Why should non-financial function members of the organization, including leadership, the board, and staff, pay attention?
Why should boards pay attention?
An organization’s mission impact and relevance is dependent on a sustainable financial and programmatic trajectory over time. Organizations used to move forward incrementally, biding their time until the right opportunity presented itself, or taking years to gradually become irrelevant. No longer is walking the financial or mission treadmill waiting for strategic business model lightning to strike a viable option. Program and financial trade-offs need to be measured, choices need to be evaluated and agreed upon, strategies need to be constructed, and intelligent investments in the mission need to be made. In a fast-paced world, non-profits have less time for indecision or even introspection and less room for mistakes, financial or otherwise.
Having unrestricted net assets or reserves, including board-designated reserves, that management controls can provide an organization with a greater sense of mission independence. The pool can reduce the probability of funders who are not as well-informed as management pushing an alternative organizational and mission trajectory. Clear financial goals that have identifiable financial statement metrics aligned with clear strategic mission goals enable boards to determine the ultimate fiduciary fate of the non-profit. Inaction as a result of cash obsessed short-term thinking (unless the organization is in cash extremis) can result in a case of financial sclerosis that’s difficult to cure. Alternatively, boards should be prepared to push management to identify their long-term mission investments and structure the necessary budgetary decision-making to implement them. As a non-profit treasurer, this experience, while sometimes financially nerve-wracking, can also be extremely satisfying.
Why should CEOs pay attention?
It used to be that CEOs would be evaluated on their ability to define and extend the effective reach of their mission. Today, CEOs get into trouble when they don’t understand, can’t articulate, or can’t control their financial present and future. The scourge of financial dysfunction or lack of resources that limits the CEO, in their experienced and learned capacity, to strengthen programs, quickly adjust to events in the world, create new initiatives, and maintain their programmatic independence infests the entire organization. CEOs who get their short and long term finances in order and can tell a compelling systemic impact story—not just the anecdotal tear jerker—are destined for societal relevance and financial function adulation.
The CEO needs to ask and answer fundamental questions such as: “What does the organization want to accomplish?” and “How do they lay the groundwork for a successful business model going forward?” The CEO needs a partner in the CFO who can help align mission goals with financial realities, opportunities, and strategies. Together they must not allow funders to determine the non-profit’s programmatic goals, underfund programs, pay late, or limit indirect cost reimbursements. Organizations stuck on a “business as usual” treadmill, constrained by finances or unwillingness to invest in an organizational vision, will be left behind by those competitive non-profits with a better understanding of the risks and rewards of mission investment. If CEOs are concerned about “flying blind” because they are not getting the financial reports and data they need, they better ask the right questions to get the financial metrics they need to make key decisions. CEOs keep their jobs when financial and mission goals are aligned, understood, and acted upon, which experience shows can and does happen.
Why should development departments pay attention?
When Russell Pomeranz was COO/CFO at the Vera Institute of Justice, he realized that greater unrestricted revenue streams were needed to close indirect cost recovery gaps. The buildup of unrestricted net assets would also provide the necessary capital to move the mission forward. He proposed the organization create a development department and identified how to build the role(s) into the fiscal year budget. Within a few years of hiring the first Development Director, the inaugural fundraiser event generated $750,000 gross. The ability to invest in other fundraising levers (grant writer, annual fund, major donor strategy, capital campaign) to build up unrestricted and restricted fundraising capacity was also integrated as a permanent part of the budget over the years. A goal-oriented partnership between finance and development enables both departments to get what they want and need over time.
Why should program staff pay attention?
When the CFO happily shows up to discuss budgets, Program leadership often runs in the other direction, assuming the CFO will request unwelcome budget cuts. The mission-infused CFO who seeks peace, organizational harmony, and growth should instead ask, “What does your program need in order to maximize its mission and impact?” Working closely with Finance to build, forecast, and monitor program budgets that have a clear set of program goals integrated with clear financial goals increases the probability of producing a compelling wish list and pipeline of programmatic investments to be built into the budget in the short and/or long term.
While hard to believe, the exercise of the CFO poring over the audited financials along with senior program management provides a good opportunity to intertwine financial and program stories. In Pomeranz’s experience, such interactions can actually be enjoyable and surprisingly informative for all parties. The interaction also sets the stage for program staff to make their case for programmatic investment, given their ultimate impact on the financials. Likewise, such interaction also gives Programs the chance to justify program deficits, with or without allocated indirect costs, by explaining those programs’ critical impact on the core mission.
Learning how to code expenses, getting vouchers in on time, and identify red flags in the forecast process requires Program and Finance to work together toward a common financial good. It’s an understatement that Finance and Program staff need each other. Ironically, more CFOs lose their jobs when they exist in silos, can’t or won’t communicate, and do not provide the departmental financial data necessary for program staff to run their programs. When Pomeranz became Business Manager of the Maret School in Washington DC, he insisted on teaching a 10th-grade geometry course. The hands-on experience afforded Pomeranz a glimpse at the critical link between mission and finance, offering an insight into what made teachers enthusiastic or at times not so enthusiastic, and served as a reminder of what made triangles congruent.
Why should finance committees pay attention?
It used to be that the fiduciary responsibility of finance committee members was focused on the short and long-term preservation of financial assets, running a breakeven budget, ensuring liquidity, and limiting debt. Times have changed and now more than ever it’s important to consider a more proactive and strategic definition of fiduciary responsibility. Fiduciary responsibility means not only maintaining financial reporting standards according to GAAP, but using and understanding the organization’s financial position to build a sustainable and competitive long-term business model. Too often in today’s world business model decisions are focused on the short term, especially when made by finance committees obsessed with cutting costs and uneven cash flows. Cash-obsessed decision making, unless the organization is in extremis, limits investment in the mission and too often ignores the importance of investing in the revenue side of the equation.
Financial and mission independence based on the strength, experience, wisdom, and motivation of the management team should drive the budgetary and mission decision-making process. Misaligned mission clarity results in poor options and missed strategic opportunities. Nobody, for example, wants finance committees focused on buying new buildings and driving the non-profit into debt while failing to invest in the programs, staff or faculty, technical resources, or even the community. Likewise, a budgetary lack of investment in staff salaries and benefit structures, a willingness to gut indirect cost support infrastructure, underfunded pet projects that stray far from the mission, and underfunded projects in general do not serve the financial future of the organization well. However, financial management leadership, especially CFOs, must take the time to make the case for positive short and long-term budgetary outcomes, factoring in manageable risk based on organizational and financial position imperatives.
Why should the non-profit sector and proponents of the business model pay attention
The non-profit corporate business model should be ascendant as an alternative or partner to the for-profit sector, as well as government. It has the legal and financial structure to be an efficient business model where unrestricted surpluses are effectively re-invested in the business. Non-profits are big businesses and should be run as such if they want to stand a chance of reaching scale and using various creative and strategic methods to raise capital.
There are many mischaracterizations and myths that plague the non-profit sector, often promulgated by for-profit participant misunderstanding and arrogance. These include the fallacies that efficient non-profits: 1) can’t make money or shouldn’t, especially given their investment goals and aspirations over time, 2) shouldn’t invest in organizational management structure to build and grow their organizational expertise and capacity, 3) can’t raise sufficient capital to fund innovative ideas, 4) can’t make strategic long-term decisions, 5) can’t make effective cost reduction decisions and maintain the core mission of the organization, or 6) don’t have the potential or know-how to grow to scale. In no way should anyone believe that the non-profit business model is an inferior corporate structure to that of for-profits.
Ultimately there needs to be ways for non-profits to raise significant capital from the marketplace while not being beholden to specific investors consumed by alternative measures of societal success. Forget about UBIT; why can’t non-profits build energy-efficient cars and sell them? Why can’t non-profits be the main driver of the inevitable new “green” economy? The non-profit finance function plays an integral and increasingly important role in non-profit corporate effectiveness and mission independence. It is more and more responsible for building successful and sustainable organizations that are also efficient businesses, with critical and measurable societal returns at their core.