CPAs who serve nonprofit organizations have access to data not readily available to others; information that can enable the success of meeting an organization’s mission. Historically, CPAs at nonprofits reported on financial performance and helped to ensure compliance, but today nonprofits need more from their CPAs. Nonprofits need business leaders who balance short- and long-term views, and who can apply data from all facets of the organization. CPAs in nonprofits need to look beyond the financial reports to help their organizations attain fiscal sustainability.
Fiscal sustainability is a term applied to governments that can be easily translated for the nonprofit sector:
Nonprofit fiscal sustainability is the ability of a nonprofit organization to successfully deliver its mission over the long term, by remaining financially and operationally viable, as well as programmatically relevant.
As the definition details, fiscal sustainability has two primary components: viability and relevance. For a nonprofit to sustain itself for the long term, both components must be understood and proactively managed. For this feature, viability is defined as the ability to deliver programs effectively and efficiently throughout the life of the program. Relevance is defined as the ability to maintain alignment between the clients’ needs and the organization’s services.
Sometimes an organization can focus so closely on delivering on client needs that it ignores or is blind to the fact that those programs are no longer viable. Perhaps a new client requirement drives up the cost, or a gap in training decreases efficiency. In this situation, the program will only continue to be relevant to its clients up to the point when the nonprofit runs out of money.
The reverse is true, as well. Focusing too closely on operational performance, and not thinking enough about the future, can drive an organization to deprioritize research, education, and technology. Thus, an organization may become the best provider of a service, but they will eventually find that they are providing a service that no one needs.
Nonprofit fiscal sustainability requires a comprehensive approach. The components do not act in isolation; so, to drive improvement, there needs to be conscious decision-making on viability and relevance issues.
At the center of the model to the left is the nonprofit’s mission. The components of relevance and viability are displayed as two halves surrounding the mission. Another way to think of these concepts is to consider that relevance represents the organization’s capabilities, while viability represents its capacity.
The left side of the model shows some of the subcomponents of relevance. To remain relevant, an organization must develop and maintain a strong set of capabilities that will allow it to lead and respond. In addition, it must be able to handle new competition and a complex, fluid regulatory environment. The organization needs to be able to build strong relationships, assemble qualified leadership, maintain service differentiation, continually learn, effectively apply new skills to the delivery of the mission, and be well-versed in managing change.
The right part of the model details the subcomponents of viability. To remain viable a nonprofit must attain and develop the capacity to deliver its programs effectively and efficiently. It must have the systems, processes, and qualified people that can achieve expected performance while remaining in line with budgets. The organization needs to have appropriate financial controls, adequate funding, quality staffing and technology, strong operational and program management skills, and strong processes and procedures.
The outer ring of the model displays items that support both relevance and viability. These are advocacy, culture, risk leadership, and strategy. They can be capabilities supporting the organization’s relevance, but also as they are executed they are capacities that ensure viability.
Ten Ways to Improve Fiscal Sustainability
In a nonprofit, the CPA likely is the strongest financial resource and is best prepared to take ownership of this feature’s recommended actions. These 10 items represent incredible learning opportunities and provide a clear path to improve the fiscal sustainability of your organization.
Apply business acumen
– Add value by applying business acumen, perspective, and the transformation of data into useful information. CPAs must look at the business in its totality, in terms of results and process. No other function within the organization has access to the breadth and depth of data. Use your innate talent for analysis and analytics to identify needs. Then apply your expertise to take all of that data and turn it into useful information for decision-making.
Spot trends and analyze performance
– The nonprofit CPA should monitor results, run analytical analysis to identify trends, and provide forecast scenarios on potential impacts. This information is critical to decision-makers who are considering both current and long-term actions.
In addition, tailor reporting metrics to limit unneeded data, and focus on the areas of greatest impact to the organization. In a nonprofit organization, clear program-level reporting helps leadership understand performance across service groups or portfolios. If a program is underperforming, and it is a trend that is continuing, the CPA must ensure the information is clearly presented so that leaders can make decisions.
These types of performance analyses surpass composing financial statements and reconciliations. They provide specific, actionable information where issues and opportunities are highlighted, improvements are monitored, and impacts easily determined.
Support proposal efforts
– Nonprofit CPAs should have an important role in the proposal process. Applying for grants from foundations or government agencies can be onerous. Often, proposals are denied because a requirement was not met or the information provided was not clear. CPAs are skilled at understanding complex instructions, and can use this skill to interpret funder requirements or to aid in the development of program-level budgets. Use your attention to detail to review proposals before they are submitted to make sure that they are consistent, clear, and concise. Above all, understand the impact of the proposal and assess if it will be beneficial to the organization or a detriment. Check that the proposal will actually result in funding that meets or exceeds costs, and alert leadership if the increased effort will exceed the potential funds to be received.
Watch and interpret the sector
– To help your nonprofit, CPAs should be spending a good amount of time engaging in their nonprofit’s sector. Building your network, attending events, and participating in social-media conversations can all provide useful information that you can bring back to your organization. Engaging the sector will help you identify best practices, as well as hear about issues and trends that could impact your nonprofit.
One great way to learn about the sector and your organization’s area of focus is to review the Form 990s of competitors, partners, or organizations with related missions. The Form 990 has a wealth of information, and CPAs know more about it than pretty much anyone in the organization. Apply your expertise to look for comparable information, trends, risks, and practices. This data will not always be fresh, but it remains useful for identifying patterns and getting different perspectives.
Most importantly, translate the data into information your organization’s leadership can use. Suggest improvements, identify concerns at partner nonprofits, and discuss issues and trends at organizations that directly or indirectly compete with your nonprofit.
Provide early warnings
– One of the most important ways a CPA can help protect a nonprofit is by identifying and communicating areas of risk. This is a continuous process, so it is something you should be considering on a regular basis. The CPA has access to all of the financial and most of the transactional data in the nonprofit. In addition, the CPA has expertise in identifying unusual items and results that do not fit with expectations.
There are three specific areas of concern that CPAs can monitor. First, there are issues associated with concentration. If the nonprofit’s funding comes from only one or a small number of sources, it is at risk. The CPA should communicate the importance of revenue diversity and provide regular updates to leadership if trends point to a concentration risk. The same holds for partners and vendors. If the nonprofit concentrates purchases with only one vendor, there is potential risk to the nonprofit.
The second action is to actively monitor the condition of clients, vendors, and funders. If you notice issues with these business partners, communicate the findings to leadership. With warning, a nonprofit can either alert a partner of an issue or start looking for alternative partners. Risks can be greatly reduced if the CPA regularly assesses the financial and operational condition of critical business partners.
Third, communicate clearly the need for, and status of, the nonprofit’s reserves and any negative value generated when actual overhead costs exceed overhead recovery limitations on programs. Reserves are critical to a nonprofit to hedge against temporary funding issues or to ensure resources are available to invest in the future. The CPA should be instrumental in establishing the minimum available cash reserves to ensure business continuity.
Support procurement activities
– Nonprofit CPAs can support nearly every phase of the procurement process. You can add value to the organization by ensuring that products and services purchased meet requirements at the best cost. The CPA should be available to assist in cost/benefit analyses and to provide insight into decisions on alternatives.
The beginning of the procurement process can be complicated, but the CPA can help define the organization’s needs clearly and concisely. Once bids are received, the CPA can analyze the bids, confirm that they are comparable, and factor costs for any differences in terms or conditions. If the process leads to a negotiation, you can be a critical member of the team, applying your understanding of budgetary constraints and defining what the organization can afford.
Develop and educate
– A nonprofit’s CPA plays a critical role in the long-term success of the organization by developing the financial staff and educating nonfinancial employees on some of the critical concepts in finance. In both cases, you generate value by creating a force multiplier for good financial decision-making.
Regardless of the size of the organization’s financial support staff, the CPA should encourage staff to learn continually. This will improve existing skills and provide new ones. Educating nonfinancial employees will help lay a foundation for understanding the concepts behind the answers you provide. For example, when reviewing performance reports with a program manager, explain how the information is derived as well as the levels that determine an acceptable versus an unacceptable variance from the plan.
Be a techie
– This article has identified many potential responsibilities for nonprofit CPAs, so it makes sense to shed some existing work so you can consider these new tasks. An effective way to decrease workload is to optimize technology. A nonprofit’s CPA needs to champion innovative technology and solutions, including automation, work share, and outsourcing. The goal is to accelerate efficiency to process transactions quicker with less human interaction, to spread work to those more familiar with the transaction, or to find service providers that can process some transactions faster and more effectively.
A nonprofit’s CPA should always ask the questions, “Is this process core to the organization?” and “Can this process be done more efficiently or cost-effectively by someone else without sacrificing quality or accuracy?” If a task, process, or function is not core and can be done better elsewhere, the CPA needs to foster the outsourcing process.
If a process is not a candidate for outsourcing, the CPA should work with IT or procurement to look for technology that can simplify the process and automate as much of it as possible.
CPAs’ broad access to data and process flows help them identify the areas that generate delays, errors, missing data, and mistakes in transactions. A nonprofit’s CPA is a top resource to help define the ongoing technology requirements of the organization.
Assess transaction impacts
– Nonprofit organizations grow and change over time. This sometimes leads to a consideration of strategic partnerships or consolidations. Nowhere can a nonprofit’s CPA make a larger impact than by being involved in the planning, development, and execution of structural transactions.
Often, these moves are initiated at the most senior level of an organization, and a general assumption is made that specialists or consultants must be used to determine the financial impacts. While that is sometimes true, the nonprofit’s CPA can provide insight and advice that an outside party cannot. The CPA knows the business, its processes, and the web of interactions necessary for the organization to function. Your insight can provide critical guidance, from the early phases of a transaction all the way through the execution of a deal.
Your skills and knowledge can support key portions of the transaction project plan, from valuation to due diligence to integration. A CPA can provide information for decision-making and can be an unbiased judge of expected future benefits. The value here is understanding the numbers and being able to produce consolidating models and other analyses that measure the impact that a transaction will provide.
– Nonprofit organizations rely on their good reputations far more than for-profit companies. For this reason, a nonprofit’s CPA must maintain the highest ethical standards and emulate and enforce ethical practices throughout the organization. In addition, the CPA must actively search for potential areas of fraud. Nonprofits are particularly susceptible to fraud because they have smaller staffs and there is a preconception that nonprofit staff members are inherently selfless. The reality is that smaller staffs mean less separation of duties. And while staff members may be selfless, they often are working for lower salaries in an environment that often deals with a lot of cash donations.
A nonprofit’s CPA understands ethics, controls, and the analytical analyses that can detect fraud. There is a natural path for the CPA to lead by example and help educate the organization’s leaders on ways to encourage ethical behavior. The CPA also can provide information that can indicate potential areas for fraud and expertise in improving controls to deter or limit the impact of fraud. These actions are vital to the long-term health of the nonprofit, as funders will not support an organization that does not maintain its ethical standards or one that cannot control fraud.
These 10 actions impact multiple components of the fiscal sustainability model. Take ownership of these topics, and encourage peers and staff members to share in addressing them. Help leaders find the right mix of focus on relevance and viability to effectively deal with challenges and explore opportunities. Engage in discussions on culture, strategy, risk, and advocacy to ensure that the organization benefits fully from your knowledge and experience. These are the ways that CPAs can support a nonprofit organization’s continual quest to attain and maintain fiscal sustainability.
Michael F. Cade, CPA, CGMA, is a strategy consultant and executive coach for MFCCoach LLC in Morrisville. He serves as a nonprofit board member for the Internship Institute and is a member of the
Pennsylvania CPA Journal Editorial Board. He can be reached at email@example.com or on Twitter @mfccoach.