5 Key Reasons Why Great Financial Management is So Important for Your Nonprofit Now
A whitepaper for nonprofits by Peter Brinckerhoff
Congratulations. If you’re reading this article and you work or volunteer for a nonprofit, your organization is still here. Tens of thousands of nonprofits in the US and Canada went under during the 2008-2010 recession and its still lingering aftermath and, apparently, yours was not among them so, again, congratulations!
All that celebrating aside, many nonprofits came through the recession having learned a very valuable lesson; recessions are brutal on weak organizations, for-profit and nonprofit. The nonprofits that went into the recession with adequate cash reserves, good financial management, a business model that worked for their mission and their community, a good check and balance between board and staff, well trained employees and volunteers; those nonprofits, by in large, not only survived the test, but prospered as other nonprofits foundered. I hope your organization was one of those.
Other nonprofits that went into the recession less strong adapted well; they came through the crisis remade, with new business plans, improved staffing and volunteering models and better marketing; in short, they became better mission-based businesses.
So what to do now? How do you make sure you’re strong enough to survive the next financial crisis when it comes? How do you do three things simultaneously: Make your organization stronger financially, meet the often increased needs in the community, and coping with often seismic changes in funding sources? Can you do all three things at once?
You can, and as a steward of your mission you must. But to accomplish those tasks, and do them well, you have to have good numbers. Whether it's cash flow projections for the next six months, expenses by category over the past 12 months or ratios from your balance sheet, good financial management and reporting provides you the information to make better stewardship decisions from here forward. In this article, we'll talk through why this is so important, give you some examples of what kind of reporting you need, and some suggestions on ways to ramp up your financial management and reporting to strengthen your ability to accomplish your mission in the current OK times, hopeful good times to come as well as the inevitable next recession.
To start, we have to answer the question: Why should you be concerned about the quality of your financial reporting system now that you’ve survived a once-in-70 year recession? Let's drill down a bit and investigate five key reasons.
1. It’s Still Best Practice
Even though your nonprofit may be stressed from the recession, good financial reporting is still a best practice and an expectation of funders and donors alike. It bears noting that donors are increasingly sophisticated about your financials. They know how to find your 990s, examine your costs of fund raising, take a look at your balance sheet and net revenues. They expect you to follow best practices in this area. If you don’t have solid, dependable reporting and current numbers both funders and donors will question your ability to manage your organization well, and to use their investment in you (their donation) to the best mission outcome possible. Remember, donors have tons of choices of great missions to fund. Why would they invest in a weak, poorly run organization? More on this in #3 below.
In addition to the fact that good, flexible financial reporting is crucial to those outside your organization, it should also be critical to you as a manager inside the organization. You still can’t manage what you don’t measure, and like it or not, financial measurements are part of the mission outcome. Certainly, not all mission measurements are financial, but making sure you get the most mission for the money requires that you look at your income and expenses in a variety of ways.
I have said for years that money is the enabler of mission. As a result of that fact, you need to be able to quickly and flexibly analyze and report the financial impact of your mission decisions as you allocate your resources.
2. The Board Is Is More Deliberate Than Ever
As you know, your board members are the fiduciaries of your nonprofit. They are personally responsible if things go off the rails, and having good financial reporting that they can both depend on and access quickly is crucial. Boards in general are much more knowledgeable than in past years, with more members having business experience than ever before. They are demanding good reporting of financial information (and other outcome measures) and if you don’t want to spend all of your (or your CFO’s) time working up those reports, having a good reporting system that is flexible enough to meet those (often changing) requests from the board will save you a great deal of frustration and effort, and make your board happier (read: less nervous!).
This brings up an important point: now may be a great time to upgrade your financial reporting system simply because you have survived a crisis, and that fact is still fresh in your board’s mind. If you choose this path, shop carefully, make sure you don't overreach, and read my list below of things to consider before you decide. I know a number of nonprofit execs who have been able to convince their boards that the systems that they avoided spending on in the past are essential now. Remember, in crisis comes opportunity. I know that instinctively you'd rather spend your resources on direct mission, but if you think strategically, having the ability to track your expenses, income and cash flow in detail may well give you the ability to do more mission down the road.
3. People Are Looking Over Your Shoulder
Increasingly, we are all always connected and open for oversight. If you think your financials are the private venue of your management team and board, think again. Your IRS 990’s are on public display at many nonprofit watchdog websites, such as GuideStar and Charity Navigator. With very little effort, I can find out what you and your key managers were paid a year or so ago, whether or not your organization made money or is in the hole, and review your balance sheet. Why would I bother to check your financials out online? Well, I don’t want to invest funds (translation: make a donation) in a failing organization. Whether I am an individual, a foundation or a corporate giver, I have oversight of your financials online. It also bears noting that every reporter I talk to (and I talk to one or two a month about a nonprofit somewhere in the US) knows about GuideStar and has already looked at the organization’s finances before we have our conversation.
You might be thinking that if the 990 federal form is what’s online, what more can you do? How will having better financial reporting help here? Isn’t the information on the form fixed? Well, yes, but good reporting can help you make a more focused, up-to-date and compelling mission-case beyond the 990, both on the watchdog sites (there’s a place for you to comment on both) and, more importantly, on your own website. You need a part of your site where you not only have your current 990 (the watchdogs tend to lag in reporting current information), but also your most recent audit and your current annual report, with your outcomes listed not only in dollars but also in mission, and not just in numbers but in graphic form.
Transparency is no longer optional, either inside or outside the organization. You might as well have a reporting system that facilitates this easily, not one that you have to spend hours pulling numbers from.
4. There Is Not Just One Audience
You may have noticed that I just said transparency is both an internal and external issue, and it is. Transparency begins inside the organization with your board and staff. Thus, you have many levels of audience for your numbers. For example, your Treasurer and Financial Committee may need one level of reporting (very detailed), while the entire board may be fine with summary information. Here’s an example of that differentiation between what the CEO might see:
CEO Data Sheet
...as opposed to what the entire board might receive:
Board of Directors Summary Report
Income and Expense
At the staff level, your CFO wants every dime spelled out for the entire organization in the reports he/she sees, while a program manager may really only need to see information about his/her program. Some people may want all numbers; some may want numbers and pictures (charts). Again, flexible reporting is key. Can your current system allow for this kind of flexibility?
5. In A Crisis, Decisions Often Need To Be Made Fast, And With Real Numbers
For the time being, the national and global recession is behind us. But that doesn’t mean we’re done with crises; they show up on their own, on a local, state or regional level. As all of us know, when you're in crisis mode, things tend to speed up. This includes your need to make prompt Return on Investment (ROI) decisions as you allocate your resources. You often can't wait until the monthly or quarterly Income and Expense reports are generated to decide. Flexibility and fast turnaround are key, and this ability needs to be part of your reporting system.
Remember that, as a nonprofit, you need to look at not only Financial ROI, but also Mission ROI. These two different returns are closely related. If a particular service is contributing a great deal toward the success of the mission, it may not be essential for it to make money. Conversely, if a service is not contributing directly to the success of the mission, it better be a profit center. A good example of the latter kind of service for most nonprofits might be a fundraising event that does not provide services directly to constituents, but does bring in more funds than it spends and contributes those excess funds toward the direct servicing of constituents.
Here’s a visual demonstration of this concept:
That said, you need accurate numbers to measure financial ROI, and here most nonprofits are behind the curve due to what’s called “cost-shifting.” Cost-shifting arises when one funder says they’ll pay for direct costs, but not indirect, on a particular project. So, you shift the indirect costs out to a different cost center. Another funder pays for 50% of the CEO’s time, and so you move her expenses there, even if she really spends 90% of her time on the project for a while. After 10 different funders weigh in with their particular reporting needs, the cost picture is so muddled, that you can’t really tell what your real costs are, unless you back out the adjustments.
Can your reporting system do that? Can it tell you what a particular service or grant is really costing you? Can it track the source of funding separate from the program cost, while still allocating to the appropriate funding sources? Without that information, the staff and board can’t make an informed stewardship decision. In addition, this information needs to be available often with greater frequency than just monthly. Doing the homework now on your ability to quickly respond in a prudent fashion is key.
What Does Your Financial Accounting And Reporting System Need?
Obviously, the list above necessitates a completely ramped up financial reporting system for many nonprofits, while just tweaks are needed for others. If you are thinking of upgrading your system, do your homework, talk to current users, ask peer organizations what they are using, go online for user reviews. Consult with your auditor. Make sure that any system you invest in has at least the following capabilities, and that those capabilities can be used easily.
- Meets all the reporting requirements of the new IRS 990, 990N, and 990T. No sense in not being able to turn these documents out easily. The same caution goes for your state reporting.
- Can provide the needed information to your auditor. The less time the auditors have to spend digging out what they need, the lower your audit bill should be.
- Can report flexibly to different audiences. As noted above, this is increasingly important. Most board members don’t want to dig through a 20 page printout. Most staff don’t need to. The ability to differentiate is key. Also, graphs and charts are really important for some users. This capability should be built in, and not require exporting to a spreadsheet.
- Can report in real time. Waiting to the end of the month is just so....last century, and can leave you wanting at times when you need to decide now.
- Can back out cost shifting. You need to make your resource allocation decisions based on real data. And, cost shifting situations can, over time, get so complicated that you do not want to require some poor staff person to do this by hand.
- Can generate reports for online review. Mostly this means that the reporting system can develop documents in .pdf format, but check with your webmaster to make sure that this is easy, and easily updated. If you have a board portal on your website and can integrate the financial reporting with that, all the better.
- Can easily integrate with other database and reporting systems. For example, your financial system should be able to connect seamlessly with your grant management and donor tracking system.
Good financial reporting is a key part of good stewardship. Now more than ever, it is essential to have the ability to be responsive to financial inquiry, whether from inside or outside your nonprofit. Make sure you have the right tool for the job.
About the Author
Peter Brinckerhoff is an award-winning author and internationally renowned lecturer on nonprofit management issues. A former Executive Director of two regional nonprofits, Peter has served on eight different local, state and national nonprofit boards, and speaks regularly to nonprofits in North America, Europe, Latin America, Asia and Australia. Peter’s books are used at the undergraduate and graduate level at over 100 colleges and universities worldwide. He can be reached at firstname.lastname@example.org and his website is www.missionbased.com.
This whitepaper is sponsored by Serenic Software, provider of the Serenic Navigator financial management suite. Serenic Navigator, fund accounting software designed specifically for nonprofits, NGOs and the public sector, is certified for Microsoft Dynamics NAV. For more information, or to register for an online demonstration, contact us or call 877-737-3642.