Why are nonprofit organizations in business? It is to achieve their societal missions. To do that, nonprofits must define their programmatic, financial, fundraising, and strategic goals. They must invest in their business to achieve objective and subjective results that lead to mission success and impact. Nonprofit businesses must balance financial viability and mission sustainability.
In our increasingly complicated and faster-moving world, all organizational functions must be efficient and effective on their own and in collaboration with everyone else. Nonprofits need diverse revenue streams, disciplined and clear expense structures, unrestricted surpluses that build net assets over time, cash (and access to cash), and appropriate salary structures for excellent staff and visionary leadership. They must choose fundraising strategies across multiple donor classes and be able to sell program efficiency and effectiveness. Nonprofits need an evaluation capacity that clarifies realistic metrics, risk management self-awareness, the ability to put priorities in context, and a mission-engaged board. Obviously, success requires a lot.
For further insight into the link between finance and mission goals, it is necessary to look deep into the systems, transactions, and personnel that roll into the ultimate depository of financial information, the general ledger. This amalgamation of transactions and systems is a window into the world of an organization’s financial inner workings and business model. The multiple moving parts include accounts receivable (A/R), accounts payable (A/P), cash management and bank balances, payroll and payroll allocations, budgeting, forecasting, coding, hiring, and IT systems. Business Offices have known all along that each staff member existing in this often unheralded world actually influences mission and strategic decision-making as well as organizational outcomes. A behind the scenes understanding of the Business Office can provide the existential context for understanding what goes on in front for everyone to see. Better yet, the goal of this paper is to present the case for the nonprofit Business Office’s crucial role in fulfilling the mission.
What does the Business Office do
that impacts decision-making strategies?
Generally, the effective Business Office must be independent, understand the organization’s short and long- term financial goals and support, and provide resources to build strong program and fundraising capacity. Accurate, timely, and interactive accounting and financial systems provide the financial data necessary to build a compelling mission and fundraising case. The Business Office is responsible for an appropriate organizational cost structure that must be sustainable over time. It must identify and provide data to achieve key financial goals that support and drive mission priorities. Running unrestricted net asset surpluses, building net assets to invest, turning new ideas into program reality, creating time to plan, and providing the human and state-of-the-art IT resources keep the organization competitive. The Business Office must provide and advocate for the resources to grow, even start, a robust Fundraising effort.
There are a number of specific ways in which the Business Office influences organizational decision-making:
- Cash and access to cash can present an existential challenge to even the strongest of missions. Effective cash management systems (A/R, A/P, access to cash though loans, lines of credit, banking relationships, and payroll) rely on collecting cash efficiently, ensuring contractual timing of cash receipts, paying properly coded bills on a timely basis, and planning for cash needs when cash flow statements signal periods of need. The A/R accountant who can bill on a timely basis, efficiently track receivables, produce aged reports, identify the source and funders, and follow up with senior management plays an important role in keeping an organization moving forward.Nonprofit organizations averaging close to one to two months of available cash (if that) often feel it is financially prudent to manage according to short-term cash availability instead of the bigger-picture accrual system of accounting, required by GAAP. Decisions that emanate from limited, often short-term cash concerns, such as curtailing programs, postponing or not hiring critical staff to meet current or future needs, limiting administrative and development capacity, and seeking ill-advised merger partners do not serve the organization’s long-term interests. Instead of becoming a proactive, forward-looking organization energized by innovation and mission success, the organization moves into a reactive, cash-driven position, a downward spiral waiting to happen.The Business Office needs to stay ahead of the cash flow curve. Identifying potential cash reserves and assets—including, but not limited to, fixed assets and Board-designated investments—that could be sold can mitigate potential harm. Otherwise, Finance Committees have been known to review bank balances on a short-term basis, a job and level of responsibility that does not serve anybody’s interests. Management will resent the intrusion and an organization can become mired in a conflict over fiduciary oversight, shifting the state of mission momentum and drive from one of forward-thinking strategic vision to one of financial sclerosis.
- Budget and forecasting answer the fundamental aspirational questions of what the organization wants to do and how to do it. Metrics for mission success are inextricably linked to financial choices. The Budget Directors and analysts who track grants and fundraising costs/returns, build departmental budgets with significant program input, analyze budget to actual variances, and build forecasts have to understand and explain which metrics are being achieved and which are in jeopardy (red flags). They must produce a set of revenue and cost options, contingencies, and trade-offs, as well as encourage a broader understanding of the short- and long-term organizational budgetary ramifications of such decisions.An organization’s ability to forecast on a timely basis impacts mission-critical decision-making. Forecasting allows for the expenditure reductions needed to prioritize core mission needs. It identifies revenue growth opportunities and the resource focus to take advantage of them. More nonprofits are not only investing in forecasting systems and software, but many have also built a forecasting reporting structure for management, staff, and boards. Full-year forecasts smooth over timing fluctuations of accrued revenues and expenses. This provides a more accurate vantage point of the fiscal year results and a better platform for strategic decision-making.
- Mission-strategic decision-making requires confidence in the underlying integrity of the financial systems. Board members and senior management are often reluctant to move forward unless they have complete confidence in the organization’s accounting bedrock. They rely on the Business Office to understand and explain the organization’s financial position as well identify future concerns and opportunities. Financial decision-makers bear responsibility for the financial downside of very public (FEGS for New Yorkers), existential financial crises. They will be accused of not asking the right questions—if they asked questions at all—or not providing sufficient oversight. Unfortunately for most Board members and senior management, the potential glories and upside from financial and mission success do not outweigh the burden of responsibility for potential financial setbacks.As a result, questions crucial to the financial and mission success of an organization—such as what are the best ways to invest, how to define future needs, and how to implement plans—are not vigorously pursued.Therefore, the Business Office must produce the necessary financial information in a structured and periodic manner, achieve clean funder- and organization-wide audits, and be able to explain the financial story. This provides the confidence that leadership needs to take measured but proactive financial and mission risks.
- Getting Off the Financial and Mission Treadmill In this day and age, time-sensitive business decisions related to incremental or dramatic growth, fundraising capacity, taking on debt to fund underfunded programs, mergers, collaborations, and spin-offs require organizations to be flexible and agile. Decisions must be justified and supported by intense organizational analysis, focus, and planning for the long-term. Inaction is no longer a viable strategy, especially when competing against motivated and well-resourced nonprofits. An inability to move forward can doom an otherwise successful organization to a financial and mission treadmill, ultimately undermining sustainable mission impact and success. Nonprofits may want to set up a Standing Risk Committee that evaluates the ramifications of strategic choices and opportunities in light of long-term scenarios.
How does the Business Office influence fundraising systems and strategies?
Finance and Fundraising must agree on business transactions that end up in the general ledger. They must agree upon, for instance, whether a grant or contribution is restricted or unrestricted, the time frame of the grant, the amounts to be spent in any fiscal year, and for what purpose the funds can be spent. Cash payments from funders that offset receivables should not be recognized as new restricted or unrestricted revenue. Inflated unrestricted revenues or duplication of grant revenue will reduce confidence in the Business Office. Fundraising revenue must reconcile with the audited financials or unwanted interrogations from eager auditors will merely prolong everyone’s annual agony.
It is a general pattern that foundations, corporations, and individuals are willing to pay cash up-front to fund direct and indirect costs yet to occur. Government contracts generally pay on a cost reimbursement or performance-based contractual basis after the work is completed. This can be a slow, excruciating process, fraying the nerves of otherwise healthy organizations. Given their short- and long-term cash needs, some organizations adopt a fundraising strategy that increases the diversity of revenue sources. The allure of unrestricted major individual gifts and event revenues—funds not tied to any specific expenditures or programs—is enticing.
Recovery of indirect costs also drives fundraising strategies. Management and Administration proudly has its own column on the Statement of Functional Expenses. However, indirect costs are not always completely covered by program-driven activities, earned revenue, or restricted grants, creating an unrestricted deficit that needs attention for an organization to break-even. Indirect cost rates have to be competitive to get grants, but significant enough to provide the necessary administrative support for programs.
Fundraising strategies influenced by the Business Office may lead to the rejection of grants or contributions that do not fully cover indirect costs or total direct program costs. Calculating an indirect cost rate can cause an organization internal friction. The Business Office wants to cover costs, Fundraising wants as much revenue as possible, and Program wants to devote as much as possible to core mission programs. Consequently, successful organizations must align and communicate goals.
Fundraising strategies based on financial needs will determine the makeup of the Board, as well as Board roles and expectations. This in turn influences the job description, time allocation, and mission priorities of the Executive Director. The trade-off between the Executive Director’s dedication to the organization’s mission and his/her efforts to raise funds for subsidiary organizational goals has long-term mission implications. The cohesion of the Board and its relationship with Management suffers when just one bad Board actor, with their own sense of mission priorities, goes unchecked by those more generous with their program involvement but who have limited financial resources.
Knowing what we know, what is the way forward?
Maintaining and strengthening the bond between the Business Office and the rest of the organization is a constant process. The Business Office staff have to strive to be mission-motivated, driven, and curious about the world outside their specific roles and functions. However, their accomplishments need to be identified, appreciated, and even celebrated. Enthusiastic communication between the Business Office and everyone else should be a natural by-product of a shared commitment to the organizational mission.
The staff of smaller nonprofits must take on multiple Business Office roles and responsibilities. Executive Directors of smaller organizations must understand the entirety of how their business works and—often to their dismay—take an active oversight role of all financial and accounting systems, including cash management, budgets, forecasts, and telling the financial story to the Board. In larger organizations, while Business Office roles are more clearly defined, the organization must guard against these roles becoming siloed, buried, or too far removed from their Program and Fundraising colleagues. Organizations must appreciate that the curious, collegial, systems-motivated Business Office can often impact and improve mission-related systems and outcomes.
Nonprofit organizations must invest in the transactional systems that link the Business Office to the success of the mission. Updated budgetary and accounting systems that forecast in real time, allow for easy interaction with budget makers, improve accuracy and timing of transactions, and increase grant management efficiency and effectiveness are smart investments.
Conversely, lack of motivation, capacity, connection, and general Business Office disinvestment has consequences. Mistakes in the Business Office can lead to a proliferation of unnecessary and costly transactions, disallowances with government contracts that impact the bottom line, misleading financial data, and time-consuming complaints. A Business Office that does not provide the timely and accurate financial data required for quick and thoughtful decision-making can have a corrosive effect on success, a gift to an organization’s competitors.
The nonprofit landscape is littered with mission-diminished organizations who did not pay attention to or focus on the potential of their Business Office. It is ironic that, even as nonprofits have the greatest ability to control their own internal well-being while the world around them constantly changes, some choose not to take responsibility for their own destiny. An inspirational mission combined with an inspired Business Office is the formula for organizational success. The happy truth is that more and more successful nonprofits clearly understand how the Business Office is integral to achieving the noble goals that make nonprofits such a valuable societal asset.