The Nonprofit CFO (#285)
/In this podcast episode, we discuss the concerns of the nonprofit CFO. Key points made are noted below.
Cash Flow Issues
The main issue with nonprofits is incoming cash flow. The business has no equity, since it’s a nonprofit, so it’s impossible to sell shares – though a larger nonprofit may be able to take out a loan – but don’t count on it. Instead, cash flow comes from revenues and donations. The CFO has to be totally on top of the entire cash flow situation, since most nonprofits don’t have a whole lot of cash reserves to fall back on.
Instead, if cash receipts decline, then the CFO needs to slash expenses right away, to maintain a positive bank balance. So, the first thing for the nonprofit CFO to watch over is a really detailed cash forecast. You’ve got to watch it constantly, which is not always the case for a for-profit business that’s flush with cash. Instead, assume that any hiccup in the cash flows will kill the business, so watch the forecast like a hawk.
Expense Monitoring
The second item to watch out for is the offsetting expenses. The expenses actually incurred have to match the budget, because there’s usually not enough excess cash on hand to cover a spike in expenses. And so, this means that the CFO has to monitor expenses much more than would be the case with a for-profit business, and investigate any expense overages in detail – especially to see if those overages are going to be recurring. If they are, then that’s an unplanned drain on cash, and that’ll require an immediate redo of the budget to at least keep cash flow neutral.
Revenue Management
The CFO doesn’t just sit behind the scenes and analyze numbers. Instead, you have to work on every possible revenue management idea, to squeeze the largest possible amount of cash out of customers and donors. This can include things like pop-up reminders on the nonprofit’s website to donate your old car to charity, or listing the nonprofit in your will. The range of possible fund raising opportunities here is endless. The CFO can benchmark what other nonprofits are doing, to see if any of their techniques can be used. Again, positive cash flow is king, so the CFO has to be constantly working on improving it.
Donation Management
And… the CFO needs to be even more active than that. Donation management is a big deal. You have to track who has promised donations, and in what amounts, and when the payments are supposed to be made. There can be some debate over who is supposed to contact donors if those payments are late, but it’s entirely possible that the CFO will have to get directly involved. It all depends on who the donors are accustomed to dealing with, since they may want the same point of contact for all donations.
And once donations are received, they may not be in cash. They might be stock certificates, or works of art, or old cars, or even real estate. When a donation is not in cash, the CFO needs to figure out what to do with it, which usually means converting it into cash as soon as possible. So, expect to spend some part of your time working with brokers to sell off assets.
And, of course, the CFO needs to continually work on donation plans for the future, since some donors will drop out every year as they die or move away, or maybe their economic circumstances decline. This means targeting existing donors for more money, and planning to locate new donors, and maybe even some occasional contacts with old donors to see if they might be brought back in.
Capital Improvements
And on top of all that, the CFO needs to plan for capital improvements. The organization might need a new building or equipment at some point, or maybe new vehicles. Whatever it might be, there’s probably no cash reserve to pay for these things, so the CFO will need to figure out a fund raising campaign for each one, usually by targeting specific donors or local businesses who’ve donated to the nonprofit in the past. This can be a major effort that takes up a large part of the CFO’s time.
Summary
A common theme running through these points is the ongoing need to look for cash. This is much worse than with a for-profit business, so if you’re not comfortable with it, stay away from the nonprofit industry. Also, making the incoming and outgoing cash flows balance is difficult, so cash forecasting is a much more significant chore than is usually the case.