Many executive directors of nonprofits know that the finance function is important, but unfortunately not every nonprofit has the expertise to transform their organization’s finance function from financial management to financial leadership. This article introduces the concept of financial leadership for nonprofits and is meant to be a guide and not a detailed manual of the concept.
To be clear, the difference between financial management and financial leadership for this article is this: Financial management is the collecting of data, production of financial reports, and solution of near-term financial issues. It’s the typical mechanical process of organizing data into financial information.
Financial leadership, however, takes the finance function and leverages it to guide the nonprofit to sustainability, which is the job of the executive director.
It starts with the budget
Transforming your nonprofit to a financial leadership oriented organization all begins with the budget - so make it count. The yearly budget is derived from the strategic plan, which is broken down into a timeline of goals and objectives. For example, if your nonprofit’s strategic plan includes a new building to replace your aging community centre, you may budget costs associated to fundraising for the new building in the earlier years, costs associated with breaking ground on the project in the mid-term, and costs associated with construction of the facility in the later years of the strategic plan. Finally, transitional costs from the old facility to the new facility would be projected as well as new operating costs for the more efficient building going forward. Of course, the projections would be broken down into the appropriate operating and capital budget, as required.
If your current way of budgeting is taking a look at last year’s actuals (or the average of the past 5 years) and using that as a base, there is a good chance that you are operating in a financial management mindset. I’m not saying that historical data can’t be useful for budgeting purposes, but historical transactions do not provide context for the budget - only the strategic plan does that. Financial leadership links the strategic objectives of the organization and plans the expenses and revenues accordingly over the appropriate time period.
Manage your risks
Financial leadership means that nonprofits take control of their risks from an enterprise perspective. Risk management goes beyond the finance function but it is usually the finance function that is best able to manage it. Develop a risk management plan for identifying, assessing, and treating risks to the organization and reporting the most important risks to the board. Most nonprofits that I have encountered do not have a mature risk management function although most will have some type of risk management activity. If your organization buys insurance, it has performed some type of risk management. The key is to move beyond an ad hoc and compliance risk management function to a risk aware organization that manages its key risks to its strategic objectives, incorporating risk management in every decision.
Staff your finance function
It isn’t reasonable to think that a volunteer or the executive director can handle the finance function duties alone. At the minimum, your nonprofit should be considering hiring a bookkeeper, even on a part-time basis. Alternatively you could outsource the bookkeeper function. There are many different options for staffing the finance function and it is critical that you match the resource required to the needs of the organization. This means that not every nonprofit will need a full time CFO and accountant but most organizations cannot get by without paid help from a bookkeeper or finance professional.
Get your board on-board
For most nonprofits, the board of directors is a governance board or they are working to be established as a governance board. This means that the board is hands off from the daily activities of the nonprofit, but they still set the direction and objectives of the organization. The information that the board requires needs to be summarized and concise, with any data or details attached as an appendix to the report.
If you are presenting the financial report to the board of directors as a full package of financial statements, you are operating more through a financial management mindset than a financial leadership one. Although the board cares about the financial statements they don’t care about details that don’t affect their fiduciary responsibilities or don't have an impact on the overall budget. At the same time if there was a potential lawsuit against the organization this should be reported in the treasurer’s report because it may have a material impact on the finances of the company. Any nonfinancial information that may have an impact on the finances should be disclosed in the treasurer’s report on finances. This is a financial leadership mindset.
Usually it is the treasurer’s responsibility to oversee the finance function of the nonprofit, but that doesn’t give the rest of the board a free pass on their fiduciary responsibilities. Depending on the board members, a nonprofit’s board may have excellent knowledge of finance or it may have almost no experience or knowledge of nonprofit finance. If the latter is true for your organization, think about getting your board engaged in financial matters by providing training opportunities. There are lots of free or low cost alternatives to getting your board up-to-date on the knowledge required to make sound financial decisions.
Getting new board members up to speed as quickly as possible is another financial leadership move that executive directors can make. Although this may seem like a non-financial function, it does reduce risk associated with disengaged board members. From a risk perspective, disengaged board members who are new and struggling to orient themselves with the nonprofit are more likely to say nothing than ask questions during meetings. By having an orientation package, it gives the board member a starting point and a frame of reference to which they can build upon (for example, the strategic plan and current annual budget). If they are starting from scratch with no help from the executive director, it will take a while before they are caught up to the rest of the members.
Financial leadership for nonprofits enables financial sustainability. It begins with creating a budget that uses the strategic plan as a frame of reference, it adds enterprise risk management to ensure key risks to the nonprofit are mitigated, it appropriately staffs the finance function with a bookkeeper or part-time CFO as needed, and it engages board members through appropriate reporting and training to enable decisions to move forward.
Andrew is a co-founder of cogsbooks.com, which provides virtual bookkeeping, risk management, and CFO services to nonprofts. You can reach Andrew at email@example.com or connect with him on LinkedIn.