I’ve seen it many times. When a nonprofit starts up its members earnestly and diligently begin to work on delivering their mission to the community, but soon enough they need to start paying the bills. In their hearts they secretly hope someone else will step in and begin to look for corporate and individual donors, write grants, and put on big events to bring in some cash. You know, fundraising.
Then someone at a board meeting mentions something about our finances or maybe how we need to get a fiscal sponsor (or become one). It all boils down to our fiduciary responsibility, this person says. Huh?
Finance is the work related to managing the money. It can include determining the best way to invest money, making sure you always have enough cash to meet expenses, taking out loans, and general planning for the organization’s future.
Fiscal usually refers to the government’s finances (taxation and such). But in the nonprofit world, there’s also a thing called a fiscal sponsorship, where one organization with a tax exempt status (the sponsor) assists another organization (the project) that does not have that status. I’ll go into this arrangement in a future post.
Fundraising is pretty straightforward for most people. It involves figuring out how the organization will actually get the money it needs. Fundraising usually refers to contributed income (donations, grants, regular sustainers, etc.) rather than earned income (like museum ticket sales or money earned in a thrift store).
A very important concept in this F-storm is fiduciary responsibility. Fiduciary means a duty or obligation to act in the best interest of another person or institution. This concept is probably the least well understood of all the F-terms having to do with a new organization’s dollars and cents. But it’s crucial to understand it.
In my last blog post, I referred to the importance of having a separate entity (that is, someone besides you) to embody the mission, values, and interests of the organization. This “pretend person” wants to work toward the mission of your organization effectively, and to do that they want to properly care for the finances of the organization. That is, they have financial interests. Fiduciary responsibility is always putting that “person’s” financial interests before your own.
In a small for-profit organization this isn’t such a big deal. In general, the whole point is to raise money for yourself. But in a nonprofit, you give up that goal. There needs to be a clear separation between your financial needs and activities and those of the organization. It’s good to consider the money the organization has came from the community as a whole, and the law requires that the organization spend it properly. This is not true of your own personal finances.
The state and the IRS are specifically looking out for situations where the money coming into an organization ends up primarily benefiting one person or one family. As a founder, that person could be you, so it’s important to draw a clear line between what your personal needs are and what the organization is trying to do for the community.
This idea of separating interests like this is the foundation for ensuring fiduciary responsibility throughout the organization. It keeps everyone honest and helps make things more transparent. It can also help ward off founder’s syndrome (but I’ll get to that in a future blog post).