Imagine a social service organization not yet in dire financial straits but in definite need of a financial course correction to meet its mission and financial goals. The organization is running an unrestricted deficit and needs to cover indirect costs, allocate additional occupancy expenses, and pay for the program department’s leadership through its grants and contracts. Development is concerned about cutting the critical program costs necessary to maximize mission impact. Meanwhile, finance makes the case that the organization cannot go another year with an unrestricted deficit that could lead to cash concerns and a reduction in unrestricted net assets. Finance feels the current business model is not sustainable. Finance and development convene to come up with a solution.
This is a relatively common scenario. So how do nonprofit finance and development departments work together to balance each department’s legitimate goals and needs? For both departments, this question should always take them back to the organization’s mission. During all the key moments— at the beginning of each fiscal year, during each forecast and budget process, and during each strategic planning process—they both should be asking questions about what goals the organization’s mission is directing them toward, and both departments should arrive at similar conclusions. They need to find and align their answers to questions like:
- What does the organization want to do in the short and long term to achieve its mission?
- What impact does the organization want and need to have?
- What does a sustainable business model look like, and how do we build and maintain it?
When finance and development are on the same page with regard to the mission goals, it is easier to answer critical questions about priorities, timing, and budgetary trade-offs, and start strategically using resources to achieve optimal mission-driven outcomes. On the other hand, if mission goals are not aligned, the lack of a collaborative effort will result in organizational inaction or misguided focus. This will ultimately hurt the organization’s programs and mission impact.
How Finance and Development Can Help Each Other
How Finance Can Help Development
A more assertive, strategic, and mission-infused finance team will play a more active role in determining and telling the nonprofit’s financial story. These stories are often told with the help of the audited financial statements and fiscal year budgets and forecasts. The financial statement public record is made available to finance, development, programs, the board, funders, foundations, government, donors, and anyone else interested in the financial position and trajectory of the organization. The following are just some of the facets of the story that finance can tell development to help them go forth and raise funds:
—A compelling and hopefully positive financial story in the short and long term
The story should include the key numbers in the audited financial statement: unrestricted net assets, cash and debt on the statement of financial position, unrestricted net income, surpluses or deficits, and a depiction of capital that belongs to management, donors, or lenders. The story should provide a sense of how the business model is working, as reflected in the statement of activities. The statement of functional expenses can be used to show how the organization spends its money, including the ratio between management and general (a.k.a. indirect cost ratio and program expenses) as well as development expenses. Cash position can be determined by the statement of cash flows. Finance should be accountable for planning and working with development and programs to achieve positive financial goals. Development needs positive results to tell a compelling story to make donors more confident about the long-term viability of the causes to which they’re contributing.
—A story that reflects confidence in management’s ability to lead the organization toward the achievement of relevant mission and financial goals
Finance can confirm that extensive planning and foresight went into achieving positive financial goals and can also explain any deficits as strategic investments expected to produce positive organizational outcomes. Development wants and needs a positive story to tell. Finance can help by making a case that emphasizes strategic clarity, including a sense of the organization’s priorities and a strong leadership capacity capable of managing risk.
—How finance can increase the probability of investment in development capacity
Finance needs a strong development capacity, and it must find the financial resources to build that capacity. The following should be on the radar of any finance team looking at growing and sustaining development:
1. Threshold investment
Starting a development department, especially for smaller organizations, requires an initial investment of capital to get it going. CFOs, hungry for unrestricted net assets, have been known to make a compelling case for starting development departments.
2. Growing the development department in light of financial, programmatic, and strategic mission goals
As new or innovative programs are planned, or as existing programs grow to take advantage of current opportunities, additional development capacity is required. To acquire unrestricted or restricted contributions, secure government grants and contracts, and increase earned income, a sufficient financial investment needs to be carved out of the budget.
3. Building communications capacity
Development and communications are intertwined, especially as mission impact stories are told to a wider range of followers and constituencies. Given the competitive pressures of this fast-moving time, a rapid-response communications capacity is not only necessary but expected.
—How investing in programmatic success benefits development
The ability of the organization to invest in program impact represents a competitive advantage that will set a nonprofit apart. Researching and evaluating programmatic impact is essential for development to move beyond anecdotal impact stories, prove long-term results, and ultimately secure funding for specific initiatives.
How Development Can Help Finance
If the finance department thinks it can achieve its goals without a development partner that is strategic, driven, and effective, it is mistaken. Development enables the financial well-being of the organization by building critical revenue streams. Overzealous finance departments and finance committees can obsess over expenses, too often eliminating administrative and programmatic expenses and infrastructure that are critical to operational success. Organizations must reinforce, encourage, and invest in revenue-building efforts to meet financial and mission goals. This can be done in several ways, but a few possibilities are:
1. Growing unrestricted revenue streams to fund operations
Unrestricted revenues are controlled by management and are essential to closing departmental deficits and supporting program initiatives. They are essential assets for any organization hoping to control its own destiny, as they enable planning efforts to move forward without necessarily having to wait on restricted funds to come in. Unrestricted net assets provide a net income and cash cushion that allow an organization to take a step back and think more strategically.
2. Building a diversity of funding streams, including earned income
The sum of foundation grants, government contracts (federal, state, and local), major donors, and an annual fund, when combined with earned income, prevents organizations from having to depend on just a few, perhaps unpredictable, funding sources.
3. Launching or growing a capital campaign
Capital campaigns build significant capital resources and reserves that can be spent or saved as needed. Development, when encouraged by financial and mission needs, builds an investment pool, which provides long-term capital for strengthening and ultimately transforming an organization. This pool can fuel significant growth or buy time as the organization implements its strategic initiatives. Nonprofit CFOs sleep much better at night knowing they have access to cash and capital to fund operations for the long term.
Using Financial Reports to Structure and Define Communication Between Finance and Development
To maximize the collaborative benefits of finance and development working together, both teams need to have regular interactions that are structured around the financial reports. These conversations should focus on:
—Reconciling booked and pledged revenues between finance and development
Development ledgers—what is booked and what isn’t—need to reconcile with the financial reports and what makes it into the general ledger. A pledge from an individual without a track record of giving may not be booked by finance, but development may track it as revenue to meet its goals. As a result, both teams need to work together to design reports that reconcile development’s metrics with finance’s metrics.
—Reconciling restricted and unrestricted contributions
There are numerous unfortunate cases of finance conflating restricted grants with unrestricted net income. This is problematic when the audited financial statements or fiscal year forecasts become a surprise. Likewise, it is problematic when restricted grants need to be carried forward to future fiscal years, reducing the amount of temporarily restricted net assets released from restrictions in the current year and, therefore, reducing fiscal year unrestricted net income. This too comes as an unwelcome surprise to finance committees and CEOs.
—Budgeting revenue that includes a realistic probability of success
Finance and development determine a threshold probability percentage before including a revenue source in a budget or forecast. Some organizations may use an 80–90% probability based on experience, interaction with the funder, or, perhaps, verbal agreements. Conservative estimates may result in critical administrative and program expense reductions if revenue levels come in too low. Overly optimistic revenue recognition can also lead to a scramble to adjust unrestricted net income. It is critical that budget decision makers identify workable contingency plans for managing any budgetary changes.
—Creating a future pipeline of revenue activity to put the organization’s financial position in context
A future funder or revenue pipeline, when assembled into a list, gives the organization a sense of multiple funding opportunities on the road ahead. The finance department wants to make the argument that the upside is greater than the downside going forward, especially to get breakeven budgets or budgets with slight deficits approved.
How a United Front Between Finance and Development Can Be Useful for Collaborating With Programs
—Education enables greater program accountability and involvement in the budget process
The ability to produce budgets and achieve financial results requires that all members of the organization be knowledgeable and motivated partners. Program management must know why unrestricted net asset surpluses are generally positive not only for their programs but for the entire organization. Organizations with unrestricted net assets have a greater capacity to invest in new or existing programmatic ideas. Likewise, unrestricted deficits can lead to reduced administrative support, curbed managerial leadership, and even program elimination.
—Mission investment requires the compelling ideas of the program team to drive future revenue streams and mission impact
Finance and development should ask the question, “What investment does your program need to achieve mission goals?” Finance and development have to encourage programs to make the case for including and prioritizing their innovative ideas in the fiscal year budget.
—Finance and development must demonstrate their commitment to the mission of the organization
Above all, finance and development need to listen, be flexible, and ask questions. Both groups need to be committed to good customer service. Ultimately, they can demonstrate their commitment to the mission by getting involved, understanding the programs that make the organization tick, showing up at events, getting a broader perspective on how the place works, and continuing to learn about the impact of the mission and its societal relevance. Likewise, the program side needs to treat finance and development with the respect they deserve.
When finance and development come together in harmony based on a mutual understanding of the organization’s mission, and when they understand how to work together and are able to tell compelling organizational stories, the organization as a whole can achieve an upward mission trajectory. The people and patrons that a nonprofit serve expect the organization to achieve the societal imperatives it set out to achieve in its mission. Developing a collaborative relationship between finance and development is not just an opportunity but a responsibility that nonprofits must embrace.