CNE Financial Sustainability & Diversification 3 — Questions and Answers
Question 1: A nonprofit is considering launching a fee-for-service consulting division. Which primary concern should leadership evaluate first?
- Whether the activity is related to the exempt purpose or may generate UBIT (Correct answer)
- Whether the consulting clients can receive a charitable tax deduction
- Whether the CEO's salary will need to increase
- Whether to register the division as a separate LLC immediately
Correct answer: Whether the activity is related to the exempt purpose or may generate UBIT
Before launching earned income activities, nonprofits must determine if the revenue is related to their exempt purpose or subject to Unrelated Business Income Tax (UBIT).
Question 2: What distinguishes an 'endowment draw' policy from an operating budget line item?
- Endowment draws are restricted to capital expenses only
- Endowment draw policies govern what percentage of investment assets may be spent annually (Correct answer)
- Endowment draws are recorded as liabilities on the balance sheet
- Endowment draw policies determine how donations are solicited
Correct answer: Endowment draw policies govern what percentage of investment assets may be spent annually
An endowment draw (or spending) policy sets the annual percentage of the endowment's market value that may be withdrawn to support operations or programs.
Question 3: A nonprofit receives a $500,000 bequest with instructions that only the investment income may be spent. This is classified as:
- Temporarily restricted net assets (with purpose restriction)
- Permanently restricted net assets (endowment) (Correct answer)
- Unrestricted net assets
- Conditional contribution pending donor approval
Correct answer: Permanently restricted net assets (endowment)
A bequest requiring that only income—not principal—be spent creates a permanent endowment, classified under permanently restricted net assets (or net assets with donor restrictions in ASC 958 terminology).
Question 4: Which approach to fundraising diversification involves cultivating mid-level donors ($1,000–$10,000) as a pipeline between small donors and major gift prospects?
- Planned giving cultivation
- Mid-level donor program (Correct answer)
- Corporate foundation solicitation
- Crowdfunding campaign
Correct answer: Mid-level donor program
A mid-level donor program specifically focuses on donors at the $1,000–$10,000 range, bridging the gap between annual fund donors and major gift prospects.
Question 5: A nonprofit with $2M in annual expenses has $150,000 in unrestricted cash. How many days of cash on hand does it hold (assuming 365 days)?
- Approximately 14 days
- Approximately 27 days (Correct answer)
- Approximately 40 days
- Approximately 55 days
Correct answer: Approximately 27 days
$150,000 ÷ ($2,000,000 ÷ 365) = $150,000 ÷ $5,479 ≈ 27 days of cash on hand.
Question 6: Which is the BEST example of a 'restricted' versus 'unrestricted' revenue issue that can cause nonprofit financial distress?
- Spending restricted grant funds on general overhead without donor permission (Correct answer)
- Investing unrestricted reserves in low-yield savings accounts
- Accepting in-kind donations that exceed fair market value
- Reporting deferred revenue as earned income
Correct answer: Spending restricted grant funds on general overhead without donor permission
Using restricted grant funds for unauthorized purposes violates donor intent, risks grant clawback, and can trigger legal liability—a common cause of nonprofit financial distress.
Question 7: Why do many financial sustainability experts recommend nonprofits maintain at least 25% of revenue from earned income sources?
- To satisfy IRS requirements for 501(c)(3) status
- To reduce dependency on philanthropic funding that can be volatile or competitive (Correct answer)
- To qualify for Community Development Financial Institution (CDFI) loans
- To avoid paying Unrelated Business Income Tax
Correct answer: To reduce dependency on philanthropic funding that can be volatile or competitive
Earned income from fees, contracts, or social enterprise provides more predictable and mission-aligned revenue, reducing vulnerability to philanthropic market volatility.
CNE Financial Sustainability & Diversification 3
A nonprofit is considering launching a fee-for-service consulting division.
Which primary concern should leadership evaluate first?