As the leader of an organization’s finance function, the nonprofit CFO makes a critical contribution to overall mission success. While this has always been an understated reality, it is especially important in today’s climate as organizations work to meet short-term and long-term challenges in an extremely competitive and constantly evolving world. If the ultimate goal of the nonprofit sector is to positively impact society—whether through advocacy, arts, direct service, education, healthcare, public policy, research, or social services—the nonprofit CFO must have a seat at the mission table.
This playbook defines the three major roles of the mission-infused nonprofit CFO: the builder, the strategist, and the cultural trendsetter. It identifies best practices and guiding questions that drive finance and mission success. This playbook is written with the hope that the reader will consider the meaningful connection between mission and finance, as well as define and implement strategies that will result in better organizational outcomes.
Role 1: The Builder
The builder is driven to construct a sustainable financial structure and business model that meets mission needs, goals, and aspirations over time. Such mission success represents the lasting legacy of the nonprofit CFO. The builder takes pride in multiple organizational contributions, but three areas are particularly relevant to the success of the organization’s mission:
- Building a sustainable financial structure that meets long-term programmatic capital needs and organizational aspirations
- Building a sustainable and dynamic business model that grows diverse short-term and long-term revenue streams and efficiently and effectively manages expenditures
- Building a sustainable organizational infrastructure that supports and contributes to programmatic success
The goal of the sustainable financial structure ultimately enables the organization to exert some level of control over its financial and mission destiny. The combination of cash, receivables, fixed assets—such as land and buildings—as well as manageable liabilities, especially debt, forms the basis for a financial position that brings financial and mission aspirations into alignment.
In particular, the organization must commit to understanding the importance of unrestricted net assets and striving to grow and invest them. Unrestricted net assets comprise an asset pool which the management team directly controls, and unlike temporarily restricted net assets, unrestricted net assets have no donor restrictions. This affords management a reserve of capital that is not beholden to any externally defined future expenses and can therefore be used to:
- Pay down or pay off specific deficits, such as gaps in indirect cost recoveries
- Invest in new programs, human capital, and space
- Cover costs in long-term program, fundraising, and administrative leadership that were not allocated to particular grants or contracts
Unrestricted net assets can meet immediate and long-term program needs as they continue to change and evolve. These assets are critical in particular for providing an organization with the opportunity to develop a long-term capital strategy that will propel them toward financial sustainability.
The builder is responsible for creating a sustainable and dynamic business model that consistently achieves financial, programmatic, strategic, and administrative goals. Often these goals are inherent in a fiscal year budget or several fiscal year budgets and forecasts. It is less often the case—though no less important—that an organization has a clear vision and strategy for how the fiscal year mission goals align with the organization’s fiscal year financial results. A focus on long-term revenue streams is key to building a sustainable business model that perpetuates long-term mission success. The CFO should also drive the conversation about unrestricted bottom-line trade-offs to ensure that optimal decisions are made.
Building Blocks of a Successful Nonprofit Business Model:
- Run unrestricted net assets either break-even or in surplus of budgets.
- Engage the CEO, board of directors, program and development leadership, and other internal stakeholders to provide options and trade-offs both in terms
of revenue and expenses to achieve unrestricted net income goals.
- Prioritize diverse revenue streams that enable the organization to cover core program costs.
- Revenue streams may include earned revenues, government funding, foundations, individual contributors, special events, and more. There must be a willingness to invest in long-term revenue streams.
- Build an indirect cost rate into grants and contracts to minimize the gap between indirect costs and indirect cost recoveries.
- Indirect cost rates have to be competitive enough to get grants, but also provide enough cushion to sustain necessary administrative support for programs.
The builder must develop a finance function that meets the fixed and variable support needs of the dynamic organization.
It has always been important to clarify roles and define relationships within the finance department, but structured and purposeful interactions with program and development teams are also critical to efficient operations.
At the management level, the finance team must work hand-in-hand with programs, development, and administration to implement investment decisions based on organizational goals. Likewise, the programs, development, and administration teams must work hand-in-hand with the finance team to determine organizational goals around mission investment decisions.
The CFO or financial function should always ask the team(s) responsible for programming, “What do you need (i.e. financial or human resources) for this investment to be successful?” In return, the finance team will expect timely communication related to budgets, forecasts, and cash flow to accurately evaluate the financial impact of investment decisions and appraise and predict the organization’s current and future financial positions.
It is also important to build up IT infrastructure and capacity. This ensures that everything runs smoothly and accurately not only in the accounting and fundraising departments, but also in the program departments. IT offers a competitive business advantage when pursued strategically and implemented thoughtfully.
Carefully researched investment in new or existing software not only encourages transparency and better communication as part of the organizational culture, but it also integrates organization-wide systems so that teams can more clearly understand the links between programmatic and financial successes.
Specifically, one of the infrastructure priorities is integrating financial, development, and program data to produce financial forecasts on a timely basis. The subsequent process of analyzing reports, identifying red flags, and ensuring that programs are fully funded enables the organization to make timely and informed financial and programmatic decisions before those decisions are made for them.
Finance and Mission Storytelling Capacity
The ability to tell multiple short-term and long-term financial stories and connect them to the organization’s mission metrics is extremely important for getting all constituencies aligned and working together. Ultimately, the builder is directly responsible for and corresponds with the stories told in the statement of financial position, statement of activities, and statement of functional expenses—all part of the fiscal year audited financial statements.
Upward-trending, long-term legacies are built on financial statements that tell a story of financial viability and long-term sustainability. It should come as an unsurprising revelation that an organization’s financial success has a significant impact on its mission success, just as its mission success has a dramatic impact on its financial success. The two are inextricably linked.
Role 2: The Strategist
To ensure that the fiscal year financial and mission stories go as planned (or better than planned), the CFO cannot be a passive bystander; he or she must be an active participant. The role requires a proactive, strategic decision-maker who moves the organization along the path to mission and financial success.
To be a successful strategist, the finance team must produce the necessary financial information and reports in a structured and timely manner, achieve clean donor-wide and organization-wide audits, and be able to explain the larger financial story behind the numbers. This reinforces a confidence in and deeper understanding of the financial position for leadership to take measured but proactive financial and mission risks. The strategist might consider setting up a standing management risk committee, which evaluates the ramifications of strategic choices and opportunities in light of long-term mission fulfillment.
Ultimately, indecision and/or a passive approach to addressing financial needs leads to a financial and mission treadmill. An inability to move forward can doom an otherwise successful organization to a prolonged period of financial and organizational sclerosis. The finance team—understanding the aspirations and ambitions of the mission team—must make a compelling financial case that supports forward-looking decisions. If members of the finance team don’t, their competitors will ultimately do it for them. Staying put is no longer an option.
Three Key Focus Areas for the Strategist:
1. Effective Cash Management
Cash vs. accrual can be a trade-off between short-term and long-term strategic decision-making. Strategic decisions should not be predicated based on cash on hand, unless the organization is in cash extremis.
2. Timely Mission Investment
Successfully deploying current and expected financial resources is critical for meeting strategic goals and opportunities.
3. Increased Development Capacity
A fundraising capacity that identifies and builds long-term, diverse revenue streams and significant unrestricted net assets allows the organization to supplement core earned income and restricted grants, pay for indirect costs, and build reserves.
Role 3: The Cultural Trendsetter
Some say the nonprofit CFO is the loneliest job in the organization. The expectation is that the role exists to cut operations down to size and achieve bottom-line goals regardless of all the good work the organization does. However, this perception doesn’t have to be the reality; it doesn’t even have to be the perception.
The CFO is very much an organizational leader, partner, and participant in the work and in the success of the nonprofit. To ensure that everyone knows this is the case, CFOs and the financial function as a whole need their own public relations initiatives to communicate their collaborative vision and success. Ultimately, the CFO has to be an organizational trendsetter who creates a culture prioritizing the alignment and integration of programs and finance, as well as transparency among all parties. CFOs also need to show their less objective side: one that is empathetic to the human characteristics of the organization. Flexibility, curiosity, and an ability to listen go a long way. To set the organization’s cultural trends, the CFO should work to:
- Establish and nurture mutually beneficial relationships with all parts of the organization. Be a partner and advisor to the CEO, department directors, and even the finance committee, especially when there is confusion about short-term and long-term mission objectives. Offer solutions, options, an understanding of trade-offs, and, most importantly, suggestions for a path forward.
- Emphasize transparency and clarity of each program’s impact on the bottom line and vice versa to build trusting relationships. Ensure that CEOs and program heads have a firm grasp of what the audit results mean, understand what the unrestricted bottom line number means for their department, and recognize what their impact is on the bottom line. Explain what the finance team thinks about and what their challenges are—i.e. getting transactions submitted on time to bill for grants and contracts.
- Effectively communicate financial and mission goals so that the CFO, finance committee, and board share a common understanding of the organization’s culture and priorities. Share the financial narrative in an easily digestible way. Prepare a budget narrative that directs and shapes the conversation and provides past, present, and future context and perspective. The finance committee wants and needs to know the whole but distilled story, while also maintaining its financial oversight role.
One of the duties of the CFO is making the entire organization aware of the finance function’s commitment to the success of the mission. Meanwhile, the finance function needs to be able to count on the organization’s respect for all business office roles and accomplishments. The CFO and finance team must be appreciated for the integral role they play in the success of the mission.
Guiding Questions for the Mission-Infused CFO
The successful fulfillment of these roles—the builder, strategist, and cultural trendsetter—hinges on understanding the nonprofit’s needs, aspirations, and impact. In other words, the goals and strategic motivation of the finance function should be a reflection of what the organization wants to do, when it wants to do it, and how it should do it to have the greatest impact. Answers to the following questions will help the CFO connect the success of the organization’s finances to the success of its mission:
- What kind of organization do we want to be?
- Are we well-positioned to take advantage of mission opportunities?
- What role can the CFO play in driving mission goals and priorities through the organization’s finances?
- What services and programs do we want to provide over time?
- What investment of financial resources should be made to achieve programmatic growth and financial success over time?
- What sort of impact do we expect the organization as a whole to have?
- What programs in particular are critical to mission success (or, just as importantly, what programs are not critical or even undermine mission success)?
- What exactly is mission success in the short-term and long-term?
- How do we know if we’ve achieved mission success?
- Can we control our own destiny, to the extent it is possible, to achieve these desired results?
The nonprofit CFO must be able to take a step back to become a strategic visionary for the organization and not revert to the stereotyped role of the myopic bean counter. To effectively invest in new initiatives, programs, research, and evaluation, and reinforce organizational and programmatic infrastructure with clearly defined impact metrics, it is necessary for nonprofit CFOs—as well as CEOs and boards—to embrace a broader and more strategic approach.