New Models for Small Nonprofit Financial Management

1. New Models for Small Nonprofit Financial Management Presented by NFP Partners

2. Introductions • Why are we here? • Define “small” NPO • Define “financial management” • Introductions • NFP, Lee and Laura • Find out composition of audience between executive directors, finance managers, and other • Find out the sizes of the organizations represented (under 100k, 500k, 1 – 2m, 2m +) • Take a poll on how organizations represented do the financial function: • In-house accountant on staff • Contract accountant • Volunteer • Outsource the entire function • Other

3. Agenda • The Challenge for Small Nonprofits • What May Indicate That Not All is Right with Your Financial Management? • What Is a Fair Expectation from Your Finance Function? • What is the Traditional Model and Mindset? • So What Is the Alternative Model? • Are All Outsourcing Models Created Equal? • How Much Should the Finance Function Cost? • Can Outsourcing Costs Save Money Then?

4. The Challenge for Small Nonprofits • Limited financial and personnel resources • Executive director focused on mission, programs, fundraising • Executive Director not financially literate and ill-advised • Knowing what is needed in way of infrastructure and resources • Knowing how to go about getting them • Limited financial expertise on BOD The serenity prayer – modified: “God grant me the serenity to admit there are business tasks I don’t do well, the courage to do the ones I excel at, and the wisdom to know the difference.”

5. What May Indicate That Not All is Right with Your Financial Management? • No financial statements or they are late and hard to read • Bank statements not reconciled regularly • Excessive vendor inquiries about payment • Audit or review results in significant adjustments and management comments • Bounced checks • Funding held up for reporting compliance • Frequent payroll mistakes • Office politics and intrigues • Hard to explain or answer question about data on the financial statements • Accountant serves as the “Jack (or Jill) of all trades” • Accountant always too busy and slow to respond • Accountant seems to be spending excessive time running QB or Excel spreadsheets • Preparation and support of audit overly time-consuming

6. What May Indicate That Not All is Right with Your Financial Management? • Hard to get information on financial status of grants and programs • No budget or budget not broken out by program or funding source • Restricted funds not tracked in accounting system • Accountant never takes a vacation • Form 990 is perpetually late • Accountant tends to live in a silo • Basic internal controls not in place or not understood • Board member complaints and questions • Past due receivables • Finance staff turnover excessive, resulting in discontinuity • Frequent IT issues and interruptions

7. What Is a Fair Expectation from Your Finance Function? • Basic internal controls • Basic financial statements: • Statement of Financial Position (Balance Sheet) • Statement of Activity (Profit and Loss) • Comparative Revenue and Expenditure Statement (to budget and prior year) • Financial statements reviewed for accuracy and delivered timely (within 10 working days of period close) • Ability to track financial information by function/program and funding source (grant) • Ability to understand and explain clearly the information on the financial statements • Audit or review goes smoothly with no surprises

8. What is the Traditional Model and Mindset? • Full or part-time accounting manager, finance director, controller, CFO (titles are cheap) • Qualifications vary for accounting and computer tools savvy • Result is usually a compromise between qualifications and affordability • Person receives nominal guidance, training or mentoring; expected to be self-sufficient • Internal controls limited • Dependence on one individual • Available "down the hall"

9. So What Is the Alternative Model? Premise: Small nonprofit organizations under $2m annual operating budget require professional-level financial expertise but acquiring that in-house and competently supervising the function is unrealistic.

10. Are We Talking About Outsourcing Then, and What Are the Main Benefits? • Internal control beyond the basics • Professional competence and specialized nonprofit accounting knowledge • Accurate, relevant, and timely financial reports • Efficiency and normalcy in the accounting cycle • Professional standards and demeanor (objectivity, independence, and confidentiality) • You pay for the level of expertise required • Continuity and ease of transition to a permanent in-house function • Intelligent and efficient use of accounting technology • Strategic help at Executive Director and BOD level as needed • Leveraging skills and broad experience for solving problems • Achieving financial literacy through interaction and training • Cost-effective (almost always less than in-house) • Streamlined audit process

11. Are All Outsourcing Models Created Equal? Some of the more traditional delivery models: • Part-time contract accountant • Likely competent • Usually a sole practitioner • Short-term availability and on-going continuity may be issues • CPA firm or other third-party accounting services • Competent performance • Tend to do things their way (one-size-fits-all) • May not specialize in nonprofit accounting

12. So what is the New Model(s) and how is it different? • A flexible arrangement that provide highly competent personnel to become part of the organization’s financial function. • Encourages utilization of in-house personnel for accounting operations. • Spectrum of involvement is from total turnkey to period-end controller-level review of financial reports based on the client’s needs and culture. • More typical is somewhere in between with in-house personnel doing accounting operations under the functional supervision of an outsource professional who also performs period-end review, reconciliations and financial reporting with a second outsourced person reviewing the financial statements before delivery. • One team member can step in for another as required. • Proven accounting technology is used and with the power of the Internet the geographic location of the client organization of lesser importance. • Clear?? and deadlines are established at the time of engagement.

13. How Much Should the Finance Function Cost? (Group discussion) In discussion groups consider the personnel-related costs of the finance function in your organization and come up with a percentage range of costs compared to the total operating budget. *Hint: Administrative costs to the total operating budget are usually around 10%, and finance is part of administration. Results: • 3 – 5% • Examples: • $100k budget $5,000 annual $400 per month • $500k budget $20,000 annual $1,700 per month • $1m budget $30,000 annual $2,500 per month

14. Can Outsourcing Costs Save Money Then? • Almost always • How: Through competence, focus and efficiency The main question should not be that it is significantly cheaper but that it delivers superior results and peace of mind so the Executive Director can pursue his or her passion unencumbered by the distraction of a dysfunctional finance function.