Non-Profits: Common Mistakes to Avoid

Today there are probably hundreds of thousands of non-profit organizations in the U.S. These organizations receive a large portion of funding from the federal, state, and local governments each year. Grants and government funding are received for numerous causes and for a variety of social groups. Generally, non-profits follow a slightly different set of reporting responsibilities and operational procedures than an incorporation. However, other aspects of the two are similar, or at least they should be. Yet, for smaller non-profits, mirroring incorporations is a much more daunting task than it is for an organization such as the American Lung Association. Typically, their limited resources make it virtually inevitable for smaller non-profits to make certain, common mistakes.

The most prominent problem that you will find in smaller non-profits is a lack of separation in duties. This is you have one or two people are responsible for the majority of tasks. Although this is very common and not necessarily a death sentence to your organization, it does open you up to financial foul play. It is a situation that breeds scenarios where one person is in charge of writing checks and approving expenses. Generally, when it is discovered that a non-profit has been the victim of embezzlement, the root of the problem can be traced back to such an example. Not to mention, this is looks negative on your internal controls. For many government grants, you may find that your organization must submit a grant packet, which must contain detailed information regarding your internal control. Granting organizations like to see your daily operating procedures as far as who is responsible for what, especially when it deals with the organizations finances. Remember, government agencies are or at least have to appear to be good stewards of taxpayer dollars; so, they try to ensure that grant funds are safe. Other negatives practices that are bred from a lack of separation are signature stamps and bad record keeping. Auditors are also not fans of a lack of separation of duties.

Another common problem among small non-profits is a conflict of interest issues. However, to be fair, this is more common among non-profits in rural communities and smaller towns. Typically what happen is that you may have a person on your board of directors or who holds a position in your non profit that may be on the board of directors for another similar non-profit. Another common conflict of interest example is when your organization is in need of widgets and the only seller of widgets in your small town just happens to be your brother-in-law. It is scenarios like these that often place non-profits in hot water. Not necessarily because they are doing anything wrong, but because there is an appearance of wrongdoing. Now, for the first scenario, the only true solution is to broaden the pool of potential board members. Possibly consider recruiting from a nearby town, or tapping another resource such as retirees. The second example also has a possible fix. You must prove that your brother-in-law deserves your business, not that they received it due to their connections. So, you need to do your research. Get at least 3 quotes from other widget sellers? If after you have shopped around and he is still the best value than present this information to your board and allow a vote. Remember, you should leave the room due to your conflict while this vote is taking place. Having too many relatives working in your organization is another issue under the same umbrella as conflict of interest. Again, although you may not be doing anything illegal, there is an appearance of wrongdoing in each example and you are opening yourself up for future downfall. Today, most granting agencies require that you have a policy about how you would handle in conflict of interest that arose and statements disclosing current conflicts.

A good rule of thumb is to use the local media test. If your agency is doing anything that your local newspaper or news channel would have a field day with, odds are you need to make some changes. Try to prevent being audited and losing the confidence of the community. After all, once you lose their faith you may find donors very unforgiving.