Streetsmart Financial Basics for Nonprofit Managers

Thomas A. McLaughlin

• Publisher: Wiley
• Year: 2016
• ISBN:
  9781119061328
• Edition: 4
• Topic: Business
• Subtopic: Nonprofit Organizations & Charities
• Index: Business

The complete guide to the basics of nonprofit financial management

Let's be honest. Most books about financial management are densely written, heavy on jargon, and light on practicality. Expert financial consultant and author Tom McLaughlin takes a different approach with his fourth edition of Streetsmart Financial Basics for Nonprofit Managers. This comprehensive guide provides effective, easy-to-use tips, tools, resources, and analyses.

The light, humorous tone in Streetsmart Financial Basics for Nonprofit Managers makes it an accessible resource for nonprofit executives, board members, students, and those new to the field. This book forgoes useless, pretentious verbiage in order to outline real-world strategies that work. This edition includes:

• New insights, updates, vignettes, case studies, and examples to deal with the implications of nonprofit financial management
• An examination of nonprofit business models in relation to growing demands from the government and other funders
• How to construct business plans for virtually any nonprofit entity
• Customizable resources—including financial worksheets, forms, and Excel templates to help nonprofit managers complete their day to day assignments
• A guided tour through common aspects of nonprofit management, such as financial analysis, accounting, and operations

Practical and informative, Streetsmart Financial Basics for Nonprofit Managers is the go-to financial management reference for nonprofit managers, boards of directors, and funders.

Part One
Analysis

Chapter 1
Structure of Nonprofit Organizations

Corporations

One of the distinguishing features of our legal and financial systems is that they have found a way to make something that no one can see or touch seem real—and therefore, it has become real. The high point of this accomplishment is that perfectly intelligent, normal people can find themselves debating the virtues of the behavior of this thing and even changing their own behaviors and choices because of its existence.

We are talking, of course, about the corporation. Even the word itself sounds substantial, and when various names or other identifiers get put in front of it, we accept the results easily. But the idea of a corporation is nothing more than a construct that gains substance and credibility in financial matters largely because we need it to do so. Our acceptance of the metaphor of a corporate structure is tangible evidence that we human beings yearn for predictability and consistency even when the entity itself exists only in our minds and in the ways that a corporate structure is said to behave.

We say all this because whatever corporate structures lack in tangible qualities they more than make up for via their widely accepted ways of indicating financial boundaries. As you will see later in this book, those boundaries can take on the nearly concrete feel of something that can seem to be virtually a physical presence.

The highest level of nonprofit management is the corporation that “owns” or runs the programs. The corporation is a statutory entity established by the legally sanctioned actions of one or more individuals. As a legally approved entity separate from its constituent individuals, the corporation has its own continuing existence. In legal theory, corporations are treated as distinct entities like individual people, and corporations have their own collection of responsibilities, liabilities, and powers.

Why a corporation? The answer is disarmingly simple: because it's easier for the rest of us. Corporations can be mentioned in the same legal breath as the individuals who use their services, work in them, or simply exist in the same state with them. All are on the same legal footing, in that respect. The complicated and narrower answer to the question has to do with a variety of practical considerations. For instance, revenue source regulations and political realities often nudge nonprofits in the direction of a specific type of organizational structure. Programs such as battered women's shelters almost of necessity start out as single-service corporations, while older and more established groups may have developed a multicorporate structure.

There are also liability laws to consider when operating different types of businesses. Nonprofit public charities traditionally have been granted generous protection from state liability laws, although that tendency is beginning to change. It's a tradition growing out of English common law that has been codified in many places around the country. Often there will be either an explicit limitation on suits or a prohibition altogether on the grounds that entities funded by the public at large ought not to be siphoning resources into private hands via lawsuits. Liability considerations alone are not normally strong enough to determine a corporate structure, but the more favorable liability climate for public charities is clear.

Like most for-profit businesses, nonprofit organizations must have a legally acceptable structure within which to operate. Nonprofit public charities are officially considered 501(c)(3) corporations. There are literally dozens of other structural choices in the IRS list of tax-exempt entity types, but this one is easily the best known. The official IRS list of these choices is reproduced in Exhibit 1.1 from IRS Publication 577.

This bloodless list of unsentimental choices obscures a central point. Corporate structures in the nonprofit world are chosen for many reasons, the primary ones being risk management, tax treatment, and the best available corporate fit for carrying out missions. The same kind of reasoning about structural choice takes place in for-profit entities. With such a large number of potential structural options, entrepreneurs—in the nonprofit sector or outside of it—would do well to mimic the guiding principle of good architecture: form follows function. Put simply, be as clear as one can possibly be in determining what one wishes to accomplish and then give some serious thought to the best structural choice available.

This area of structural choice for public-serving entities has seen unprecedented innovation recently. One of the ...