By Russell PomeranzFEBRUARY 2008 - The advent of the Sarbanes-Oxley (SOX) era in nonprofit governance is often interpreted to mean a phalanx of bookkeepers accurately accounting for every organizational penny, and keeping all interested parties informed in a timely manner. Unfortunately, if that performance measurement determines whether new legislation or organizational financial oversight is successful, then an interesting opportunity will have been missed. Viewed more broadly, the ultimate goal of a SOX–like focus on nonprofit organizations’ financial function could be to take advantage of a key organizational resource capable of making a larger contribution. Creating stronger, more-efficient, mission-focused nonprofits requires an exploration of the relationship between the financial function, embodied by the CFO, and the programmatic function.
The ‘Big Picture’ Outcome
Nonprofit organizations want to fulfill their financial and programmatic potential. That requires self-awareness, an efficient use of resources, and an effective decision-making capability. The financial function, embodied by the CFO, is part of that equation, but too often works in “big picture” isolation, if included at all. This deprives the organization of critical analytical capability and a unique perspective. When the CFO and the financial function move beyond the bean-counter role, and understand the organization’s programmatic structure and mission, they contribute by being an organizational strategist, the potential architect of a successful business plan, and a lightning rod for new ideas and growth. The CFO can serve as the long-term thinker who makes sure that the most important financial and programmatic decisions are made with sufficient information and analysis, and that the impact of decision making is understood over time.
The finance department not only serves to advise but also to drive programmatic decision-making, whether out of necessity, curiosity, or long-term planning considerations. Based on close cooperation with the programming side, the finance department can provide organizational focus by identifying the opportunities for investment and new business creation, and can also identify current and potential resources to support those efforts.
For an organization’s key decisions to be successful requires sound financial understanding, discipline, and flexibility, with the vision and pursuit of the programmatic and mission-related goals. Even if the upside is discounted, the downside of bad decision-making, non–decision-making, or decision-making based on incomplete analysis or data, can be dramatic. This is especially true in very competitive nonprofits. Infrastructure decisions such as moving, acquiring new space, increasing or decreasing support staff, and investing in new programs, depend upon understanding long-term potential revenue streams that will cover additional liabilities. The finance function must rely on the program staff to fully understand the competitive nature of the organization’s business, and make realistic assessments and forecasts of potential revenue streams.
This symbiotic relationship furthers the opportunity for change if the finance area has effectively communicated a strategic or business imperative to the program area. Likewise, if program staff have not been trained to take advantage of opportunities or leverage their successes, then key organizational opportunities are being missed. This is much to the chagrin of the finance department, which knows that if the revenue side doesn’t produce, it will be under increased pressure to reduce costs, often by reducing administrative support. Avoiding this unpleasant situation requires a close relationship with the program side.
The ‘Souped-Up’ CFO
The CFO is in a unique position to contribute to the organizational big picture. The CFO may be the only person, other than the executive director, who makes decisions, forms perspectives, or analyzes data based on information from the entire organization. To synthesize, create, and articulate the financial and organizational big picture, the CFO may have to draw on possibly dormant skills, capabilities, and interests.
Nothing motivates someone to learn beyond the job requirements more than seeing the organization’s positive impact on the outside world, the individual’s role, and being involved with other participants in making that happen. It is the nonprofit version of the year-end bonus. The following are additional skills that enable the CFO to play an enhanced role:
Natural curiosity/question-asking capability. The CFO needs to get to the bottom of things. It may be why numbers change from quarter to quarter, why a program is under or over budget, or why one department is more profitable than another. Figuring out how programs run may be important as well, and it helps to understand why they exist, whom they serve, and their results. The right questions, or in some cases a barrage of seemingly random questions, will put the CFO in a position to understand the organization and its business, and also to evaluate the program staff’s ability to clearly explain what they are doing and why.
Storytelling skills. Each fiscal year, every profit center or cost center has a story to tell. The CFO must translate financial analysis into a story to be told to the board of directors, the finance committee, and the program and financial staff. The board can then respond appropriately. Any CFO who has presented financial results knows that a mastery of the programmatic reasons for success or weakness will improve how the presentation is received.
Desire to work with program staff. CFOs and their staffs sometimes lose sight of the need to work with program staff. Program and finance departments often have different cultures and perspectives. Finance and accounting departments can also be considered second-class citizens by their program counterparts. CFOs who are able to articulate the importance of the finance and accounting functions, and clarify the critical role they play in the organizational mission, are better able to attain equal footing with program staff. CFOs should announce finance department successes every chance they have.
The organizational structure must support the CFO. Hiring well-qualified people for the finance department’s number-two or -three spots, such as controller or staff accountant, may be a worthwhile investment. Strong support gives the CFO a credible base from which to operate. Strong support staff also understand what information to analyze. The potential impact of a good business idea justifies the additional expense in creating a strong finance department. Another worthwhile step can be creating a position, probably in the budget department, that places a financial person in the program area.
CEO and board support. The CEO must make clear that the CFO’s role is not just to crunch numbers, but to help guide the organization’s future. CEOs must encourage interaction between all departments. The board must do the same, and challenge the finance department to explain the programmatic underpinnings of the organization and its relationship to finances. The nonprofit sector as a whole might also build the capacity of CFOs who are also CPAs by placing more of them on nonprofit boards, a position supported by the CPAs on Board program offered by the New York State Society of CPAs (www.nysscpa.org) and the Nonprofit Coordinating Committee of New York (www.npccny.org).
Nonprofit boards might also strengthen the relationship between their organizations’ financial and program functions by promoting a CFO to CEO. In the right organization, with the right support, this could motivate nonprofit CFOs to focus on the big programmatic picture to advance their careers. It might also motivate program staff to work more closely with the finance department.
Where and How the Financial and Programmatic Functions Meet
Given the CFO’s function, where is the meeting ground between finance and program staff to make decisions? How might program staff show the CFO how to integrate the mission into his calculations? Similarly, how can the CFO convince skeptical program staff that the bottom line is important?
A discussion with a group of CFOs, program directors, and CEOs of small and midsized nonprofits held at the Rensselaerville Institute provided the author with the following insights into building financial and mission-related bridges between the financial and program departments.
Communication. Obviously program and finance departments need to communicate about what they are doing, upcoming events, important deadlines, audit schedules, and the pressures of their respective areas. These should not be ad hoc discussions; the exchange of information needs a structured forum, and the CEO often plays a role in bringing these two functions together. Whether it’s a monthly, weekly, or daily meeting, it should be scheduled. If program staff don’t know or care about the fiscal year, they won’t react far enough in advance to the finance department’s pleas for meeting year-end revenue projections. Similarly, if finance doesn’t know what programs are growing or newsworthy, it can’t judge where future opportunities lie or whether projections are realistic.
Education. Both the program and financial functions need to be educated about what the other area does. The CFO should walk through the same audited financial statements and reports presented to the finance committee and board with the program department heads. The CFO needs to explain, for example, why surpluses generated by a specific program go into the organization’s unrestricted revenues and are unavailable for future use unless the organization can withstand the bottom-line impact. Likewise, program staff should be told which departments are running deficits, and should understand the short- and long-term bottom-line implications.
Likewise, program staff must invest time in educating the finance and other administrative departments about what they do. Answers to questions such as how programs work, how positive outcomes are achieved, where additional investment might be worthwhile, are, from a CFO’s perspective, extremely valuable.
Involvement. Finance, and administration in general, should observe programs in action. They should take field trips, attend presentations, hear relevant speakers, and ask questions. In some circumstances they may even be able to actively participate in mission-related activities. For example, the CFO at a nonprofit private school could teach a math class. On the other side, a program department head or manager could spend time in accounts payable to gain perspective on how accurate and accessible documentation is produced.
Reporting. The discussion group at the Rensselaerville Institute thought that a natural forum for discussion and collaborative decision-making would revolve around financial and programmatic reports. First, finance and program staff need to work together to determine what reports program staff need to manage their projects, departments, and grants beyond the current fiscal year. Likewise, given fiscal year pressures, finance must design financial reports that communicate bottom-line results and needs as well as relevant budget variances. The finance department would rely on program departments to answer questions concerning how the business operates and why results are as they are reported.
Reports don’t have to be entirely financial. Increasingly, organizations use performance and outcome measures to track programmatic efforts. Programmatic reports often have a financial component (e.g., a cost–benefit analysis). The ability to analyze financial reports as well as programmatic reports side by side, or to create a report integrating both financial and programmatic information, would assign accountability to both departments, thereby fostering cooperation.
Alignment of strategic goals. Finance staff want profitable organizational growth. Program staff want to fulfill the organization’s mission. The program that runs well, grows, serves an important function, and has a significant positive impact in the field has the potential to add resources to the organization over time. The program director who can justify an investment of time and money over the long term should find a willing partner in the finance department, even if there is long-term risk and a negative short-term bottom-line impact.
Battleground and Armistice
Harmony between the financial and programmatic functions is no foregone conclusion. A conflict of desired outcomes often lies at the heart of organizational dysfunction. A common battleground is the bottom line. The finance department’s key outcome is a positive unrestricted bottom line, with some level of growth in temporarily restricted net assets, and the fortuitous growth of permanently restricted net assets. Finance departments and their associated audit, finance, and investment committees, whose members are often experienced for-profit managers, are under pressure to produce results. Also, individual donors, foundations, and watchdog groups are increasingly focused on these bottom-line numbers. They view a break-even budget, and perhaps a modest surplus, as proof of efficient management, short-term financial stability, and a sign that the organization’s product and mission are needed and sought.
Even more important, a surplus can build on or establish an operating reserve that grows over time. The existence of a reserve has been especially critical in periods when grants and other sources of revenue have decreased. Organizations capable of drawing down a portion of their surplus to maintain their revenue-producing capabilities have stronger long-term viability than those without such financial resources.
Positive program outcomes may put the bottom line into a different perspective, however, or even sacrifice bottom-line performance for increased program activity or investment. When finance departments cut vital administrative and programmatic staff that support the organization’s revenue-raising capability, nickel-and-dime expenses, and aggressively allocate more administrative costs to programs while reducing available program funds, they do so at the expense of the programs that drive the organization. These decisions may be necessary, but they also have implications, both short- and long-term. The program with the resources to excel, and that achieves the mission-related results the organization desires, will be better-positioned to leverage its success and to generate more money to further the organization’s work in the future. Such a program also gives a sense of pride and accomplishment to the board, staff, and funders, and motivates them to build on their success.
Converging desired outcomes between finance and program staff will be critical to resolving complex strategic and managerial issues. For example, organizations with endowments need to determine a spending rate, the percentage of the endowment transferred to operations on an annual basis. Finance staff may want to keep that rate low, to preserve capital. Program staff may want to spend more to fulfill the mission and achieve a greater impact in the short term. The common ground may be to maintain or slightly raise the spending rate so that adequately funded programs achieve greater success, increasing future revenue-producing capabilities, or even justifying fundraising initiatives. Moderation may sometimes be necessary to protect against weak endowment results that over time may reduce the organization’s ability to fulfill its mission.
Outcome Questions, and Research for the Future
What impact does the financial function have on nonprofit organizations? Do organizations with a more clearly defined and more sophisticated financial function develop differently? How have financial decisions negatively impacted the growth of an organization, or its ability to fulfill its mission? Unfortunately, the available information is limited.
The empirical evidence to corroborate the logical notion that improved and increased programmatic and financial cooperation improves organizational outcomes is even more limited. Given the potential conflict between the finance and program areas, positive outcomes for one department don’t necessarily mean positive outcomes for the other—or for the organization. What are the trade-offs between finance and programs, and to what extent will they always exist? More research is needed.
It would also be interesting to study how financial department resources and structure affects organizational decision-making, and how organizations can compensate for this. The disparity is most striking when comparing small organizations to medium or large ones. If the small organization cannot invest in decision-making capability beyond the bookkeeper, or if the organization’s treasurer is limited, will the gap result in poor or incomplete organizational decision-making, or no decision-making at all? Research into the optimal organizational structure of the financial function based on size might shed further light on the importance of programmatic and financial cooperation.
Despite these research deficiencies, the author’s personal experience leads to him to the conclusion that the programmatic and financial functions of nonprofit organizations need to work closely together. The expertise, knowledge and strategic capability of one enhance the capability of the other and move the organization forward in a focused and determined manner. Nonprofit CFOs should not to be relegated to the periphery of an organization just for championing their bottom-line beliefs.
Russell Pomeranz, MBA, is manager of financial advisory services at Fiscal Management Associates (www.fmaonline.net), New York, N.Y., which offers fiscal management, accounting, organizational, and technology consulting services to nonprofit organizations.
Note: Parts of this article are based on discussion and ideas presented at a seminar titled Outcome Finance—Strengthening the Connection of Program Management with Financial Management in Nonprofit Organizations, held at the Rensselaerville Institute.