The Cost of Messy Financial Systems: How Outgrown Reporting Stalls Nonprofit Momentum

They can create hiring delays, cause stress during board meetings, and result in long pauses by the Executive Director as he or she figures out how to respond to a simple question about the organization's financial status.I am not convinced that many nonprofits realize the level of operational tension they have created through their messy financial systems, or how that tension impacts their organizations.

Upon reviewing the reporting of a nonprofit with $4 million in revenue, I found that the organization was operating well from an outsider's perspective (programs were growing, fundraising was on solid ground, cash balances were stable, and the mission was expanding quickly).

However, within the organization, the leadership team felt financially stressed at all times.This isn't because they didn't have funding; rather, it was because there was no trust that they would get a clear answer on any of the following questions in the timeframe needed:

How many unrestricted cash dollars are available after payroll?

Why have program expenses shifted significantly from the last quarter?

What is the correct method for recognizing balances for each of the grants?

Can we hire another individual before the end of the fiscal year?

Although these appear to be routine questions for us as leaders, what is alarming is the difficulty the financial team is having in providing authoritative, immediate answers.Each finance board meeting requires the finance team to export documents, which are then moved to Excel spreadsheets, reviewed, updated with offline grant tracking, and finally reassembled by the finance team for presentation to their leadership teams.

Over time, the organization has built in layers of workarounds to its financial processes that were not developed through negligence.

In actuality, the organization has had to outgrow its existing financial reporting structure.

Uncovering Financial Stability through Growth

In my opinion, one of the most common misconceptions about nonprofits is that they will always face financial difficulties due to insufficient income.For example, I know many nonprofits that receive strong donor support and stable grant funding, yet have long histories of poor financial controls due to insufficient visibility.

Nonprofits can survive solely on the institutional knowledge of their finance teams (who know where everything is), and the organization trusts the finance team's verbal explanations of reporting before any meeting.They often make manual adjustments to reports prior to the meeting.Each department keeps its own records outside of the accounting system.For several years, an organization can operate effectively without this financial structure.

Over time, the organization can experience unprecedented growth:

• Increased funding

• Increased demand for reports

• Increased number of programs

• An increasing number of department directors are looking for clear visibility

• Increased number of board members

• Increased demands for quicker decisions

As the organization outgrows its existing way of doing things, operational tension between departments begins to seep throughout the organization.

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