Fiscal Sponsorship: An Overview

th32An overlooked concept in the world of non-profit organization financial management that does not appear to have hit its full stride yet is that of fiscal sponsorship. In a prolonged and challenging economic downturn, it may be a good time to look at it more closely. Prompted by the increase in the number of non-profit organizations seeking IRS tax exempt status (e.g., following the widespread devastation of Hurricanes Sandy and Katrina), fiscal sponsorship refers to the use of existing, established organizations to achieve similar or overlapping missions thGTJ6SAFIrather than forming new organizations. Essentially, a ‘fiscal sponsor’ is a non-profit, tax exempt entity that acts as a financial sponsor for a project, committee or another organization that may not yet have received its tax exempt status with the IRS. In recent years, fiscal sponsorship has become more widely known in areas of human services, environmental causes and artistic endeavors.

Perhaps ideal for start-up organizations or those that want to accomplish time-limited charitable projects, the fiscal sponsorship of a larger, established organization can thCAP8GAXGprovide often costly administrative “overhead” functions such as office space, payroll, employee benefits, fundraising, publicity, legal counsel and training assistance. Some project developers may simply want to test their ideas out in their fields of interest before taking on the task of applying for tax exempt status with the IRS. There are many kinds of sponsorships; however, chief among them is grant-seeking sponsorship largely because foundations and government agencies [always] fund organizations and disallow making grants to individuals. In effect, the fiscal sponsor organization may receive grants and donations and even engage in other fundraising activities on behalf of the project, manage those funds according to their intended uses as well as document the progress of the project. Choosing a thL5AMP8X8fiscal sponsor largely depends on the nature or purpose of the project or committee and how consistent it may be with the mission of the larger organization. In addition, choosing a fiscal sponsor also needs to take into account the reputation of the larger organization in the community, its own financial health as well as its relationship with its funding sources. In other words, how attractive will the proposed sponsor organization be to potential funding sources for the project in subsequent grant requests? Aside from the local community, many national organizations have sprung up expressly for the purpose of providing fiscal th467N86XNsponsorships; for example, Tides in San Francisco, and many directories are available online. Moreover, the opportunities for a social cause or project to attract more attention and increased funding is somewhat greater in a fiscal sponsorship through the “cross promotional” benefits of an association with the larger, established organization. According to Gregory Colvin – a leading tax law expert in fiscal sponsorship – additional models of sponsorship include direct project sponsorship, independent contractor support, group exemption and technical assistance. For more detailed information about each of these models of fiscal sponsorship, please see Mr. Colvin’s book, Fiscal Sponsorship: Six Ways To Do It Right (Study Center Press, 2006).

Like many management decisions, entering into a fiscal sponsorship relationship is not a casual decision and does not come without some potential pitfalls for both the non-profit and the proposed project. A fiscal sponsorship arrangement needs to be thERW0I7W9formalized in a written contractual agreement or memorandum of understanding between both parties, typically specifying who will be responsible to do what and when. A memorandum of understanding – which, it is recommended, be reviewed by a tax attorney first –  clearly addresses the terms and conditions of the project management, including the scope of the project, timeframes and deadlines, employment issues if necessary and the authority of the th821KA897 project, to name a few. Perhaps one of the biggest concerns for an established non-profit organization is that it will assume all of the legal liabilities, tax requirements and regulatory compliance of the project in a fiscal sponsorship agreement. Conversely, on the side of the project or committee seeking fiscal sponsorship, there may be a perceived lack of independence in the project when it is administratively managed by others. Additionally, that established non-profit thHD9NNX8Borganization is not going to give away their administrative time for nothing. The sponsoring organization can and most likely will charge administrative fees, which in itself need not be a bust for the project because the administration fees can be built directly and transparently into the budgets of grant requests.

Clearly, the choice of a social cause or project to seek fiscal sponsorship from a larger, established non-profit organization is a highly individualized and case-specific one. While some organizations and projects may view this kind of relationship as cumbersome or intrusive, others may thrive on it or choose to continue indefinitely in a sponsorship mode. Still other projects may receive enough valuable insight and guidance to launch their own non-profit organizations.

References:

Colvin, G. (January, 2013). Brushes With the Law. Fiscal Sponsorship.com. Retrieved on February 5, 2014, from http://fiscalsponsorship.com/.

Colvin, Gregory (2006). Fiscal Sponsorship: Six Ways To Do It Right. San Francisco: Study Center Press.

Guide to Fiscal Sponsorship. Foundation Center.org. Retrieved on February 5, 2014, from http://foundationcenter.org/getstarted/tutorials/fiscal/conclusion.html.

Fiscal Sponsors. Council of Nonprofits.org. Retrieved on February 5, 2014, from http://www.councilofnonprofits.org/resources/resources-topic/fundraising/fiscal-sponsors.

Advertisements

Building Financial Strength in a Weak Economy

thCAVENOP1The sustainability of many non-profit organizations today largely depends on their abilities to  manage their finances effectively and often in new ways. According to the 2013 State of the Nonprofit Sector Survey Results (Nonprofit Finance Fund, 2013), organizations that are successfully weathering the economic storm are changing their business models – among other strategies – in order to achieve increased fiscal stability in an unstable economy.

A review of the current literature in the field yields the following salient points in non-profit organization financial management :

  •  Plan to increase cash reserves

thCAI0COAJAccording to the Nonprofit Finance Fund survey (2013), twenty-four percent of the participating organizations had only one month or no cash reserves on hand. Thirty-two percent of the organizations had two to three months of expenses in cash. Increasing cash reserves needs to be planned and a part of the overall financial projection for the year rather than happenstance that a surplus will be realized at the end of the year. The lower the cash reserve, the greater the greater the difficulty in meeting expenses during periods of low revenue or when revenue is delayed (e.g., grant awards, contract payments).

  •  Financial planning is a team process

Many non-profits typically use a single-handed approach to preparing the annual budget. Effective financial planning for the next year’s annual budget and beyond requires every level of the organization; for example, program managers, development staff, human resources, the finance department as well as individual board members and committees. These individuals have hands-on experience or oversight perspectives about actual revenues and expenses that may be overlooked by just one or two people.thCAHMWV58

  •  Communicate financial needs clearly and often

All too often the financial needs of an organization are discussed primarily among the upper levels of management. In fact, the Nonprofit Finance Fund survey (2013) cites that many non-profit organizations are uncomfortable discussing their financial needs with funders: only 24 percent of participating organizations would discuss their working capital needs, 16 percent would discuss cash flow problems, and 5 percent their debt problems. In the current economic climate, non-profit organizations need to communicate their financial needs clearly and often across all levels of the organization and with other key stakeholders. Once again, in a team process, communicating this financial information to other staff in the organization in terms that are clear to them increases their ability to act on it directly in their positions.

  •  Utilize program-specific financial reports

The usual practice of non-profit managers and boards is to use budget-to-actual financial reports to gauge the fiscal health of the organization. That is, the annual budget is a road map against which monthly financial reports are compared to determine how “on course” the organization is to realizing its annual budget. In actuality, much of the research indicates that many non-profit organizations do not have a clear understanding of how much their specific programs are costing them (Barr and Bell, 2013; Kotloff and Burd, 2012). Utilizing program-specific analysis goes beyond the current fiscal year and is part of the overall future financial planning.thCAJ1QURJ

  •  Invest in realistic administrative capacity

For many years, non-profit organizations have worked very hard to minimize their actual administrative costs. Likewise, foundations and contractors typically want to fund programs and services to the community rather than administrative overhead. However, those administrative costs are very real and lack of investment in this area often leads to gaps in a non-profit’s capacity to perform efficiently and effectively. According to the Nonprofit Finance Fund survey (2013), 69 percent of the participating organizations reported not having enough staff or time for data collection, 40 percent reported not having the correct staff expertise, and 26 percent did not have the necessary technology. Clearly, the old “let’s-cut-as-much-administrative-cost-as-possible” mentality is not working for many organizations across the United States. Adequate investment in a non-profit organization’s administrative capacity – in particular, finance expertise and technology – is an issue that demands honest dialogue between organizations and their funding sources.

  •  Determine the need for diversification of revenue

Once considered a key element of financial sustainability, diversification of revenue largely depends on non-profit business models and the type of service the organization provides. Diversification of revenues has some inherent risks in that more streams of income does not necessarily mean greater surpluses at the end of the year. In order to attract new revenue streams, a non-profit needs to develop and sustain new programs or capacities. The reliability and competitiveness of the organization’s revenue streams dictate the degree of diversification that it needs (Barr and Bell, 2013).

  •  Collaborate with a broad spectrum of public and private funding thCACVINBQ

Today’s non-profit organizations need to consider a broad array of collaborations and partnerships with other non-profit organizations (merger) to increase the delivery of services available to meet increasing demands from constituents as well as with for-profit businesses (social enterprise) in order to gain new sources of revenue and build their marketing brands as well as increase their financial sustainability.

References