In April 2017, the authors wrote “Top Challenges Facing Not-For-Profit CFOs Today.” The intent of the article was to affirm how complex and diverse the role of not-for-profit CFOs has become. Specifically, last year’s article identified and discussed the following noteworthy challenges: overseeing many functional areas; balancing strategy and operations; funding and financial sustainability; communication; leadership; governance; managing people; information technology; compliance, regulations and unfunded mandates; and mitigating and managing risk, including reputational risk.
As a sequel to last year’s article, the following is an in-depth examination of three of these major challenges: funding and financial sustainability, communication, and leadership.
Funding and Financial Sustainability
While the impact of the recently enacted Tax Cuts and Jobs Act on funding for not-for-profit entities is yet unknown, the potential uncertainty may be a significant challenge for CFOs. This funding volatility makes the budgeting and strategic planning processes more difficult. Clearly, funding is not going away. There has, however, been a shift in donor expectations, as donors are becoming more sophisticated and no longer giving just for the sake of giving. Funders are less concerned about the percentage of program expense as a percentage of total expense as a way of measuring an organization’s effectiveness. Instead, they are focused on programmatic outcomes as the major criteria for evaluating an organization’s success. Many organizations struggle with how to measure success and impact. A social service organization can easily track the number of people it serves, but it is considerably more difficult to measure how the organization is improving the lives of the people it supports.
Despite the noble efforts to “dispel” the overhead myth, there continues to be a lack of funding for administrative overhead and infrastructure. While some organizations have been successful in enticing a core group of donors to focus their support on infrastructure, often by offering these donors involvement in programmatic activities, it continues to be difficult to find funding for non-pro-grammatic activities. In addition, not-for-profit organizations continue to be bombarded by unfunded mandates; the increase in the minimum wage and the new paid family leave provisions are recent examples. While the merits of these initiatives are not being debated, there are staff, legal, and information technology costs associated with implementing these directives, for which there is no funding.
The nature of funding also continues to be a challenge, as restricted funding with onerous reporting requirements is becoming more common than unrestricted funding. Funding diversification is a risk for many not-for-profits, as they are too reliant on one or a few funding sources. Many organizations lack funding strategies; there is still the mindset that some funding is better than no funding, resulting in organizations accepting funds without performing adequate analysis to determine whether the funds are truly beneficial. Many entities continue to struggle with the prospect of exiting programs that operate at a loss. Organizations lack gift acceptance policies or, worse yet, have gift acceptance policies that they fail to follow.
In addition to proving programmatic outcomes, funders, regulators, watchdog organizations, lending institutions, and auditors are requiring not-for-profit organizations to demonstrate their financial sustainability. Funders, donors, board members, and watchdog organizations are using financial health and mission in the same sentence. This expresses the realization that financial well-being is essential to an organization’s ability to carry out its mission. Indicative of this are new financial statement and disclosure requirements that include a discussion of a not-for-profit organization’s “liquidity.”
While accrual-based financial statements are essential, “cash is still king.” Many not-for-profits fail to realize that they are businesses and must maintain cash balances to meet obligations as they come due. Some lack the robust systems and processes needed to extract the data required to demonstrate financial sustainability. Data integrity is also an issue, as the quality and accuracy of data are insufficient and cannot be relied upon to make sound business decisions. Operating reserves are critical to an entity’s financial sustainability. Operating reserves allow organizations to operate during difficult financial times. They also allow organizations to pursue strategic opportunities. Many not-for-profit organizations fail to maintain operating reserves at targeted levels and lack appropriate operating reserve policies. This makes pursuing both short-term and long-term opportunities extremely difficult.
Today’s CFOs must be able to tell their organization’s story and bring the numbers to life. Making a meaningful connection between finance and mission is imperative. This is a challenge, because bringing numbers to life is no small task. In addition, typically finance functions have not fostered soft skills in their ranks. Too often, professional development activities have emphasized the technical aspects of the finance role and have failed to focus on the importance of effective communication. As discussed below, this includes both internal communications within an organization—especially within the fabled C-suite—as well outside of the organization. Not surprisingly, most CFOs have a passion for numbers and favor poring over data to telling compelling stories.
When communicating, it’s important that CFOs know their audience and recognize that not everyone speaks the language of finance.
When communicating, it’s important that CFOs know their audience and recognize that not everyone speaks the language of finance. In fact, they must be trilingual—able to speak finance, fundraising, and program. Like other effective professionals, CFOs must be able to translate complex information and communicate it simply and clearly to all constituents.
The tone of communication is very important as well. CFOs need to acknowledge that not everyone knows as much about the organization as they do, and that not everyone is a CPA. CFOs need to communicate with authority, but not arrogance.
CFOs serve as the source of truth. It is imperative that their communication be consistent, authentic, credible, timely, and relevant. It’s really all about establishing trust. As such, CFOs don’t always deliver good news, but must deliver the news nonetheless.
As CFOs’ functional role has expanded across the organizational chart, so has their constituency base. Historically, CFOs have fostered strong business relationships with bankers, auditors, and investment advisors. In addition, today’s CFOs have greater interaction with staff throughout the organization. They also communicate more with the board, audit and finance committees, lawyers, insurance brokers, regulators, and vendors. CFOs are now communicating with funders and donors. As noted above, donors are becoming more sophisticated and asking for more financial data prior to giving.
The leadership role of today’s CFOs has evolved dramatically over the past few years. They now serve as key advisors to CEOs and in many cases have replaced Chief Operating Officers as second in command. In fact, CFOs are often viewed as the heir apparent. Unlike CEOs, CFOs are in a unique position to challenge ideas and reject them when necessary. Saying “no” in a collaborative manner is often deemed to be an important part of a CFO’s role.
CFOs’ role reaches well beyond producing and analyzing the profit and loss statement. They are now being asked to provide their expert and analytical advice to support programmatic decisions. With respect to governance, CFOs’ role has also expanded, given the requirement for greater transparency. This is partly due to the enhanced role of the audit committee, somewhat driven by the enactment of the New York Nonprofit Revitalization Act, as well as boards’ increased appetite for data as part of the strategic planning process.
Demonstrating how far the CFO role has extended beyond finance, CFOs are now being asked to function as chief: motivational officers, strategic officers, innovation officers, transformation officers, risk officers, historical officers, data officers, opportunity officers, and feasibility officers!
CFOs’ broadened roles in leadership are challenges, as CFOs are still required to spend a significant amount of time on compliance-related matters. CFOs must continuously balance strategic and operational activities. Compliance, while necessary, is the largest nonstrategic activity. Given their backgrounds and professional experience, most CFOs tend to be data-focused and struggle with social leadership, and they may not have developed the skills needed to influence, engage, and inspire. In addition, CFOs are now required to understand all aspects of the not-for-profit organization. Luckily, today’s CFOs are in an optimal position to do so, given their ability to gather information from all segments of the organization.
Managing the Challenges
As described above, funding and financial sustainability, communication, and leadership are major challenges for today’s notfor-profit CFOs. It is important to underscore the fact that this ever-evolving, exciting, and dynamic position is a wonderful opportunity for the right person. Below are some thoughts and suggestions on managing these challenges.
Agility is key to CFOs’ success. They are faced with sweeping changes resulting from recent tax law, updated accounting pronouncements, a dynamic political landscape, evolving technology, increased data requirements, and new regulatory mandates. CFOs must embrace the opportunities presented by change and encourage staff to do so as well. Often with change, there is increased risk. It is imperative that CFOs continuously assess risk and develop risk mitigation strategies.
CFOs must spend at least 80% of their time on transformative activities. As noted above, compliance is a time-consuming non-strategic activity. But the only thing more time consuming than compliance is non-compliance. To be effective, CFOs must recruit and retain talented staff to perform transactional activities. CFOs should hire for attitude, competency, and customer service orientation. Recruitment and retention strategies are crucial. CFOs should strive to be better leaders, managers, and mentors. Staff should be empowered to make decisions and be encouraged to resolve problems at their levels; not all decisions can or should be made at the CFO level.
If cash is king, than data is “queen.” Notfor-profit organizations need to spend more time analyzing relevant financial and non-financial data enabling sound business decisions. Organizations should not focus on useless metrics and performance indicators. Instead, indicators that measure organizational effectiveness and financial health should be developed in conjunction. For example, the fact that a not-for-profit organization has a $200 million operating budget may indicate that it is large, but it gives no indication as to its financial health. The ratio of administrative expense as a percentage of total expense, while easy to calculate, doesn’t really tell whether an organization is investing too little or too much on an organization’s infrastructure. Organizations need to find a way to measure program outcomes and mission effectiveness.
Not-for-profit organizations need to develop tools and metrics that can be utilized to ensure and demonstrate a healthy cash position. As examples of this, reports should include a daily cash balance and a daily summary that shows the outstanding balance of an entity’s line of credit. If the line of credit balance isn’t periodically reduced to zero, inquiries should be made to determine if the line of credit is being used for bridge financing rather than being used to fund a structural deficit. Current ratio and debt service ratios tend to be good measures of an organization’s ability to pay obligations as they come due. Other useful reports include accounts receivable and payable ageing reports, capital cash outlay reports, and reports that track those activities that influence revenue. Models should also be developed to assess the financial feasibility of entering and exiting programs.
Often with change, there is increased risk. It is imperative that CFOs continuously assess risk and develop risk mitigation strategies.
Most organizations have a thoughtful budget process. Because a lot can happen between the adoption of a budget and year-end, organizations should develop reports that forecast annual revenues and expenses that may include multiyear projections. In addition, reports projecting the organization’s ability to meet the financial covenants associated with borrowings should be maintained throughout the year.
Information technology literacy and aptitude are and will continue to be paramount to CFOs’ successes. The effective use of technology is integral in developing new analytical tools.
Funding strategies should include increasing unrestricted funding, funding diversification, and funding for infrastructure. Policies on when to accept new funding or when to say “no” should also be developed. An organization-wide commitment to adhere to these policies and procedures should be made.
Operating reserves are key to an organization’s ability to fulfill its mission in the long term. Organizations should establish an operating reserve target and determine how it will reach and maintain the targeted level. The building of operating reserves begins with the budgeting and planning process—the only way to build operating reserves is to generate surpluses. CFOs should develop and implement operating reserve policies and procedures that address the targeted level and when these reserves can be used.
CFOs also need to invest in professional development and broaden their operational skills, recognizing that the role goes well beyond debits and credits. The abilities to communicate, motivate, influence, and lead others are all critical to being a successful CFO. Acknowledging that it’s not all about finance makes CFOs more approachable and valuable leaders.
Lastly, today’s not-for-profit CFOs should remain confident and optimistic.