Raise your hand if you're a nonprofit executive director (or you serve on a nonprofit board) and have a long list of mission-advancing ideas but scarce resources to make them a reality. Keep it in the air if your board has limited financial information upon which to base its guidance/counsel.
Whether you sheepishly glanced around room to make sure no one was looking before putting your hand in the air or thrust it up as emphatically as an athlete's fist pump after a gold medal performance, you feel this dilemma viscerally. You want to expand the impact of your nonprofit's mission, but aren't quite sure how to remove the financial resource shackles that limit that expansion. You feel trapped because you don't see a way around this all-too-common situation.
Perhaps you've fantasized about having a CFO to sort thru the mish-mash of financial information and chart a clear path forward, but ruled it out because it would be cost prohibitive. You might be surprised to find CFO services can be structured very affordably... which turns the question around to “can you afford NOT to engage a CFO service for your nonprofit.”
Read our separate articles that cover exactly what a CFO service is and how much a CFO service costs to better understand the concept. But let's now discuss how a CFO service can effectively address financial challenges for nonprofit organizations.
Common Financial Challenges Faced by NonprofitsLet's begin by listing some of the more common financial obstacles that nonprofits encounter:
- Cash shortages
- Budget deficits/resource limitations
- Fundraising woes
- Compliance misses, penalties
- Fraud: Consider that 9% of all frauds occurred inside nonprofits and those had a median fraud of $75,000 according to the 2018 Fraud Report by the Association of Certified Fraud Examiners.
- Organizations that are managed by the "heart" rather than the "head"
- Inactive or hamstrung boards
How a CFO Service Can Overcome these Challenges
The right nonprofit-oriented CFO service should be well-equipped to effectively manage your organization through each of these challenges. Taking them one-by-one, here's how:
Cash is the lifeblood of any organization and proactive cash management is arguably the single most important planning activity you'll undertake. Common cash management tools include a cash position report that details your organization's cash balance, burn rate (pace at which you're depleting your cash balance) and runway (time till you run out of cash). And cash flow projections specify the schedule of anticipate cash inflows and outflows. These tools coupled with the guidance required to interpret and use the data they provide, ensures a nonprofit always has advanced warning of cash shortfalls while there's still time to react. They also serve up the levers at your disposal to deal with the cash crisis. Sound cash management enables an executive director to plan and successfully navigate through periods of limited cash.
Built and used properly, a budget can serve as the financial roadmap for a nonprofit organization. It keeps an executive director and the board on the same page. Similarly, an executive director can use a budget to hold department heads accountable to hit their respective income and expense hurdles throughout the year. Leveraged well, it aligns everyone in the organization around the same quantifiable goals and you'll likely find it refreshing to see how motivating that can be for everyone involved.
Most nonprofit organizations must raise money to supplement revenue from fee for service activities in order balance their budget. Such fundraising occurs through avenues such donations and grants. Regardless of the source, however, prospective sources of capital will want to understand the impact their funds will have and that you will be responsible and effective stewards of their money. While their interest in your mission is important, don't lose sight of the fact that they'll want to see a compelling financial story that provides quantifiable evidence of your organization's impact and that it's on firm financial footing. Crafted effectively, this story could be the single biggest ingredient in expanding your nonprofit's impact in line with your dreams.
Tight internal controls to prevent errors, compliance lapses, fraud and security breaches aren't a nice-to-have. Rather, they're an integral part of a nonprofit's overall finance function. Here are a couple ways in which a CFO service can turn your controls (or lack thereof) into such an asset.
Build trust through transparency: Use controls to build trust with your stakeholders such as funding sources. Controls to protect their investment in your organization and maximize its impact will provide assurance of your sound stewardship.
Compliance: As a nonprofit, you must adhere to certain Financial Accounting and Audit Standards. The hurdle for compliance is quite high in many circumstances. A CFO service can help you interpret and meet these requirements, month after month, year after year. Let's take “Fund Accounting” as an example. Fund accounting is an accounting method for recording resources whose use may be limited by law or by a donor, grant authority, funding source, etc. This means your accounting systems must recognize the various forms of income (list below) and track their deployment so that you may demonstrate compliance in your audit.
- Fee for service
Insightful reporting can serve as an extremely powerful management tool. Not only do well designed reports provide transparency but they also enable data driven board engagement and communicate programmatic impact to stakeholders.
Keep in mind, that just as your nonprofit evolves, so too must its reporting. A CFO service can design and build useful reporting and adapt it as your needs change. Such a service can build a dashboard for efficient consumption of the data so you, your management team and your board can spend its precious time using the data to inform decisions.
Here are a handful of key performance indicators (KPIs) specific to a nonprofit that a dashboard should include (relative to forecasted outcomes):
- Program impact. Remember if you want to new donors to join your cause or existing donors to step up again and again, be sure to quantifiably demonstrate the impact their dollars are having.
- Fundraising performance by fundraiser.
- Board of directors. Are all roles filled, is each pulling his/her weight in respective area?
- Financial health. From cash position to performance relative to budget to program-level profit/growth areas of weakness should jump of the page so issues may be rectified and noone is blindsided.
- Sustainability grade. Most nonprofits are striving for a sustainable business model. How is yours tracking?
Why a financially healthy nonprofit’s impact is greater
Let's start by dispelling a myth about nonprofits. In fact, it's number one on the nonprofit "myth list" according to the Council on Nonprofits. That is, the word “nonprofit” is a misnomer. Because of what the name suggests, many believe a nonprofit isn’t supposed to produce a profit. But that couldn't be farther from the truth. While a nonprofit's income shouldn't benefit private individuals beyond reasonable compensation, it can and should be used to invest in advancing its mission.
Moreover, a financially healthy nonprofit is a sustainable nonprofit. Sound financial management of a sustainable nonprofit can ensure the mission is carried out for decades to come.
Click here for a brief story that brings to life how financial management in a nonprofit is at the very core of achieving impact.
There's no better way for a nonprofit executive director and board to monitor the health of its organization than a finance dashboard designed for your organization. Request the executive kit below for your free sample nonprofit finance dashboard.