We live in an era of both transparency and of difficult problems to solve. I deeply believe that the more people who know about the problems our nonprofits face and the ways that we are trying to solve them, the better. To do that, you have to be willing to share plans, strategies, minutes of meetings and…..budgets and financial reports.

I know that this sounds like heresy to some readers. I was brought up in an era where, when we took a math test, we were told by the teachers to “Cover your work!” You may have been as well, and that experience seems to have scarred our generation’s outlook on management. We already share our financials with our boards—why not with our staff and non-governing volunteers?

Hear me clearly: Do not do this without first training staff and volunteers on how to read income and expense reports and balance sheets. But once you do, start discussing long and short term goals, their financial impact and their mission outcome. Start sharing financial benchmarks, then more people will have a better understanding of your organization–and that’s a good thing. If you don’t believe me, read the wonderful book Open Book Management, The Coming Business Revolution by John Case. This book and Case’s two follow up books are still best sellers for a reason: Opening up your financials works.

Will everyone care about your financials, plans, or strategies? No. But those that do are likely to be your most valuable employees and future stars. Think about it: You can do leadership development and identification just by sharing more of the information you already have. Pretty cool.

There are two rules about knowledge (information) and both are true.

“Knowledge is power. If I keep all the knowledge I keep all the power.”
“Knowledge is power. If I share all the knowledge, we all get powerful together.”

You choose.

I recently had a scare at a large national presentation when I discovered that a number of board members in the audience didn’t understand the how and why of an Audit Committee. There were comments such as: “Oh, our auditor just presents the audit to our CEO and she gives it to us. That’s fine, right?” I suggested that they Google “Family Connections, Austin” and read a terrifying and cautionary tale.

So, to avoid getting your nonprofit’s name in the paper in a negative light, what should you do? First, your nonprofit needs an Audit Committee. Second, that committee should have two tasks: engaging your auditor and conducting the first review of the audit. The Audit Committee should be independent, and can include non-board members (former board Presidents and Treasurers are common on Audit Committees). It is usually small, with 3-5 members.

The first job of the Audit Committee is to engage the audit firm—this work should be bid out at regular intervals. Most organizations do this every three years. Even if your nonprofit stays with the same firm, it’s recommended that you change the partner in the firm who oversees your account.

When the annual audit, along with a management letter is ready, the auditor meets with the Audit Committee first without clearing the report with the ED/CEO. Your ED/CEO can attend this meeting, but just shouldn’t see the information in advance. Then, the Audit Committee reports to the full Board of Directors.

This is now best practice in nonprofit governance and required by many funders. If your organization is not up to speed in this area, now is the time to get it there!

Assets, as everyone knows, come in a variety of forms. Just look at your balance sheet. There are fixed assets, like buildings, liquid assets, like cash or investments, money owed to your nonprofit (receivables) and even intangibles like “goodwill,” which is your accountant’s way of valuing your reputation and the value of your brand.

All of these assets are important and the job of a good nonprofit steward (staff or board) is to balance protecting and using those assets for the optimal benefit of your organization. But there is one asset that is more valuable than all the assets listed above, and that is your nonprofit’s mission.

Your mission is more valuable than your buildings, your cash, your board, your staff, your volunteers and your donors. How can I say that? Because the mission is why your donors donate, it’s why your volunteers show up and why your staff keeps working (hint: They aren’t there for the high pay and benefits!).

Your mission is your organization’s sole reason for existing. It’s why the Internal Revenue Service granted your nonprofit’s tax exempt status, the reason people visit your website, why they become enamored of your activities and are so interested in your outcomes.

Every decision that your staff and board make should revolve first and foremost around your mission. Here’s the metric: Each and every decision should result in one or more of the following:

• More Mission
• Better Mission
• More Efficient Mission
• More Effective Mission

Your decisions don’t have to result in these outcomes during the next week, month or even fiscal year, but you should be able to rationalize any and all decisions based on the intent to achieve one or more of the four results listed above. Remember the first rule of nonprofits: Mission, mission and more mission!

Most nonprofit board members get far too much material prior to their regular meetings, and certainly the financials are prime offenders. Face it: Most of your board members don’t take the time to slog through a five, ten or even twenty (yes, I’ve seen these) page financial report. While your board treasurer and members of your finance committee should go through the financials with a fine tooth comb, is that really necessary for other members? What most board members really need to see is a summary of income and expense against budget, a cash flow projection for the coming six months (also in summary) and a set of balance sheet generated ratios, again compared to goals and past performance.

Remember, any board member should be able to see any number they want, and right away. This kind of differentiation of reporting is intended to allow board members to perform their fiduciary responsibilities efficiently without being buried in numbers.

What about your staff? Does each member of your management team need to see the detailed financials for the entire organization? I don’t think they do. What each manager really needs is a report of her or his area of responsibility in detail and then summary information about the organization as a whole. And, of course, a cash flow projection; everyone needs to see that far too infrequent report.

My philosophy about financial reports is that they should be constructed to fit the varying needs of their intended audience. In reporting your numbers, one size definitely does not fit all. Ask board and staff members what kind of displays they really want. Show them some options and stay flexible. Some people love numbers as numbers. Others get more out of numbers as pictures (graphs and charts). Take a look at the options provided in your Serenic Software and begin a conversation with the end users of your financial reports about ways to accommodate their needs. They’ll be happier, the oversight will be cleaner and you’ll save a few trees to boot.

Since the release of Navigator 2009, I have had on my task list the need to update our Serenic Navigator Decentralized Technical White Paper.  If you are familiar with this white paper, then you understand the implications of the new Dynamics NAV 3-tier architecture for the   decentralized deployment of Serenic Navigator.  The recent announcement of NAV R2 further reveals how Microsoft is moving Dynamics NAV into the “cloud.”  How does this impact your organization if you have already or are getting ready to deploy Navigator in a decentralized environment?

NAV R2 will basically eliminate the need for Citrix or Terminal Services.  As mentioned in the press release, “this allows for remote or roaming users to take advantage of the richness and Microsoft Office integration of the RoleTailored interface and the many integration features connected to local resources, such as the operating system and Microsoft Office.” As the underlying architecture for Serenic Navigator (Dynamics NAV) continues to evolve, the deployment options have become even more flexible.

When I first wrote the decentralized white paper three years ago, the following options were available:

• Citrix or Terminal Services to deploy the NAV classic client
• Serenic Portal Services
• Data Backbone Replicator 4.21

Today, we have multiple clients around the world that run Serenic Navigator using these options.  One particular organization can open Microsoft Excel at headquarters, hit refresh and know the accounts payable balance for their Swaziland operating company.  They can do this daily.  Since the introduction of Navigator 2009 and with the upcoming release of NAV R2, completely new and exciting options are now available:

• NAV role-tailored client deployed using Microsoft Application Virtualization (App-V)
• Serenic Portal Services that now uses native NAV web services
• Excel templates utilizing web services
• RapidiOnline (formerly Data Backbone) Replicator OnDemand

Now more than ever, the technical challenges of deploying software across the world have greatly been reduced.  The toolbox has definitely expanded and we haven’t even mentioned SaaS J–yet.

Until next time…

In the prior post, I discussed the strategic things do in a crisis. Now, let’s turn to some tactical tasks that can really help your organization.

• Once you have the best-case, worst-case and middle-case scenarios prepared by your crisis team, go to the board and choose a path.
• Run weekly cash flow projections that show receipts and disbursements out six months. Remember CASH=OXYGEN. Thus, your case projection is your most important financial report in a crisis.
• Inform creditors and vendors that you may well be late with payments, but that you have a plan. All vendors would rather get a small regular payment than none at all, and they definitely want to know you have a plan.
• Review all your contractual obligations. Is your office or vehicle lease amendable? Your other contracts? Does cutting one program affect the funding for another? Find out what you can and what you can’t cut.
• Be available to staff and volunteers to talk. This means being visible in your organization. Don’t hide behind your open door policy. As a leader, you are iconic, and never more so than in a time of crisis.

Finally, remember to take care of you, the leader. It’s natural to think you have to work hardest, longest, and take on all the decision-making. That’s a fast track to the ER, and in the interim, you don’t make very good decisions. Get your sleep, your exercise, eat right and do something that relieves stress. You’re the leader—the people that work and volunteer for you, to say nothing of the people your nonprofit serves, depend on you.

Crises come in all shapes and sizes. For most nonprofits, they have their root in money—and not enough of it. A contract gets cut, a grant reduced and things get far too interesting far too easily. Use the ideas here and you’ll at least have a strategy to get your nonprofit back on track. Remember, mission first.

When your nonprofit hits the wall (or, more recently, the wall falls down on your head), what’s the best leadership strategy? In this and my next post, we’ll take a look at a sequence of actions that can act as a checklist when (not if) a crisis presents itself to you. Before we go through my list, though, always remember the point of your nonprofit is to do good mission. That’s just as true in a crisis as in other times. Mission first, last and always.

When you confront a major crisis, start strategic and then move tactical. This is harder than it sounds. As leaders, we tend to want to fix something NOW when a problem pops up. When the problem is huge, we fix more small stuff faster, but often don’t stop and think through the larger mission issues before we start acting. Start Strategic.

Form a team of staff, board and outsiders to ask the following questions:

• How bad is the problem—really? (Rumor mills need to be checked out)
• Are programs or, worst case, the organization at risk?
• What guidance does our vision, mission, values, strategic and marketing plans give us as we decide how to proceed?
• Should we consider a new business model and/or merger?

Now, talk to peer organizations in the same position as you. Make sure you don’t reinvent the wheel. Then, once the data is in, create a best-case, worst-case, and middle-case for action.

Communication is key, but also a trap. Make sure you tell people (staff, volunteers, funders, the people you serve) what you know. What you know, not what you hope. What you know, not what you think may possibly perhaps sorta happen. The rumor mill can be deadly even if well intentioned. For example, if someone in a staff meeting asks, “Will we need to cut staff?” and you don’t know yet, but in trying to make them feel better say, “I sure hope not.”–what they hear is: “STAFF IS BEING LAID OFF!!!” What. You. Know.

In my next post, we’ll talk about a list of tactical things you can do.

Last week I was asked by a controller new to his position if the auditors would be easy on them because they were a nonprofit organization. I must admit I was really surprised by the question and calmly explained that no, nonprofits are not given a “break.” In fact, the requirements on nonprofits were onerous and especially complex if the NFP was receiving grants from any governmental organization.

I explained the alphabet soup of regulations including: GAAP, FASB, A-133, A-122 and so forth. I further clarified that he was also responsible for specific US HUD regulations, because his organization received HUD funds for housing. After a lengthy conversation, I felt bad for the new controller—his life just got a lot more complex in terms of accounting.

Later, when I got home, I thought about how financial controls have changed in my career—no jokes about doing T-Accounts on cave walls. I can remember when federal cash advances were actually cash advances.  Life was so simple: we would estimate the cash needs for the month and draw it all down. When I first started working for a community health center, we actually kept the finances in 13 column ledger books. Our first computer used Microsoft’s first spreadsheet program, called Multiplan, and then we moved to Lotus 1-2-3—life was good.

I also remember a few examples of why, at least in my opinion, the regulations got so extensive, and the requirements on audits expanded to include so much internal control compliance review.

In the St. Louis area, a vast network has formed as a result of the extensive need for nonprofit services. Most of them provide great services and managed their financials correctly, but a few were a financial mess.  Let me give you a few examples.

• Example 1: Organization A had two sets of books, one for the auditors, and one the Executive Director carried in the trunk of his car.  The police found the second set of books when he had a heart attack and crashed his car on the interstate.

• Example 2: Organization B was an early adopter of a new computer system. They didn’t test the quality of their back-up tapes and kept no paper trail of activity.  When their hard disk crashed, the organization lost all of their financial and client data.  It was no surprise that they went out of business.

• Example 3: Organization C used their CPA firm to first prepare the financial records and then audit them. I will never forget the audit opinion: “The audited financial statements bear little or no resemblance to the organization’s financial statements.” Can you imagine that happening today—and this was one of the Big Eight CPA firms, now called the Final Four or Big 4?

Yes!  Nonprofit audits are extensive and rightfully so; bankruptcies and the issues discussed above should not be allowed to happen and if the audit work can give the donors and grantors a level of confidence in the NFP’s books and controls, we are all better off.

As every reader knows, the board members of a nonprofit organization are fiduciaries, personally responsible for the activities, resources and well-being of the organization. There are many great resources online about better boards, better policies, etc., but in this space, I want to go over some key components of current best thinking about boards as fiduciaries.

Have Turnover

• A permanent board is not a good idea, and nearly all accrediting bodies require that boards have terms and that new members come on with some regularity. This is challenging for many organizations, but it’s essential to have new perspectives on your governing body. Train your board regularly about your organization—don’t just have one night’s orientation each year.

Have Quorums

• You can’t do business without a quorum and, for individual board members; not being at a meeting is no defense if the board does something stupid or illegal.

Have Access to Information

• Make access to information easy and in readable form. This is particularly true for financial reporting. Talk to your board about what they want to see, and then make sure it’s in understandable form for non-financial experts. Also, have a passworded section of your website just for your board members with access to much more information than you want to give them in print.

Have a Conflict of Interest Policy

• Not having a conflict policy is a deal-killer for many funders. Review it every year (including discussion of what it means) and have all board members sign annually.

Have an outside Audit and an Audit Committee

• If your organization is of any size, you need an outside audit with a management letter, and it needs to be delivered to your audit committee directly, not through your paid staff.

These five items are not the complete picture, but they are the big issues in improving the fiduciary capabilities of your board.

–Peter Brinckerhoff (biography), a Serenic Software Blog content contributor

Most nonprofit staff and board members are not MBAs, CPAs, or financial planners. Yet, all of them need to be able to read and understand the organization’s financials. Staff has to plan and manage their budgets, while board members are fiduciaries of the nonprofit. Financial statements are often long and detailed, and it’s hard to see through the clutter to know if the organization is on sound financial footing.

This is why financial benchmarks are so important. Certainly the annual budget is one benchmark, but let’s look at some others that many nonprofits use.

Ratios (such as the Quick Ratio, Current Ratio, and Debt to Equity) are great ways to quickly look at an organization’s status and understand key parts of the balance sheet. Net revenue (as a percentage of budget) is another. Non-financial benchmarks that affect finances (occupancy, number of new donors, percent of staff turnover) are also great to have available. There are others, but these can get you started.

When you report benchmarks, don’t just list a bunch of numbers. That only adds to everyone’s confusion. Have a display that looks like this:

You can see that this kind of display compares your current status both with trends and with your overall goal. This makes it much more useful information.

To set financial benchmarks, gather a team of staff, your board Treasurer, your CPA, and your banker. Perhaps you can add an outside expert, or another board member with financial acumen. Set the benchmarks and then review them every 12 months. Finally, train both staff and board in what the benchmarks mean and how to use them.

–Peter Brinckerhoff (biography), a Serenic Software Blog content contributor