Nonprofit Leaders Participate in Financial Management Professional Development Training
By Kate Chadwick
In January 2017 staff and board members from a number of Bay Area nonprofit organizations (NPOs) attended an NPO Financial Management training at UC Berkeley’s Haas School of Business. Participants included leaders from local NPOs hosting 2016–17 Berkeley Board Fellows — these are UC Berkeley graduate students who are spending the academic year serving as consultants to nonprofit boards in an effort to better understand the elements of nonprofit board service.
After a 20 minute speed networking session, Brent Copen, Chief Financial Officer (CFO) at Tiburcio Vásquez Health Center (TVHC) in Union City, California, trained participants on “The intersection of finance & strategy: Using financial data to inform strategic decisions”. Brent emphasized how important it is that NPO leaders have access to reliable financial information in order to inform strategic decision making, as well as the unique position of NPOs in needing to understand not just the financial bottom line, but also the true cost of all programs. With donors often willing to fund the mission and programs of NPOs, but not the overhead costs to run an NPO, Brent explained that organizations repeatedly fall short in attaining financial stability. As a result of this cultural norm, and the fact that NPO salaries and benefits are typically a large percentage of budgets, it is exactly those expenses that are frequently the first items NPOs choose to reduce. According to Brent, this then results in a suboptimal staffing model that is normalized, allowing funders to become accustomed to paying lower fees. To combat this norm, NPOs need to be able to articulate the fully loaded costs of maintaining their programs.
As fiduciary managers, NPO boards are responsible not only for setting the strategic direction of organizations, but also for ensuring financial sustainability. From the moment potential NPO board members read the job description, they should understand their role as a key fundraiser for the organization. Brent explained that NPO board members should also understand the true costs of running an NPO, and be able to effectively integrate the financial narrative with the mission-based narrative when fundraising. According to Brent, the key components of the NPO business model include:
1) Who we are & what we do: Mission and programs (& where we work)
2) How we do it: Overhead (& competitive advantage)
3) How we finance it: Maintaining finances
The NPO business model components are not independent of each other, but interact in an ecosystem. As Brent stated:
“As managers, we need to actively pay attention to all three components and understand how they interact.”
Furthermore, NPOs and donors should understand that NPOs with surpluses are ultimately healthier organizations. NPOs should reinvest surpluses back into the business through new opportunities, rainy day funds, investments, and maintaining facility costs. NPOs that are used to scraping by financially are often complying to a suboptimal funding fee in order to please donors, and again, then cutting on labor costs. Subsidizing NPOs through “sweat equity”, according to Brent, is not sustainable.
After addressing these unhealthy cultural norms in NPO finance, Brent then trained participants on the rules of NPO accounting, including how to effectively analyze the Statement of Activities (often referred to as the Income Statement). Brent started by clarifying the difference in unrestricted, temporarily restricted (timing and purpose donor restrictions), and permanently restricted (endowment) funds. At first glance, a surplus in net assets on an NPO Statement of Activities might signal to NPO board members and donors that an NPO is financially secure. However, depending on the level of restriction, an NPO might actually have an operating deficit. Therefore, when reviewing NPO financials, a chief executive officer (CEO), chief financial officer (CFO), or board member should always ask, “Is that change in net assets released from restrictions?” In order to maximize flexibility it is always healthier for NPOs to receive unrestricted funding. Brent explained that, often times, obtaining unrestricted funding requires building a relationship of trust between NPO leaders and donors, where donors feel that they can rely on the decision making abilities of NPO boards and executive directors to effectively deliver on their organization’s missions, while also maintaining a financially sustainable organization.
Brent also emphasized that understanding the full costs of running an NPO allows board members and executives to then make strategic decisions around programs and operations. Participants at the NPO Financial Management training included NPO board members, executive directors, and financial managers. The Center for Social Sector Leadership thanks Brent Copen for training our local NPO partners on how to ensure the financial sustainability of their organizations, in order to ultimately continue delivering essential programs and services to members of our Bay Area community. And finally, we thank our NPO partners and Berkeley Board Fellows in dedicating their time, energy and resources to fulfilling the important visions and missions of our local NPOs.