Some years ago, while giving a seminar to top managers of nonprofit organizations, I was asked by one why it was necessary for top managers to immerse themselves in understanding finance when it was possible for them to hire good accountants. This question has led me on a mission. First, it revealed that the questioner did not appreciate that a good financial officer is not equivalent to being a good accountant, although, many good accountants do become financial officers. Second, it revealed an absence of an understanding of the organizational, personal and professional risks that a person in charge of an organization takes when that person chooses to operate without familiarity and commitment to certain motivating precepts that should influence every decision of consequence. As a result of thinking about this question (which may seem on its face to be naïve) I have been led to the following conclusions which are reflected in my writings and teaching.
No senior executive officer can completely escape responsibility for at least some measurable aspect of the financial integrity of an organization because every senior manager makes decisions that have financial impact. These decisions vary from hiring to firing of employees, from purchasing of supplies to the sale of inventory, from the use of the telephone to how employees are used, from the seeking of funds to manage a program to the actual implementation of programs. It behooves every CEO to make senior managers conscious as to how each one affects the financial integrity of the organization.
But the executive officers—especially the chief operating officers--must themselves develop certain financial competencies. The first step for many is to overcome fear and anxiety about how technically difficulty financial management is and to replace this fear with the fear that failure to come to terms with certain basic knowledge will be the foundation for future failure be it by the deceit of those they supervise or by the collapse of the financial operation. Whatever the reason, top management (including the board) can be made morally and often legally liable. So what are the ten basic things the leadership should know to manage successfully by controlling its financial future while designating certain critical micro management functions to others?
1. The management has to view the organization as an economic institution with a welfare mission. This means that no matter how turned off one might be by economic realities, there is no escaping that the organization generates costs that good managers try to understand and control as they must understand that the organization needs revenues to meet these costs and good manages try to maximize these revenues. The most successful of managers master the underlying techniques that this concept implies. Having a vision is not enough and neither is love and commitment to the mission.
2. The management of the nonprofit must see the financial function as a tool—as a means to an end rather than the end itself. This concept distinguishes the CEO from the CFO (chief financial officer). But they must have a common basis and language in order to communicate. The language of charity and philanthropic mission is no substitute for the language of finance.
3. The management of the organization has to see it as a competitor in a world where potential donors have alternative non-donative uses for their dollars and in which the number of organizations seeking these dollars is rapidly growing. Moreover, prospective donors seek more and more information before making a decision and such information is increasingly available partly because of law and particularly because of the Internet access that organizations like Guidestar provide.
4. Successful managers learn less about how to create the numbers in a budget than understanding how those numbers are created, how they impact decisions on all levels, how they direct the future of the organization and ultimately the likelihood that a vision will be realized or magnified. A skillful CEO learns how to use a budget to accomplish long and short-run objectives and appreciates that an approved budget communicates a diagram of the path the leadership intends. Good CEOs are not mesmerized by budget numbers or the process by which the numbers are created. A budget communicates an idea with numbers and dollar signs attached.
5. Successful financial management honors and respects the force of accountability. Respect for accountability leads to the development of procedures over which the use of the smallest of resources is controlled and there is no ambiguity about by whom, when and under what conditions. Good financial management is conducted under a hierarchy where the rules are clear, strict and yet functional. Accountability occurs continuously and ultimately through audits—many of which may not be voluntary. Donors and contractors often retain the right to audit the use of their contributions. Failure to set up stringent rules of accountability, confidence of the naivete of management and its shirking of its responsibility will always be an open invitation to internal corruption—embezzlement being only the most glaring form of such corruption.
6. Every successful manager needs to understand the financial statements. Basically, these fall into two types—those which are used only for internal purposes and those which are used for public and legal purposes such as the annual report to the public and the 990s and other forms that must be filed with the government. The truth be told, many CEOs dislike calculating ratios and many distrust them. Indeed, ratios may often portray an incomplete or inaccurate picture of the organization. But they do provide an important service to understanding and conversing about real resources in organizational planning sessions and there is no way to prevent the public from calculating these numbers in order to make judgements about the organization. Teaching reluctant managers about financial statements is often a trying enterprise requiring pedagogical imagination.
7. Every top manager must appreciate that for a nonprofit, unlike a firm, the structure of finances—both expenditures and revenues have very serious implications for the organization because these structures are used by the IRS to determine the tax-exempt status of the organization. They are also used by states to determine not only the tax-exempt status but the eligibility for relief from various fees and for inclusion in certain preferred classes particularly for bidding and state aid. There is no denying that the maintenance of the tax-exempt and privileged status of a nonprofit is the responsibility of top management. Federal and state laws allow personal penalties to be imposed on managers whose behavior (or lack of it—called omissions) leads to these unintended consequences.
8. The frank fact is that sophistication and the need for resources mean that the successful nonprofit manager must go beyond the traditional public appeals and the seeking of grants. An endowment is a useful tool and so too are revenues from charging fees--called business revenues. But what should the manager learn? Concerning endowments, investment and withdrawal policies should be part of the board minutes. Methods for choosing investment advisors and for giving them broad directions should be agreed upon and in the record. Like business revenues, these types of earnings can have tax implications; and business revenues can affect the tax-exempt status of the organization in ways other than the complete loss of such exemptions. Business revenues require a whole different form of accounting. Business revenues also invite public scrutiny and even claims of unfair competition (often unfairly so in this author’s view).
9. Management must appreciate that in finance and accounting everything is not up to managerial discretion. There are rules for reporting that accountants must follow. These rules constrain the discretion of the accountants. Their violation constrains the ability of the organization to work with outside agencies from banks to governments, from potential contractors to potential partners. Violations of accounting rules show up in audit statements and will seriously reduce the ability of the organization to raise funds from foundations and large donors. Some accounting and expenditure violations are outright unlawful. These include violation of donor restrictions and improperly accounting for them.
10. Finally, the discussion can be capped with one statement: Without money and its proper management no mission no matter how worthy and honorable can be sustained and grow.
Herrington J. Bryce is author of Financial and Strategic Management for Nonprofit Organizations, 3rd edition, Jossey Bass, 2000, 776 pages. He is also Life of Virginia Professor of Business Administration at the College of William and Mary, Williamsburg, VA. 23185.