Visionary Protectors of the Bottom
Line, or Myopic Bean Counters?
- 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
‘Big Picture’ Outcome
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.
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.
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 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,
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:
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.
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.
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.
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.
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).
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.
and How the Financial and Programmatic Functions Meet
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?
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
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.
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.
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.
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.
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.
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
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.
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.
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
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.
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.
Questions, and Research for the Future
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
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.
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.
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.
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.
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.