Spotting the Signals: 4 Internal Red Flags Nonprofits Shouldn’t Ignore

Many nonprofit leaders are nervously watching macroeconomic signs, such as inflation, rising interest rates, and the possibility of a recession, to predict how their organization will fare in the coming months and years. But threats to your nonprofit’s well-being may be closer than you think. Whether you’re an executive or board member, make sure you’re looking out for these four nonprofit internal red flags:

1. Unexplained budget discrepancies

After the board has approved a budget, it should be monitored for variances. Although some variances are expected, your staff should be able to provide reasonable explanations, such as funding changes or macroeconomic factors, for significant discrepancies. Where necessary, work to mitigate negative variances by, for example, cutting expenses.

In addition, watch out for overspending in one program funded by another, dipping into operational reserves, or unplanned borrowing. These, plus the need to raid your nonprofit’s endowment for funding, may mark the beginning of a financially unsustainable cycle.

2. Down-trending donations

Let’s say your nonprofit has been receiving fewer and smaller donations lately. Then you start hearing from long-standing supporters that they’re losing confidence in your organization. Investigate immediately and ask supporters what they’re seeing or hearing that prompts their concerns.

Also, note when development staff hits up major donors outside of the usual fundraising cycle. These activities could mean your nonprofit is scrambling for cash.

3. Unreliable financials

If your financial statements are untimely and inconsistent or aren’t prepared using U.S. Generally Accepted Accounting Principles, you could be heading for trouble. Poor financial statements can lead to poor decision-making and undermine your nonprofit’s reputation. They also can make it difficult to obtain funding or financing.

Insist on professionally prepared statements as well as annual audits. Members of your organization’s audit committee should communicate directly with auditors before and during the process, and all board members should have the opportunity to review and question the audit report.

4. Leadership out of line

Even the most experienced and knowledgeable nonprofit executive director shouldn’t have absolute power. Your board needs to step in if an executive tries to ignore expense limits or breaks other rules of good fiscal management. The board also should question any executive attempting to choose a new auditor or making strategic decisions without board input.

Questions

If you spot any of these nonprofit internal red flags, don’t ignore them. Contact us if your nonprofit needs an audit or financial statement review.

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