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BLOG / 09.02.24 /Nancy Durand

Spending Wisely: Balancing Operational Success and Donor Trust in Nonprofits

In the nonprofit world, every dollar counts. The funds that organizations raise are not just numbers on a balance sheet; they represent the trust and generosity of donors who believe in a mission. But what happens when questions arise about how those dollars are spent?

A recent New York Times article titled “A Pattern of Lavish Spending at a Leading L.G.B.T.Q. Nonprofit“ by Emily Steel, has sparked a conversation about financial ethics within the sector. The article highlights extravagant spending at a prominent L.G.B.T.Q. nonprofit and offers insights into how organizations can balance operational effectiveness with the need to maintain donor trust and uphold the principles of responsible stewardship.

 Clarify Mission and Align Spending

When it comes to spending, a nonprofit’s mission should serve as the primary touchstone. Every expenditure, whether on staff, programs, or infrastructure, must be justifiable in terms of how it advances the organization’s objectives. However, spending on luxury accommodations for staff retreats might raise eyebrows if it’s not clearly connected to the organization’s purpose – and communicated transparently to stakeholders.

 Implement Strong Financial Policies and Controls

Operational effectiveness often requires spending money – whether on talent, tools, or infrastructure. But without clear financial policies and controls, there’s a risk of overspending or misallocating funds.

Nonprofits should develop and enforce comprehensive financial policies that include guidelines on what constitutes acceptable expenses, how funds should be allocated, and who has spending authority. These policies should be regularly reviewed and updated to reflect the organization’s current needs and external regulatory changes. In addition, implementing strong internal controls, such as requiring multiple approvals for significant expenses, can help prevent misuse of funds.

 Prioritize Transparency and Communication

Nonprofits that openly share their financial practices and processes are more likely to maintain the confidence of their supporters. This means providing clear, accessible financial reports that detail how funds are being used, as well as the impact of those expenditures. Regular communication with donors about how their contributions are making a difference can reinforce the connection between spending and mission fulfillment.

 Benchmark Compensation and Expenses

Nonprofits must ensure that executive pay, and other significant expenses are reasonable and aligned with industry standards – specifically, industries within the nonprofit sector. Benchmarking is an effective and essential tool in this regard. Implementing a practice of comparing their compensation packages and spending to similar organizations ensures that the nonprofit is offering fair and reasonable compensation – and helps protect it from potential criticism and regulatory scrutiny.

 Foster a Culture of Ethical Stewardship

Ultimately, balancing operational effectiveness with donor trust requires a culture of ethical stewardship throughout the organization. This means instilling a sense of responsibility in every employee, from the executive team to entry-level staff, about the importance of managing donor funds with integrity.

Leadership plays a key role in setting the tone. By modeling ethical behavior and making value-based decisions, leaders can encourage a broader commitment to prudent financial management across the organization. Regular training on ethical issues, including conflicts of interest and the appropriate use of funds, can reinforce these principles. In addition, creating an environment where staff feel comfortable raising concerns about financial practices can help prevent issues before they escalate.

 Engage the Board in Oversight

The board of directors is an indispensable ally in maintaining the balance between operational effectiveness and donor trust. Boards should be actively involved in overseeing financial practices, including approving budgets, reviewing major expenditures, and ensuring compliance with legal and ethical standards. Board members also bring an outside perspective that can help identify potential issues and ensure that spending aligns with the nonprofit’s mission and strategic objectives.

 Evaluate and Adjust Regularly

Nonprofit environments are dynamic. Changing donor expectations, regulatory requirements, and operational challenges require nonprofits to regularly evaluate their financial practices and make adjustments as needed. This might involve rethinking how resources are allocated, scaling back certain expenses, or exploring new revenue streams to support the organization’s mission. By remaining adaptable and responsive to both internal and external factors, nonprofits can ensure that they continue to operate effectively while upholding the principles of prudent stewardship.

 Nonprofits that are committed to maintaining these best practices can not only protect the integrity of their organizations but also honor the trust and generosity of their donors – ensuring long-term success and impact.

For more information, please reach out to: Nancy Durand

Email: NDurand@sbjlaw.com