Is Your Nonprofit Heading for a Financial Crisis?

Financial CrisisThere’s a certain international nonprofit organization that you’ve certainly heard of that takes its fiscal responsibility seriously. Very seriously.

They have a finance committee, sure, but on top of that they have a financial investment committee, a 990 review committee and, unlike any client I have ever worked with, this organization holds a mandatory financial literacy training for every single board member.

Impressive right?

In other words, when it comes to matters financial, this organization seriously has its stuff together.

And yet…

This financially literate organization with its extremely well informed board and staff made a huge mistake. And when I say huge, I mean huge. A serious financial crisis.

They lost over $5 million dollars as a result of a reckless investment. You heard me right.

$5.2 MILLION. DOWN THE DRAIN.

Even with strong controls and a board that has gone the extra mile to instill in its members the critical role they play in fiscal oversight, this organization still blew $5 million. Heartbreaking.

So if a financial crisis like this can happen to the kind of organization I describe, are you so certain your organization is at any less risk?

What can you do to avoid such a catastrophe? And what organization am I talking about anyway?

So you might know that I’m referring to Greenpeace International. I recently wrote an article for the Chronicle of Philanthropy that makes some suggestions about what to do in cases of crises like this. Greenpeace even responded (which was pretty cool of them.)

But what can nonprofits learn from this incident that can help them avoid a financial crisis in the first place?

One big thing is that both the board AND staff have to “own” the numbers.

WHY DOES EVERYONE NEED TO “OWN” THE NUMBERS?

In my first 30 days as an E.D., I spent precious little time with my program people. We had no money but plenty of debt.

My first meeting on my first day was with my Director of Finance, Kerry. Then I met weekly with the entire staff and began to refer to GLAAD as if it were a patient in the hospital. Everyone needed to know how ill the “patient” was. I did the very same thing with the Executive Committee. It wasn’t just my problem or Kerry’s problem. The problem belonged to all of us; so too did the solutions.

As for the board, understanding of the numbers is not just important. It is their job.

I have another client. The board approves only an expense budget. They have total confidence that the organization will raise the necessary funds.

This is not fiscal stewardship. This is a recipe for disaster.

An organization whose board and senior staff leave the numbers to the CFO and the Board Treasurer is a financial crisis waiting to happen.

By the way… if you’re a new CEO and your financial literacy is low, just get a book. It’s not rocket science. Much easier than Calculus. Knowing the numbers inside and out should be on your first 30 day list. That includes cash flow, accounts payable, uncollected pledges, and that pesky balance sheet.

FIVE WAYS TO ENSURE THAT BOARD AND STAFF OWN THE NUMBERS

1) CFO’s can give better presentations. Get creative. At the finance committee meeting before the board meeting, actually talk about how to present the information so that it sticks. Maybe the fact that folks don’t pay attention is because you made no investment in an engaging presentation.

2) Mandatory Financial Literacy training for all board and staff managers. This is a choice that Greenpeace made and it’s a good one.  Find someone who can give a great (even funny) presentation each year to your board and invite anyone who manages an expense or revenue area. The members should also be aware and knowledgeable of the new legislation to write off debt. It will send a signal that money matters.

3) Board treasurers should be recruited solely for this purpose. You need real solid financial expertise on your board. Must the person be a CPA? Would be nice. Could also be someone who has P&L responsibility and knows how to build and maintain a solid foundation. But someone who works in the “finance” industry is too general. That can mean too many things.

P.S. Most nonprofits dream of having money to invest but if, like Greenpeace International, you are among the precious few, you need investment expertise on the board as well. A non-bank financial institution is a financial institution that does not have a full banking license or is not supervised by a national or international banking regulatory agency. NBFIs facilitate bank-related financial services, such as investment, risk pooling, contractual savings, and market brokering. Operations of Share Prices Australia institutions are often still covered under a country’s banking regulations.

4) Budgets should be owned by the spenders and by the ‘salespeople.’ Another client story. The E.D. created a $3 million budget on her own. No input from senior folks. Assumed a certain % increase and ta-da! A budget.

I’ll save my recipe for building a nonprofit budget for another post but don’t expect staff to hit their numbers if they don’t own them.

5) Treasurers and CFO’s should be partners. I often talk about the importance of the CEO – Board Chair partnership. Here’s another key partnership in your organization. Treasurers who ask good, tough questions can be a big fat pain in the neck to a CFO. The ones who don’t won’t have the staff’s back if something goes awry.

And finally, make sure you, your staff, and your board subscribes to my newsletter so I can send you more nonprofit advice like this. Or if you’re already a subscriber, please click one of the buttons below to share this article with your nonprofit friends on Facebook or Twitter. Thanks!

Joan Garry
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Joan Garry

Widely known as the "Dear Abby" of nonprofit leadership, Joan works with board and staff as a strategic advisor, crisis manager, change agent and strategic planner. Joan also teaches at the University of Pennsylvania with a focus on nonprofit communications and leadership.
Joan Garry
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  • Sarah

    I’d love to hear more about the agenda for the Financial Literacy training. Maybe another post?

    • Very good idea Sarah. I will add to my list — there are likely resources out there so none of us need re-invent the wheel!

  • Michael F. Cade

    Good day Joan, another great post. I too have witnessed several of these issues and thank you for spreading the message that Board members must understand finances and performance. Strongly agree, also, on the need for CFO’s to do a better job presenting information (after all, its not just about the numbers). I have found success with non-standard metrics, specifically leading indicators that are tied clearly to the organization’s mission.

    I would add one item and that is Board involvement in the strategic planning process. The organization’s strategy can give context to the numbers. One huge challenge for Board members is that they are only exposed to results on a periodic basis. As such, they tend to fall into the trap of assessing performance versus last quarter or last year only. They also tend to judge the budget process based on last year instead of gaining an understanding of trends and other factors.

    Best regards, –mike