Non-Profit Is Not Non-Business...

As we work with nonprofit accounting departments helping to install the FAMCare Cost Tracking/Financial Module, we are noticing a notional bias that seems to pervade the entire industry and prevents nonprofit organizations from operating efficiently from a financial perspective.

The Bias

Because most nonprofit employees are focused on mission and not on profits, they do not feel the need to prioritize financial management. Perhaps the very title, nonprofit, changes the focus of everyone working in the nonprofit arena.

The Effects of - The Nonprofit Bias

In many subtle ways, nonprofits do not function with the same professional standards required in for-profit pursuits.

1. Annual budgets are not designed to reach a net financial result. Spending in nonprofits, for example, is not tied to income and adjusted if income projections are not realized. In for-profit organizations, the budget is never permission to spend when income is not coming in as planned.
2. Cash flow management is left to unpredictable fund raising. Cash flow can vary because of seasonal fundraising, annual grant payments, reimbursement-based contracts, and start-up costs for new programs. Most nonprofits err with a too optimistic annual cash flow projection and never adjust it during the year. For- profit organizations have long ago learned to adjust revenue projections (and related expenses) quarterly and, if circumstances require, monthly.
3. Financial projections are not added to budgets. Midway through the year nonprofits should add a projection column to their financials that is management’s best estimate of where the organization is likely to end the year.
4. Ineffective revenue evaluation and classification – The reliability and competitiveness of revenue streams dictate the degree of diversification that an organization needs. Often, maintaining multiple, highly diverse revenue streams can be problematic when each requires, in essence, a separate business to keep them flowing. They each can represent different constituents that require individual fund raising techniques at different times of the year and usually result in unique and restricted uses of funds that fuel different missions.
5. Restricted funding is not all bad. A restricted grant for a program central to your desired impact is functionally the same thing as general operating support – it is funding a core piece of the work that you do.
6. Staffing – too many nonprofits have not staffed their finance function properly. Depending on the size of an organization, the four functions of financial management – compliance – evaluation – planning – control – must all be adequately staffed.
7. Reserves – Wishing for reserves is not the same as planning for reserves. Reserves are built up over time by generating unrestricted surpluses and intentionally designating a portion of the excess cash as a reserve fund.

Most nonprofit management who have already read this blog post say they were surprised that they were indeed biased in their thinking and guilty of most of the omissions above. The subtlety of this nonprofit bias is the devil of it.

Check your own thinking and evaluate your organization’s financial leadership. You may find that nonprofit means to you - not having to worry about balancing the budget when you’re on a mission. That’s the devil of it.