Does your organization have a strategic plan? And what is the associated financial strategy? If there isn’t a realistic financial plan to go with your strategic plan, it may wind up on the shelf as a nice report that didn’t go anywhere.
Large nonprofits have fiscal experts on the staff, but smaller nonprofits usually do not. The lack of understanding by Board and Executives of the fiscal health and financial details of smaller nonprofits is at a crisis level. Certainly, they recognize that their finances are tight and that they may have had to cutback, but many have not looked strategically at their fiscal health and don’t have the skills to do it. It is time for small nonprofits to look beyond the next payroll – you know who you are – this is what financial management means to many small nonprofits. Reducing staff but trying to do the same things or reducing salaries and benefits may not constitute a sound financial strategy.
A typical scenario for a small organization could be this: the finance department consists of a bookkeeper, the executive director’s background is as a program manager and there are no accountants on the Board. This is not far-fetched. It is not uncommon in nonprofits with less than a $1 Million operating budget. Many of these organizations are constantly at the cusp of their own fiscal cliff and only one wind gust away from going over it. The loss of or reduction from a big funder, under insured property damage, competition that erodes demand for its services, loss of a favorable lease or many other possibilities can be a death knell. Operating everyday with these possibilities hanging over head adds to the stress but not to the solutions. I know more than one organization dependent on an unrealistic lease or otherwise unprepared to deal with their own fiscal cliff.
What’s a small organization to do? Actually, lots of things.
First of all develop more financial management understanding. The Executive Director should take courses and workshops and develop as much financial management expertise as possible. The Nonprofit Finance Fund has chapters throughout the country and offers excellent workshops.
Recruit accountants and financial managers to be on the Board and get them on the finance committee. Develop a list of things for the finance committee to tackle besides developing a budget.
Look at your expenses by program and assess financial viability, effectiveness and relationship to your core mission. I’ve seen several organizations with programs that outlived their viability and only when reviewed in depth were they eliminated.
Understand risk. Understand your insurance policies. Evaluate in terms of cost and coverage.
Develop a reserve and a line of credit. There isn’t a simple answer to what is the right reserve level. It depends on your vulnerabilities and accepted risk levels. That’s why you need someone with some financial prowess on your Board. Don’t abuse a line of credit – use it only as intended.
Real Life Case Study
Sometimes you have to dig to get the truth. Physical observation is always my favorite approach. This is a real life example that I am personally familiar with. Myth believed by the Board: “Our training center serves 60 students in four classrooms and the county pays for the full cost.” Truth: County pays based on daily attendance and does not pay at all if students drop out in first three weeks. Our dropout rate is 30%. “County pays full cost” is based on having 90% capacity and we operate at about 60% capacity. The cost does not cover overhead which is a real cost. Nobody was lying about this. When the plan was initially presented and approved it was developed on the 90% model and the myth that it was “paying for itself” perpetuated even though it was far from the truth. That’s the financial picture. It gets worse. The Board was told that as a “back to work” government program, they could expect that mothers leaving their kids at the pre-school operated in the same building would be users of the training programs. It sounded like a perfect fit with the mission. Reality – most county referees were on parole and just out of jail. That didn’t seem like as good a fit to be co-located with a pre-school. The issues were financial, mission appropriate, effectiveness of the program and infrastructure appropriateness. What happened? The training center was closed. It wasn’t a good fit and it wasn’t financially viable. It took a Board member to visit, look around, count the students, read the government contract and ask a lot of detailed questions of the program manager to understand the facts.
I have seen many programs that were supposed to pay for themselves that didn’t. They were a drain on the infrastructure and management and sometimes not closely aligned with the mission. And without program by program financial analysis the myth of the health of these programs stays alive.
I have grown a little bit hardened I must admit by seeing some of these programs up close. If a program is underutilized, what is the reason? Are there better options in the community or have you just not marketed it properly? Has a program outlived its value? Undertaking financial analysis should be only one component of an overall analysis – but make sure it is an accurate one and not a mythical one. It is more important to have high quality for the programs you offer than to keep all of your programs operating. That’s strategic. And being strategic means keeping an open mind about change.
Financial Scan – Guidestar and the Nonprofit Finance Fund have partnered to develop this software tool that can help you understand your financial health, provide comparisons with your peer group and offer the base for doing real financial strategic planning. Find out more about Financial Scan here.
The Nonprofits Assistance Fund has excellent resources with a variety of articles on financial topics. Check out the resources here.
Excellent Book Resources:
Nonprofit Sustainability - Making Strategic Decisions for Financial Viability by Jeanne Bell, Jan Masaoka and Steve Zimmerman
The Nonprofit Business Plan