I encourage you to read the full article (and subscribe to the magazine!)  Here is the brief “Executive Director’s Finance Cheat Sheet” of the eight key business principles that we believe are essential for financial leaders.

1. Develop your annual budget with a commitment to its net financial result—whether surplus or planned deficit—and then adjust spending during the year if income is not coming in on pace to yield that net result. Then, complement your annual budget with rolling financial projections that incorporate your most current information about probable future financial results.
2. Diversify your income cautiously, ensuring you have the capacity to develop and sustain the programmatic and operational requirements of attracting each new resource type well.
3. Develop cash flow projections along with the budget and rolling projections so that you can anticipate any cash flow problems well in advance, when you have more options.
4. Plan goals for financial reserves based on your typical cash flow cycles and risks and incorporate reserves into all financial plans and policies. Be sure to foster a financial culture for staff and board that understands the importance of a regular operating profit or surplus.
5. Pursue restricted funding from those foundations and corporations that understand and value your organization’s mission and particular strategies for achieving impact. When pursuing restricted funding, develop proposal narratives and accompanying budgets that link staff development to program design to superior outcomes, including all related costs as direct.
6. Ensure that your finance function is always properly staffed; if necessary, use a mix of staff and expert contract consultants to achieve this.
7. Discuss expectations for financial roles and responsibilities with board leadership to create accountability and information flow that matches the size and life stage of the organization. Make sure to invest time to develop meaningful financial report formats for the board that reinforce organizational strategies and goals and supports the board in fulfilling their responsibilities.
8. Introduce the concept of enterprise risk management to your team and initiate an internal assessment of a full range of risks.

Read the article and let me know what you think and what other principles we should add. For those of you in Minnesota, we’ll have a chance to hear directly from Jeanne Bell at a conference coming up in April that Nonprofits Assistance Fund is co-hosting with Minnesota Council of Nonprofits. Watch for more information soon!

This focus makes me wonder about something: How much impact does the departure of an executive director have on a nonprofit? Of course the executive leadership role is important (as an ED myself, I certainly hope so). But if nonprofits are thrown into chaos or disaster by the loss of their ED, they have systemic problems that need to be addressed. A succession plan will give the board a roadmap to react to a departure, but building leadership within the organization is more proactive and effective. Some nonprofits groom another person to step into the ED role. There are lots of reasons not to lock into a selection prematurely, though.

Shared leadership is one approach to strengthening organizations by distributing authority and responsibility broadly. The article “Doing More with More: Putting Shared Leadership into Practice” in a recent issue of Nonprofit Quarterly reports on a two year study of 27 organizations that put this into practice. The concept of shared leadership isn’t radical or new, but as the authors note:

Most organizations continue to accept a hierarchical structure, with the executive director shouldering an enormous burden of responsibility for organizational success. The LLC participants generally reported that this was true of their organizations. However, we found that this concentration of power was not because executive directors were power hungry. Nor was it even deliberate. It was due to a lack of familiarity with the alternatives.

Implementing this approach requires nonprofits to un-learn some common practices. Success depended on senior leadership’s commitment to change, time to educate and plan fundamentally sound management practices, and engagement and accountability. They found that the 27 organizations adapted the practice to their organizations. One result was that “These organizations’ leadership capacity has expanded. (…) This reduces the stress and potential burnout on the part of executive directors, while helping to advance, develop, and retain other staff.” It seems to me that this would also make the departure of ED more easily managed. Boards could rely on the distributed leadership to maintain stability and agility and help define the profile of the next ED.

I’m also intrigued with the possibilities of this finding, “In many cases, shared leadership has also led to programmatic changes, and many of the participating organizations are beginning to think about how to expand the concept of shared leadership to their boards and allies.” Sharing leadership outside the staff chart could change relationships and impact significantly.

Another proponent of this kind of shared leadership is Leslie Crutchfield, one of the authors of the book Forces for Good. The book examines high-impact nonprofits to discover the common traits and practices. One of the six practices that help these nonprofits to produce results is to share leadership across staff, board members, and external networks.  I’m hoping to learn more about shared leadership and how to implement these practices from Crutchfield when she’s in Minneapolis this fall for United Front 2011. Crutchfield is speaking at the luncheon that is also part of the schedule for the MCN’s Annual Conference.

Nonprofits that develop broad leadership by sharing authority and responsibility effectively will be well positioned for transitions and departures – whether they have a written succession plan or not.

I’ve told the story many times about my first job at a nonprofit. I was a receptionist at an arts organization (a long time ago). The board of directors discovered that payroll taxes had not been paid for many months. The financial situation was dire and the board took extreme action. All but two staff members were laid off or furloughed, the board took over all financial matters, and a major budget reduction was implemented. They had to have someone answering the phones (this was long before voice mail and email), so I kept my job. After the immediate crisis was over I was asked to take on some financial tasks and eventually became business manager. That firsthand experience with the impact of unpaid tax liabilities is forever seared on my brain. It’s the worst way to solve a cash flow problem ever.

Here’s how it happens – slowly and silently. Cash flow is tight and when taxes are due, the director/business manager/accountant holds off on the payment “until the grant check comes next week.” The check comes, but other obligations are due. Pretty soon it’s time for payroll again and cash flow is still tight. By the third payroll, the unpaid taxes are starting to add up to more than can be paid all at once. Meanwhile, the landlord, vendors, and contractors are calling to remind our intrepid manager that payments are due. The IRS doesn’t call, though. This is one of the most insidious parts. People often choose to pay low priority bills before urgent obligations because of relationships, annoying phone calls, or emotions. The IRS doesn’t take action to demand payment of delinquent taxes for quite a while. When they do, the matter is immediately urgent and expensive and becomes the #1 priority for the organization.

As an example, this article from North Carolina, Nonprofit’s IRS bill tops $850K, describes a mental health agency that had their state funding cut by 23%. They reduced their budget but also had serious cash flow delays. As stated in the article, “they fell behind in making payroll tax payments.” It appears from the article that the agency financed their budget deficit by deferring tax payments. Ultimately, the IRS filed a lien and the situation became a crisis so severe that the agency ultimately closed in July 2010. When they faced the state budget cuts and delays, the statewide mental health agency had to make some tough decisions. It’s really unfortunate that they chose delayed payroll taxes to “manage” their finances.

If you need another reason to stay current with payroll taxes, share the article Not Paying Your Taxes? Your Board Could Be Personally Liable from Nonprofit Quarterly with your board members. The article lists seven lessons learned from payroll tax cases.

Lesson two: Virtually any alternative – including taking on additional debt, restructuring, downsizing, and filing for bankruptcy – is better than failing to remit withholding taxes to the government.

That’s a pretty harsh lesson, but it underlines the severity of consequences of this financial choice. The worst one.

If you read the by-laws of most nonprofits it’s no wonder that the role is seen as dull and/or daunting. Here’s an example from one of many templates available:

The Treasurer, subject to the order of the Board of Directors, shall have the care and custody of the money, funds, valuable papers, and documents of the Corporation and shall have and exercise, under the supervision of the Board of Directors, all the powers and duties commonly incident to such office. The Treasurer shall deposit all funds of the Corporation in such bank or banks as the Board of Directors shall designate. The Treasurer may endorse for deposit or collection all checks and notes payable to the Corporation or to its order, may accept drafts on behalf of the Corporation. The Treasurer shall keep accurate books of account of the Corporation’s transactions which shall be the property of the Corporation, and shall be subject at all times to the inspection and control of the Board of Directors.

This sounds like the bookkeepers’ job description with legal responsibilities. I can tell you that even as a person with good finance and accounting experience I don’t want that job. Fortunately, nonprofits that are large enough to have paid staff to handle accounting and daily financial management don’t need the treasurer to make deposits or keep the books. What they need is a board treasurer who is willing and able to provide leadership in the financial life of the organization.

That financial leadership requires a combination of skills and characteristics. A great treasurer balances these responsibilities:

• Knowledge – Thorough understanding of the financial reports. It helps to have some financial background, which may require some supplemental training in nonprofit financial terminology and requirements.

• Communications – Able to translate financial information and financial concepts for the board. The treasurer doesn’t necessarily have to present the financial reports at board meetings, but they may need to help to explain and re-frame until everyone understands the reports. It’s also the treasurer’s role to interpret and translate the board’s questions, goals, or concerns about the financial information or financial situation to the staff.

• Planning – Partner with the staff leadership to develop a useful budget. The treasurer can bring great value in preparing for budget discussions and conveying budget information to the board. Budgets are the financial version of an annual or strategic plan and the treasurer is in the best position to make sure that budget priorities and decisions reflect the intentions and objectives of the board.

• Strategy - Great treasurers go beyond annual budgets, audits, and financial reports to bring financial leadership to the organization. Great treasurers look down the road to find the financial options and decisions needed for longer term goals and initiate discussions to connect finance and mission.

Come to think of it, I think it sounds pretty exciting and glamorous. Sign me up.

1. Step out

Step out of the familiar and comfortable role of supporter and cheerleader.

Now is the time to ask important questions about impact, effectiveness, and entrenched practices. Board members can often bring the outside viewpoint required to ask the right “why” and “what if” questions.

Some of the most important questions to ask right now are about budget assumptions. Any significant revenue number in the budget needs to have a good plan and rationale, not a wish and a prayer

2. Step back

Step back and let the staff do their work.

I have seen boards get carried away generating ideas for new reports, analysis, and research without considering how much time it would take the director and staff to complete the work required to follow through on the ideas. The board chair is the moderator of this balancing act, making sure that every new task suggested by the board is weighed against other priorities and internal capacity.

I urge particular caution for board members who suggest that the nonprofit start a new way of raising funds. If you’ve never hosted a fundraising event, or carried out a significant individual donor campaign, this might not be the time to divert staff time and effort. Remember that each type of income is essentially a new business.

3. Step off

Step off of the board if you do not have the time or energy to work hard for the next two years.

This is not going to be easy and nonprofits need to have the right people on the board. It’s nothing personal, but it’s a good time to ask yourself if you can commit to this organization.

Next lesson: Action must be taken. One of the most interesting dynamics in nonprofits is the relationship and shared authority of executive directors/CEOs and their board of directors. We could debate infinitely the question of who is really in charge. In day to day life, most nonprofits find a way to make it work if they have assembled and hired the right people, agree on roles, and know how to share and use information. There are times, though, when the board needs to assert its real and legitimate authority to make a big decision – to take action in the face of urgent needs for the nonprofit and its mission. In Lesson Number 1, I said that asking questions is one of the board member’s most important roles. I will state here that I think the primary role for board members, especially board chairs, is to know when they need to take action, and then to do it. I think this is an urgent issue right now because I have often seen the sometime dire consequences of reluctant, slow decisions. Too often, board members who have been expected to be good supporters and cheerleaders can’t seem to change gears and be the leaders they need to be. If the board’s practice has been to ask for more information and then defer decisions to the next meeting, and then the next, then real problems can grow while the options shrink.

The need to step up and take action is always applicable, but it seems to be more urgent right now. If income sources are less reliable, or costs are harder to identify and match with impact, then boards simply must ask questions and then follow up with real decisions – and real governance.

What do you think about these Accountability Lessons?  Do you have an example where asking tough questions and then taking action led to positive change? Or do you have lessons learned that may be helpful to others?  I invite you to share your experiences in the comments section.

• Time Horizon – Funds that may be needed within a few months must be invested in highly liquid, safe investments. This is the most common type of investment fund for most nonprofits, composed of operating funds and reserves. In order to be assured that the funds will be available as needed, the investment choice must be readily available. The recent financial news has even raised red flags about some short-term investments – see my earlier post It’s 10 AM, do you know where your cash is?.

• Risk Tolerance – One of the fundamentals of investing is the balance of risk versus return. Investments with a higher return almost always also come with higher risk. The key question for nonprofit leaders and boards is to understand how much risk is involved and to decide if they can accept the risk. As an example, if the funds to be invested represent the balance of a large program grant that will be spent over the next year, then the organization can’t afford to risk the loss of any of the funds. A permanent endowment fund, on the other hand, is usually invested in a diverse portfolio that includes more risk in return for a higher long-term return.

• Responsibility – The nonprofit’s board of directors is responsible for overseeing this balance of risk and return for the health of the organization and any legal requirements. In order to fulfill this responsibility the board must act as prudent and loyal stewards of the organization’s assets. The board may decide to employ professional staff or outside advisers to manage the investments if the amount if large enough.  At minimum, the board needs to adopt and follow an investment policy. I highly recommend a booklet from BoardSource, Minding the Money: An Investment Guide for Nonprofit Board Members.

In this economic environment, every nonprofit needs to take a look at their investments and understand any risks that may have been taken for granted. It’s better to spend some time now and avoid surprises later.

So how concerned should you be? In general, you shouldn’t panic, but you also can’t make assumptions that all is well just because you haven’t had a problem before. It depends on how your short-term cash accounts are actually invested or deposited. Many nonprofits have balances of funds that are needed for payroll and regular expenses, for reserves, and to hold funds that are restricted or designated for a specific program or purpose. It’s common to have a checking account, other bank accounts, and some money market funds or short-term investments.

However, over the last 20 years the distinction between keeping funds in a bank account and a range of other investment options has gotten pretty fuzzy. We’ve become a little lazy about using terms – like money market account, money market fund, and short-term investments – interchangeably. But they are not the same.  Your first priority is to find out where, in fact, your nonprofit’s cash balances are – do you have a bank account or a mutual fund? If it’s a bank money market account deposit, what is the FDIC insurance coverage? Some banks offer a service to provide additional coverage or work with other banks to enhance the coverage by exchanging funds within a network. If your funds are invested in a money market mutual fund, it’s wise to read the prospectus or other information from the fund manager to learn about the types of investments that are owned by the fund. Money market funds range from ultra-conservative investments in treasury bills to investments with a little more risk. If you have made direct purchases of short-term investments, read up on what you have and how those investments are valued or affected by the current market.

Again, know what you’ve got and then have a discussion with the finance committee about any risks, concerns, or restrictions. Then you can decide whether to make any changes. This might also be the trigger for you to re-visit or create an investment policy and educate yourself and the finance committee on fiduciary duties and nonprofit investment practices. I highly recommend a short book published by BoardSource, Minding the Money: An Investment Guide for Nonprofit Board Members.

]]> http://www.nonprofitsassistancefund.org/blog/2008/10/01/its-10-am-do-you-know-where-your-cash-is/feed/ 0 http://www.nonprofitsassistancefund.org/blog/2008/07/18/accountability-lesson-number-1-questions-must-be-asked/ http://www.nonprofitsassistancefund.org/blog/2008/07/18/accountability-lesson-number-1-questions-must-be-asked/#comments Fri, 18 Jul 2008 20:52:56 +0000 Kate Barr http://www.nonprofitsassistancefund.org/blog/2008/07/18/accountability-lesson-number-1-questions-must-be-asked/ How do you know what you don’t know? Someone asked this question last week in a workshop on the topic of board oversight and some high-profile problems. It’s such a great and critical question. There’s been a swirl of conversations in the last week or so about financial problems and governance issues at a number of nonprofits, both local and national. No matter what the details are, questions have been raised in every situation about the board’s role – what did they know, when did they know it, and what did they do? But what’s the first step for the board, since they are relying on reports from the staff and have little or no access to the raw information. Boards that ask for lots of details are accused of micro-managing and not trusting the staff. So how do you know what you don’t know? There has to be a balancing act between accepting reports at face value and asking questions that go beyond the information presented. I think that there’s an art to asking good questions – my favorites generally start with either “Why…?” or “What if…?” (I actually have those two words up on the wall in my office). Speaking last night to a group of people who had recently joined boards of nonprofits, I suggested that asking questions is their primary job. It’s great if they get an answer that makes sense. However, the role of governing requires further action and follow up when the answer doesn’t make sense, or when the answer is “Don’t worry about it,” or “I’ll find out later.” The distinction between hyper-questioning and prudent questioning depends on circumstances, but in every one of these recent governance and financial situations there were some “why” questions that needed to be asked and then carried through.

This complex balancing act between supporting and governing is discussed in the article Why Boards Don’t Govern available from CompassPoint. One point raised in this article is the importance of creating an atmosphere and culture at board meetings that encourages questions and disagreements. I know in financial matters, many board members feel like second-class citizens because they are not the “financial” board members. The fact is that if they have a question, or if something doesn’t make sense, they need to feel free and encouraged to ask the question. It just might be the question to unlocks the truth.

There was no telling what people might find out once they felt free to ask whatever questions they wanted to. (Joseph Heller, Catch 22).

Can we make a list of the problems with this scenario? Among other reactions, I want to thank the whistle-blower, though I would like to know why it took eight years for anyone to think this was not OK. Yesterday, ACORN released a statement from the president apologizing for their handling of the situation and announcing that the founder (brother of the embezzler) had stepped down. The most alarming phrase in the statement is that “The ACORN Board recently learned …” How comfortable would you be if you sat on that board – with fiduciary responsibility – and learned that you had been sitting for years on this ethical powder keg?

The statement says, “We want to assure our many friends and supporters that ACORN’s Board has taken additional steps to ensure increased transparency and accountability” (emphasis mine). It seems to me that they need to start with basic transparency and accountability. They can start with a basic accountability overview from Independent Sector.

There is a lesson here for every nonprofit organization. Public trust really is the most important asset for each individual nonprofit and for the whole sector. It’s too easy to mess it up, which is why we all get asked to answer questions and fill out forms and certifications by donors, foundations, the IRS, state Attorney General, etc, etc, etc. As long as these kind of egregious situations occur, and especially when they are mishandled, nonprofits will be subject to deeper scrutiny and misgivings about trustworthiness.