The Skills to Pay the Bills: An Evaluation of an Effort to Help Nonprofits Manage Their Finances
The Importance of Strong Financial Management for Organizations Serving Young People
Nonprofit organizations serving young people exist to provide meaningful opportunities for those young people to build their skills; experience positive, supportive relationships; and prepare for the future. No one would judge an organization’s worth by its financial soundness alone, but financially unhealthy programs threaten an organization’s ability to achieve its mission. Unfortunately, although they are critical to effective management, core organizational capabilities and effective administrative functions often are mistakenly perceived as peripheral to an organization’s mission.
To the contrary, good financial management is essential to effective youth interventions. First, it enables organizations to plan strategically: A clear understanding of the resources needed to serve program participants well serves as a guide to fund-raising efforts. It also provides information on the types of investments in an organization’s core capabilities — management, support functions, and infrastructure — that need to be made to sustain program quality. Second, good financial management means organizations can deploy their resources thoughtfully. It enables them to predict the impact of changing circumstances, such as funding delays or shortfalls, and respond to them while managing their effect on program quality. This report examines what happened to a group of organizations that attempted to strengthen their financial management systems from 2009 to 2013.
The Current State of Financial Management
Good financial management is not easily achieved in organizations that often have grown organically out of community need, funders’ compassion, and the passion and good ideas of people committed to bettering young people’s lives. Indeed, weakness in financial management is pervasive across the nonprofit sector. The following problems were common among participating organizations at the beginning of the current study:
- Staff members with less than optimal financial management skills, understaffed financial departments, and underdeveloped information
technology (IT) systems created inefficiencies in routine tasks. Staff members in organizations’ financial departments often operated in crisis mode or
were absorbed with daily tasks such as paying bills and responding to funder requests, leaving long-term financial planning functions underdeveloped. This could potentially have serious consequences for organizational sustainability and efficiency.
- A lack of transparency regarding organizations’ financial positions, and an absence of useful forecasts, meant leaders often could not make informed
choices about program and organizational needs.
- Incomplete understanding of the true costs of program delivery, including the support functions necessary for high-quality programs, left those programs chronically underfunded.
- Organizations’ financial staff members operated in isolation, with few connections to staff members who understood the resources needed to support
and strengthen programs and who knew how to respond effectively to weaknesses.
The challenges that arise as a result of poor internal financial practices are exacerbated by certain funder practices. Funders place limits on allowable overhead that are often insufficient for organizations to manage programs well. Funding is often insecure, obtained through short-term contracts. And payments for contracted services may be late — sometimes many months late.
The Study and This Report
As the third prong of the initiative, the Wallace Foundation commissioned an independent evaluation of the extent to which the initiative achieved its intended results, and at what cost of money and effort. The foundation was committed to informing a wide audience about whether and how results were achieved, what challenges were encountered, and whether and how the challenges were overcome. It also sought to inform a wide audience about the Donors Forum’s efforts to improve the funding environment. To address these issues, the four-year study relied on information from interviews with CEOs and CFOs, conducted every 9 to 12 months for four years; annual visits to a selection of the organizations; and document reviews.
This report presents findings that should be of interest to practitioners, funders, policymakers, and the public. It examines the following questions: What forms of support do organizations need to strengthen their ability to manage their resources? What type of time commitment does this require from the organization itself? From consultants? What types of changes need to be made to funder practices, and how might those changes be achieved? When those
changes have been achieved, how effective have they been? What lessons can the evaluation offer those who seek to strengthen the financial management of nonprofit organizations
Download the report to read the full Executive Summary