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It would be great if whenever an association was at risk, a large, flashing light went off. But in real life, we must depend on far more subtle clues to help us predict what is going to happen so we can be prepared to avert any problems headed our way.

As part of their jobs, association executives and board members must do their best to keep their organizations out of financial trouble. This in part means knowing two things: how to identify clues that forecast problems and how to act on those clues as they appear. Identifying the clues is the easy part if you know what to look for, but taking corrective, decisive action takes experience and careful analysis.

Not all of the clues discussed below are purely financial in nature, but they all have financial implications. For example, declining membership is not a financial datum, but it obviously will adversely affect your finances if ignored. Following are 12 of the most prominent clues that an association may be headed for financial trouble.

Clue 1: You are running a deficit from operations — either over an extended number of years (more than three) or very large deficits in relation to your available reserves (more than ten percent).

An occasional small annual deficit is not the end of the world (although there are a few people in the nonprofit world who truly believe it is). Of course continuing or large deficits will eventually erode whatever reserves you have and will leave you without the resources to operate; see Clue Two. There are two obvious ways to respond to this clue: increase revenue and/or reduce expenses. Do not expect either to be painless or immediate.

Clue 2: Your available reserves (however you define them) are either negative or are well below the target level your board has determined appropriate (more than 50 percent).

Every organization needs some resources that can be drawn on in a pinch or if an unexpected opportunity arises. There is no "right" amount or percentage that fits every organization all the time, however. You want enough to tide you over a crisis but not so much that members will start griping about paying dues or fees.

Most organizations try to have between three and 12 months' operating budget in the bank. If you have less, you may be at risk of not having the resources you need when you need them. If you have more, be prepared to explain to members and others why they still need to pay such "high" dues or fees and to your employees why they can't get bigger raises. Legitimate reasons for larger reserves might be that you are saving to acquire capital assets, such as a building or new computer system, or you plan to expand member benefits.

Clue 3: Your revenue from two or more of your five largest sources (e.g., dues, events, publications, other member services) — after adjustment for inflation — has declined in more than two of the last five years or has declined more than 10 percent in any of the last five years.

Declining revenue will inevitably lead to the problems in Clues One and Two. This usually is a symptom of underlying problems. The challenge is determining why members no longer want to belong, or why conference attendees do not feel they are getting value from attending, for example. As with any other problem that can be identified through evaluating quantitative data, such as declining revenue in the previous example, it's important for executives to realize that the challenge isn't so much in "getting the numbers back up" as it is in identifying more complex problems such as inefficient business processes or lackluster value for members and customers. Part of the reason is sometimes found in Clue Seven.

But do recognize that, especially in this area, you often are at the mercy of outside events you can neither control nor predict. Declining attendance at conferences after 9/11 is a prime example. That is why this clue (like some of the others) is dependent on a number of distinct factors and is presented in such terms as "two out of five." There sometimes is no single causal event that can be blamed for a problem.

Clue 4: The number of your paid members and/or attendees at your major annual conference has declined in more than two of the last five years or has declined more than 10 percent in any of the last five years.

This clue is a real wake-up call, which will inevitably lead to Clue Three (see that discussion).

Clue 5: If you have donor-restricted funds, the total of your temporarily restricted net assets exceeds the sum of your cash plus liquid investments plus currently collectible receivables.

By accepting grants or gifts with donor restrictions, you have accepted the obligation to use those amounts in the way donors stipulate. If you do not have enough liquid assets to do this, you have likely violated your agreement by using the restricted money for unrestricted purposes, and, at best, may be required to borrow cash to complete the project or refund the gift, and, at worst, could face legal action, an inability to raise future such amounts, and damaging publicity.

Clue 6: The net profit from a significant association activity (e.g., annual conference, publications, or other activities) is significantly below what you planned.

Even though you may have budgeted a loss from a particular activity, you must not fail to manage the activity carefully, so that the loss is no greater than you originally felt you could handle. It is easy to fall into a mindset that, "We were going to lose money anyway, so what does it hurt to lose a little more?" It can hurt a lot if the resources aren't there to cover the loss or were already otherwise committed.

And if you budgeted an excess of revenues over expenses from that activity, then you have presumably been counting on that profit to augment your reserves (see Clue Two) or to help cover the costs of other activities, which will suffer if this subsidy is suddenly unavailable.

Clue 7: The percentage of your expenses used for member services and other program activities (as opposed to administration and fundraising/member development) has declined in more than two of the last five years or has declined more than 10 percent in any of the last five years.

Members of associations and attendees at conferences naturally expect to receive commensurate value for the amounts they pay to you for dues, conference fees, and other services. If you are not providing that value, you will alienate these sources of revenue; see Clues Four and Three for the result. Again, there is no one "right" percentage for all organizations, but it becomes very difficult to explain to members why less than two-thirds of their dues dollars are being used to benefit them in some identifiable manner rather than simply to pay "overhead" expenses. Always carefully review your expense-allocation methods to be sure you are not either overstating or understating the amounts allocated to the various expense categories.

Clue 8: "Miscellaneous" assets and/or expenses seem to become more and more significant relative to the respective totals.

At best, this may simply represent lazy bookkeeping, where an accountant is not properly analyzing transactions to determine their true nature. The result is that management may lack the full details of information it should have to manage wisely. A worse case is that management is deliberately hiding items it thinks it would be embarrassed to have the board or members see.

The very worst case is that someone is defrauding the organization and burying the resulting debits in miscellaneous accounts, where the criminal hopes no one will notice them. Any of these will only lead to trouble down the road.

Clue 9: You have been overdrawn at the bank or have had to defer paying bills more than once, or for more than a week, in the last two years.

These are sure signs of dangerously low levels of liquid assets, normally the result of one or more of the situations described above, or worse, financial mismanagement. They can lead to a poor credit rating and the inability to serve your members. Bank overdrafts also can lead to legal problems. (See Clue 12 for comment on payroll taxes.)

Clue 10: Financial and operating data being provided to board members and management are delayed, unclear, or incomplete. Explanations of key items and variances are unavailable or are of doubtful validity. Managers and board members are not well versed in reading or understanding the significance of the information they are given.

If management and the board are flying blind, a crash is inevitable. Yet these are common problems in the nonprofit sector.

Imagine that you are driving at 55 mph on the interstate, but where your car windshield usually is, there is a large, high-definition television screen, connected to a camera on the front of the car, that shows the road ahead. Now imagine that there is a 10-second time delay between the camera and the screen. Your airbag had better be in good order (see Clue Two).

Or imagine you are on an unfamiliar highway, following directions you have been given. Now there is no time delay, but a glitch in the camera circuit automatically translates every road sign into ancient Greek. Will you get where you want to go?

If management is not getting the information it believes it should have, on a timely basis and in understandable form, it must act firmly to make that happen. On the other hand, accountants must take care to see that the information they produce is meeting management's and the board's needs.

Clue 11: Your auditors have been reporting numerous and/or serious weaknesses in your internal controls and/or have had numerous "findings" in your audit reports, but management has mostly not implemented the auditors' recommendations.

Auditors do not make such comments lightly, and their comments should be taken seriously. Failure to do this means management is taking an unacceptably high risk of fraud and mismanagement as well as future funding and other financial problems.

Clue 12: Although you are convinced that the financial situation needs serious attention, top association leadership does not appear to accept that there is anything amiss.

Get out while the getting is good, or you will sink with the ship.

One item to be especially careful of is the remittance to the government of withheld income and Social Security taxes. By law, organization personnel (management and board members) responsible for making these remittances will be held personally liable for amounts of payroll taxes not remitted; this personal liability remains even though the association is organized as a corporation or files for bankruptcy, or whether the responsible persons are volunteers.

Don't Panic — Evaluate
Just because you see one or two of these clues hanging around your association does not mean it is time to get out the lifeboats. There may be perfectly normal reasons for them, and you may have adequate backup reserves to fall back on for a while. Sometimes they are the result of deliberate management or policy decisions: For example, maybe the reason conference revenue has declined (Clue Three) is that your board decided to reduce fees so that more members could afford to attend, while planning to make up the difference from other available resources.

But if you start noticing too many of them, or if they seem to stay around longer than the latest fad in shoes, then it is time to take serious action to prevent a major financial disaster.

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