how much money do we need to raise, how much do we need to spend and kind of look at that holistically through those five years big picture. And then when you go into that again year three in our example where maybe we need to have a deficit budget that one year >> you it's not a surprise to the board. Whereas sometimes if an organization knows this is just what we have to do, but they haven't really communicated that well to the board, then the board struggles with approving a budget. >> Yeah. >> Yeah. And putting so much pressure on that executive director or development team to fix it by just raising more money, >> right? Wow. This is a what a a really interesting way to kick off the red flags. Okay. So, red flag number two, delayed financial reporting. Yeah. >> So, this one is huge. If you are not get as a board, if you are not getting financials timely and a couple of days before the board meeting so that you can process that, then likely management is also not getting those financials timely. So, therefore, how are they managing the organization? How do they know if they're on track to that budget? How do they know if a program is financially stable or viable? What are they how are they running the organization or are they just kind of running it blind because they don't have this information? >> So, what's realistic? I mean, I know that with so many of our guests talking about AI and how that's integrating into, you know, just financial management, how fast should the organization and the board um expect or set an expectation to get that information? Again, love that you brought up you need this information before the board meeting so that you can review it. But but what should we be really thinking about in terms of that timing? >> That's a good question. And sometimes it actually means maybe moving the meeting, right? So I would say between two and three weeks, >> okay, >> after the month end. So it's January, month end is December. You're you should be able to get December's financials or at least a draft because if it's your year end or something, you might just have to have a draft, but within two to three weeks so that you can kind of understand your cash position, understand where your organization is to budget, that kind of thing. >> Okay. Thank you. You know, I didn't know what you were going to say and that's good. That's that's really interesting. I love that. And I'm like super intrigued by just the concept of saying, "No, we're not going to have a meeting. We're and I'm I believe you have to schedule your meetings out a whole year in advance." But but looking that looking towards that, okay, maybe we're now going to start meeting the third week of each month because we >> That's what I recommend. >> Exactly. Instead of having that board meeting the first week of the month, you're always going to be looking at a whole month behind of financials. So, plan the calendar around when you can connect. >> Okay. So, not only do you look like a teenager, you're a smart cookie. >> Well, I've been doing it for a while. I've been doing this for a little while. >> Oh gosh, that that sounded so terrible. But we've known one another for many years, so I know that I can tease Deanna. Okay, so the first one and two red flags been burners and really interesting, but let's move into red flag number three. Unrestricted reserves and noticing that maybe they're shrinking or changing. Talk to us about this. >> Yeah, this goes handinhand to that consistent budget deficits. Okay. >> So, if you're consistently seeing that you're not bringing in more money than you're spending, you're going to see shrinking unres unrestricted reserves, assuming you have them, of course. So, hopefully you have them to start with, but if you're seeing them shrink, this is a huge red flag. >> Okay. And that would be like year over year or month over month. like what is the trajectory of time that that we should be thinking about this? It seems to me if you're doing year over year, that's too late, right? >> Yeah. I mean, you can track year-over-year every single month and see, okay, where are we at with our reserve this month versus last year at the same time? So, that's one way you can track it. Another way would be to just have your unrestricted reserves in a different account so that it can be really intentional. the the right way to do it is to have unrestricted reserves in place and then be really intentional about when you potentially need to dip into those reserves. It shouldn't just be by accident. And what we see a lot of times is that nonprofits who aren't getting their financials timely or who are budgeting for a break even or a deficit are accidentally dipping into those restrict unrestricted reserves. And that's just not best practice. You really want to make sure you're intentional in the way that you're spending your money, >> right? I love that you you kind of painted that full-on picture. Um, so it's not just an item in a spreadsheet, but it's actually a practice. Yeah, that's smart, Diana. That's really really smart. Okay, red flag number four. And this is I was telling you in the green room I just heard from a major funer um in my community that they were concerned about this um excessive dependence on one funer. Again share with us what you think this should mean and why we should be thinking about this. I think it means risky risky risky. Any single one funer whether it is a donor a individual donor or a foundation or the government department for your grants. Any one funer can go away at any time. We cannot rely on a year over year over year. Oh, they've always given us that $500,000 grant every single year. We're going to get it again. >> We can't rely on that. And by doing so, it's just risky because when something happens and all of a sudden you don't have that fun, if it is go if losing one funder is detrimental to your entire organization, that's a problem. >> Yeah, really a good comment. And I would say too, um, it it kind of skews your relationship management. You know, when you have a funer that's like you're you're it's so critical, it's it's you can get mission creep. It's harder to walk away. It's it's uh it changes that power dynamic, if you will. Um Yeah, >> 100%. Yeah, this is important, you know, and I also think too I see boards leading this and even people in development that are like all I need is one rich person and all my problems will go away, right? You know, it it's just an awful mindset, if you will. And I'm wondering if you've heard that from from clients. >> We always try to steer clients back to that revenue diversification. Most accountants and finance managers are going to go back to you have to be diversified. Where can you find some fee for service programming? Where can you be creative at your messaging? Who where is your impact? Who cares about that impact? And how can you tell that story in order to get money from multiple different sources so that you can fulfill your mission? That's really what we like to steer nonprofits towards as opposed to think about that one, you know, rich person to to give the money. >> Yeah. You know, I think this is the the ultimate case for sustainable giving. You know, those monthly giving programs that are so easy now with technology to manage and to structure. And donors like this, you know, they like that monthly giving. it's smaller amount that adds up over the 12 months and that it really changes I think the discussion about how you work with your donors, how you communicate. I loved what you just said about sharing that impact um with a bigger group versus just that one donor that you're just freaked out that they're gonna not leave you, right? Um, you mentioned something in the green room that I I hadn't really thought about, but I do know um that a lot of times funders don't want that long-term relationship. They want to move on maybe three to five years after a big investment. What are you seeing there? We're seeing a lot of kind of capacity building funding where a foundation wants to provide some kind of a capacity building funding for three to five years for an organization and then they need to move on to something else because they have constituents that they want to show impact across multiple organizations across a sector. Right? So, we have to make sure as the nonprofit who's receiving these funds that we're using those funds to build up our structures, build up our systems, build up our the way that we're connecting with the public so that we can be sustainable going forward as opposed to just saying, you know, oh, we're always going to have this $500,000 grant every year or something like that. It's not >> you can't rely on something long term like that. >> Right. Right. Yeah. It's just such a a it to me, Deanna, and and before we move on to red flag number five, it seems to me like for a lot of organizations, this is going to be a pretty big mind shift because the boards, I think, a lot of times put this downward pressure on the CEO and the development folks just to find that one big, you know, unicorn. Um, and we tend to do that even in American business. you know, you just need that one big department store chain to buy your widgets or you just need that one big sale as opposed to breaking it down. So, it it's it's not so easy to get everybody on the bus with this concept, is it? >> Right. And I'm not saying you don't want a big fun because right, but you want to be intentional. You want to say, okay, we've got this big fun, we just can't assume it's going to be forever. So how can we in addition to this funer, how can we diversify our funding streams? How can we make sure that our impact is spread amongst differenti constituents? How can we have some fee for service? You know, it's actually just like in your retirement fund. You're not going to put everything into one company's stock. You're going to diversify your investments the same way you want to do that with your nonprofit funding. >> Yeah. I I love that you brought this up because again, you know, for for boards, they might not understand this and so that is a red flag that you kind of need to educate up on, I think, a little bit. Um, okay. So then go, let's go to the the red flag number five. And and this might take a little bit more time um and an explanation. We're going to be talking about the lack of liquidity and then how you analyze this and and why you should analyze it. What are you seeing here, Deanna? >> So, this is basically just saying where where are you liquid or not? Where is your cash and analyzing that cash to make sure that it's not just a like a mountain in and you're going to have this valley. You have to track your cash over time. How much days cash do you have on hand and project that into the future? What do what do you think that that cash is going to look like if everything goes to plan? What's going to happen if things don't go to plan? So this is where we typically bring in some scenario analysis and then bring that back to cash so that the board and management can really see not just where like how much cash is in the bank right now but really understand the usefulness of that cash and what that can do for the organization. So if first of all if no one else gave you your organization anything right you kind of have this cliff of funding how many days could you sustain your organization without having to shut your doors so that's kind of what we say about what are your days cash on hand or your cash runway. I've heard different organizations call it different things. Then you take that and forecast it out and kind of see, okay, at my lowest point of the year, every organization has some seasonality, so they know, okay, in June, that's when I have the least cash. What is my cash projecting to right now in that lowest amount? And how can I get ahead of the game to make sure that I have enough cash to be sustainable even through those low times? Okay. So, let that I think is a really interesting concept and I think it's really important. Let me move to like some of the structural aspects of this discussion today because I've served on boards where we had like rockstar, you know, finance committees who were people from the industry that really could do all this heavy lifting and then they would be able to report back and and I will say I'll I'll woman up and say a lot of times I was like, "Oh yeah, the experts are taking care of it and I wouldn't really pay attention because it wasn't my strong suit of why I was serving on a board. But then I've been on other organizations that didn't have that and this bulk of responsibility fell to the general board. And it seems like we're not spending enough time on these red flags are important, but how many of us can honestly say, "Yeah, we understand that this is a red flag." So long story short, how should we be thinking about this? Because it seems to me, Deiana, these five topics could be just one board meeting. >> Exactly. >> I mean, I think >> is that fair? >> It is fair. So at the beginning of the year or when a board member comes on board, board orientation explaining what we watch, explaining these are the red flags that we're always looking at and then basically structuring your report, your board report around the different KPIs or key performance indicators against either these red flags or maybe there's one or two additional red flags that your organization has so that every single month you're touching on each individual one and it's not going to take up the entire board meeting if everyone understands why you're watch why you're watching these things and how it can really affect the impact and the sustainability of the organization. >> Yeah. Okay. So, this is really interesting because prior to this conversation, I didn't think of it that way. I didn't think of as saying these five flags are like the the things that we're watching the bar and that. So, I love that this makes this these five red flags more digestible to me because it becomes a habit. What I hear you saying is that, okay, we're gonna we're always going to know that when we're being reported to these are the things that that we're watching. That's a really that's a pretty that's a pretty different thing than I think that most boards do. >> Get that feedback. I mean, with the surplus budget, you're looking that annually, but now you already have a surplus budget, not a deficit. With your strategic planning, you're thinking through how what that looks like for big picture budget. But then when you're talking about the other things, we're talking about timely financials. Well, you have to have that every single year or every single month. And then when you're looking at the liquidity, you know, that's one of those KPIs. You also might have a couple of different diversific like funding diversification maybe that's what is the percentage of you know our highest five funders what is that percentage of our revenue and you can have that as a KPI so it's all about and then watching your unrestricted reserves on a regular basis it's those specific KPIs that you can watch every single month and as long as the board knows what you're talking about because you've educated them then everyone's staying on top of things as opposed to just reliance on one treasurer to do all of it, >> right? It also makes me think too that for a finance department if they know every board meeting um they're going to have to report out and it can be as simple as you know a a paragraph narrative on these five topics then you don't just sit around and go well what's going to happen what information is going to flow right I mean I can see where this becomes part of a really healthy habit for a nonprofit board to have generative discussion and and not be shocked by certain things. >> Right. Exactly. Because if they're seeing where everybody is, where the organization is at on these key items >> Yeah. >> throughout the year, it's not a surprise when you get to the the end of the year and you go, "Oh, well, I don't know if we're going to be able to cover payroll because our cash has been dwindling." And then it becomes a surprise because the board hasn't seen financials for six months. I mean, it's these types of things that we see sometimes in the nonprofit sector. >> Wow. This has been riveting. I I loved your approach, Deanna, and it's not it's not where I thought we'd be going today. I think it's really really interesting and it kind of calmed me down a bit because then it seems like every month, okay team, these are the five things that we need to know in order to be strong fiduciary leaders of this nonprofit. This is how we're going to roll. Um, very very brilliant Deanna Peterson. Wow. I it's just been a pleasure personally to see you grow and your expertise within your part-time controller. U Deanna Peterson is the nonprofit specializations director and um as she mentioned working with 19 different sides of the nonprofit sector um has been a fascinating thing to to witness and we're just delighted that you've joined us. Thank you. >> Thank you so much, Julia. I always love being here. >> Yeah, it's really fun. It's I always learn so much from you and um I love the way that you take what should be going on in the finance department, let me just say finance world and then pull it back through the organization because it's not enough just to be like yay team finance department get cracking. It's got to flow through the rest of the organization and you always seem to wrap that up for me Diana. So thank you. Awesome. >> Been a lot of fun. So, this is nonprofit power week and we have some really cool um shows and guests. Um we're going to be talking about everything from AI to, you know, the people that you work with, the questions that you should be asking your finance team, and then we're going to even be talking about software. There's so so many times we get all bogged down and then we're like, well, we just need to change the software. And it's like, maybe not. maybe we need to think about how we're using it. So, join us every day this week um because I think you'll find great conversations and great ideas and tips that you can really dig in with your nonprofit team. You don't have to be a financial expert to uh know these things or learn about these things, but and and I think that's what's so key about this week is that we're kind of looking at how just the normal person working in the nonprofit sector can be thinking about this. So super super important. Hey, you know who's what's also super important are the people that join us each and every week. We just passed our 1,600 episode two weeks ago and we did that because we have amazing partners. They include Bloomerang, American Nonprofit Academy, Staffing Boutique, JMT Consulting, Third Sector Company, of course, our friends at your part-time controller, and Martis. These are the folks that join us day in and day out. As we end this very special week, nonprofit power week, with our friends at YPTC, we end with this message like we do every day. And it goes like this. To stay well so you can do well.