(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. 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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)