Whether it’s inflation, trouble finding staff members in a tight labor market, or cybersecurity threats, nonprofit leaders have a lot to worry about. If making financial forecasts is harder than usual, consider taking measures to reinforce your not-for-profit’s position, regardless of the challenges.

Keep an eye on cash

Your organization may still be recovering after the pandemic. Or perhaps tax law changes have led to reduced donations from individuals. The fact is, financial reserves have taken a hit across all types of nonprofits. And, for some organizations, fundraising is falling short of expectations. These factors make effective cash flow management essential.

Nonprofits should prepare cash flow projections quarterly, monthly, and even weekly. A good place to start is during the budget process. When will the cash for the budgeted item arrive or be spent? To avoid being caught off guard, review reports on funding sources regularly — particularly those that have dropped significantly.

Prioritize UBIT compliance

Compliance with unrelated business income tax (UBIT) rules is essential to avoid costly issues later. Since the Tax Cuts and Jobs Act was passed, nonprofits must calculate UBIT separately for each unrelated business. Any activity that produces a loss cannot be used in reducing the current year total UBIT. The loss will be carried forward to offset future UBIT for that specific activity only. 

If your organization has multiple unrelated trades or businesses, you must allocate deductions among them using a “reasonable basis” standard. Certain types of investments can be treated as single trades or businesses.

Work through potential scenarios

If it isn’t already part of your process, your finance committee (and appropriate staff) should develop different financial scenarios. Assemble budgets for multiple revenue situations your organization could face — typically, best case, worst case, and somewhere in between. Ask how your nonprofit could cover the projected expenses in each situation.

You also should examine your nonprofit’s recent fiscal year’s financial performance for negative indicators by comparing metrics with previous years or other benchmarks. Because 2020 and 2021 were “unusual” years, you may want to reach back further when doing the analysis. Review conditions that were present in the years your nonprofit seemed to have struggled and determine whether they still threaten your organization and could be a problem in the future.

Run efficiently

Regardless of your organization’s current financial position, you should always try to operate efficiently, which, in addition to the previous three suggestions, means minimizing expenses and monitoring budgets closely.

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