The Limitations of Financial Visibility

Growing nonprofit organizations often delay recognizing system problems, even as the finance team feels the burden early on.

Initially, the signs suggest that things are under control:

A few additional spreadsheets; month-end closing takes longer than it used to (due to additional days during the month); greater communication back and forth leading up to a Board meeting; additional clarification requests regarding financial performance from department leaders.

At first, everything appears manageable.

However, over time, it becomes difficult to obtain clear, timely answers about financial information, leading to a loss of trust.

When that happens, the whole organization takes on a different identity.

I evaluated the financial structure of a nonprofit organization with revenue slightly over $4 million.

Outwardly, the organization appeared normal:

It was expanding its programs; fundraising was going well; cash appears to be stable; and the organization's mission was increasing.

Internally, however, the leaders described a persistent sense of tension about their ability to operate as a financially sound organization.

The core issue is not a lack of funding.

Rather, it is more a case of a lack of transparency in the financial information that they receive.

For example, before each Board meeting, every member of the finance staff spends almost two full days manually reconstructing the reports they will use to prepare for the meeting.

To compile the reports, the finance staff must export and copy information from QuickBooks (the financial software) and then adjust the Grant allocations outside QuickBooks.

In many cases, program directors are tracking their own budgets because they do not have full confidence that the reporting processes currently in place provide reliable information.

I continue to be struck by how many times I have heard this comment:

"We have accurate numbers, but we are not confident that we will receive them in a timely manner."

This quote summarizes the experience of many nonprofit organizations that, due to rapid growth, have exposed weaknesses in their financial reporting systems.

Most nonprofit organizations have many dedicated, hardworking employees.

The problem is that the financial structure does not support the organization's increased complexity.

When this occurs, the organization begins to experience operational friction.

As a result:

• Board meetings take longer to conduct because the reports require interpretation before the meeting.

• Leaders become nervous about making hiring decisions, fearing that large amounts of unrestricted cash are available.

• Program directors begin to create their own tracking systems.

• Finance departments are spending more time translating the numbers than analyzing them.

As a result, organizations that were financially stable a few years ago now operate with great caution because no one has confidence in their financial reporting.

Unfortunately, one of the biggest myths in the nonprofit world is that financially stressed organizations are out of money.

In many cases, the organization has money, but the leadership team lacks clear, reliable visibility into the financial information it needs.

When visibility into financial information is compromised, confidence in it follows suit.

When this occurs, bookkeeping shifts from a mere accounting function to an executive leadership issue.

A pattern I have observed many times is that as these nonprofits grow, their financial structure gradually grows with them, yet they manage through their financial reporting until they suddenly become overwhelmed.

For instance, when revenue is $700,000, workarounds may still be manageable; however, as soon as revenue exceeds $2,000,000 or $5,000,000, the same workarounds begin to create operational drag across the entire organization.

The operational drag becomes more pronounced because:

1. Grant reporting becomes more complex
2. More than one department requires visibility into the financial reporting
3. The Boards want answers quicker
4. Hiring decisions imply a greater degree of financial risk
5. Programs are growing faster than the financial management capabilities of the organization have been developing

As operational drag continues, the organization will rely on institutional knowledge rather than the clarity of financial information.

Reliance on institutional knowledge creates additional stress that no one wants to discuss.

Executive Directors will experience pressure leading into Board meetings.

Finance teams will experience significant operational stress.

Leaders will take longer to make decisions because uncertainty about the future poses a financial risk.

All of these changes occur gradually but can seem to appear overnight (too much pressure to take long enough to compile financial reports).

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