Outstanding Nonprofit Management! Hallmark #5: Financial Strength and Performance

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Welcome to the fifth installment of my seven-part series on Outstanding Nonprofit Management. If you have not seen the first four posts visit:

This series is inspired by the Axelson Center’s Alford-Axelson Award Review Committee’s use of the following seven Hallmarks of Nonprofit Managerial Excellence℠ in order to assess the nonprofit management and performance of award applicants:

• Mission and Program
• Leadership and Governance
• Strategy and Innovation
• Human Resources
• Financial Strength and Performance
• Resource Generation and External Relations
• Accountability and Integrity
This post addresses Financial Strength and Performance and provides insights and resources to help your organization excel in this critical area.

For each Hallmark, the award review committee uses a set of underlying performance criteria to identify exemplary management. For Financial Strength and Performance the criteria are:

1. Organization operates in accordance with an annual budget that has been approved by the board.

2. Organization has a system in place for the accurate, clear, and timely reporting of financial information and data to internal and external constituencies.

3. Financial reports are audited by a Certified Public Accountant on an annual basis.

4. Organization has written financial policies in place that are appropriate to its size and complexity. These policies may address issues such as investment of organizational assets, internal control procedures, purchasing practices and unrestricted current net assets.

5. Organization demonstrates overall solid financial performance and health.

Here are some insights and actionable steps for addressing points 1-5 above:

1: The importance of an annual budget cannot be overstressed. It’s more than numbers. It’s a tool to monitor expenses and more effectively manage cash flow and other resources to support operations and programming. Here is an excellent resource to help your organization develop a process for creating your annual budget or to compare your current process with one recommended by the Virginia Society of Certified Public Accountants: Budgeting: A Guide for Small Nonprofit Organizations. The annual budget must also be approved by the governing board. Board members can provide their expertise and input; this is a part of their fiduciary responsibilities.

2: Staff must have nonprofit accounting experience so that financial information is captured, recorded, analyzed and reported in a manner consistent with generally accepted accounting principles (GAAP), and in an accurate and timely fashion. (See: Basic financial reports that a nonprofit must prepare.) Ideally, there should always be at least one board member with accounting experience (preferably nonprofit accounting) available to support the internal team as needed. Use an accounting software application appropriate for your organization’s size and complexity in order to manage data, track key performance drivers and to generate reports for all stakeholder needs. Your external CPA auditing firm can recommend a package best suited for your needs.

Additionally, all board members must be able to interpret, question and critique your data in a nonprofit context, but don’t assume that they are all able to do so. Some members may be reluctant to acknowledge that they are unfamiliar with nonprofit reporting practices, so providing a one-on-one opportunity with a staff or other board member to train them will be in everyone’s best interest.

3: When selecting an external CPA firm to annually audit your organization, choose one that has nonprofit experience, primarily because of the data tracking and reporting requirements unique to nonprofits. Younger nonprofits can turn to smaller CPA firms with expertise in nonprofit accounting and finances, but avoid very small firms with limited capacity to support your organization. Although a small firm’s rates may be more attractive, the risk of having no redundancy in support will be far more costly. As the organization grows, along with a need to address more complex accounting matters, your choice of CPA consultancy may need to change.

4: Maintaining meaningful and well-considered policies and procedures is a critical component of a strong financial management system. They are used to establish an organization’s internal controls and for ensuring compliance with regulatory standards, as many funders expect grantees to comply with specific policy and procedure guidelines. Documenting the organization’s fiscal policies also serves as an important tool for clarifying roles and responsibilities. The organization’s financial data should consistently be an accurate and reliable basis for organizational decision making.

For policy and procedural guidelines see: Nonprofit Fiscal Policies & Procedures: A Template and Guide

5: What contributes to overall solid financial performance and health? In addition to the points listed above the following are also essential:

• Attention to capital structure:

o Maintain a blend of diversified funding sources and revenue streams
o Ensure cash flow can meet or exceed recurring expenses

o Maintain adequate cash reserves to cover 3-4 months operating and unforeseen expenses

• Risk Management

• Develop fundraising initiatives as an ongoing strategic process designed to engage multiple constituents on an on-going basis throughout the year

• Measure key performance indicators to improve:

o Financial return on programming investment
o SROI (social return on program investment) which is becoming increasingly important to funders and discerning donors who want to see compelling statistics on social as well as financial returns on programming. For example The Cara Program, committed to solving the problems of homelessness and poverty, reports that beyond the direct impact to target populations, for every $1.00 invested in its program $5.74 is produced in tax contributions, social security, sales taxes paid, and costs avoided (shelter expenses, cash assistance, unemployment benefits, health care costs, food stamps, re-arrest costs and the like) over a five year period of time. To see how these returns to society were calculated click here Cara Social Return on Investment (SROI).

In my next post I will examine the sixth Hallmark of Nonprofit Managerial Excellence, Resource Generation and External Relations, so stay tuned!

Additional Resources:

Red Flags in Nonprofit Financial Performance! From The Associations of Small Foundations

• Decrease in annual revenue
• Decrease in net assets
• Increase in receivables
• Operating deficit—particularly if more than one year
• A trend of decreasing reserve balances
• Regular cash flow problems
• Lack of revenue diversity
• Large portion of the fund balance is restricted income
• Late audits—more than 5–6 months after the close of the fiscal year
• Problems mentioned in the audit notes
• Gaps in financial reporting
• Missing documents and/or failure to retain documents or electronic files consistent with the organization’s retention policies or practices
• Indications of altered documents
• Inadequate information on financial performance
• Unexplained variances from budget
• High dependence on one funder—including government contracts
• Loss of income from one or more significant funders
• Recent change in management—particularly if no executive director for a time
• Unusual delays by personnel in providing requested information
• Decreased client demand for services
For a lender’s perspective on nonprofit financial performance, see my earlier post Funding Non-Profit Organizations: A Banker’s Perspective

Please post your questions/comments and share this post with others in your nonprofit network, and feel free to call/e-mail me anytime for free chat about any questions you may have.

Jim Stoynoff
jstoynoff@Synthesis.Biz or (312) 920-1700


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