Do you have some nonprofit financial questions? We have written up the following Financial FAQ based on the most common nonprofit financial questions we receive.
We review proposals sent to us from all over the world. Our applicants actually have very little in common. Some are trying to bring healthcare to those who would not have it. Others are fighting for social justice in their communities. Some just want to make a documentary about one of their heroes. Still others work to save our planet from the pending disasters caused by climate change. While their work is very different, the one thing they have in common is that they all need more money to fully realize their goals and they have come back to us with questions and to have their proposals reviewed.
Some of our applicants are experts in finance and accounting. Many have submitted countless successful grant proposals and fully understand the process. Others are making their first foray into philanthropy and have basic nonprofit financial questions. Regardless of the proposal we are reviewing, we have found that our applicants almost always have questions about nonprofit finances. Note that this post was originally drafted by our managing director Margaret Chapman before it was slightly edited by our founder Dave Moss before being approved by our comptroller Stephanie Skryzowski of 100 Degrees Consulting.
Nonprofit Financial Questions for Donors
Q1: Where can I learn about how an organization spends their money?
There are several places to go if you’re interested in learning more about who funds different organizations and how those organizations spend their money. Larger nonprofits will often share their financial reports on their website including their most recent 990, financial audits and even regular balance sheets. A 990 is basically a nonprofit’s tax return. All registered nonprofits are required to file a 990 every year so at a minimum you can search the IRS databases for these documents. The best way to do so is through Guidestar (Guidestar has merged with Foundation Center and now called Candid), a resource that aggregates information about nonprofits including their 990s, board members, programmatic details, and other pertinent information. With a free account you can view 990s for any of the thousands and thousands of nonprofits registered to operate in the United States. 990s are somewhat dense documents but they are pretty straightforward, even a layperson can learn a lot by reading one carefully.
Check out Unfunded List’s own profile on Guidestar where we are currently ranked Silver.
Q2: Are all contributions tax deductible?
The short answer is no. First, for a contribution to be tax deductible it must be made to a registered 501(c)(3) organization. You can research on Guidestar or another site ahead of time if you are unsure if the group you are donating to is recognized by the IRS as a nonprofit. Once you have confirmed it is a registered nonprofit, ask yourself, “did you receive a good or service in return for your contribution?” This is often the case with tickets to events or auction items. The organization should send you some kind of documentation noting what portion of your contribution was tax deductible. These are often sent immediately after an online or credit card contribution, or some nonprofits send annual statements for those who contribute via check or other methods. Under the CARES Act there are new rules allowing all tax filers to deduct $300 directly in donations for 2020 (even if they do not itemize).
Contributions to Unfunded List are 100% tax deductible.
Nonprofit Financial Questions for Your Organization
Q3: What is “overhead”?
Nonprofit leaders may often hear of overhead referenced in grant applications or when asking for donations. These are also known as indirect costs or administrative expenses. Generally, these are costs that are not related to a specific project or program but are used across the organization. Some examples include rent, utilities, and office supplies. Some staff are also considered overhead when they are working on finance or administrative tasks. Since these are general to the whole organization, they are not usually allowable as direct expenses on grants but are charged as a percentage.
This leads to a frustrating reality for many organizations that rely on restricted grants. They have enough money for their program but they are not allowed to spend that money on certain necessary (yes, overhead and administration are necessary) elements. And while it is true that many foundations are shifting to providing more general operations funding rather than restricted dollars, the vast majority of large grants from foundations are restricted. If your program has considerable indirect costs you will need to make sure your grant portfolio includes enough unrestricted funding to cover your expenses.
Q4: What is restricted funding? How is this different from unrestricted funding?
Grant funds and donations may be restricted in their use in three main ways – time, project and permanently. Time restricted funds are set aside for a specific period – usually a year. For example, an organization receives a grant that covers three years for $150,000 with $50,000 budgeted for each year. Only $50,000 would be available to spend in year one with the additional $50,000 available each subsequent year.
The other method of restriction is by project. Unlike general operating funds, some donations or grants may be intended to be used for a specific project. For example, a funder may require that funds only be used for a food pantry, or the development of an app. These funds would not be allowable to use towards any other expenses not related to those programs.
Finally, some organizations may have permanently restricted funds. These are traditionally endowments where the organization is meant to use the interest or returns and not the principal.
Unrestricted funding can be spent on anything, as long as it’s in support of your charitable mission. Unlike foundation grants, most individual donations are unrestricted.
Q5: What is accrual versus cash accounting?
The main difference between accrual and cash accounting is timing – when are items booked to the accounts. For expenses, accrual books the expense at the time it was incurred while cash shows it at the time that it is paid. For income, accrual accounting includes the donation or grant at the time it is pledged or invoiced. A cash basis would show the income when it is deposited. Most organizations opt to use accrual. While a cash basis may be somewhat simpler, accrual provides a more accurate picture of the financial health of the group.
Particularly when it comes to grants, but also individual donations, you are almost certainly going to know that the donation is coming before you receive the check. Accrual accounting allows you to account for pledges to your organization as well as the checks and donations that have already hit your account.
Q6: How do I write a budget?
Very carefully! Annual budgets can have several moving parts and can also tell the story of the organization’s programs, growth and impact. Start with your overall vision and strategy and build from there. Here are a few key steps:
Start with your goals: what do you want to do during the year?
– Map out the activities needed to achieve those goals.
– Create a monthly calendar that itemizes the activities you anticipate for the year.
(When are you going to host that gala? When is the large conference going to take place?)
– Identify the staffing you will need to achieve those goals and map out your staffing plan for the year; full time, part time, interns, consultants
– Identify your fixed or overhead costs; rent, utilities, internet, insurance, etc.
Using your favorite spreadsheet program or accounting software, enter the costs associated with the above in your budget template. Once you have your ideal expenses listed out, map out the income you will need to raise.
Break out funding by:
Foundation grants
Corporate Sponsorships/grants
Government funding
Large Dollar Donors
Small Dollar Donors
Earned Revenue (This could be split into additional categories; sales, events, service fees, etc)
If the income cannot match or exceed the expenses, you may need to rethink some of the goals for the year or have contingency plans. Often organizations have a baseline budget and then concept budgets for new projects that they will undertake if funding becomes available. Here at Unfunded List, for our first few years we were mostly guessing when it came to revenue projects so we designed ‘shoe string,’ ‘expected,’ and ‘windfall’ budgets to prepare for any contingency.
Q7: What financial information do I need to apply for grants?
While each grant application is different, there are basics that most funders will look for in a grant application. It is also important to include some of these details in your application even if they are not specifically requested, especially budget expectations. To repeat that, we are saying that you should include financial info even if the application does not ask for a budget.
At a basic level, a potential grantor likely will request a budget (see above for guidance on budgeting). Some will request both an organizational budget and a project budget. The organizational one covers all aspects of managing all of the programs, even those not being funded with this grant. A project budget is specific to the grant being requested.
For example, an organization has a patient care program, a research program and a tech development program all aimed at supporting the cancer community. Taken as a whole (and combined with the dreaded overhead costs), these make up the organization’s budget. However, they may only be requesting funding for tech development from a specific funder and also include the expenses anticipated for that project.
In addition to a budget, most grants will request some kind of financial statements. Federal grants will require audits – and they will expect annual federal audits if awarded. For others, a financial statement review by an independent CPA will suffice. Be sure to incorporate this expense into your overall budget. Despite requiring audits to apply, funders will almost never allow their funding to go towards paying for an audit. Yes, that is frustrating.
For funders that do not require full audits, including a reconciled Profit & Loss Statement and Balance Sheet are likely the least that will be accepted. Often, if a funder requires an independent audit on the proposal they will accept a Profit & Loss instead if you ask them and explain why you do not yet have a completed audit.
Depending on your revenue totals and the state where you are incorporated, you may be legally required to conduct an audit.
Q8: How do I acknowledge my donors?
Acknowledging donors is often legally required and always a vital part of your donor stewardship program. The most important step in fundraising from individuals is thanking them for their gift. It is much easier to get a second donation than it is to get a first and that starts with a thoughtful and gracious thank you letter of acknowledgement.
Depending on the formation of your organization you may be legally required to acknowledge the gift. If your donor is planning to deduct their contribution from their taxes they will need a receipt from you acknowledging the amount and date of the gift and proving your tax exemption. A major advantage to many modern donation programs is that the platform will take care of the tax receipt aspect automatically but this does not absolve you of your responsibility (and the opportunity) to thank your donors. Here is what our founder Dave Moss has to say about thanking donors:
“A thank you email works in many cases. A handwritten letter is great. Everyone loves receiving a handwritten letter. I’ve had more than one donor make a second gift RIGHT AWAY after receiving a handwritten thank you letter from me. Beyond the strategy of it, it makes me feel good. I have a lot of calls to make, emails to write, proposals to read, and other things to do every week. Spending some time on gratitude is a healthy and often productive exercise.”
Q9: I had to cancel an in-person event because of COVID-19. Do I need to refund all of my donors?
Like many of the nonprofits facing fundraising challenges during the COVID-19 crisis, Unfunded List has had to cancel our upcoming events including two fundraisers that would have meant critical operating funds. Many nonprofit organizations make a large share or even a majority of revenue from events. Organizations do have a few options to help cut the losses and there are some new things to consider as a result of corporate response and the recently passed CARES Act.
An organization can:
A. Offer refunds – Check the terms and conditions of the original sale very carefully. Unless specifically stated in the language in buying the event ticket that there are absolutely no refunds, you should offer to refund the ticket price. If you did say absolutely no refunds in the terms, then you are within your rights to refuse refunds.
If the ticket buyer wants a refund they might contest your refusal with their credit card company and most will have up to a year to do so. You want to avoid chargebacks and credit card disputes, Make sure to consider the relationship as well. Is this a long term supporter asking for a refund? A more generous approach now might be better for you long term. If you do refuse to offer a refund, make sure you have thought this through. As a general rule, we recommend giving the refund if the donor asks for one.
Offering refunds, or refusing to offer them, isn’t the only option you have.
You can also:
B. Reschedule if possible and offer to apply their ticket to a future event. If you are able to reschedule the event (or equivalent) for a later date, offer to extend their ticket for use at that time. Eventbrite makes refunding simple (it includes fees) and is offering gift cards for future events with additional no fees. Rental websites like VRBO and AirBNB have changed their refund policies to make canceling easier. In April of 2020, we had to cancel a cottage we booked and got our deposit back in full. We were lucky as many venues are refusing to offer refunds for COVID related cancellations.
C. Suggest that the purchased ticket becomes a tax deductible donation to the organization. Under the CARES Act there are new rules allowing all tax filers to deduct $300 directly in donations for 2020 (even if they don’t itemize). So, you can offer ticket holders the opportunity to donate the cost of their ticket to general operating funds of the organization and receive a tax receipt at that time for the full amount. That tax receipt would need to make it clear where the funds were going and that if there were another event in the future, the donor would have to purchase additional tickets. Many organizations these days rely on automatic tax receipts from their online donations processor. These would need to be custom made tax receipts. Consult your financial advisor for specific language.
When encouraging donors to defer their ticket to a rescheduled event or to consider making it an outright donation remember that you are making an appeal and use strong fundraising language. If they switch to a gift card rather than ask for a refund that might mean the lights stay on for your organization, don’t be afraid to tell them about the specific needs you are facing when you make this appeal and make sure they know how you’ll be using their donation. Lastly, make sure to thank them.
Whatever issue you are working on you are likely to come up with some nonprofit financial questions along the way. Unfunded List’s Evaluation Committee is replete with talented evaluators who will pay close attention to the financial section of your submission and do our best to answer your questions about nonprofit finances. If this kind of feedback is of particular interest to you, make sure to let us know when you submit your proposal. If you have a strong financial background and want to provide some tips to our applicants, please consider joining our committee.
Disclaimer: This, like all financial advice, should be interpreted and applied to your organization as it fits. Please consult your accountant or tax professional if you have questions about deductibility of donations, restrictions of your funds, or other nonprofit financial questions. Unfunded List is not a tax or accounting advisor.
