November 21, 2017
 
Financial Realities that Nonprofit Leaders Need to Keep Top of Mind

By David Orlinoff

David Orlinoff
Of the many financial realities with which key nonprofit executives need to be concerned, five stand out – not just because they are important, but because they are often overlooked.

Paying continuous attention to the following will help nonprofit leaders to fulfill their ultimate responsibility of fulfilling their organizational mission:

1. Understand your fiduciary responsibility.

As a board member or a senior manager, you have a responsibility to be an effective, loyal, and ethical steward of the organizations resources and reputation. There are two elements to fiduciary responsibility: duty of care, and duty of loyalty.

Duty of care means you must pay attention to the affairs of the organization. Not only should you attend board meetings and participate in committee work, but you should also prepare for your meetings by reading advance materials. At meetings you should make sure you understand reports on finances, fundraising, and program activities, and you should be alert to situations that carry potential rewards and risks.

Duty of loyalty means you must put the interests of the organization ahead of your personal interests when you are acting in your official capacity for the organization. Make sure there are no actual conflicts of interest, and take whatever steps are necessary to remove yourself from any situation where any conflict of interest may be suspected or implied.

2. Make sure there is a balance between the organization’s ambitions and resources.

Remember that an organization’s mission can only be as effective as funders’ willingness to pay for it. Whether your revenue comes from contributions, or contracts, or fee-for-service engagements, or even investment income, try whenever possible to keep your spending within the limits of affordability.

Pay attention to the organization’s capital structure (do you have debt or do you self-fund your assets?) and to the timing of cash flows as well as your annual budget. There’s a reason for the saying, “No money, no mission.”

3. Understand your organization’s revenue model, and identify the strategic direction you’d like to take it.

A nonprofit’s revenues come from three major streams: contributed income (primarily donations, grants, and bequests); earned income (e.g., government contracts, tuition, fee-for-service, gift shop sales); and investment income (interest, dividends, and gains/losses on investments).

Visualize or create a pie graph with these three elements. Is the mix right for where your organization is in its sector, its life cycle, and its growth trajectory? Or do you need to develop a strategy to, for example, increase or decrease your dependence on contributions?

4. Recognize that not all contributions are created equal.

Depending on the scale, complexity, and nature of its activities, your organization may receive donations and grants that carry restrictions, usually “purpose restrictions” that direct how the funds must be spent. Nonprofits, especially smaller ones, can forget that accepting such gifts carries a responsibility to ensure that the funds are actually directed to the designated purposes. Your organization needs to have the capacity to administer these contributions, both programmatically and accounting-wise.

Make sure the right people are informed of the restrictions, the requirements for after-the-fact reporting to funders, and the documentation required for auditability.

5. Take your budget responsibilities seriously.

The annual operating plan for your nonprofit projects the revenues and expenses for the upcoming year, at a level of detail appropriate for the organization’s size, complexity, and financial condition. But be sure you understand that the budget is more than merely a compilation of more-or-less scientific forecasts. It also serves other important purposes:

  • It’s a planning tool – the collaborative process of developing assumptions brings together all the relevant history, forecasts, strategies, and (hopefully informed) opinions.

  • It’s a measurement tool – the comparison of actual results to the budget creates a foundation for evaluation and for course corrections as needed.

  • It’s a control tool – variances may indicate that some process is not well managed or has been subject to fraud or manipulation.

  • It’s a statement of values – the budget forces a focus on what the organization thinks is worth paying for and communicates that to stakeholders.
David Orlinoff is the founder and principal of Concord Financial Organization, which provides interim financial management and related consulting services to nonprofits throughout New England. Contact him at orlinoff@1cfo.com or 978 828-6100.
May 2016

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