The Nonprofit Auditor and Mission-Infused CFO: Building a Strategic Partnership for Success
The Business Roundtable, an association made up of CEOs from major for-profit corporations, recently announced that their companies plan to invest more attention and resources into addressing social impact issues. Their goal is to make a positive societal difference while maximizing company profits to keep their shareholders happy. Perhaps this change in priorities reflects a desire for the for-profit corporate structure to play a more significant role in addressing critical social and societal issues that nonprofits or government entities have traditionally addressed. Or perhaps it reflects a belief that nonprofits can no longer keep up with the challenge of building a sustainable business model that can define, measure, and ultimately meet long-term mission goals.
The origins of such thinking may stem from the unfortunate reality that, despite the fact that the nonprofit corporate model is designed to address social impact, nonprofits often do not sufficiently invest resources to determine long-term mission clarity and relevant program outcomes.
Measuring mission impact is difficult and expensive under even the least complicated of circumstances, and the problem is exacerbated when nonprofits aren’t able or willing to conduct the level of research and evaluation needed to determine the best metrics for measuring optimal mission impact. The reasons for this vary, often including some combination of
- Insufficient financing
- Poor business models that run unrestricted net asset deficits
- A lack of mission or program independence from funders
- Insufficient organizational knowledge and data systems
- A general lack of will to invest on the part of key organizational decision-makers
Simply put, too often nonprofits don’t have a plan, strategic or operational, to figure out what works and what doesn’t.
However, in a reflective, proactive, and determined way, the nonprofit sector needs to show that it is in fact the best equipped corporate structure and model to lead the industry of social impact. The nonprofit sector is uniquely positioned to make long-term societal impact its primary focus, especially when organizations are empowered with a business model that allows them to build up unrestricted net assets and thereby reinvest its own capital back into the mission.
That is not to say the for-profit sector doesn’t have an important role to play. They can, should, and must complement the work of the nonprofit mission experts by providing unrestricted capital, among other financial support, to build long-term, sustainable business models focused on innovation and programs that are or have the potential to be successful. But, ultimately, it is nonprofits that are best equipped to measure and shape the societal impact of diverse and complicated missions—especially when strategically independent of outside influences.
Financial function leadership, often embodied in the role of the nonprofit CFO, is also becoming more and more critical for making this work. CFOs are in a unique organizational position—with obvious help from the CEO, mission experts, and a savvy board—to weave mission independence into a sustainable business model.
Ideally, over time, mission independence and a sustainable business model should become a positive feedback loop: the organization’s improving financial stability continues its mission independence and impact, which should further improve the organization’s financial stability, and so on.
It might also prove to those skeptical Business Roundtable CEOs that a financially sound, mission-independent nonprofit can not only be an intrepid force for affecting systemic social and societal change, but that it is the optimal corporate structure to make it happen.
What Contributes to Mission Independence?
To define mission independence, it is helpful to look at on whom or what an organization’s mission is dependent. Boards, finance committees, and donors try to exert sway over the direction of the mission. An organization might be deemed “mission-dependent” when it’s steered not by a clear and realistic understanding of what works and what doesn’t, but by forces within or outside the organization injecting alternative priorities and assumptions into the direction of the mission.
A lack of mission independence muddies the clarity of successful mission impact, which ultimately weakens the organization’s long-term business model. It becomes a sure-fire recipe for mission myopia followed closely by financial stagnation. But mission independence cannot be assumed to be organic. It is more often a function of the organization deciding to make important investments including:
- Independent research and evaluation
- Independent research and evaluation
- Unrestricted net asset reserves for strategic use
- Existential organizational decision making
1. Independent Research and Evaluation
Mission impact requires a research and evaluation capacity in the short term, but it is arguably more important in the long term. Successful short-term program metrics are known to falter over the long term, especially if there are limited methods for re-training program staff and management to measure long-term mission impact. Looking at long-term impact requires moving beyond narrow-sighted, anecdotal influences and instead identifying a systemic and societal result—perhaps a reduction in poverty, cures to diseases, a reduction in recidivism for youth placed in family supportive programs, or people with disabilities finding work and becoming valued, long-term employees; the list is endless.
But to serve a mission that goes beyond an amalgamation of anecdotal successes, a robust research and evaluation capacity is essential. To justify their worth, the sector and individual organizations must determine what actually works, what doesn’t work, what could work, and what is worth investing in over time.
The goal must be to let program management determine and own their mission metrics. It should not be the role of the funder or “impact investors” to determine which mission metrics are important. When dealing with large swaths of data, the nonprofit has to invest a great deal of time and money to build the technical systems to find and collect the data, put it in usable condition, determine the metrics as they relate to the mission of the program, analyze the data, hire the researchers or research firms to distill the data, write the report laying out what the data and metrics mean, and make recommendations about what to do about it.
There is an entire program and administrative infrastructure that needs to support this process over the long term. Unfortunately, too many nonprofits don’t have the unrestricted or committed restricted resources to fund the process and thereby control their own metrics and mission destiny. In addition, funders won’t invest enough to ensure the process remains independent, especially if the metrics are not their own. Shortcuts are often taken and omissions prevalent. Outputs instead of outcomes are used to measure impact, and the bigger societal questions are left unanswered.
2. Building Unrestricted Net Asset Reserves to Use Strategically
The desire to please wealthy donors requesting restrictions on programs or finance committees focused on short-term results such as cash flow translates into nonprofits having to relinquish some measure of control over their mission direction and identity. The ability for the organization to determine its own path—fund mission initiatives, invest in research and evaluation, prioritize new initiatives, and invest in leadership and staff—should not be thwarted by restricted giving from individuals or funders with alternative agendas. The notion of “giving back”—i.e. the propensity to idolize and celebrate philanthropists who give a small fraction of their wealth in exchange for outsized adulation—too often comes at the expense of mission focus and programmatic integrity.
A prime example concerns the heavy investment in “space/occupancy.” Many nonprofits spend millions renting, buying, leasing, or subleasing space, driven by board and donor interest, often at the expense of investing in and growing impactful programs. An investment in a named building can preclude or crowd out investments in quality programs, staff and leadership positions and salaries, innovation, and thoughtful, well-capitalized replication.
What is the point of a beautiful building or space, if there aren’t the commensurate programs to fill it?
3. Existential Organizational Decision Making
For a number of reasons, many nonprofits consider whether to merge, collaborate, or search for fiscal sponsorship with another nonprofit organization. However, the trade-off for administrative or financial benefits such as economies of scale, reduced administrative expenses, increased compliance capacity, or additional fundraising capacity is usually mission independence. The price of giving up mission independence by subsuming your programs into a larger organization in which your leadership, board, and management are less independent and less relevant is often too high a price to pay.
Over time, mission priorities, administrative focus, promises of increased capital, and fundraising momentum can get lost in the shuffle. This is especially true when the “parent” organization—or the organization with the most financial leverage—has their own financial issues to sort out and prioritizes those over any others.
The trade-off question should be: what will the impact of improved access to capital, administrative capacity, or even fundraising focus be on the ability for the organization to fulfill its mission and chart its own programmatic path to get there?
The savings from mergers designed to save administrative costs are rarely transformational. As for finance departments, a merger may save minimal amounts here and there, but the department is often left without the dedicated financial and organizational leadership to think strategically. The question has often been posed whether there are too many small nonprofits doing the same thing, but that isn’t necessarily the right question. The better question is whether there are too many mission-muddled nonprofits unable to define mission fulfillment and impact in the short and long term.
What is the Impact of Mission Independence on the Sustainable Business Model?
Before spinning off smaller, direct service-oriented nonprofits, the Vera Institute of Justice required an independence agreement. The assumption was that by establishing mission clarity and independence, the spin-off business model had a higher probability of success in the long term.
Given their own board, diversified funding streams, leadership (often comprised of those who led during the planning stage), ample infrastructure capacity, and a mission not in competition with the parent organization, the probability that the spin-off organization would be successful increased significantly. It was taken as a given that a well-managed spin-off organization could and should:
- Run unrestricted surpluses over time
- Run unrestricted surpluses over time
- Build up unrestricted net assets
- Raise capital for the organization and programs
- Invest some of that capital in strategic planning
- Run efficient and cost-effective programs
- Determine what works best to achieve the mission.
In essence, it was assumed that mission independence positively impacted the financial sustainability of the business model by:
—Attracting long-term capital investment after a long-term research and evaluation process
There is no stronger incentive to attract and build revenue streams over time than a successful program with a measurable mission impact. Without an investment in long-term research and evaluation, there are inherent limitations on program revenue growth.
After all, who is going to invest restricted or unrestricted net assets based on inconsequential results? The whole notion of replication and growth is predicated on a program mission model that
“works”—however the mission experts define it. Without basic evaluation, what sources will provide capital or investment to take the program to the next mission impact level?
Unfortunately, too many nonprofits are quick to replicate or expand before the original business model is validated in the long term, often resulting in financial distress. If the metrics are the prerogative of a single funder or not necessarily in keeping with the spirit of mission independence, the likelihood of capital investment from a multitude of funders diminishes over time.
—Attracting long-term, diverse revenue streams to fully fund programs over time (and cover indirect costs)
One of the dangers of limited mission independence is that distinct programs or departments are not fully funded. Donors too often give a fraction of the amount necessary for a program or initiative given their unique restrictions, and yet insist on offering parameters for the program regardless of whether they are aligned with the mission. The unfortunate result is a multitude of under-funded programs or even deficit-running programs that not only don’t cover the indirect cost allocations but sometimes don’t even cover the direct costs. This is especially relevant for cost reimbursement contracts and performance-based contracts.
The choice is to drain unrestricted net assets, reducing program expenses and program quality, or to focus on new revenue streams, perhaps at the expense of other fundraising priorities. These trade-offs can negatively impact the available budgets for other programs and initiatives, and ultimately hurt the organization and mission as a whole.
The inability to build up unrestricted net assets starves the organization of the capital it needs to risks in order to maximize mission impact, sets an organization apart from its competitors. control its own destiny. The ability to think and invest long-term based on organizational priorities and ambitions, especially taking manageable risks in order to maximize mission impact, sets an organization apart from its competitors.
Additionally, the ability to run unrestricted surpluses based on a viable long-term business model ensures that the organization can cope with the kinds of short and long-term liquidity issues that short-term decision makers on finance committees or elsewhere seem to obsess over.
—Getting long-term, strategic plans into the fiscal year budget
The emphasis on and impact of strategic planning is greatly enhanced when there is clarity of mission and a sense that the organization has control over its own destiny. Every strategic and business plan needs to be translated into and included in a fiscal year budget if it is to be successfully implemented.
Creating and bringing to fruition a prioritized pipeline of ideas becomes much more likely when there are clear links between the idea, the mission, and the budget. In addition, strategic coherence aligns the program, financial, and development leadership, as well as the board, to move forward on the same mission path.
—Taking advantage of opportunities as they arise with a coherent mission impact story
Development finds it easier to communicate organizational priorities that need requisite funding. Trying to raise money for a variety of programs, initiatives, indirect costs, and impact requires a compelling story that ties into the overall mission. If there is confidence that the mission direction is clear and that the organization controls its own business model, mission direction, and impact metrics, development can focus their efforts more effectively.
How Does Mission Independence Impact the Financial Function Leadership Role?
Given the impact of mission independence on the business model, it’s not surprising that the roles and responsibilities of the financial function leadership need to change to stay ahead of the curve. Financial function leadership can and should be proactive in building the business model. They must encourage a pipeline of activity, prioritizing those which align with stated financial and mission goals, and understand their fiscal year budgetary impact. This could include creating new projects and innovation, as well building on existing departments such as communications and development. Financial reporting has provided a window into the priorities, interests, goals, budgets, and drive of the ambitious, mission-driven nonprofit.
The new, proactive roles of the financial function leader should include using financial data to better understand whether and how mission independence and the long-term sustainable business model are working together.
The finance function has always had a standardized, analytical database to tell short and long-term financial stories. This includes the audited Statement of Financial Position, Statement of Activities, Statement of Functional Expenses, and Statement of Cash Flows. The financial function should reconcile and put into perspective fiscal year budgets, variances, and fiscal year projections based on actuals to date. However, given the link between mission independence and the sustainable business model, additional metrics could be developed to answer important questions like the following:
- Is the mission adequately capitalized, possessing sufficient unrestricted net assets and funder obligations to maintain, at the very least, its impact and independence over time?
- Do board-designated net assets threaten mission independence by taking financial resources (e.g., cash) off the table?
- Are the revenue streams long-term and diversified enough to enable the organization to maintain its independence?
- Is there sufficient investment in research and evaluation to ensure that the organization can adequately determine what works in the short term and, more importantly, the long term?
- Are programs adequately capitalized to maintain their impact and grow accordingly? Are they fully funded?Do they have the potential to build sufficient long-term revenue streams?
- What is the financial connection between indirect cost rate recoveries and effective and efficient program management?
- Is there a strategic or business planning process that is incorporated into the budget?
- Is it clear that there are financial goals set up to achieve financial stability? Has the organization determined the correlation between investment in building long-term revenue streams and the ability to maintain mission independence?
- Is there clarity about which programs are underfunded and are there strategies in place to fully fund them?
The Intriguing Notion of CFOs as CEO: A New Frontier for Nonprofit Financial Function Leadership
As an organization’s mission independence comes into alignment with its sustainable business model, it may become necessary for the financial function leadership to have enhanced roles and responsibilities. The nonprofit CFO needs to be able to tell a financial story that connects to the organization’s mission ambitions and drive, requiring a more holistic, proactive approach. Financial function leadership will need to understand the mission to earn a seat at the strategic decision-making table. Likewise, boards, CEOs, and mission leadership have to provide clear CFO expectations, guidelines, and goals in their evaluation process.
The CFO is now accountable and responsible for the virtuous cycle of mission independence powering a viable business model that then reinforces mission independence and impact. They need to encourage a pipeline of programmatic ideas, manage a relatively efficient but productive organizational infrastructure, and understand how the organization’s mission strategy makes them competitive in the long term. In other words, in order to drive the organization forward, nonprofit CFOs need to take on some of the roles of the CEO. Would it then be too much to suggest that the nonprofit CFO be seriously considered for the CEO role? In a relevant trend, CFOs and even auditors in small and large nonprofit organizations alike have taken on board leadership roles such as President and Chair.
The nonprofit corporate structure has incredible potential to address critical societal issues. From educational inequality and poverty reduction to criminal justice reform and climate change, nonprofits need the clarity of mission independence connected to a long-term sustainable business model to be successful.
While it may be worthwhile to discuss and determine the ultimate existential role and impact of the nonprofit corporate model on our societal infrastructure, answers to these questions can wait until more data is collected and evaluated. However, in the meantime, nonprofits and their financial function leadership must stay ahead of the curve by defining the curve. They must pursue the mission independence that builds a sustainable business model in the constantly changing and evolving nonprofit landscape.
Perhaps surprisingly to some, the success of the nonprofit sector and its ability to address the most important issues of our time may come down to the inspired leadership of the nonprofit financial function.