Bookkeeping Red Flags & Your Board's Oversight

Tony Martignetti
Hello and welcome to Tony Martignetti Nonprofit Radio, big nonprofit ideas for the other 95%. I'm your aptly named host and the podfather of your favorite hebdomadal podcast. Oh, I'm glad you're with us. I'd be hit with apiraphobia if you told me that forever after and for eternity you'd miss this week's show. Here's our associate producer Kate with what's coming.

Kate Martignetti
Hey Tony, we've got Bookkeeping Red Flags and Your Board's Oversight. Jackie Shaw reveals the biggest financial red flags most nonprofits overlook. Including proper controls, reconciliation, getting receipts, your chart of accounts, and more. She also shares how to keep your board fully informed without overwhelming them. Finally, she's got an admonition about QuickBooks Online. Jackie is co-founder of Brass Jacks. On Tony's Take 2.

Tony Martignetti
I hope you enjoyed your Thanksgiving.

Kate Martignetti
Here is Bookkeeping Red Flags and Your Board's Oversight.

Tony Martignetti
It's a genuine pleasure to welcome Jackie Shaw to Nonprofit Radio. She and her longtime friend and colleague, also named Jackie, founded Brass Jacks in 2022 with the mission to educate people to become highly skilled bookkeepers And to connect nonprofits to well-trained bookkeepers. The Pair of Jacks, that's like, I called them Pair of Jacks. The Pair of Jacks published the Bookkeeper's Survival Guide in 2024. You'll find the company at brassjacks.com. See, I figured I was safe calling them the Pair of Jacks. They call their company Brass Jacks. I think I'm safe with Pair of Jacks. You'll find the company at brassjacks.com. And Jackie Shaw on LinkedIn. Welcome to Nonprofit Radio, Jackie Shaw.

Jackie Shaw
Thank you so much for having me, Tony.

Tony Martignetti
It's a genuine pleasure. I gotta shout out, uh, now most people are going to be listening, they might see a short reel, but you have a lot of color all about you. Uh, your, your sweater, your necklace, your lipstick, there's a lot of color involved. Red, red top, uh, uh, green sweater. Red lipstick, bold brown and gray glasses. You got a lot of color going on.

Jackie Shaw
I am an artist that day jobs as an accounting professional.

Tony Martignetti
Okay. Do you have a degree in art?

Jackie Shaw
I actually have a degree combining math and art. And so I did a math-based art exhibit, and then I studied Fibonacci for the math department.

Tony Martignetti
All right, all right. So the Fibonacci series, I, I've just— all I remember is the phrase Fibonacci series. What, what is Fibonacci? What is the Fibonacci series?

Jackie Shaw
Well, it's so fascinating. Originally, um, it was—

Tony Martignetti
Oh, and your fingernails! You just touched your— your fingernails are all multicolored. Yellow, blue, red. What do I see there? Oh my gosh, it's unbelievable. Oh, yellow, blue, red. Yes. All right.

Jackie Shaw
They need a little upkeep. It's been a, it's been a minute since I've—

Tony Martignetti
All right, most people are going to listen to the audio. That's okay. But I wanted to shout out more color. I just saw— That's right, more

Jackie Shaw
So, um, you had asked me a question before we did the

Tony Martignetti
Fibonacci series.

Jackie Shaw
Originally, that, um, series was created to explain the breeding of rabbits in an enclosed environment. How many rabbits will you end up with if there are no predators? And once Fibonacci created the series for that, because there wasn't TV back then, all the other mathematicians started playing with the sequence and they discovered It explained so much going on in nature, you know, the spiral created by our cosmos, waves, the shape of waves, the way stems grow on a plant so that each one of them has enough sunlight. It just absolutely exploded, and it's become, you know, a foundation mathematical concept ever since.

Tony Martignetti
Cool. Being Tony Martignetti, I love that it was founded by and created by an Italian Fibonacci. What was his first name? Do you know his first name? I

Jackie Shaw
don't remember his first name anymore.

Tony Martignetti
Okay, I'm sure it was something very Enrico. Michele. All right, that's all right. Oh, and then so you did an art installation based on mathematics. So was it a physical representation of some equation or formula or something like that?

Jackie Shaw
Yeah, one of the pieces filled the entire gallery wall, the longest part of the wall, and it compared the counting numbers versus the Fibonacci sequence. And then I did a lot of other pieces that were in glass and things like that that had a mathematical component. What was fascinating is my exhibit sold out. There was very few pieces remaining. Wow. And a lot of people that are scared of math were drawn to the art.

Tony Martignetti
Yeah, right. Well, it's a physical representation. If I can't understand the mathematics behind it, at least I can— this helps me understand what it represents, I guess, or something like that. It's a physical representation of numbers that are beyond me.

Jackie Shaw
Yeah. And I think as humans, we're drawn to those, the math in visual, right? Visual representations of math. We're actually just drawn to that naturally. The fear of mathematics, which leads into the fear of bookkeeping and segues nicely into our meeting today.

Tony Martignetti
Look at you.

Jackie Shaw
The fear of mathematics that gets instilled in school where people are told that they're not Yeah, yeah,

Tony Martignetti
it worked. It worked. It worked for me. I struggled. I did take some advanced mathematics. I got as far as calculus, but the stigma around math, yeah, I struggled with it. And I don't think I needed to struggle as badly as I did. But I think it goes back to Mrs. Gaffney, my 7th grade teacher. She was teaching— I still remember, I'm 63 years old. I still remember this moment. 7th grade, You know, we were confident, learned the concept of infinite numbers, infinity. And she asked the question, the number of grains of sand on the beach, finite or infinite? I shot my hand up. I was positive I knew it. Infinite. Wrong. I was crushed. But it's practically infinite. Nobody's going to measure. And then how do you define dirt versus sand? Who's going to come up with that explanation? So it's so impractical. effect, it is infinite. So I think I was right. Mrs. Gaffney could at least give me part credit for answering the question half right. It's practically infinite.

Jackie Shaw
Exactly. Because more sand is getting created every day and washing up on the beaches. You know?

Tony Martignetti
That's true too. What snapshot in time are we going to— at what second are we going to measure the— and then the next, by the time you— you can't count by the time the next wave comes up. and deposits and withdraws sand in certainly not in equal amounts. You're exactly right. Thank you very much, Jackie Shaw. So Mrs. Gaffney, she— but she hurt me. I was so embarrassed that I got that wrong. I was like, oh, but it's the practical effect. Nobody's— all right. I was thinking, you know, if you did an art piece on imaginary numbers, you could just have a frame that's empty inside. And then you could sell it for like $7,500. No, it's just, it's, it's, it's the imaginary numbers.

Jackie Shaw
And maybe it would get bought up by people later and it would end up being like the duct tape banana and somebody in the future would get like, sell my artwork for like $8 million.

Tony Martignetti
Millions. You'd be sold at Christie's after you'd probably have to wait till after you die though to get that kind of notoriety. Uh, it seems, seems it works that way for a lot of, for a lot of people. Not for some like Boxy, but for a lot of people. Uh, yeah. All right. Oh, interesting. Mathematics, art. Let's bring them together as you did so elegantly a few minutes ago and talk about bookkeeping and financial awareness for the boards and things like that. You have some financial red flags that you would like nonprofits to be aware of. So let's talk about some— let's talk about some Some of those.

Jackie Shaw
Yeah. Another, I have to give kudos to this quote. It goes to Leslie Scheiner, who's also a nationally recognized accounting professional. And she says that business owners must not abdicate their books, but delegate. This is very true in the nonprofit world. So often people just abdicate the bookkeeping. They just like hand it off to somebody.

Tony Martignetti
Yeah.

Jackie Shaw
And where it gets really dangerous is if they're handing it off to an executive director. Especially, I feel like if that executive director is not a founding director. You know, a lot of times when nonprofits are founded, the executive director is the person that came up with the idea, right? But at some point they transition to maybe being a board member or retire, and then we're hiring EDs. They're, they're now employee EDs. And I think that, you know, all callouts to the EDs and all the work, hard work they do, but they're not invested like the founder is. Right. And so, that's when the board really needs to take control over the financials. And because we have so much innumeracy in our country, in the world, and people don't really understand numbers or math.

Tony Martignetti
Yes, because a lot of people had Mrs. Gaffney in 7th grade.

Jackie Shaw
Exactly. Yeah. And so, then it just gets tossed off to somebody and nobody's really paying attention to the details. of what's going on. And, you know, we see it in the news every day, the nonprofits that have embezzlement, nonprofits that suddenly realize— we had an issue here with a local school, bookkeeping was done incorrectly. They didn't notice it until they were hundreds of thousands of dollars in the hole, and they were going to have to lay off like 20 employees and do the stopgap measures because nobody, nobody bothered to We can trust, but we also have to validate. Nobody was validating that the information the board was seeing was accurate.

Tony Martignetti
Okay. Okay. So let's distinguish— I ask my naive questions. Let's distinguish first before we get to the red flags. You referred to bookkeeping, but what's the difference between bookkeeping and accounting?

Jackie Shaw
Great question. Bookkeeping is the mechanism of creating the data, right? The person that's, that's adding all the information to your accounting system and ideally should be doing things like reconciling. Accounting is the broader, bigger scope of things, right? It's, it's, it's the accounting department that has a bookkeeper as one of the employees. And so accounting is the, is the, is the bigger picture. So bookkeeping is inside of accounting.

Tony Martignetti
Okay. Okay. And you said a bookkeeper would reconcile. We gotta— you gotta be careful of jargon jail. We have jargon jail on Nonprofit Radio. I've heard the word reconciling, but I don't know what, what do you— what are, what are we reconciling? The, the, the progressives versus the conservatives? What are, what are, what's being reconciled? The reds versus the greens?

Jackie Shaw
So the goal is reconciling Any accounts that are on the statement of financial position, also known as the balance sheet. We need bank accounts, savings accounts, credit card accounts, basically any account that we can get a statement for, third-party proof of the balance. We want to reconcile those accounts. A lot of them should be done monthly. Sometimes it's okay to do something quarterly. And boy, oh boy, do we have to make sure everything is dialed in. at the end of the year before a 990 is created.

Tony Martignetti
Okay.

Jackie Shaw
The activity of reconciling is a 2-part system. And what I'm finding now in the world is, number one, there's a lot of bookkeepers out there. And yeah, I just did air quotes and y'all can't see me do air quotes. So there's a lot of people that are put in the bookkeeping chair, but they're not bookkeepers. They're more like data entry clerks. So they know how to clickety-click the software, but they don't really understand the repercussions of what they're doing, right? Like what, how the data that's, that's going to be created as a result.

Tony Martignetti
Okay. What's the other thing you're seeing around bookkeeping?

Jackie Shaw
So, so number one in reconciling is you have to actually do it. And a lot of bookkeepers, people that are doing bookkeeping nowadays, don't even know you're supposed to reconcile because they don't have any training. So, you know, I just worked with a nonprofit and their books had not been reconciled since 2020.

Tony Martignetti
Oh my.

Jackie Shaw
And when they haven't

Tony Martignetti
checked their bank statements and checking accounts and

Jackie Shaw
for 5

Tony Martignetti
years,

Jackie Shaw
they've been clicking and putting data in, but they haven't confirmed. So the reconciliation process confirms, is the— are the transactions in the system and only in the system once? And the second part of reconciling— so the first part is comparing your records against the third-party documentation. Yeah. Like a bank statement and saying click, click, click, click. Yeah, I have all these things. But part 2 of the process, which 90% of bookkeepers don't know to do unless they've been trained. And honestly, a lot of the bookkeepers we're training are telling us they're not learning this stuff when they're getting bookkeeping degrees at colleges. And so the second part of reconciling, my friends, is you have to look at what's not clearing What's not on those third-party statements but is in your accounting software and figure out what it is and why it's there. And you have to deal with it because it could be it's a duplicate. What I think happened with this local school where they ended up in this huge cash flow shortfall and they had to lay off a bunch of people, I think that their income was getting double booked and no one noticed. And the person that was doing the bookkeeping either wasn't reconciling at all, or when they reconciled, they just clicked off the things that were on the statement and left behind all this old garbage that was not accurate because it wasn't on the statement.

Tony Martignetti
Okay, so, so they had twice as much— they thought they had twice as much income or revenue as they actually had.

Jackie Shaw
Yeah.

Tony Martignetti
All right, all right. That's as far as— well, let's not go any deeper on that. No, we do want to really—

Jackie Shaw
Okay, okay.

Tony Martignetti
But now I can understand. So if I can understand it, certainly our listeners got it. Okay, those are the 2 things you got to reconcile. And then reconciliation has 2 parts to it. You got to actually enter the data, and then you have to verify it against— you're saying like basically reality, like what, history and reality?

Jackie Shaw
Yeah.

Tony Martignetti
Okay, so that sounds like one of our financial red flags. Like, you're not, you're not reconciling, your bookkeeper isn't properly reconciling. Okay, can we go to another financial red flag?

Jackie Shaw
Oh, well, what I want to do is tell the audience the takeaway of this one, what they can do about it, because I don't want to scare the bejeebers out of your audience and then have them just like running around like, I don't even know what to do now. So, um, To take care of this, what a board member needs to get from the person doing the bookkeeping every month— and I want a board member to get it, not the ED, but a board member— is something that's called the reconciliation report. It, it shows the result of the person reconciling. So number one, you're gonna be able to prove they did that step because you've got the report. And number 2, the board member can look at all the uncleared activity on the report and see what's hanging out old. And so they can hire someone else to step in if the person doing bookkeeping doesn't have the skill set or knowledge to deal with the ick.

Tony Martignetti
Give, give, give us an example of an uncleared item. Maybe if we ground it in an example.

Jackie Shaw
Yeah, a great example is this. People are processing payroll in QuickBooks Online. So QuickBooks Online payroll is creating paychecks. And then they turn on the bank feed in QuickBooks Online. That bank feed can cause more trouble than it's worth, but everybody thinks that they're supposed to be using it nowadays because of the marketing and, and the pop-ups in the software. So the bank feed The checking account has all the paychecks listed. And so the data entry clerk, not realizing what they're doing, adds the paychecks from the bank feed. Now I have 2 paychecks for every single employee.

Tony Martignetti
I see. Okay. All right. All right. Um, are, are there more? Well, before we get to more red flags, I'm sure— I bet you have a bunch of red flags. Should every Well, we should either— we should have a bookkeeper or a CFO. Like, is this— can a CFO do the— in a small nonprofit, can the CFO do the bookkeeping function or no, that you're paying that person too much to do a more lower-level job?

Jackie Shaw
Yeah. What I would say is that we need a data entry clerk. We need someone entering the data. And then we need somebody that's either a bookkeeper on steroids or like a controller-level person. That oversees and ensures accuracy. That's the ideal scenario. And I know a lot of the little baby nonprofits—

Tony Martignetti
So, okay, it should not be the same person, right? Right. That's like basic financial controls, I guess. Yeah, because the person could be helping themselves or helping, you know, whatever, a vendor, and they're, and they're changing the bookkeeping to make it look legitimate. Or— all right, we should have 2 pairs of eyes on these, on the books, on the books, right? We're talking about the books.

Jackie Shaw
And we should have it for everything. You know, in the for-profit world, it often lands on the owner's lap, and the owner might not really have the skill set or knowledge to be the overseer, the controller watcher person. Yeah. But in the nonprofit world, we really, you know, I know that budgets are tight, but, you know, better to have 2 part-time people than to have 1 full-time person that doesn't really know what they're doing.

Tony Martignetti
Well, you could have somebody who knows what they're doing, but you still only have like— if you just have a CFO, what about a board member overseeing the, the, the work of the CFO? Would that, would that person catch malfeasance?

Jackie Shaw
One would hope.

Tony Martignetti
Or mistakes. Let's just say, or mistakes.

Jackie Shaw
Yeah, one of the, one of the trainings that, that we do at Brass Jacks is training treasurers what they should really be looking at, you know. A lot of treasurers are very passive and they just get this report put in their lap from the person doing the bookkeeping.

Tony Martignetti
Yeah.

Jackie Shaw
And they just say, you know, we have $50,000 in the bank. And, you know, they're not even really presenting the financials, but they don't know how. They don't know how to proceed.

Tony Martignetti
Okay. By the way, I love the company name Brass Jacks. It's like brass tacks. It's like, Brass Balls. You know, it's a good name. It's a good name. Um, all right. Financial Red Flags. Let's, let's continue with, um,

Jackie Shaw
yeah,

Tony Martignetti
I'm sorry. Wait, what did you say about Brass Jacks?

Jackie Shaw
Oh, luckily no one else had taken it. I was worried it was going to be like the Futurama where every, every name we pick, we go to look and someone else's.

Tony Martignetti
Yeah, it's not the same. It could be Brass Jacks 2, but it's not quite the same. You know, Pair of Jacks, you could have done Pair of Jacks. That's why I But Parajacks is not as good as Brass Jacks. All right. Red flags, financial red flags, or like oversight. We don't have adequate financial oversight. Help us diagnose problems we may have that we're not aware of.

Jackie Shaw
Yeah. So, the number one red flag is there's only one person that has access to your bookkeeping information. That's a huge one. You need more than one person to have access. But then the other people that have access need to be trained on what to look for, right? And what, what they should be going after. Um, another red flag is the financials change, especially in the nonprofit world. When, when the board votes on those financial statements, that's it. Those numbers have got to stay exactly like that. And so let's say At the end, for the close of June, we have a board meeting and it says that the, the net profit, the remaining, remaining money after income, is $20,000. But then the next time we get the financials, that June number has changed and it's now $10,000. Well, the board voted on the financial packet. It should not have changed at all. And so one red flag and one thing that the board should look at is to get out your statement of financial position, that balance sheet, and the board should always receive the prior month versus the current month so they can go down the prior month column and say, does it match last month's current month? You know, are all the numbers still the same? And if they're not, they really got to get on that. Right. Because one, because the board voted on the financials, they should not change. But the second piece of this is numbers changing after the fact either means that the person doing the bookkeeping doesn't fully know what they're doing, or they're not getting the information they need to do it right, like the executive director isn't turning in receipts. Another red flag we got to talk about. Um, Or, um, they, they don't understand the importance of not changing the past. So the board really needs to like do a smackdown and say, hey,

Tony Martignetti
okay,

Jackie Shaw
you know, June changed, you got to change it back, right?

Tony Martignetti
Or why did it change? Yeah, what's going on?

Jackie Shaw
Yeah,

Tony Martignetti
right. All right, all right.

Jackie Shaw
Yeah,

Tony Martignetti
that's— that sounds basic, but, uh, I'll bet there are a lot of boards that are not Not doing that. They're

Jackie Shaw
maybe looking to report back. I bet you, um, $1 each. How many people do you have watching this show?

Tony Martignetti
15,000 a week.

Jackie Shaw
I bet you, uh, 10 cents each that when you go to look at your financials, they probably have changed.

Tony Martignetti
Okay, well, don't be so giddy about it. Look, she's laughing at us. I mean, you know, that's, you know, not supposed to take joy in this. That's, that's a pain point.

Jackie Shaw
Don't you know it's either laugh or cry? And if you've seen the disasters I've seen and the heartbreak I've seen, I would either be in a puddle crying right now or I have to just laugh.

Tony Martignetti
All right. Plus you're in the position of having to explain what the problem is and why it matters. All right, so what's the— you know, no, so they're like, well, numbers always change. You know, things changed from, from October to November. Yeah, this— the situation changed. What's the big deal?

Jackie Shaw
Yeah, it's, it's that, it's that October changed. It's okay for November to change. That's the current month that the person's handling.

Tony Martignetti
Yeah.

Jackie Shaw
Going back and changing September and October, that's the problem. Because, okay. It gets very easy to do embezzlement and hide things. It's a shell game. They're constantly moving the embezzlement activity to past periods, hoping nobody sees it.

Tony Martignetti
Well, then should we be looking at 3 months? Uh, so should we look at September, October, and November?

Jackie Shaw
Hey,

Tony Martignetti
in one report?

Jackie Shaw
Good question. That exists in one report. It's the statement of financial position, and you can look at the net profit showing in equity. I know I'm throwing out accounting terms right now, but the statement of financial position has the total Profit for year, for the year. Okay, if you take that number and you subtract the current month's profit, it should equal the last report.

Tony Martignetti
Last month's. Yeah, even I, even I got that. Okay, it should equal last month's. All right, all right. Well, what do we do if we have somebody who's just cheating on the number? Well, that's why you have the second set of eyes. I mean, you could just put anything in the report to the board. You could say that the numbers didn't change, but they could have actually changed. That's why you need the— you need somebody overlooking the creation of the statement of financial position. That would be great. How did we get to these numbers? That, that's not— that ideally doesn't sound like it shouldn't be a board member. That should be somebody internal overlooking the creation of the statement for the board.

Jackie Shaw
Yeah, the problem— and I, you know, I've been on a lot of boards and I've been the treasurer most of the time.

Tony Martignetti
Oh yeah.

Jackie Shaw
And usually people bring me on board to actually teach the other board members how to read the financials, because a lot of board members don't know how.

Tony Martignetti
Yeah, yeah.

Jackie Shaw
And so there's that piece of it, but then there's also the idea that we have new treasurers every 2 to 4 years. And so if we say the treasurer is in charge of this, then we need some sort of treasurer onboarding Like almost like video showing someone, this is the report, these are the things to look at, here's the math, like a tutorial stepping them through each step of the way. So if you have someone take over as treasurer that isn't an accountant, that they could follow the system.

Tony Martignetti
Okay.

Jackie Shaw
Yeah.

Tony Martignetti
Yeah. All right. Because Yeah, because I could see in the transition could be a place where mistakes— instead, I won't go to the nefarious, you know, the bad actors. I won't go there every time. That's where the mistakes could crop up. The new treasurer is just not catching the difference between the way things were and the way they are now, or, you know, something changed in the process, or, you know, so you need to have overlap, as you're saying. Yeah.

Jackie Shaw
Absolutely.

Tony Martignetti
Some, some transition time between treasurers if they're doing your oversight properly. All right, uh, you mentioned turning in receipts— not, not turning in receipts, another red flag. Oh, I spent $25 on lunch with, uh, with the prospect. That's a pretty cheap lunch. Uh, I spent $75 on lunch with, uh, with my donor, with our, with our donor, meeting the foundation contact. Just put it down. Just put it down. $75. That's bad, right? That's bad.

Jackie Shaw
Yeah, again, where the bank feed really gets nonprofits, because somebody will turn on the bank feed in the software, all the transactions from the credit card are being fed in, and someone's just blindly clicking and going, oh, you're supply, you're this, you're that, without the receipt. Well, you know, there's definitely instances where You know, an EDI, you know, like, let's pretend I take over as treasurer for a company and I start asking them for all this stuff that they—

Tony Martignetti
Do it for a nonprofit. Be treasurer of a nonprofit.

Jackie Shaw
So, let's say I'm coming on board as a treasurer for a nonprofit. I start asking the bookkeeper things that no one else has ever asked them before. And as I do, I discover that the credit card hasn't been reconciled for 3 months. And I say, hey, bookkeeper, what is going on? This has to be done every month. And they say, well, the ED hasn't turned in their receipts. Well, and this is something that I've seen happen in real life many times. So the ED is actually causing the financials that are going to the board to be inaccurate because they're withholding those records. And then the question is, why are they withholding the records? Is it just that they're very disorganized? And can't manage to keep track of their receipts, or are they hiding something? That's where it just gets so tricky so quickly in the bookkeeping world.

Tony Martignetti
And it's not just the ED. I mean, everybody should be turning in receipts.

Jackie Shaw
Oh yeah. Right.

Tony Martignetti
For whatever expenses. Well, it was, it was gas for the, it was gas for the outreach van. Uh, it was dinner with a prospect, you know, whatever. Right. Okay. And then should we just be marking, like, is it okay to just mark in the, in the corner, dinner with Jackie Shaw, re— you know, renewing her $750,000 gift, uh, this month. We'll put you down for $750,000 monthly. You're a sustainer at the $750,000 level.

Jackie Shaw
No problem.

Tony Martignetti
I mean, we may as well, if we're gonna have hypotheticals, we may have some fun. So every month, uh, you know, you give us $750,000. I feel like I should take you to lunch or dinner at least A couple times a year. Um, so is that okay? Just a little— just a little lunch read, uh, with Jackie Shaw, gift renewal. Boom. Hand that over. And then at the end of the week, is that okay? Just the end of the week, I can give my receipts over to the, to the bookkeeper? All right. And then they should be checking against the, the credit card statement. That's reconciliation, right?

Jackie Shaw
Exactly.

Tony Martignetti
Okay. Okay. Uh, it didn't come— wait, it's, it's, uh, $12 short. The, the, the bank is $12 more than the receipt. Where— no, I paid the tip in cash. Oh, all right, $12 tip in cash. You didn't note that on the receipt. Try to be better about that if you're going to pay cash for receipts, which is admirable, so the, the person gets 100% maybe. Uh, you know, you got to note that down. $12 cash tip. All right, we're on you.

Kate Martignetti
It's time for Tony's Take 2.

Tony Martignetti
Thank you, Kate. Unbelievable. Last week's show was the Thanksgiving week show. We publish a show every single Monday, every single— 50 times a year. Thanksgiving last week. Did you, did you hear all the mentions of Thanksgiving? And I hope you have a Happy Thanksgiving. I hope you enjoy your time with friends and family. No, no. You didn't— all of them? You didn't hear a single one? You know you suffer with a lackluster, middling host at best. At his best, lackluster and middling on good weeks. I just didn't think of it. And I have an associate producer too. But I know I always said I wish I had an intern so I had somebody to blame. Now I don't have an intern. We have— I have an associate producer, but it's hard for me to blame her. Yeah. Uh, you know, I just, I didn't think of it. I, I'm thinking of the show. I'm thinking of, you know, what to say about the guest. And so middling and lackluster. That's, that's the best excuse I can come up with. I do hope you enjoyed, past tense, your Thanksgiving. Hope you were with family or friends, and I hope you took some time for yourself too. This is essential. This is essential. You, you're working in a high-stress time for our nonprofit community. So I do hope you took some time for yourself because now it's the hectic fourth quarter. 25-30% of your revenue could come in the next six weeks. So be good to yourself. I hope you were over your Thanksgiving and. I hope I remember to say Happy Thanksgiving next year. That is Tony's Take 2. Associate producer Kate?

Kate Martignetti
I think to make up for the lack last week, we should say what we are thankful for this week.

Tony Martignetti
Oh, okay. All right, I'm game for that. I'm thankful for family. Certainly, I'll be seeing my wife over Thanksgiving because we don't live together. You know that, but a lot of listeners might not know that. She lives in Indiana. I live on a beach in North Carolina. And I would say for just this life that I've created with where I live, my business, the clients that I have, the friends that I have. Yeah. Yeah, you know, you— I've— I, I, I, I love and I'm thankful for the, the life that I have created. How about you?

Kate Martignetti
Um, I am thankful for family. Family always comes first. Um, I am thankful for my 2 pets who are watching me right now, and I am definitely thankful for, um, my education. I am very happy with where I'm going. Back to school in university. I'm always happy to go every other day. I think I have because I'm hybrid. Yeah, so I'm thankful.

Tony Martignetti
You're studying education. You want to be a teacher. All right. I hope we hope we do this on time next year.

Kate Martignetti
Do we want to say Merry Christmas early or maybe next week? Well, first,

Tony Martignetti
everybody doesn't celebrate Christmas, but we can say.

Kate Martignetti
Happy holidays.

Tony Martignetti
Yes, in case, in case we forget. Well, we're off for 2 weeks. We're off for the 2 weeks around, around Christmas anyway, Christmas and New Year's. So maybe that's a good idea since I might forget. I think usually the last show of the year I don't forget, but it's probably— it's still a good idea. So thank you.

Kate Martignetti
We've got beaucoup buttloads more time. Here's the rest of Bookkeeping Red Flags and Your Board's Oversight with Jackie Shaw.

Tony Martignetti
Other red flags. Let's have some fun. What other red flags we got?

Jackie Shaw
A wonderful red flag is that the financial statements are like 8 pages long. So there's this other financial statement called the Statement of Financial Activity. That's what's also called a profit and loss in the for-profit world or income statement. It shows all the grant and donation income you're getting in, all your current year expenses, and what money's left over, if any. The longer that report is, the more likely the bookkeeping is not going to be done correctly, because when you have too many choices, people are going to put— this is Expense A, okay, so it's the, it's the meal with me as a donor.

Tony Martignetti
Okay.

Jackie Shaw
One time they're going to put it into outreach expense, and the next time they're going to put it in mileage, meals, and something else expense. And so it's not consistently going to the same bucket. And consistency is one of the most important things that we want to implement in our bookkeeping systems. We want consistency month over month or year.

Tony Martignetti
Otherwise, we can't manage our expenses. Exactly. If we're not defining expenses the same month after month, then how can we say these expenses are too high or we can afford to spend a little more over here if we're not measuring it the same? Because we don't know really what it is.

Jackie Shaw
Right. And so, you know, a nice-looking statement for a nonprofit, this report should be 2 to 3 pages at the most. Because any more than that, it means you've got so many categories that the person doing the data entry probably will pick a different choice and not be consistent because there's just too many choices. And then for the board members, you can imagine, especially with the innumeracy we have in our country, that they're going to glaze over. The board members glaze over after the first couple pages. And so— No, then no one's looking. No one's paying attention, and no one's asking the right questions.

Tony Martignetti
Yeah, it's too long. We just—I can't—I can't deal with it. I'll just assume everybody's honest and accurate.

Jackie Shaw
Yep.

Tony Martignetti
That's probably a bad assumption. That's a—that's a—I don't know if it's a false assumption. It's an unsafe—that's a risky assumption. I'm sure everything's fine. All right. You shouldn't shouldn't be a board member if if. If you're just sure everything is fine, I mean, you're not confirming that, you probably shouldn't be on the board.

Jackie Shaw
Yeah, maybe just be a volunteer.

Tony Martignetti
Just be a volunteer or, yeah, or donor.

Jackie Shaw
Yeah.

Tony Martignetti
With high hopes. Yeah, we need people to take their responsibilities more seriously as fiduciaries than it's all fine. It's all fine. You got more red flags for us?

Jackie Shaw
Um, the— so we've got the, the reconciling piece, we've got the fact that we need oversight, we've got the way too many choices. Um, and then the other red flag for me is when a new treasurer is voted on the board, they want to change the entire accounting framework. And what I mean by the accounting framework is The chart of accounts, that list we were just talking about that can be too long, you know, the way the data is being entered. And so, you know, you get some fairly strong-willed treasurers that want to change everything. And if you can imagine every 3 to 4 years everything changing, imagine someone coming into your house every 3 to 4 years and they move absolutely everything in your house to different areas of your house. Like, there's no way you're going to be able to compare year-over-year information, or as a board even feel like you're confident in that you learned this system and you can look at the financials if every treasurer is going to want to change everything. And so as treasurers, we have to be really careful about coming in and like wanting to implement our idea. of the way things should be.

Tony Martignetti
Okay. You're talking about the overall organization of, of the accounts and the different buckets. Okay.

Jackie Shaw
Yeah.

Tony Martignetti
Although if you see, if you come in and you're, and you see that the, the list of accounts is like you were saying, 7 or 8 pages, that sounds like a worthy— we got to consolidate these things.

Jackie Shaw
And I—

Tony Martignetti
Sounds like a worthy overhaul.

Jackie Shaw
Absolutely. And there have been times where I have been brought in as treasurer specifically to do that activity. Now, I will say some of my CPA colleagues have told me, don't do that, only revise the systems as a paid contractor. Okay. They didn't want me doing it as a volunteer for, for legal reasons or whatever. But there are reasons to have the chart of accounts And these systems revised, reviewed and revised, especially if we're not getting the information the board needs to manage the company very well. And so while there, there are times to do it, it has to be something where everybody's on board with it. It's not a surprise. Like the board, you know, the board says, we don't understand, and they have somebody come in and say, I can fix this and I'm going to do this. And then they're like, okay, yes, do that. Right. Right? It has to be, um, all out in the open, not the new treasurer gets access to the QuickBooks file and just changes everything.

Tony Martignetti
Okay, very good. The chart of accounts.

Jackie Shaw
Yeah.

Tony Martignetti
Keep it, uh, keep it to a couple pages.

Jackie Shaw
Yep.

Tony Martignetti
And that, that even sounds like a lot. Like, I don't know, your average small to mid-sized nonprofit, I don't know, page and a half, maybe 2 pages of accounts.

Jackie Shaw
Yeah, absolutely.

Tony Martignetti
Otherwise, you're subdividing too much, and then the value gets lost because you've got these $6 accounts that don't— you got to try to figure out in your mind, well, how is that related to the, to the other accounts on the 7 or 8 pages so that I can aggregate them in my head? No, that's not— all right, I understand. All right, if I understand it, yeah, that's a good sign.

Jackie Shaw
That's another red flag, is that So let's say we have a data entry bookkeeper person that's doing the clicks and adding the data to an accounting system, and we have the board of directors that no one on the board of directors might have an accounting or bookkeeping background. And the board tells the data entry person, we want this account, we want that account, and pretty soon your statement of financial activity doesn't say Telephone expense, it says Verizon, you know, and they start listing all— like, instead of accounts explaining what was purchased, they start changing it into who we bought it from.

Tony Martignetti
Okay, right. Well, that's fine if it's Verizon, but then if it's like Joe's Mechanical, you know, is that plumbing? Is it electrical? Is it HVAC? Is it carpentry? Well, we don't know, Joe's, right? All right, all right. And then, you know, you find out that Joe is Uh, I'm married to the bookkeeper. That's bad. That's bad.

Jackie Shaw
Yeah.

Tony Martignetti
All right. All right. Thank you for the red flags. Okay. Those are cool. Those are cool. Um, keeping boards— you've alluded to boards many times. Keeping boards informed, that's essential. That is— that is— that the treasurer's— is that the board treasurer's responsibility? The board treasurer in conjunction with the CFO? Who's responsible for informing the CEO? Who's responsible for informing the board? And then we'll get to what you should be informing them of. But who's responsible for this?

Jackie Shaw
So in my opinion, the treasurer, it's the treasurer's job to present the financial statements to the board of directors. I think that's a good idea. I don't think you should rely on your bookkeeper or your, you know, paid CFO to do it. Because, you know, they're going to come in and they can point at the things they want you to look at and not point at the things they want you to ignore and guide the board into not noticing issues. Right. And so we want, again, that third party part of the accounting controls, that third-party person that doesn't do the bookkeeping. The treasurer should be looking at the financials and looking at supplemental documents And then reporting to the board the state of the organization.

Tony Martignetti
Okay. And how do we report the state of the organization? What does the board need to know?

Jackie Shaw
Yeah. So we need that statement of financial activity and the statement of financial position. Um, so those 2 reports are important, but then it's like how they're formatted. You know, we can get into the weeds. Like, I always get rid of the pennies. You know, I try to keep— put as few numbers on the page as possible by, by rounding and things like that, because there's going to be people on the board that are right-brained people that, uh, a white page with black numbers is not their jam. So to help them with that, and it's just a smart idea anyway, I like nonprofits to have a dashboard. You had mentioned that earlier. So a dashboard I want a dashboard that shows us what our open grants are, what we've spent, how much there is left to spend, you know, the deadline to spend it. And so there's, you know, every nonprofit, their dashboard might be a little different, but if you have grants, that's a really important piece. And then usually with the statement of financial activity report, We are often looking at that as a budget versus actual report. So we have a budget added to our accounting system, and we're always looking at budget versus actual.

Tony Martignetti
Okay. And they should be aligned, or maybe there's an explanation for why they're not. A tree crashed and tore down the fence and the east wing. Oh, that's a bad example. I don't know. Lamenting our east wing, tore down whatever, a tree crashed into the pool, the outdoor pool. Right. Big expense. We got to drain the pool, the heater got crushed, and plus we got to get the tree out of there. So we didn't budget, we didn't budget in, I guess, in facilities for tree falling. Okay, that's explained. But if we're— but if If we're not— but if there's consistently disparities between our budget and our actual, we're either spending recklessly or we're not budgeting properly.

Jackie Shaw
Exactly. Yep.

Tony Martignetti
Okay. Well, this is easier than— see, in college I took accounting for poets and I got a D. So, you know, you can imagine. So you see where— what you see, what the foundation is that you're working with.

Jackie Shaw
That's because I didn't teach the class, Tony.

Tony Martignetti
Pretty stable. Yeah, I know.

Jackie Shaw
I know.

Tony Martignetti
I know. Thank you. Not an A? Wouldn't you give me an A? Mrs. Gaffney taught it. I'm still plagued. 63 years, whatever. 57 years later. No, that was 7 years old. It was 7th grade. Well, however old you are on 7th grade minus 63, that many number of years, I'm still plagued by Mrs. Gaffney. She had that phony blonde hair too. It just looked terrible. The, the— it was, it was on— it was, it was very unbecoming. Infinite, finite. Um, all right, what, what, what else goes on the dashboard, the, the board dashboard? Besides grants, you mentioned grants, grants, grants revenue, grants income spent, how long we have to spend it with deadlines. What else goes on that board dashboard?

Jackie Shaw
I also like a really high-level view of the budget. Like we said, we'd bring in this much in income. We've brought in that much of income. I also like a dashboard that has some graphs. Like, I'd like to see like a pie graph of our expenses, how much we're spending on fundraising versus programs versus overhead kind of thing. So bringing in graphs for those right-brain board members that really need to, to see colors and shapes. Yeah. And not numbers.

Tony Martignetti
Okay, okay, all very good. Colors are good. Um, all right, so that— all right, anything else you want to, you want to share about

Jackie Shaw
all this stuff?

Tony Martignetti
About the board? Well, about, about the board specifically.

Jackie Shaw
Yeah. Um, well, I will tell you a really interesting story. So I had a, um, an old—

Tony Martignetti
we, we love stories. Yeah, please.

Jackie Shaw
I have an old client that reached out And they said, we're going to move to QuickBooks Online from QuickBooks Desktop because QuickBooks Desktop went from $150 to $3,000, skyrocketed. Why? Because we're paying— we're out of pocket paying for Intuit's AI development, and they're lobbying to keep themselves in a good position. For example, they're taking away the free file software that our government had so people could file their taxes for free. That's being taken away this coming year because the current administration says the tech companies have it under control. Well, they do, but they're gouging us. So

Tony Martignetti
sounds like what Microsoft did to nonprofits earlier this year, taking away our 400,000 free Microsoft 365 licenses for For small nonprofits and now, you know, started charging a licensing fee.

Jackie Shaw
Yep. Same problem here. So what happened is—

Tony Martignetti
Bastards.

Jackie Shaw
So the story is that there's this company TechSoup and TechSoup provides software to nonprofits and you could always get QuickBooks Desktop through TechSoup. Well, they stopped, they stopped selling it. So now you can only get QuickBooks Online. QuickBooks Online is not that smart of software. I've been using it for almost 20 years. If you want to ask anybody who's the expert at QuickBooks Online, right here, I'm one of them. I've been, I've been using this software for years. I know its limitations, and it absolutely cannot handle a $7 or $12 million nonprofit. It just can't handle it.

Tony Martignetti
So the desktop, the desktop version, which now Is, is 2,000% larger than it was, costlier than it was. That's the version. Well, if, if, if QuickBooks Online is so inadequate, how come you've been using it for 20 years?

Jackie Shaw
Because people wanna integrate with third-party platforms and all the third-party platforms are being told by Intuit they're not allowed to update their desktop integration apps, which I, which should be illegal. You know, if another company shouldn't be able to tell another company what they can do and what they can't. So they're, they're telling all the third-party companies that integrate, you're not allowed to update your desktop, push everybody to QuickBooks Online. And so it's all about the marketing and the third-party integrators getting pushed. Now, the story, my client, old client reaches out and they say, hey, we're going to move to QuickBooks Online, we think, because we need— we want to save money for bookkeeping and we think this will save us money. Now, I understand you're paying $3,000 for software right now, and you think it's really sexy to pay like $90 a year with the TechSoup subscription. The problem is that they're trying to cut down on the time it takes for the bookkeeper to do the bookkeeping. That was their endgame. It wasn't so much the cost of the software, but their new treasurer thought that They would save a bunch of time in bookkeeping if they switched. So I very easily explained to them what a huge disaster this would be. And any money they think they're going to— any— the savings between the 2 different software platforms, like that $3,000-ish, they're going to lose that in the delays and the inadequacies of that software. Yeah. So if you're used to using QuickBooks Online, you would be a very rare user if you didn't sit and watch the blue donut of death spin. Because— and it's not your— it's not your internet, my friends. Intuit oversold QuickBooks Online when they pushed everybody into QBO this— they were the last year, and now they don't have the bandwidth. They don't have the server farms, AKA now called data centers. They don't have the data centers bandwidth to, to take care of all of us. So it's just this constant, just lag time, lag time, lag time, and the functionality's not there. The, the ultimate report for board members is a statement called Budget Performance. It's in QuickBooks Desktop. It shows last month actuals, last month budget, year-to-date actuals, year-to-date budget, and then the annual budget all on one report. Wow. That's like the jam. That's the perfect report to give the board. It doesn't exist in QuickBooks Online.

Tony Martignetti
All right. All right. And an admonition. We're going to end with an admonition about QBO, QuickBooks Online. Inadequate despite the very attractive price.

Jackie Shaw
If you're a nonprofit that's doing more than $1 million, I would be real careful about using QuickBooks Online.

Tony Martignetti
It's advice from Jackie Shaw. Yeah, half of the pair of jacks with her friend and co-founder. You'll find the company at brassjacks.com, and you'll find Jackie on LinkedIn. Thank you very much, Jackie. This is fun. This is a lot more fun than 7th grade mathematics.

Jackie Shaw
Yeah, hanging out with me and doing numbers is gonna be way more fun than that lady

Tony Martignetti
Mrs. Gaffney.

Jackie Shaw
Mrs. Gaffney, come on.

Tony Martignetti
She's probably long dead now. Her blonde hair is probably still very blonde in her, in her casket. I hope she got cremated just so that the blonde hair died, went out, went out, disappeared.

Jackie Shaw
All of the plant life around her coffin area is all gone because—

Tony Martignetti
Yeah, it's contaminated. It's contaminated by the, by the bleaching product. Oh, it was bad. Thank you, Jackie Shaw.

Jackie Shaw
Thank you, Tony.

Kate Martignetti
Next week, overlooked consequences of AI. If you missed any part of this week's show,

Tony Martignetti
I beseech you, find it at tonymartinetti.com.

Kate Martignetti
Our creative producer is Claire Meyerhoff. I'm your associate producer, Kate Martignetti. The show's social media is by Susan Chavez. Marc Silverman is our web guy, and this music is by Scott Stein.

Tony Martignetti
Thank you for that affirmation, Scotty. Be with us next week for Nonprofit Radio, Big Nonprofit Ideas for the Other 95%. Go out and be great.