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The Third Sector Report By Jeffrey Wilcox

The Six Realities Of Nonprofit Financial ManagementJeffrey Wilcox - The Third Sector Report

Shortly after becoming a nonprofit executive director, the amount of advice I received to build relationships in the community, manage the organization and raise money was overwhelming. Everyone had ideas.

The most sobering part of the job, however, was the realization that most business leaders cast nonprofit executives as being weak in knowledge and aptitude to run successful enterprises. It was as though I was welcomed into a world where there was the “grownups’ table” and the “kids’ table” for leaders of organizations; and, as a nonprofit executive, I should know my place.

My experience was also reinforced by research findings that very few trustees actually understand nonprofit finance, financial reports at board meetings generate the least amount of engaged conversation, and training sessions about nonprofit finance are the least attended.

To make matters worse, the leaders with the most financial savvy in my organization formed their own club called the Finance Committee which put little financial reasoning at work in other parts of the organization where well-meaning volunteers were making unwise decisions, directives and demands.

Everyone wanted what was best for the organization, but the sad truth is that the assumptions about nonprofit finance and the financial culture at work throughout the organization put into motion a leadership process destined to place the organization in peril during economic downturns.

The current economic headlines are perfect examples of those kinds of downturns I feared the most:  Foundations worried about their short- and long-term investment portfolios, fearing lower yields will translate into significantly reduced grants; public agencies facing dramatic cuts in government spending putting contracts for services provided by local nonprofits at risk; and, philanthropists focusing on their most loyal projects and causes while reticent to undertake new ventures.

Helping a nonprofit to weather the financial storms requires an extra dose of leadership savvy. Now seems like a good time to remind “the grownups’ table” about six fundamental realities of fiscal management that can make the difference between financial strategy and financial straits for nonprofit organizations.

The first reality is the economic cycle. The nonprofit sector experiences a delayed reaction. Because philanthropy is based on yields, corporate contributions are based on profits, and governments plan budgets in one fiscal year for the next, the effect of one economic cycle spills over into the other in nonprofit financial planning. Don’t assume what’s going on at the office and in the personal bank account are what’s going on at the nonprofit.

The second reality is the role of government. On a per capita basis, nonprofits have a significantly higher rate of government contracts than small businesses of similar size.  Accounts receivable management, collections and compliance are a whole different ball game when your primary customer is Uncle Sam. Heed his word. His voice can override even the board’s voice when it comes to financial policy and board obligations.

The third reality is leveraged capital. The nonprofit sector is the only slice of the American pie that benefits from uncompensated human resources called volunteers. Any approach to actively developing staff positions to get work done without first talking about developing and deploying voluntary approaches misses the unique nonprofit advantage of leveraged human capital.

The fourth reality is obligation of stewardship. Investors in nonprofit organizations carry a significantly wider definition of “return on investment.” This requires a more aggressive investor relations program which many wrongly believe is a staff function. Stewardship begins with the stewards.

The fifth reality is the sustainability factor. All revenue-generating decisions must include discussions about the prospects for sustaining these revenues. This is particularly true with grants and in special events fundraising. Even the favorite fundraiser has sustaining costs that aren’t immune to inflation. Knowing how much of a dollar it takes to raise a dollar is a fundamental financial formula.

The sixth reality is the responsibility of financial literacy. A finance committee must have non-financial people involved to learn while financial volunteers are deployed throughout the organization to inform decisions.

Today’s economic environment demands strategic fiscal management that benefits from both business and nonprofit executive savvy. The result will be that the next generations of both sectors will know it takes one table to advance society, not two.

Jeffrey R. Wilcox, CFRE, is president and chief executive officer of The Third Sector Company, Inc. Join in on the conversation about this article on Facebook or drop us a line at jwilcox@thirdsectorcompany.com