Nonprofit Finance: Your Board Members Hate It. Help Them Love It.
Throughout my twenty-plus years in the nonprofit sector, I have encountered a lot of governing boards. I’ve served as a staff liaison to board committees, managed boards as an executive director, provided professional development consulting services to boards, and served on numerous nonprofit boards through my volunteer work out in the community. In each of these experiences, I have observed one very predictable reaction when it comes to organizations’ finance committees. Friends, your board members do not want to be on your finance committee. Of the various types of governance committees that a nonprofit may have, finance committees are usually the least in-demand when it comes to board members volunteering to serve. If you are blessed to have at least one CPA on your board, you can usually count on that person to serve as chair. But filling the committee with a variety of voices and perspectives is usually like pulling teeth. What’s this all about? Well, friends…fact is, finances can be intimidating! Assets, liabilities, pledges receivable, oh my! Revenues, expenditures, investment strategies, please help! It takes a special kind of mind to LOVE finance. But, at the end of the day, the finance committee is by far the most important committee a nonprofit organization has. Whether your board members love finance or hate it, they have a fiduciary duty to the organization, and it behooves them to understand the finances to be sure there are no fiscal surprises down the road. And, as a nonprofit leader, it behooves YOU to give your board members the tools they need to be successful. What Does Fiduciary Duty Mean, Anyway? When a person agrees to serve on a nonprofit board of directors, they are agreeing to become fiscally, ethically, and legally responsible for the organization. In terms of financial responsibilities, this means board members must ensure the organization’s fiscal health in all aspects. This includes approving the organization’s budget, ensuring that organizational expenditures remain within the approved budget, keeping a close eye on bank accounts and investments to ensure proper handling and performance, and overseeing the annual audit and tax filing processes. I know, it’s a lot. And the fact that it’s a lot reinforces the importance of the endeavor. Board members’ fiduciary duties simply cannot be overstated, and it is a big mistake to rely on the one CPA on your board to do all the heavy lifting in this area. So, how can nonprofit leaders help bring more awareness to the importance of organizational finances and support board members who say “yes” to serving on finance committees? Here’s a few tips: Training is Key. Setting board members up to be impactful finance committee members is so important. Start by offering a training session so members can learn about the organization’s current financial position. Is your nonprofit financially healthy or are you operating with less than one month of operating expenditures in the bank? Either way, your board members should see and understand. They also need training on the types of reports they’ll be reviewing regularly, their role in the budgeting process, and any other financial issues that they’re responsible for overseeing. Take them through the annual audit process and discuss why it matters. All of this is important, you must never assume that board members understand it all the moment they join your finance committee. If you’re lucky enough to have a CPA on your board (or other professional who is well-versed in finance), perhaps you can recruit this person to help with training, whether one-on-one with individual committee members or as a group. If you don’t have an in-house financial expert, spend a few hundred dollars to hire a consultant for this purpose. It’ll be well worth the expense, your board members will appreciate it, and your organization will be better off because of it. Slow Down the Finance Discussions. I can’t tell you how many board meetings I’ve sat through where the board treasurer sprints through their financial report as if it will self-destruct in 30 seconds. Other board members may try to follow along, but most simply zone out until the report is over. Is this familiar, friends? I know… Nonprofit leaders can begin to deepen board members’ understanding simply by slowing down financial discussions during meetings. Give the treasurer ten minutes instead of five. Review the profit & loss and balance sheet reports in detail. Avoid too much financial jargon that board members outside of the finance committee won’t understand. Discuss the finances in context with the organization’s programs. Incorporate charts, graphs, etc. for the visual learners on your board. Encourage questions and spend whatever time it takes to get those questions answered. Seriously, friends, your nonprofit’s finances are too important to rush. Please, take it easy. Be Clear About Annual Financial Cycles. As your nonprofit’s leader, you are more likely to understand your organization’s financial fluctuations better than your board members. Do you have a major annual program that hits your balance sheet hard with expenses every June? Do you have a gala that replenishes your funds and enables you to build up your reserves at the end of each year? Are there two months out of every year when you barely meet payroll? Whatever these cycles look like for your organization, its important to be clear and transparent with board members so they don’t panic when a normal dip occurs. Helping your board members understand these cycles can also enable them to think strategically and offer solutions to help the organization through difficult times. It’s Tricky But Not Impossible. Sure, friends, nonprofit finance can be overwhelming, confusing, and outright boring for board members who are less numerically inclined. But this thing called “fiduciary duty” is real and helping your board members perform their important fiscal oversight duties is so important to your organization’s overall health and sustainability. So, spend the time giving your board members what they need to be successful in this area. Slow down the financial discussions at your board meetings. And don’t
The Ever-Elusive Unrestricted Dollar
One of the biggest sources of stress and uncertainty in the nonprofit sector is ensuring sufficient funding to cover operational costs. Operational costs, or “overhead”, are all of the costs associated with keeping the doors open and the lights on in an organization: staff, equipment, supplies, rent, etc. The vast majority of nonprofit funding is restricted funding. The term means exactly what it looks like: funding designated for a specific purpose. And in most cases, the purpose is programmatic, not overhead. Donors are keen on supporting the mission of the nonprofits they contribute to, but in most cases this translates into support for the most visible and/or public aspects of the organization that donors see or experience: the programs. What donors, grant funders, and corporate sponsors don’t see – and therefore don’t typically want to support – are all of the other things required to ensure an organization’s programs run smoothly. Yep! The overhead. Restricted funding is wonderful for enabling organizations to accomplish their activities and programs. It is necessary and important, and worth every ounce of energy that goes into raising it. However, restricted funding does absolutely nothing to help a nonprofit stay alive. So, you might ask…how is a nonprofit supposed to sustain its programs if it shuts down because it can’t sustain its operations?? Enter the ever-elusive unrestricted dollar. The absolute most important funding in every nonprofit budget, and the absolute most difficult funding to secure. Unrestricted funding (also referred to as operational funding) is what allows organizations to meet payroll, purchase equipment & supplies, and also build reserves for long-term sustainability. Studies have shown that less than 20% of all funding received by nonprofit organizations is unrestricted. What does this mean? This means that organizations that may be swimming in money for their programs & activities can simultaneously be starving to death because there’s insufficient money available to cover operational costs. The inexperienced nonprofit leader might make the mistake of thinking it’s ok to move money allocated for programs to other purposes. But, don’t even think about it…that would be both unethical and illegal according to nonprofit laws and regulations. So, what is a nonprofit leader to do? How can we manage sustainable organizations with so few unrestricted dollars coming in to support operations? Here’s a few tips from my own experience: Ask For It The first and foremost thing that nonprofit leaders can do to increase unrestricted funding is to ask for it. Don’t get so caught up in raising money for your programs that you neglect the need for operational support. Sure, it’s true that the majority of funders will be most interested in helping your programs thrive, but my rule of thumb is that you’ll never receive unrestricted funding if you never ask for it. So, consider broadening your approach to asking for funding. Whether you’re writing a grant, soliciting a company for sponsorship dollars, or talking to an individual donor prospect, always look for opportunities to bring operational support into the conversation. The fact is it takes a healthy organization to sustain healthy programs, so don’t be afraid to make this case to your funders. Require It For many small or mid-sized nonprofits, the concept of a “gift fee” might be foreign. A gift fee is the portion of a gift or grant that is assessed by a nonprofit to provide unrestricted funding for the organization’s overall operations. Gift fees (or assessments, as they are also referred to) have been around for years, and even though some contributors balk at the idea of “paying” to donate to a nonprofit, these assessments are standard practice in large nonprofits and should be far more common in small nonprofits than they are. Gift fees, which typically range between 3% and 10%, become reliable sources of unrestricted funding by forcing funders to participate in sustaining the organizations whose programs they want to support. But please, before you start carving off slices of grants and calling them gift fees, be sure you’ve established a formal Gift Acceptance Policy that details the types of gift that you will accept and the parameters under which acceptance will occur. Your gift fee should be clearly defined in a Gift Acceptance Policy, and then implemented with confidence and consistency. Budget and Spend Wisely & Transparently One of the primary misconceptions about unrestricted funding in the donor community is that nonprofits use it frivolously. And, I imagine this is true in some nonprofit organizations who may not have a great handle on their budgeting and spending processes. But, for the responsible nonprofit leader who wants to expand overall organizational support, there’s no better way to counteract misconceptions than by being transparent with the external community about how organizational funding is put to use. If your board is not already reviewing and approving an annual operating budget, start now. If you’re not already making financial information available to the public, either by posting your audits & tax returns on your website or by creating and distributing an annual report, make 2021 the year you start doing so. And, if you’re not sharing success stories about organizational improvements that have been made with unrestricted dollars, try it out. The moral of the story is this: YES, unrestricted dollars are the most elusive of all funding for a nonprofit to secure. YES, they are the hardest dollars to raise yet the most needed for overall organizational health and sustainability. YES, some donors and funders are adamantly opposed to anything but restricted support. All of these things are true. But, you know what else is true? You must put a focus on ensuring that unrestricted operational dollars are coming into your organization or simply put, your organization will not survive.
When Grant Funding is Problematic
Grant funding is often the primary source of operational and/or programmatic revenue for a nonprofit organization. Whether from government or non-governmental sources, grants are integral to a nonprofit’s survival. Executive directors and grant writing professionals can spend many hours researching and writing grants with varying degrees of success. For organizations that are just starting out in the grant writing arena, it can be a daunting and sometimes frustrating cycle of applications and denials with limited positive results. However, the time and energy it takes to pursue grant opportunities is well worth the effort when a major grant is finally won. The best positioned nonprofits are those with well-seasoned grant writing professionals who dedicate their time to researching and pursuing opportunities. Unfortunately, most organizations can’t afford full-time grant professionals, so grant seeking becomes one of the many responsibilities of the organization’s director. Regardless of who is responsible for grant seeking in a nonprofit, the pursuit of grants should follow the overall strategic plan and priorities of the organization. As time consuming as the grants process is, it is imperative that this time is spent pursuing funding that will help the organization and support its mission and programs. This sounds easy, right? Well, sometimes it’s not easy at all. I’ve written before about “mission creep” because it’s a real danger, especially to the under-resourced nonprofit. In relation to grants and other funding, mission creep happens when the stated purposes and priorities of a grant funder are misaligned with the mission and priorities of the nonprofit grant seeker. When mission creep sets in, funding sources dictate the organization’s direction instead of the organization’s direction informing the types and sources of funding being sought. A minor programmatic shift to align with a funding opportunity may not seem like a bad thing at first – particularly when the shift is rewarded with funding. However, any modifications that are guided by the pursuit of funding, as opposed to the organization’s strategic plan, can (and often do) have lasting detrimental results. The truth is, all money is not good money for an organization. And, any strong nonprofit leader will share stories of times when they have said “no” to a funding opportunity because the costs to the organization outweighed the benefits of the grant or gift. }It’s true….it can certainly feel counterintuitive to walk away from a grant opportunity, especially as funding for many nonprofit industries (the arts, for example) continues to dry up. However, by keeping the organization’s mission and strategic priorities front of mind, the pursuit of grant funding will become less daunting and more impactful in the long run. So, before you sit down and start writing that next grant, take a moment to consider it in relation to your strategic plan. If it is well aligned, the grant will help you expand something you’ve already planned to expand, grow something you’ve already planned to grow, or create something you’ve already planned to create. That is what grants are supposed to do!