Brett Beemer of SeatonHill Partners on Answers That Count with Charles Musgrove:
Sharing vital information a CFO needs to know for nonprofit organizations
Charles: Hello, I am Charles Musgrove, host of the Answers That Count podcast. You know what we do, we to bring information to help you run your business, to operate your business, and today is going to be no exception. We have got great content for you today but before we get started do me a favor, hit the Subscribe button, also hit the like button and leave us some comments. We are going to have great content on today’s show so leave us some comments, questions and we will get back to you on those comments that you leave us, or questions that you leave us. So, thank you for doing that. I appreciate you participating and subscribing. And today we have Brett Beemer. He is joining us. He is a nonprofit expert, and he is a partner with SeatonHill. Brett, thank you for joining us.
Brett: Thank you, Charles. I’m looking forward to our time together.
Charles: This is going to be a great show and SeatonHill, I know a lot of you heard of who SeatonHill is, well SeatonHill Partners, they are actually sponsoring today's show. Also, SeatonHill Partners, they are the fastest-growing strategic CFO firms in the nation. Yea, they are nationwide now. So, Brett, how many states or cities are they located in now?
Brett: We are currently in seventeen cities and have fifty partners and by the end of the year we expect to have over one hundred.
Brett: Well one, I have worked as a board member on a lot of smaller nonprofits. Some of them are churches. I've worked as treasurer for a lot of churches, and I've worked on some other boards as a member. I’ve also worked on nonprofits as a CFO staff member, on 501(c)3’s and 501(c)6 which are associations. There are a lot of the rules and problems for nonprofits. There are twenty-six different types of nonprofits out there.
Charles: There is twenty-six different types. So, you know when people talk about nonprofits you always hear them throw out the 501(c)3. So, associations, those are like trade associations and so those are 501(c)6, right?
Charles: So, just for the audience’s general knowledge, what is a foundation? Give us an example of a foundation and what number is that.
Brett: I wish I knew the number because I don't have all 26 numbers memorized, but what I do know is that a college foundation is separate from some of your other foundations and we will deal with some of the issues related to foundations later because they do have some unique issues and problems that they have to deal with and they will come up in some of the examples. We will also be looking at Credit Unions as a nonprofit, there are two types of Credit Unions. One is authorized by the state versus a federal credit union is two of the different numbers. One a lot of listeners are familiar with is your nonprofit universities. They have their own number. So, as you go through it there are a lot of different nonprofits out there that we do not even think of as a nonprofit.
Charles: So, the nonprofit status or classification is really done by the Internal Revenue Service. They are the ones that give you kind of the stamp of approval, yes, you are qualified, your application is approved for this type of nonprofit status, is that right?
Brett: That's correct. You do have to file with the IRS and there is a specific form and a lot of backup that goes into it. Including, just like for-profit organizations who the organizer is, what your original bylaws are, who the board is if you have a board already. A lot of the processes are the same but there is a specific form you must file with the IRS. Most states require that you also file with them because if you are a non-profit organization, you to register to operate in most states just as a for-profit at the state level. You must be consistent across all your filings. You need to make sure you are following the state regulations where you are registered to be a non-profit with the IRS.
Charles: Right so what is happening in that situation is you get the advantage of qualifying yourself as a non-profit, so you get tax advantages with that. That is one of the reasons that businesses apply for that tax status is to have their activity related to their nonprofit business not taxed. So as part of that there is also some more, I guess you would say regulatory, or compliance requirements related to the nonprofit so that the IRA what they look at on their tax returns that they require for the nonprofits is it typically can be a little more rigorous where they are looking for more disclosure type information.
Brett: That is true and it is funny because I just read an article on this the other day that was talking about when nonprofits first started there was only two pages to the return. Now it is like 12 pages and they ask questions on everything under the sun, and they ask what type it is. So, it has become very complicated and yet a mistake on that filing with a question being answered incorrectly or without it being documented on why the answer is not what is expected could cost a nonprofit their nonprofit status. Where tax filings for for-profit had been four pages and moved five pages. Now they have other schedules depending on what they are doing but the actual initial return is now up to five pages. I think you cannot get out of a nonprofit for under twelve pages. So, that is a huge difference.
Charles: That is a huge difference. And a lot of times from what I have seen on those non-profit tax returns, it is the disclosure. The numbers are the same and they are looking for the same basic generic information for the tax return but there is a lot of disclosure requirements that are more rigorous on these non-profit returns. And again, the purpose of that is to make sure that they retain, that they are in business, they are collecting money based on what its application was when they were originally granted nonprofit status.
Brett: That is correct and to make sure that they are not doing transactions that might have a taxable effect on the donors because there are questions on donations and what those donations are and trying to see if there are gains in those donations. They also ask detailed questions about people's salary and their compensation to make sure that the nonprofit is not trying to make a profit for an individual. It is supposed to be working on the purpose for what it was created. And then there are questions that are specific to different types of activities because there are some nonprofits that are politically active. Well, donations for that politically active stuff are usually taxable. They also want to know how much a non-profit is doing business on the for-profit side. Nowadays there are a lot of nonprofits that have side businesses in them that are fully taxable, even though it is under the head of the nonprofit and so there are questions to make sure you are not doing something that is taxable and just because you are a nonprofit you're not paying the taxes. They want to make sure if it is taxable they are collecting the taxes that are owed.
Charles: And this discussion that we have had so far really emphasizes that a non-profit although it may sound innocent and noncomplicated, these nonprofits entities, a lot of times have reporting requirements and actual requirements that the business has to comply with they so can be more complex than a for-profit business. So, it really emphasizes the need to make sure that you have qualified professionals as part of your management team as well as the board members, and that that kind of leads into another important topic I wanted to talk with you about Brett, that is the fiduciary responsibility of the board members. The board plays an important part of most nonprofits. So, let us kind of dive into that subject of the fiduciary responsibilities of the board members.
Brett: It is a topic that I love talking about because it is something that quite often no one in the nonprofit world actually understands, the fiduciary responsibility that the Board of Directors (“board”) has. Sometimes people get their friends and people that they think are well known in the business community to join their board, but the reality is there have been a lot of cases over the last 5-6 years where stakeholders have sued boards. The board may not even realize who/what are the stakeholders. These stakeholders sue the board for not doing their job of overlooking and making sure the organization is meeting its’ mission. We'll talk a lot about what the jobs are later. The board fiduciary responsibility is making sure the organization is doing what it is supposed to be doing, that the board members are truly independent of the organization, and that they are working for the good of the nonprofit mission, not necessarily the good of someone who works for the nonprofit.
Charles: Now I think that is so true you really do not want to have the situation where you got a long list of board members that they're part of the board just so that they get their name on the letterhead and are really not active in discharging their fiduciary responsibility. I think that is a bad situation, that's a bad scenario but it happens. I've seen it happen in many nonprofit organizations and it really can spell disaster for that organization if those board members are not taking their responsibilities seriously.
Brett: Well, that is true and we have seen some instances as I said where boards have lost the lawsuit. Boards hope that their insurance covers it but in a lot of cases they think we are a small organization we only need a million dollars of coverage (I have seen coverage as low as $5,000). Well, the board members are listed under that lawsuit, if they are losing five or ten million dollars, a lot of nonprofits do not have five or ten million dollars to cover the losses, so the plaintiffs are going after board member's deep pockets to collect the five or ten million dollars and some board members do not have a lot of money, but some do. I would hate to be sitting there to get my name on the letterhead to find out that my Law Firm is now coughing 3 million dollars because we weren't actively involved.
Charles: What do you look at to see if the board consists of the right people. And the right people are not just based on personality, but it is based on the skillset, the training, the experience, the education of the members. So, what are some of the top three or four people or professions or types of people that you want to see on that board?
Brett: Well first and foremost if you can find someone who have an interest in what you are doing otherwise, they sometimes want to be paid to be on the board. Attorneys are invaluable on boards because the one thing an attorney will do will be provide independent thinking. Board members really need to be independent of the staff. An attorney will provide that independent thought process also provide answers to basic legal questions and save you some money on attorney fees. If you find one with interest that is the same as yours, you got someone who is probably going to also help give to the organization. Attorneys are invaluable. It is just the matter of finding the right attorney for your board but any board I have ever worked on could always benefit from having an attorney.
Charles: I totally agree with that. So, what would be the next profession that you want on there?
Brett: The next one is some sort of accountant, CPA or business professional who can read financial statements and understand how to deal with auditors. One of the biggest areas where nonprofit boards recently are having problems with their fiduciary duty is not having an audit committee, not necessarily having a finance committee, not looking at making sure that the finances are kept correctly and independently. They get told how they are doing by their staff and are good to go does not work because a lot of issues that show up that the staff will not ever talk about. And you need someone who can talk with the auditors understand the auditors to understand the financial system and make sure you have things in place.
Charles: Yea, I totally agree with that and of course, I am a CPA so I am being biased to say that you need to have a CPA on that board, but I've seen situations where that level of profession was not on the board, and it's really a gap that oftentimes is hard to overcome. What are some of the basic duties that that board should undertake? What are the responsibilities that it has kind of first and foremost?
Brett: First and foremost, and we will go back to that CPA, you need to have an audit committee if they have an audit, and we should have an audit of some sort even if they're small You will usually find a CPA firm that'll do the audit at a cost they can afford because if it's small they don't have to do a lot of testing. So, there is not a whole lot of risk involved. They need to have someone that is a CPA or an accountant who can understand what is going on with the audit committee and make sure that they are in compliance. You also need to be responsible for hiring the senior executive. Too often nonprofit boards feel like they are being appointed by the senior executive to the board and feel like they are beholden to that senior executive. But, It’s the exact opposite where the board is really the manager for the senior executive. So even if the senior executive is wanting to get you in the pipeline to get on the board, once you are on the board you need to turn from "I'm a friend of that person," to, "I'm the manager of that person," making sure they are overseeing the senior executive. More Boards have run into problems by not doing that than you can imagine. it just happens over and over and over again where the senior executive is looking like they are the one in charge and they are not. So, all policies should be board approved they should not be co approved or senior executive director approved. An executive director should be the one bringing them to the board so they should agree with what is being presented. But it should not be made a policy until the board goes, so yes, we agree with this. And we believe that this is fulfilling our mission. And of course, the other most important thing that boards must do, which sometimes executive directors do not care about is the long-term fulfillment of its mission. Board needs to try and get the mission fulfilled and if it cannot be fulfilled maintains itself as an ongoing mission. Sometimes a senior executive is looking to leave in two or three years, and they do not care where the organization is in 5 years. They are looking at how much money can I get out of the organization before I retire or go on. The board should be going, you know our job is to feed the homeless in the community, how can we make that something that always is happening, that the people we are trying to serve are able to eat.
Charles: Yea, exactly right, and they also, that board has responsibilities to as you said understand the finances, what has happened, and also approve what's budgeted for the future. So, it connects with what is happening, the functions and the responsibilities of the nonprofit as well as how our money is being allocated to be spent and received in the future all that is the responsibility of that board for the nonprofit. So, you know you went into some of the items I will call strategic planning. Is there a role of the board for strategic planning?
Brett: Without question, I mean in fact the board should be approving the organizations strategic plan. There should be no strategic plan that is put in place in a nonprofit that the board has not said yes, this is what you are about. The board is responsible really for trying to make sure that the organization is fulfilling its goal and its mission. And if at some point the mission needs to change then it is the board's job to change that mission. And sometimes it happens, like with the March of Dimes, it was originally its original Mission was to get rid of polio, well polio has been eliminated. The March of Dimes, they did not go away, they just changed their mission to solve other issues in the medical field and they have continued with working that area very successfully. So, the long-term strategic goals are always the board’s responsibility.
Charles: Right so, not familiar with the March of Dimes scenario, what may be required is if the mission changes or the strategy changes enough they have to go back to the governing document or that application to see what was filed with the IRS for their original approval as a non-profit to see if that needs to be amended and new IRS approval. I do not know if that was the case for the March of Dimes but that is definitely possible within the purview of what the board should be directing the staff and the executive in what they need to accomplish, what they failed to accomplish.
Brett: And one reason you want to make sure you get someone who has dealt with a nonprofit is that you really want the purpose in your filing to be as broad as possible. Because if your mission statement changes which happens in bylaw documents, it does require a new filing. If you set your nonprofit to remove polio but when you file with the IRS, we are here to support the medical industry and resolving medical issues, that is a broad mission and therefore you can change your mission as a board while still maintaining what you have done within the IRS.
Brett: And the best way of doing that is creating business plans just like for-profit businesses to meet your goals and targets. Produce a 3-year business plan, have a 5-year business plan and if you can manage, get a 10-year business plan. If you are big enough it is great knowing what the benchmarks are for three, five, and 10 years and monitoring them. The plans have been written by the staff so the staff is feeling like they can accomplish the plans unless there is something like covid that hits which may put a damper on it. But other than that, they are telling you what they expect to accomplish you are reviewing it and saying yeah this is where we should be going or saying no, we think three years we should be doing this instead to meet our mission and send it back.
Charles: So, another, and you touched on this, but when you get executive directors eventually, they're going to go to another job, they're going to retire. So, I would think the board is involved in the succession planning to make sure that they have a plan in place in case the executive director moves on unexpectedly, or whether there is a planned retirement, or phase out or change for those executive directors.
Brett: That is true and looking at it, the board's responsibility is on the high level. The day-to-day responsibility is on the lower level. I mean depending on the size of the nonprofit. If it is a small nonprofit your CEO is making every real decision that is going on in that business. When you go to a medium-sized business, and here we are looking at succession planning, this becomes even more important not just on retirement but hopefully because you are growing. But when you are a medium-sized business you need a CEO who makes the big strategic decisions but a lets the new Executives that have joined make the day-to-day decisions. That takes a different type of leader. When nonprofits start crossing over those benchmarks from small to the medium, they do not make a change in the leadership, and they wonder why they fail. We were great as a small nonprofit; we went to medium size and when we went to medium-sized we failed. or they went to large where the CEO is a figurehead and really does not make even a lot of the Strategic decisions, but works with the board, but so do the senior Executives work with the board. A lot of your strategic decisions are now being made by those executives. The day-to-day decisions are being made by managers. Your CEO has gone from doing everything to doing some things, to now really doing nothing but coaching four or five other individuals and being the face and the organization. You need to have succession planning for not only when people leave which is important for when that happens but also looking for where your organization is going to be. If you are planning to move to a different plateau in 5 years from now you need to make sure you are planning for that right leader to be in place now. You might want to say we want to keep the one we have. Well, then you need to start spending time training them to see if they can be trained as they are because if you want to keep them then you are going to have to train them.
Charles: That is exactly right.
Brett: And part of that is as important when looking at developing the staff as well. If you want to make sure your organization is going to continue you need to make sure you are spending and investing time training your staff so that they get better and better, so low-level staff when they are small but eventually, they are managers at the large level. You must spend time training that person to go on. Many nonprofits will say they do not have any time whatsoever for training and it is a shame because training staff is critical. From the executive director being trained all the way down to the newest employee who may be working the front desk as a receptionist. Everyone needs some sort of training. It is important for them to be able to develop, but it is also important for them to see that you are investing in them and care about them. And since nonprofits are notorious for not paying as much as for-profits, even though they should, they are notorious for not, you need to spend money on other ways of making those people feel like they are making a difference. Because if you act like it does not matter who is working in that position then ultimately you are going to have trouble keeping people and that is going to hurt the organization more.
Charles: And that is so true and it really goes back to the importance of that board and having board members that are business savvy and they cover the different components of running a business. So, you got the legal parts, you got the accounting, the financial part, you may want to even consider a banker and what we are touching on now is an HR professional. So, you know if your board members make up those different categories of what the business segments are it really equips the board to have that nonprofit on the best footing possible. We're not saying that the board members had to do the execution on training and the Hands-On stuff but they have to make sure that plans are in place that the plans are being executed and follow-through is happening so that the nonprofit is well protected and positioned to be a long-term entity and a long term business concern.
Brett: And that can go over to even training for the board. What the board does looking at these things and what it should do. Far too many boards in the nonprofit world have their board meetings but do not get any training whatsoever. They do not actually do any planning for when the chairperson is not going to be chairperson anymore. A lot of nonprofit boards have time limits on how long you can be chairperson, but they do not work on bringing the other chairperson along. It is not like so and so would make a great chairperson and we will have him shadow the chairperson during the last year of the chairperson's term, instead, it is the exact opposite. They promote a new chairperson and then say, okay we will have the old chairperson kind of work with them. Well at that point the old chairperson cannot say you know someone is a bonehead and we really need to rethink who is coming next, maybe we need to change who is next. You really want to know that before the chairperson comes in, not after he is there to find out, oh we made a mistake. So, if you have plans on how you are going to have a future chairperson, have them work before they become chairperson to make sure that it looks like they are going to be a good fit. Other important positions are secretary and treasurer. A lot of times it is like who is willing to do this. It should not be that way. They should look to have a succession plan in place for those people as well. You may have a secretary who does not understand all of their jobs and duties when they volunteer for it. and something gets lost in the translation. It is amazing how much board activity really is lost.
Charles: That's true. So, you know we touched on a lot, and I know we are running out of time right now, but did we leave anything out of the subject that is near and dear to your heart? Maybe that is accounting and compliance?
Brett: It really is one of the nearest and dearest to my heart. Too many nonprofits’ entities hire accountants out of the for-profit world who do not understand the intricacies of not-for-profit accounting. Most entries that deal with gifts go through either temporarily restricted or permanently restricted accounts. If it is a for-profit accountant, they do not understand segregating everything. So, if someone gives you a donation of a hundred million dollars permanently but you can take the earnings from that to feed the poor because that is your main purpose then you have a permanently restricted environment there. You have a temporary restriction because the money earned can only be spent for the poor, and then it goes into unrestricted when you spend it. So, it fits all three stages. Someone who is from the for-profit world says we got money in, and I got a hundred-million-dollar revenue, and it is like all this other revenue and there are no restrictions on it. You will not pass an audit with that. It used to be easy to see that stuff, but audits have changed how restrictions are reported. You still got to maintain those separations. And it is very important, especially for foundations and endowments.
Charles: So that goes back to what we said earlier that the compliance and the reporting requirements for nonprofits are very strict, and they can be more complex than they are for the for-profit entities. And this is another example that you just brought up with the fund accounting and the different funds restricted, non-restricted. That kind of puts an exclamation point on getting qualified professional people to run your organization and to help you manage that and to be on the board, so board responsibility is critical for you to have an effectively run nonprofit organization
Brett: That is correct sir.
Charles: Outstanding content that we covered today Brett Beemer, partner with SeatonHill, I want to thank you for providing excellent content related to nonprofit organizations. It has been very good, very helpful and I think something that those nonprofits out there that are watching this are going to get a lot of valuable information from this so thank you for joining us, Brett.
Brett: Thank you Charles and thank you for all you have done in our community because you have done a lot for the Tallahassee Community over the years.
Charles: I appreciate it and you have been watching The Answers That Count. I am your host Charles Musgrove. Thank you for joining us. Hit the Subscribe button. We will see you next time on Answers That Count. Peace.