Nonprofits: Focus on Fiscal Matters

By Jim Lovelace, Shareholder

Many nonprofit organizations have been unable to escape the effects of the current bear market. Although nonprofits are not typically market risk takers, the weakened market did not discriminate and all sectors are feeling the pain today.

With the recent economic downturn, portfolios have lost ground. Nonprofit organizations have had to tap unrestricted reserves – if available – to fund ongoing programs and operations. Consequently, just as the individual investor has become more cautious and wary, nonprofits are also rethinking their organizations’ investment strategies.

It is important to remember that although an organization is a nonprofit, it still needs to run its operations like a business. Although exempt from taxation, nonprofits should follow generally accepted accounting principles, including reporting investment portfolios at fair value. This means recognizing both realized and unrealized gains and losses.

With regard to investments and portfolio management, a nonprofit should have written policies and procedures. Its fiduciaries need to understand where investment dollars come from and must maintain the principal in accordance with donors’ restrictions.

One of the board’s key responsibilities is to ensure efficient, fiscally sound operations. The board should not only establish policy, but also develop an organizational structure to accomplish the organization’s mission and purpose; and set short-term and long-term goals. The board is primarily responsible for oversight and the big picture – not necessarily day-to-day operations.

It is also beneficial for the board to include at least one member with a financial background to serve in an advisory capacity on risk management/risk avoidance issues. Previously, smaller nonprofits may have had difficulty attracting such advisors. But there may well be an increased willingness and interest in working with smaller nonprofit organizations to develop and oversee a sound fiscal strategy.

In light of current investment market turmoil, it may be wise to revisit and review the organization’s investment objectives and portfolio allocation. For example, an organization might consider placing money in more liquid investments such as overnight money market funds, time deposits, and short-term fixed income investments.

Historically these strategies have helped nonprofit organizations weather the uncertainties of past volatile markets while maintaining the integrity of—and return on—their investments.