Joan M. Renner, CPA, CGMA, Director 501(c)(fit!)
When presenting our 501(c)(fit!) seminars, it is energizing to meet the nonprofit leaders in our 501(c)(fit!) community, learn about their challenges and share our take on nonprofit finance. I enjoy it so much, it’s hard for me to appreciate that some nonprofit leaders put financial concerns toward the bottom of their long list of priorities. I get it. Some nonprofits’ finances are just not that complicated. If that’s you, count your blessings. Others, however, are running on a shoestring, and are only able to devote so much of their scarce resources to accounting and reporting. If that’s you, read on.
If you read last week’s FIT TIP, you know that I came across some new perspectives on nonprofit financial issues while reading about some high profile nonprofit bankruptcies. I was surprised to learn that these stories had a number of issues in common, leading me to think of it as “The Grant Paradox” and “The Blindsided Corollary”.
In last week’s FIT TIP, “Nonprofit Finance— what you don’t know can hurt you, I shared my thoughts on The Grants Paradox—“One cannot live by grants alone”. What the grants paradox really means is that if grantors won’t cover all of your core costs, you can only afford to do so many grants. Your capacity to take on government social services contracts that don’t cover your full overhead is limited by your ability to make up those costs with outside contributions. Even with the best fundraisers on the job, there is a limit to how much a nonprofit can raise from its local or regional community.
Under-funded overhead is at the heart of many of the nonprofit bankruptcies, but what seems more tragic is that one organization after another, full of sincere hard working nonprofit leaders, was blindsided by their organization’s closure.
The Blindsided Corollary – “No one ever sees it coming”
Surprise is a common theme in stories of nonprofit closures. In the wake of these nonprofit closures, including the Federation Employment and Guidance Service (FEGS), The Human Services Council in New York (HSC) conducted a study of the health of the nonprofit social services sector, and in February 2016, released their report, New York Nonprofits in the Aftermath of FEGS: A Call to Action. HSC reported that the government agencies that contracted with FEGS to administer programs were surprised to learn of the organization’s poor financial condition. The reason for the surprise—lack of resources for good financial information.
HSC found that:
- “weak internal financial and programmatic reporting” may prevent nonprofits from seeing a financial crisis early enough to take effective action,
- many nonprofits are not able to prepare the right financial reports often enough to support management and Board oversight, and
- due to “inadequate funding of indirect expenses” most organizations lack the resources upgrade their systems for financial reporting and oversight.
When funding is tight, nonprofits cut infrastructure, which can lead to a downward spiral of skimping to the point where nonprofit employees are underpaid, roofs are leaking and equipment is in disrepair. Under these conditions, resources are not available to prepare the timely financial reports needed to plan effectively or spot approaching financial distress. Without sufficient help with controllership, books can be misleading. For example, in organizations lucky enough to get grant advances or drawdowns, bookkeepers have been known to report them on the cash basis, as income when received, instead of when earned, overstating income by hundreds of thousands of dollars at a time. This one misstatement is enough to mislead everyone involved.
This brings us to The Blindsided Corollary—No one ever sees it coming. Without timely and accurate financial information and awareness of nonprofit financial principles, nonprofit leaders don’t have what they need to assess the organization’s financial position, or foresee pending distress. For the organizations that closed, better information might have made the difference between staying afloat and closing the doors.
What We Can Learn
Insist on knowing where you stand financially. Make it a priority that your management and Board receive and review timely and accurate financial reporting to support decision making and planning. Know your true overhead rate, and know what it takes to cover your core costs. Grantors will be more interested in assessing your financial staying power, so prepare accordingly.
To learn more about nonprofit finance, check out our 501(c)(fit!) live seminars; 501(c)(fit!)—Financial Intensive Training for the Nonprofit Executive.
Assess your organization’s long-term staying power. Make sure your operating plan is financially sustainable and address your ability to deliver mission impact for the long haul. In its report, The HSC urged human services providers to “ensure that executive staff and boards focus effectively on organizational sustainability and continued delivery of services to the community”.
To learn more about assessing your organization’s long-term staying power, check out the upcoming 2017 FIT Nonprofits Annual Conference—Sustainability and the FIT Nonprofit; Your Long-Term Staying Power.
Update your risk assessment. Undertake a risk assessment process to prepare your organization for the future. The HSC urged human service nonprofits to “affirmatively identify risks to their survival and collectively act to address them”.
To learn more about nonprofit risk assessment, check out our 501(c)(fit!) NEXT Guided Solutions webinar series; Your Nonprofit Risk Assessment.
These unexpected nonprofit closings shed light on how important it is for nonprofit leaders to understand the economics of how they operate, and to receive timely and accurate financial information for decision-making, oversight and good governance. We think nonprofit financial education makes a difference. That’s why at 501(c)(fit!), we’re passionate about empowering nonprofits.