Payroll Crisis and Restricted Funds

The executive director should first build a 13-week cash-flow forecast and identify all available unrestricted resources. The organization has $40,000 in unrestricted cash and $70,000 remaining on the line of credit, so drawing the remaining line may cover one payroll but increases interest and risk. The board can release the $100,000 board-designated reserve because board designations are internal and can be undesignated by board action, documented in minutes. Other appropriate steps include accelerating government billing, requesting an advance or expedited payment, negotiating short payment terms with major vendors, delaying nonessential spending, and asking the board for an emergency meeting. The $310,000 scholarship funds are donor-restricted; using them for payroll without donor consent is inappropriate and likely a breach of fiduciary duty. The board should request written donor approval before any release. It is also inappropriate to hide the deficit, skip payroll taxes, or commingle restricted cash with operating cash. The executive director should communicate honestly with staff and the board rather than solve a liquidity problem by violating restrictions.

The key principle is that no one person should record, approve, and reconcile the same transaction. The bookkeeper should prepare disbursements but not approve them; the executive director can sign checks but should not be the sole signer above a threshold. The board treasurer or another independent director should review bank reconciliations monthly and initial them. Require dual signatures for payments above a set amount, such as $2,500, and require documented approval for purchases before commitment. Restrict credit cards to named staff with receipts and monthly review. Have a director review vendor master changes and payroll changes. Because the audit found a $22,000 supplies variance, the organization should implement inventory or supplies tracking and compare budget to actual monthly. A whistleblower or anonymous reporting channel is prudent even in a small shop. The board should adopt written policies, train staff, and monitor corrective actions from the audit. In a small organization, perfect segregation may be impossible, so compensating controls-independent review, dual signatures, and board oversight-are essential.

The finance committee should review the balance sheet, statement of activities, cash-flow statement, and a restricted-funds schedule at every meeting, not only the statement of activities. It should examine the $140,000 deficit by cause, the $22,000 supplies variance, receivable aging from government contracts, and line-of-credit usage. The full board should decide whether to release the $100,000 board-designated reserve, but only with a written plan to rebuild it. It should not approve use of scholarship funds without donor consent. The board should also approve a corrective action plan for segregation of duties, engage the auditor or a financial consultant to review controls, and adopt a reserve policy with a target range. It should revise the budget or develop a deficit-reduction plan, including revenue diversification and cost controls. Finally, the board should receive a dashboard with days cash on hand, line-of-credit availability, restricted-fund balances, and payroll coverage. The reasoning is that payroll is a symptom; the board must govern liquidity, restrictions, and controls together.