Financial Management for Nonprofit Organizations: Policies and Practices

758 Pages·2018·11.26 MB·English

by  John Zietlow

(cid:2)
TrimSize:7inx10in Zietlow ffirs.tex V1-03/01/2018 7:27am Pagei
Financial
Management
Nonprofit
for
Organizations
(cid:2) (cid:2)
(cid:2)
(cid:2)
TrimSize:7inx10in Zietlow ffirs.tex V1-03/01/2018 7:27am Pageiii
Third Edition
Financial
Management
Nonprofit
for
Organizations
(cid:2) (cid:2)
Policies and Practices
John Zietlow
Jo Ann Hankin
Alan Seidner
Timothy O’Brien
(cid:2)
(cid:2)
TrimSize:7inx10in Zietlow ffirs.tex V1-03/01/2018 7:27am Pageiv
Copyright©2018byJohnWiley&Sons,Inc.Allrightsreserved.
PublishedbyJohnWiley&Sons,Inc.,Hoboken,NewJersey.
FirsteditionCopyright©1998byJohnWiley&Sons,Inc.
SecondeditionCopyright©2007byJohnWiley&Sons,Inc.
PublishedsimultaneouslyinCanada.
Nopartofthispublicationmaybereproduced,storedinaretrievalsystem,ortransmittedinany
formorbyanymeans,electronic,mechanical,photocopying,recording,scanning,orotherwise,
exceptaspermittedunderSection107or108ofthe1976UnitedStatesCopyrightAct,without
eitherthepriorwrittenpermissionofthePublisher,orauthorizationthroughpaymentofthe
appropriateper-copyfeetotheCopyrightClearanceCenter,Inc.,222RosewoodDrive,Danvers,
MA01923,[phone],fax[phone],orontheWebatwww.copyright.com.Requeststo
thePublisherforpermissionshouldbeaddressedtothePermissionsDepartment,JohnWiley&
Sons,Inc.,111RiverStreet,Hoboken,NJ07030,[phone],fax[phone],oronlineat
http://www.wiley.com/go/permissions.
LimitofLiability/DisclaimerofWarranty:Whilethepublisherandauthorhaveusedtheirbest
effortsinpreparingthisbook,theymakenorepresentationsorwarrantieswithrespecttothe
accuracyorcompletenessofthecontentsofthisbookandspecificallydisclaimanyimplied
warrantiesofmerchantabilityorfitnessforaparticularpurpose.Nowarrantymaybecreatedor
(cid:2) (cid:2)
extendedbysalesrepresentativesorwrittensalesmaterials.Theadviceandstrategiescontained
hereinmaynotbesuitableforyoursituation.Youshouldconsultwithaprofessionalwhere
appropriate.Neitherthepublishernorauthorshallbeliableforanylossofprofitoranyother
commercialdamages,includingbutnotlimitedtospecial,incidental,consequential,orother
damages.
Forgeneralinformationonourotherproductsandservicesorfortechnicalsupport,pleasecontact
ourCustomerCareDepartmentwithintheUnitedStatesat(800)762-2974,outsidetheUnited
Statesat(317)572-3993orfax(317)572-4002.
Wileypublishesinavarietyofprintandelectronicformatsandbyprint-on-demand.Somematerial
includedwithstandardprintversionsofthisbookmaynotbeincludedine-booksorin
print-on-demand.IfthisbookreferstomediasuchasaCDorDVDthatisnotincludedinthe
versionyoupurchased,youmaydownloadthismaterialathttp://booksupport.wiley.com.Formore
informationaboutWileyproducts,visitwww.wiley.com.
LibraryofCongressCataloging-in-PublicationDataisAvailable:
ISBN9781119382560(Hardcover)
ISBN9781119382614(ePDF)
ISBN9781119382591(ePub)
CoverDesign:Wiley
CoverImage:©Andrey_Popov/Shutterstock
PrintedintheUnitedStatesofAmerica
10 9 8 7 6 5 4 3 2 1
(cid:2)
(cid:2)
TrimSize:7inx10in Zietlow ftoc.tex V1-03/02/2018 3:37pm Pagev
CONTENTS
About the Authors xxiii
Preface xxv
Acknowledgments xxix
1 Understanding Nonprofit Organization Finances 1
1.1 TheImpactoftheGreatRecession 2
1.2 DefinitionofNonprofitOrganizations 3
(a) 501(c)(3)Corporations 4
(b) BylawsandArticlesofIncorporation 6
1.3 CharacteristicsofNonprofitOrganizations 7
(a) OrganizationalMission 7
(b) OrganizationalStructure 8
1.4 UnderstandingtheLanguageoftheNonprofitOrganization 9
1.5 FinancialPolicies 10
1.6 FinancialPractices 11
1.7 PrimaryFinancialObjective 12
(a) DifferencesBetweenBusinessesandDonativeNonprofits 13
(cid:2) (cid:2)
(b) SurveyEvidenceonthePrimaryFinancialObjective 14
(c) FinancialObjectiveforPurelyFinancialDecisions 16
(d) RecommendedPrimaryFinancialObjective:Appropriate
LiquidityTarget 16
1.8 Conclusion 17
Notes 17
Appendix 1A TheLillyStudyFindings 19
TheLillyStudy 19
KeeptheMissionFirst! 20
ManagementandFinancialObjectives 20
On-SiteInterviews,Questionnaires,andArchivalStudies 25
TheAppropriateLiquidityTargetModel 25
Note 28
2 Liquidity Management 29
2.1 Introduction 29
(a) ImportanceofLiquidity 31
(b) AreNonprofitsOverlyRisk-Averse? 31
2.2 NoncommercialNonprofitOrganizations 34
(a) GuidancefromFinanceTheory 35
(b) EvaluationofFinanceTheory 35
(c) ComplexityofNonprofitCashFlows 35
v
(cid:2)
(cid:2)
TrimSize:7inx10in Zietlow ftoc.tex V1-03/02/2018 3:37pm Pagevi
vi Contents
2.3 EvidenceonLiquidityManagementintheNonprofitSector 37
(a) LiquidityManagementintheHealthcareSector 37
(b) LiquidityManagementinCollegesandUniversities 38
(c) LiquidityManagementinFaith-BasedDonative
Organizations 38
2.4 FacetsofLiquidityManagement 40
(a) LayersofLiquidity 41
(b) Solvency 41
(c) Liquidity 41
(d) FinancialFlexibility 42
2.5 ImportanceofLiquidityManagement 42
(a) InstitutionalFactors 42
(b) ManagerialPhilosophyFactors 45
(c) LiquidityImplicationsofInstitutionalandManagerial
PhilosophyFactors 46
(d) WatchdogAgencyStandardsonSolvencyandLiquidity 47
(e) AssessmentofWatchdogStandards 50
2.6 WhatIstheAppropriateLevelofLiquidity? 51
(a) EstablishingtheLiquidityPositionBasedonFinancial
Vulnerability 52
(b) DiagnosticToolstoAssistinSettingtheAppropriate
(cid:2) (cid:2)
LiquidityTarget 52
2.7 Conclusion 54
Notes 55
3 Managing Mission, Strategy, and Financial Leadership 59
3.1 ValueofStrategicPlanning 60
3.2 WhatIsStrategicPlanning? 61
3.3 WhatAretheOrganization’sMission,Vision,
andGoals/Objectives? 61
(a) Strategyandthe“BottomLine” 63
(b) WhatAreStrategicDecisions? 64
3.4 StrategicManagementProcess 65
(a) SWOTAnalysis 66
(b) WhatAreInternalStrengthsandWeaknesses? 67
(c) UsingEnvironmentalScanningtoDetectExternal
OpportunitiesandThreats 68
(d) StrategicManagementIsanOngoingProcess 68
(e) FinancialLeadership,Sustainability,andtheBusiness
Model 68
(f) Sustainability 70
(g) BusinessModel 70
(cid:2)
(cid:2)
TrimSize:7inx10in Zietlow ftoc.tex V1-03/02/2018 3:37pm Pagevii
Contents vii
3.5 ImplementingtheStrategicPlan 73
(a) ThreeStepsinImplementation 73
(b) CutbackStrategies 73
3.6 PerformanceManagementSystems 78
(a) BalancedScorecardandDashboard 79
(b) PortfolioApproaches 84
3.7 StrategicPlanningPractices:WhatDoestheEvidenceShow? 88
3.8 Conclusion 89
Notes 90
4 Managing Structure, Accountability, and Ethics 93
4.1 FinancialToolsandSupportStructure 93
(a) ElementsoftheFinancialStructure 94
(b) InternalControls 95
(c) FinancialPolicy 96
(d) FinancialProcedures 96
4.2 OrganizationalStructureandGovernance 96
(a) BoardofTrustees/Directors 97
(b) OfficersoftheNonprofitOrganization 102
(c) BoardCommittees 103
(cid:2) (d) ExecutiveDirector/ChiefExecutiveOfficer 107 (cid:2)
(e) Staff 107
(f) Volunteers 109
(g) IndependentContractors 109
(h) Constituents 109
(i) FinanceFunction 110
(j) InterfaceofCFOwithCEO 122
(k) InterfaceofCFOwiththeBoard 122
4.3 AccountabilityStructure 122
(a) AccountabilityStructure 122
(b) EstablishinganAccountabilityPolicy 123
(c) ChecklistforAssigningResponsibility 124
(d) DesigninganAccountabilityStructure 126
(e) MonitoringanAccountabilityStructure 128
4.4 Ethics 129
(a) EthicsCheck 129
(b) MakingEthicalDecisions 130
(c) EthicalChallengesFacedbyNonprofits 131
(d) AnEffectiveEthicsandComplianceProgramGoes
BeyondaCodeofEthics/Conduct 133
4.5 Structure,Accountability,andEthicsinPractice 135
(cid:2)
(cid:2)
TrimSize:7inx10in Zietlow ftoc.tex V1-03/02/2018 3:37pm Pageviii
viii Contents
4.6 NewForms 137
4.7 Conclusion 138
Notes 140
Appendix 4A By-LawsoftheABCEducationalFoundation –
ACaliforniaNonprofitPublicBenefitCorporation 143
ArticleI.Name 143
ArticleII.Offices 143
Section1.ExecutiveOffice 143
Section2.OtherOffices 143
ArticleIII.PurposesandPowers 143
Section1.Purposes 143
Section2.Powers 144
Section3.DedicationofAssets 145
ArticleIV.MembershipCorporation 145
Section1.Membership 145
Section2.MembersCalledTrustees 145
Section3.PersonsAssociatedwiththeFoundation 146
Section4.LiabilityofTrustees 146
Articlev.Trustees 146
Section1.Powers 146
(cid:2) Section2.NumberandQualificationofTrustees 146 (cid:2)
Section3.MannerofSelectionofTrustees 146
Section4.TermofOffice 147
Section5.HonoraryTrustees 147
Section6.ResignationandRemovalofTrustees 147
Section7.Vacancies 147
Section8.RegularMeetings 147
Section9.SpecialMeetings 148
Section10.NoticeandPlaceofMeetings 148
Section11.ActionataMeeting:Quorum
andRequiredVote 148
Section12.ActionWithoutaMeeting:Mail-Written
Ballots 148
Section13.ValidationofDefectivelyCalledorNoticed
Meetings 149
Section14.Adjournment 149
Section15.FormofProxyorMail-WrittenBallot 149
Section16.FeesandCompensation 149
Section17.CouncilofPresidents 149
ArticleVI.StandingBoardsoftheFoundation 150
Section1.ExecutiveCommittee 150
Section2.BoardofDevelopment 152
(cid:2)
(cid:2)
TrimSize:7inx10in Zietlow ftoc.tex V1-03/02/2018 3:37pm Pageix
Contents ix
ArticleVII.Officers 153
Section1.ChairoftheBoard 153
Section2.President 153
Section3.President-Elect 153
Section4.VicePresident–Development 153
Section5.VicePresident–Finance 153
Section6.GeneralCounsel 154
Section7.RemovalandResignation 154
Section8.Vacancies 154
Section9.Compensation 154
ArticleVIII.Procedures 154
Section4.StandingOrders 154
Section5.IndemnificationofAgentsoftheCorporation:
LiabilityInsurance 154
Section6.SupportGroupPolicy 155
ArticleIX:Miscellaneous 155
Section1.InspectionofCorporateRecords 155
Section2.RepresentationofSharesofOther
Corporations 155
Section3.FiscalYear:Audit 155
(cid:2) ArticleX.AmendmentstoBy-Laws 155 (cid:2)
Notes 156
Appendix 4B SummaryofTrusteeResponsibilities
andQualifications 157
BoardofTrustees 157
SummaryofResponsibilities 157
Qualifications 157
BoardChair 158
SummaryofResponsibilities 158
Qualifications 158
ExecutiveDirector/ChiefExecutiveOfficer 158
SummaryofResponsibilities 158
Qualifications 159
Treasurer/ChiefFinancialOfficer 159
SummaryofResponsibilities 159
Qualifications 160
Secretary 160
SummaryofResponsibilities 160
Qualifications 160
NominatingCommittee 161
SummaryofResponsibilities 161
Qualifications 161
(cid:2)
(cid:2)
TrimSize:7inx10in Zietlow ftoc.tex V1-03/02/2018 3:37pm Pagex
x Contents
FinanceCommittee 161
SummaryofResponsibilities 161
Qualifications 162
Volunteers 162
Appendix 4C RecommendedGovernanceandEthicsResources 163
5 Developing Financial Policies 165
5.1 Introduction 165
(a) WhatIsPolicy? 165
(b) WhyArePoliciesRequired? 166
(c) ComplyingwithandEstablishingPolicyandProcedure 168
(d) WhoSetsPolicy? 169
(e) WheretoStart? 170
5.2 FinancialPolicies 176
(a) RolesofBoard,BoardTreasurer,andCEO/ED 176
(b) FinancialPolicies:PrescriptiveorRestrictive? 177
(c) CategoriesofFinancialPolicies 178
(d) AccountabilityandRegulatoryCompliancePolicies 179
(e) FinancialandFinancialManagementPolicies 182
(f) DataIntegrityPolicies 185
(cid:2) (cid:2)
5.3 PuttingPoliciesintoPlace 189
5.4 EstablishingProcedures 190
5.5 FinancialPoliciesandProceduresinPractice 191
5.6 AdditionalResources 193
Notes 193
Appendix 5A NonprofitFinancialPolicyExamplesontheInternet 195
Appendix 5B Good,Better,andBestMeasuresofTargetLiquidity 198
6 Understanding Financial Accounting Basics and Financial
Statements 201
6.1 Introduction 201
6.2 FinancialStatementUsersandUses 202
(a) WhatDoDonors’RepresentativesSay? 204
(b) ExternalandInternalFinancialStatements 205
(c) WhoDoestheAccounting? 205
(d) RolesoftheControllerandTreasurer 209
6.3 AccountingBasics 210
(a) FinancialStandardsandStandardsSetters 210
(b) FundAccountingVersusConsolidation 211
(c) CashBasisVersusAccrualBasisAccounting 212
(d) Audit,Review,orCompilation? 212
(cid:2)