We sat down with one of our not-for-profit leaders, Allison Harrell, to review some frequently asked questions by not-for-profit organizations.
Question: What tips or direction can you give organizations on how to better prepare for the future? We are concerned about losing a leader for the short or long term due to COVID.
Allison: The biggest thing we’ve heard during the pandemic is that CFOs were getting COVID. If they can’t work for a few weeks, how does that affect the operations? It is important to have a contingency plan or a Business Continuity Plan (BCP) if a key member of leadership can’t work for weeks, months, etc., specifically the CFO for covering finances (payroll, bills, etc.).
Question: How do we add something like a pandemic into our contingency plan?
Allison: Take notes about how things were handled during COVID or new policies that were put in place so that the history is recorded for the future. Take time to write it down now. It will be much more difficult when this is over to think back to your initial steps from 2020. If you don’t have a software for continuity planning, we can help!
Question: What would you say is the best rule of thumb or best practice for establishing or continuing to build assets during the current environment?
- You need to look at your organization’s liquidity when setting up reserves to make sure those are liquid.
- What are the cash and investments being held?
- A good rule of thumb is to have an operating reserve of approximately six months of expenses. Reserves should be an action of the board. If you are spending reserves in the current year, that is considered overspending of your budget and must be done through board action. Look at the organizations’ 5-year plan. What do those look like? Do you have reserves set aside for those reasons?
Question: Is a 5-year plan realistic in this environment?
- Yes, a 5-year plan is still realistic and important to have, but a 3-year plan is also important. A 3-year plan includes things more in the immediate future (registration charges – may need to increase).
- A 5-year plan is more for capital projects, huge changes in programs, if you want to establish a for-profit subsidiary in place, build a new building, etc.
New CARES Act FAQs
Question: What should we know about the Paycheck Protection Program (PPP), the Employee Retention Credit, and the Family First Coronavirus Act?
Allison: The new Act was signed in December allows 501 c(6) organizations to be eligible for the PPP. Learn more about the new Act and how it affects not-for-profits here.
Question: There are organizations saying that they are not applying for the new round of PPP. What is your take on this?
Allison: I have been recommending people at least evaluate the Employee Retention Credit. This is up to $5,000 per employee as long as they are continuing to be paid and their ability to work has been diminished.
Question: With the new Act, 501c(6)s are eligible for the new PPP. Does the entire loan get repaid or just a portion?
Allison: THF has been helping clients apply for forgiveness for the first round. First round entire loan amounts have been forgiven, and I’m not anticipating that changing with 2021 round. They did put additional parameters for the new Act. As it relates to 501c(6)s, the lobbying activity may not comprise more than 15% of overall revenue. If it’s less than 15%, it can’t be more than $1 million for the most recent tax year.
Question: Do the rules allow the use of the funds for contracted employees?
Allison: No, it’s based upon W2 wages. 1099 contractors were able to apply for a PPP loan by themselves based on their tax return and activity. Read more about the new Act here.
Question: Are you finding that some banks have not yet implemented the forgiveness application?
Allison: We are finding that a lot of the big banks have not opened them yet, but some local banks have already started.
General Questions FAQs
Question: How do we compare to other associations as far as percentage of expenses in general, administrative, and our program overall?
Allison: Each association has different primary purposes (lobbying, education, etc.) so this question doesn’t have a real answer to easily compare.
Question: How much should we have in reserves?
Allison: THF works with a lot of associations and can provide best practices. However, there is no magic number. You can look at future plans with capital improvements and expansions of programs – these can help determine this number.
Question: How often should an association be audited?
Allison: As an auditor, we would recommend every year, but that may not be the case for every organization. You really need to talk to the board or who you are submitting the audit to and ask what they are looking to get out of it.
In short, a good practice for a large association is every year. You want up-to-date audited financial statements for the board to make decisions. If your goal is really to get a check-up on internal controls, an audit may not be the best. An internal control assessment may be more appropriate. You may not need an audit every year but may consider a review, then the audit every third year. With a review, you get a set of financial statements, very similar to an audit, but without getting an in-depth look at the internal controls. For more information on audits vs. reviews. vs. internal control assessments, check out our most recent update below.
Question: What percentage of funds should go to salaries?
Allison: It depends – we do compensation studies for organizations we serve and other data we have access to. Even though we have a lot of data, it can be uncertain.
Question: Do you have any tips on communication of financials to the board?
Allison: You should understand the board expectations for communication and try to follow that. We offer board training on reading financials and how to understand them. We notice that this helps the board in the future analyze the statements.