Domain 1 | Strategic Management

Question 1

segregation of duty

Answer 1

No individual should control all four aspects of any financial transaction:
•	Initiation (check requests)
•	Authorization  (approval to pay)
•	Asset custody (keeping the checkbook)
•	Recording the transaction (posting)

Question 2

audit: clean vs unqualified

Answer 2

_Clean audit: an opinion providing the highest level of assurance that the Statement of Financial Position fairly presents the organization’ s financial position, the Statement of Activities fairly presents the results of the organization’s operations, and the Statement of Cash Flows fairly presents its cash flows.

_Unqualified audit: an opinion providing the highest level of assurance an audit can provide. Attention is given to a particular matter and provides for disclosure of additional financial statements provided or draws attention to an additional important matter.

Question 3

balanced scorecard monitoring

Answer 3

Associations are adopting this popular for-profit means of expressing strategy in measurable terms. Board performance is measured in four categories that can provide a more “balanced” perspective: financial performance, customer satisfaction, process efficiency, and, at the time, innovation.

Question 4

branding

Answer 4

A marketing process that incorporates a singular look, feel, and message in building a belief about your association and its products. It creates in the mind of the prospect the perception that there is no product on the market quite like yours. The power of a brand is its ability to influence purchasing behavior.

Question 5

budgeting, strategic program

Answer 5

A budgeting best practice, allocating salaries and other overhead to a program budget to know the true profitability of the program’ s products and services. It is achieved through conducting a systematic study relating allocation of staff time to program categories, then applying the calculated prorated share of overhead expense to the programs identified.

Question 6

dashboard indicators for monitoring chapters and components

Answer 6

The dashboard concept identifies the critical variables that determine a chapter’s success and a system for measuring with full, safe, low, and warning levels. The first step in adopting a dashboard approach is to define the indicator values that fit your association. Once the relevant values are identified, set up your dashboard.

There are five basic steps:

1. Revisit the mission and vision of the national organization and the chapter Icomponent.
2. Define the gauges as they relate to the mission.
3. Establish methods to measure success.
4. Conduct a chapter assessment to establish initial dashboard readings.
5. Assign a staff member to regularly monitor the gauges.

Question 7

financial controls: annual audit

Answer 7

Management is responsible for the organization’s financial reports and the information contained within; the auditor’s role is to verify the amounts included in the reports. In its fiduciary capacity, the board hires the external auditor and receives the report. It is a conflict of interest for the CSE or CFO to hire the auditor. Financial records must agree with the financial report certified by the auditor. Any changes the auditor deems necessary are subject to acceptance by management. The Sarbanes-Oxley Act has created regulatory requirements for corporations related to the audit function.

Question 8

financial controls: essential factors

Answer 8

Four factors essential to good internal financial controls:

1. Clear lines of authority
2. Clear definition and acceptance of responsibility
3. Authority commensurate with responsibility
4. Proper training

Question 9

financial controls: Sarbanes-Oxley

Answer 9

Only two provisions of Sarbanes-Oxley directly impact nonprofits: the whistle-blower protection provision, which prohibits interference with a person who reports a potential infraction to a federal law enforcement agency, and the prohibition of document destruction upon the commencement of a federal investigation. However, many nonprofits are moving toward creating a separate Audit Committee, drafting conflicts of interest and fraud policies, and being much more transparent.

Audit Committees establish procedures for processing whistle-blower complaints by employees:
_A code of ethics for financial officers
_Increased penalties for document destruction or alteration
_Certifications by the CEO and the chief financial
officer regarding the financial condition of the company and internal controls

Nonprofit recommendations include:
_A code of ethics for the Board of Directors
_A whistle-blower policy
_Regular board training
_Regular board self-evaluations
_Audit Committee members who are financially literate

Question 10

financial controls: segregation of duty

Answer 10

At the heart of any internal control system is having no single individual able to control all essential aspects of any transaction: initiation, authorization, asset custody, and recording. Other steps include a well-designed record-keeping and information system, a sound budgetary process, and an independent audit.

Question 11

financial key indicators

Answer 11

Selected by leaders, these quantitative measurements are of strategic importance to indicate a fairly accurate picture of the organization in relation to its strategic plan. Indicators might include the number of new members, accounts, new business starts, and organizational members participating in programs, plus percentage of retained members.

Question 12

types of financial policies

Answer 12

Among the kinds of financial policies commonly found in associations are investment and reserve policies, a budget policy, and operational accounting policies.

Question 13

financial projections

Answer 13

A forecast of future financial results, usually presented in a pro forma statement, that is generally speculative.

Investors are cautioned to recognize that the projections are not guarantees of performance. Sound financial projections should be based on credible assumptions, a conservative projection of revenue, and an aggressive projection of expenses.

Question 14

financial statements: cash and accrual statement

Answer 14

In a combined statement, certain transactions are recorded on an accrual basis and others are recorded on a cash basis.

Usually, unpaid bills are recorded on the accrual basis and uncollected income is recorded on the cash basis. Many organizations keep books on the cash basis and convert them to accrual at the end of the month for accounting purposes.

Question 15

financial statements: management letter

Answer 15

Issued by an independent auditor, the management letter communicates those areas that management needs to address in order to come into compliance with GAAP accounting practices.

Question 16

financial statements: reporting capital gains

Answer 16

Capital gains or losses should be reported in the unrestricted class. There are two exceptions to the rule:

_Gains must be reported in the restricted class if there are explicit donor restrictions on the gains.
_An applicable state law exists that is judged by the organization's governing board to require the retention of some or all of the capital gains/losses in the restricted class.

Question 17

financial statements: statement of activities

Answer 17

Shows the organization’s financial activity by the month and on a year-to-date basis. It reports revenue generated, expenses incurred, and results in net income or net loss. Previously called the statement of revenue and expenses or the profit/loss statement.

Question 18

financial statements: statement of cashflows

Answer 18

Provides relevant information about cash receipts and cash disbursements from operations, investments, and financing activities during a period of time. The statement helps creditors and others to assess the organization’s ability to generate positive future cash flow to meet its obligations and its need for external financing. Since cash is the single most liquid asset, cash plays an important role in maintaining an organization’ s financial health. Sufficient cash, along with the ability to readily convert other assets into cash, is important for maintaining an organization’s financial flexibility.

Question 19

financial statements: statement of financial position

Answer 19

Summarizes the financial makeup of the organization at a specific point in time. The statement reflects assets, liabilities owed by the organization, and residual net assets representing net worth. Formerly called the balance sheet.

Question 20

financial statements: accrual vs cash accounting

Answer 20

Accrual-basis accounting recognizes revenues when earned and expenses when incurred. Cash-basis accounting recognizes revenue when cash is received and expenses when cash is expended. The best practice in association accounting is to use accrual accounting, allocating dues when earned monthly, rather than recording a lump sum when received. Accrual accounting gives a much better financial picture and cash flow projection than cash accounting.

Question 21

financial term: association reserves

Answer 21

Net assets minus net liabilities. This is the surplus, or “rainy day” fund, for an association. Reserves are usually protected by the board. Some organizations budget to contribute to the reserve fund annually; others contribute if they have extra cash at the end of the year.

Question 22

financial term: capital budget

Answer 22

The financial plan for long-term expenditures such as land, buildings, or equipment, including depreciation.

Question 23

financial term: capital expenditures

Answer 23

Requirements for long-term objectives, such as major equipment purchases, major improvements, or additions to the physical facilities.

Question 24

financial term: chart of accounts

Answer 24

A system for organizing financial data: a listing of all the line item accounts being used by the organization. Numbers are assigned to each account to facilitate identification.

Accurate and appropriate entry into correct accounts is the key to sound financial management and reporting.

Question 25

financial term: financial narrative

Answer 25

Tells a story about how all the elements relate. It must provide more than just numbers and must highlight key financial issues, concerns, and trends. Numbers have meaning only in context.

Question 26

financial term: financial ratios

Answer 26

_Liquidity ratio: measures the organization’s ability to pay its short-term obligations.
_Current ratio: measures the current assets divided by current liabilities.
_Profitability ratio: measures the profits (losses) over a specified period of time.
_Coverage ratio: measures the projections for the interest and principal payments to long-term creditors and investors.
_Activity ratio: measures the resources required to carry out certain activities, sometimes referred to as the efficiency ratio.

Question 27

financial term: net assets

Answer 27

The residual values of the association’s assets after liabilities have been paid. Contains three classes of assets:
• Unrestricted net assets
• Temporarily restricted net assets
• Permanently restricted net assets

Question 28

financial term: operating budget

Answer 28

The basic day-to-day financial plan that projects all the operational revenue streams and normal business expenses incurred.

Question 29

financial term: overhead

Answer 29

Expenses incurred that are not actual, direct expenses of a specific program; they are incurred and booked as a general expense to an association. Overhead expenses include administrative costs, i.e., for telephones, computer expense, rent, insurance, accounting, maintenance, and similar expenses.

Question 30

financial terms: classes of funds

Answer 30

There are three classes of funds in a 501(3) organization: unrestricted, permanently restricted, and temporarily restricted (as to time and/or purpose).

_Unrestricted funds can be used at the discretion of management within the range of uses defined.
_Permanently restricted net assets result from contributions where the donor has stipulated a specific use that does not expire with time and cannot be shifted by the organization. Endowments are one common type of permanently restricted net assets.
_Temporarily restricted net assets result from contributions of assets whose use by the organization is limited by donor-imposed stipulations that either expire or can be fulfilled and removed by actions of the organization. These assets are shown on the Statement of Financial Position and reported on the 990 long form.

Question 31

international vs global association

Answer 31

_International: a significant portion of the membership is based outside one region, or members are headquartered in one region with significant interests in other regions.
_Global: direct membership is spread over two or more regions of the world, more or less equally, and no one country holds a board majority.

Question 32

international: cross-border collaboration

Answer 32

_Know your market and give them what they want.
_Global localization: identify individuality in any given place.
_Identify market needs; work with people within a given market to discover those needs; tailor services to international markets

Question 33

international: globalization strategy of engagement

Answer 33

• Establish international chapters.
• Create cooperative partners with other international organizations to fulfill operational needs in foreign countries.
• Secure localized access, getting close to local markets with seminars, major meetings held regionally, and local customer service (regional hub for localized service center).
• Be flexible since one size doesn’t fit all; revisit policies, procedures, and requirements.

Question 34

international: international vs multinational meeting

Answer 34

_international meeting may simply be a meeting held in a foreign country. Issues to consider: currency exchange, visas, border passage, prohibitions on exhibitor and association goods crossing international borders, and security.
_A multinational meeting implies integrating multicultural and multinational participation across all facets of the event, including attendees, speakers, exhibitors, sponsorships, and advertisers that represent the range of countries where the association is active. Such a meeting could be held in the United States but would not be U.S.-centric.

Question 35

international: parity and money transfer in international delivery of services

Answer 35

Currency exchange and parity are key concerns when offering international services. The financial implications of international delivery of service may require the association to open an overseas bank account to handle delivery of international member payments for dues and other financial transactions, or to contract with a foreign currency exchange firm to process international wire transfers, handle forward contracts, and make foreign currency payments.

Question 36

international: strategic alliances

Answer 36

A strategic alliance involves a commitment to continue, for the foreseeable future, shared or transferred
decision-making power and a formal agreement. Two areas most likely to be handled through a strategic alliance are administrative consolidation (contracting for, exchanging, or sharing services) and joint programming (single or multifocus programs or integrated systems). There is no change to the corporate structure of any of the organizations involved. Strategic alliances are highly recommended to assist the organization in creating efficiencies, outreach, and program or geographic expansion. Strategic alliances serve as an effective forerunner to corporate integration (merger).

Question 37

management: fundamental theories

Answer 37

Association executives need to be familiar with diverse theories of management, organizational behavior, and employee motivation, including but not limited to: Taylor’s theory of scientific management; Maslow’s Hierarchy of Needs; Douglas McGregor’s Theory X and Theory Y; Ken Blanchard and Paul Hersey’s Situational Leadership Theory; and Edward de Bono’s Six Thinking Hats.

Question 38

mission-based management

Answer 38

A philosophy of nonprofit management from author Peter Brinckerhoff that encourages leveraging the cause of an organization’s mission to bring about optimal strategic performance.

Question 39

open information

Answer 39

Not-for-profits are required by law to make their 990 or 990EZ filing available for public inspection. This is particularly important for 501(c)(3) donors, in order to verify allocations of donations to administrative expense. Minutes of the organization must be made available to members, if requested. Statistical reports must be made available to anyone who requests the information; nonmembers may be charged a reasonable fee for the report. Member lists are the property of the association and may be withheld from nonmembers.

Question 40

organizational capacity

Answer 40

The degree of ability the organization has to tap into and leverage the wealth of resources in its leadership, staff, and membership. It includes the ratio between infrastructure and programming to sustain quality delivery of service. To build capacity, you need to develop your leadership team to learn new skills and broaden their approach to problem solving and critical and conceptual thinking.

Question 41

organizational stages of development

Answer 41

All organizations develop and move into and out of various "stages" that are characterized by certain behaviors and problems. Organizational stages include
•	Embryonic
•	Takeoff / entrepreneurial
•	Survival
•	Aging
•	Success

Question 42

organizational uncertainties

Answer 42

A process to assess uncertainties includes these actions:

1. Broadly identify key questions about the future. Consider macro-uncertainties: i.e., events that your organization has little or no control over; industry uncertainties where you have limited control, such as actions by competitors or regulators; and internal uncertainties, such as budgets and deadlines.
2. Isolate real uncertainty from perceived uncertainty.
3. Understand your biases, to address the uncertainties.
4. Develop leadership and the right culture.
5. Change organizational systems that block success.

Question 43

planning: disaster and recovery

Answer 43

A crisis process that helps you determine what to anticipate in order to better prepare. Considerations are

1. Service and time interruptions: identify the time intervals over which the association would be able to operate without key base processes, including those that are outsourced to a third-party vendor or organization.
2. Emergency incident assessment: determine the types of disruptive events that are most likely to affect normal business processes; review any documentation relating to the areas under investigation (evacuation plans, building management documentation, back-up procedures, etc.).
3. Operational impact service interruption: knowing time bands and then conducting an emergency-incident assessment will establish “significant impact” areas on normal office and membership operations.

Question 44

planning: high yield, tactical

Answer 44

A model for planning that yields the highest return on the investment of the association’s resources of time, people,
and finances. The eight-step process includes )
1. Setting goals and objectives
2. Conducting situation analysis/ problem definition
3. Identifying key audiences
4. Identifying/ developing vehicles/ tactics
5. Creating the tactical plan
6. Scheduling the plan
7. Budgeting the plan
8. Conducting an evaluation

Question 45

planning in unpredictable times

Answer 45

Because it is impossible to predict the future, associations must create “intelligence” systems to gather information and detect patterns of behavior that indicate trends. This information, grounded in data and leveraged with informed intuition, allows an association to anticipate the future and plan for it.

Question 46

planning: strategic and long-range

Answer 46

Strategic planning enables an association to establish a reasonable framework for making short-term tactical decisions in an uncertain environment. Long-range planning involves establishing goals, objectives, and strategies that have a time frame of more than one year. Strategic long-range planning combines the two concepts.

Question 47

planning: scenario

Answer 47

A specific type of future planning where the organization creates multiple “plotlines” based on various states of existence; evaluates the likelihood and impact of each; then plans for the most likely scenario and the one with the most beneficial impact. This process applies trends and external decisions that could have both positive and negative results on the organization. Once the scenarios are defined, the planners work backward to create a strategic plan to address the issues that created the projected circumstances.

Question 48

reinvention

Answer 48

In the stages of development, an organization is best positioned to reinvent itself when it is at the crest of the takeoff / entrepreneurial sage. An organization must continue to reinvent itself or it will lose its relevance to the current needs of the members. However, leadership can become comfortable with its past successes and ultimately ride them into the sunset.

Question 49

statement of purpose vs mission

Answer 49

_Statement of purpose: statement of the reasons for an association’s existence that defines its underlying design and thrust. The stated purpose is crucial in making determinations such as whether the association can be a nonprofit corporation, is exempt from paying taxes, has interests and activities consistent with its purposes, and can attract prospective members who wish to support its objectives.
_Mission: the focused energy driving the organization, defining the business it is in. The mission may change, but the purpose generally does not.

Question 50

strategic direction vs strategic management planning

Answer 50

_Defining strategic direction is the work of the board; it is a broad focus on where to align the association’s resources. Optimally, that direction should be outcome driven rather than activity driven.
_Strategic management planning is the operation work plan to achieve the outcomes defined by the board. It involves monitoring and evaluating environmental opportunities and problems in light of the organization’s strengths and weaknesses, and shaping a coherent set of strategies, programs, and budgets to take advantage of these circumstances.

Question 51

strategic planning: core values

Answer 51

The organization’s core values describe the assumptions and beliefs of the organization, which represent the common understandings and commitments of the members. Core values are the most important central qualities that define the character of the association as an organization.

Question 52

strategic planning: values vs mission

Answer 52

_Values: the beliefs at the heart of the organization.
_Vision: the image or state to which the association aspires.

Question 53

strategic planning: environmental scanning

Answer 53

Environmental scanning and strategic planning are not simply linked. They are inseparable. Environmental scanning is a systematic effort to obtain information about the world that will affect an organization. Scanning is important in managing change and avoiding costly mistakes.

1. Macro environment: a larger space shared with other organizations and professions.
2. The association industry environment and organizational trends: evolving governance, structures, operational practices, services to members, technology trends, and competition.
3. The environment in which the members operate: the profession itself.
4. The association’s immediate operating environment: internal trends and issues need to be addressed. Key aspects are governance and structure; leadership, management, and administration; internal and external relations; and communications, programs, and services.

Question 54

strategic planning: environmental scanning model

Answer 54

A six-step environmental scanning model:

1. Plan, including a review of the literature (print and Internet); brainstorm issues, trends, and other important topics; outreach to members through surveys, list servers, and workshops; and outreach to others, e.g., new members, young employees, and periphery observers.
2. Scan the trends in your industry, associations, and the operating environment.
3. Apply insight and interpret trends important to the association’s strategy.
4. Establish a framework for decision making.
5. Identify strategic issues for the association to address.
6. Develop strategies.

Question 55

strategic planning: response models

Answer 55

_Fluidity: encourages a paradigm where the marketplace outside the organization decides its actions and priorities.
_Flexibility: involves ways to easily move assets around and reshape direction much more quickly. In a world of diverse needs, this paradigm has associations organizing to meet needs and be strategically important.
_Nimbleness: decision-making processes operate more quickly, and are more maneuverable. Seek out and upgrade structures that inhibit nimbleness. Consider your membership, governance, event and educational programs, workforce, financial, and information structures.

Question 56

strategic planning: growth vs maintenance

Answer 56

_Growth objectives: “doing the right things” is the ability to identify critical issues and opportunities that can change and develop an organization for the better-strategies that energize and maximize a strategic plan.
_Maintenance objectives: “doing things right” is important for maintaining and sustaining growth.

Question 57

strategic planning: visioning

Answer 57

Imagining a desired future: a commitment to rethinking and reviewing the organization holistically; a process of scanning and planning for long-term results in an organization.

It begins with a commitment by leadership, which sets off a chain reaction that generates enthusiasm, sparks creativity, leads to new ideas, attracts committed followers, and ultimately reinforces the leaders’ commitment.

Question 58

subsidiaries: for-profit

Answer 58

An exempt association can own 100% of the stock of a
for-profit, taxable subsidiary, provided the two entities engage in separate activities and have separate boards of directors, separate books and records, and separate bank accounts. The subsidiary is not the alter ego of its parent organization.

Question 59

subsidiaries: reasons to form

Answer 59

_Protects the association’s exempt status
_Facilitates joint ownership in property
_Insulates the association from liability
_Enables an association to properly reflect income from an activity
_Aids in reducing taxable income
_Performs member services

Question 60

subsidiaries: separate identities

Answer 60

A parent and its subsidiary should have separate corporate tax identities where the subsidiary carries on a separate business activity and is not acting as a true agent of its parent.

Question 61

succession plan

Answer 61

As volunteer or staff leadership will change, it is ideal to have a plan for what qualities are needed and who will succeed the current leader. The plan is usually implemented when a term ends, a retirement is announced, or in the case of a resignation.

Question 62

tax management

Answer 62

Intentionally structuring the for-profit and nonprofit
functions of the organization in order to minimize the organization’s tax liability requires a tax management process:
1. Assign a top executive to make minimizing taxes ·an ongoing priority, making it part of the job description.
2. Plan for minimizing taxes;it does not happen by accident.
3. Documentation is paramount.
4. Perform annual updates. Items not updated annually are all suspect. Each year, review the prior year’s plans and documents. Ask a lawyer about new legal and tax developments. Ask colleagues about factual and operational changes. Any of these may require an update to your plan and documents.

Question 63

taxes: 990 & 990 EZ Forms

Answer 63

An association that exceeds gross annual income of $50,000 must file a Form 990. Associations with gross receipts less than $200,000 and total assets less than $500,000 at the end of the year can file a Form 990EZ simplified form. The forms are due the fifteenth day of the fifth month after the association’s fiscal year ends.

Question 64

taxes: employment related

Answer 64

Associations exempt from federal income tax remain subject to federal, state, and local employment taxes-withholding, Social Security, and unemployment taxes.

Question 65

taxes: taxable functions

Answer 65

_Dues related to lobbying
_Expense deductibility from attendance at association meetings
_Income derived from real estate
_Income produced from non-dues sources of revenue
_Advertising

Question 66

taxes: UBIT & 990-T

Answer 66

Unrelated business income is income derived from a regularly conducted trade or business activity that is not significantly related to the tax-exempt purpose of the organization. Its purpose is to prevent exempt associations from competing unfairly with taxable businesses in activities that do not advance their exempt purposes. An association’s exempt status can be jeopardized if unrelated business income constitutes too high a proportion of the organization’s income.

Some specified requirements for computation, payment, and reporting of UBIT are:
• Unrelated business income and losses generally can be lumped together to offset total income and total losses.
• A $1,000 special deduction.
• Regular business deductions are allowed.
• Taxation is at corporate rates.
• Quarterly estimated tax payments are required.
• A foreign tax credit is available to foreign associations.
• IRS Form 990-T is to be filed by associations with more than $1,000 annual gross unrelated business income. This is in addition to Form 990.