It’s hard to ignore screaming headlines today about the sorry state of the US housing market. Talk shows are dominated by stories about hapless homeowners who unwittingly gorged themselves on mortgages they really couldn’t afford. As Warren Buffet says, “It’s only when the tide goes out that you learn who’s been swimming naked.” Companies, too, from all sectors of the economy are being swept up in the financial tsunami. Everyone is paying the price for a decade of fiscal mismanagement. A hard lesson is being learned: financial prudence is critical to the survival of every individual and organization.

What does this mean for the NPO sector?

Even though the mission of a not-for-profit organization isn’t the accumulation of wealth, resources are nevertheless consumed in fulfilling its mandate. The objective of “best value for dollar” implies that the assets of all organizations should be used as efficiently and effectively as possible. Management must, therefore, clearly understand the relationship between inputs and outputs. In other words, it must excel at doing what it does best. This might seem trite, but history is replete with examples of organizations that lost their way and subsequently imploded.

Further complicating the input-output equation is the reality that outputs can’t always be quantified. It’s very difficult to build a cost/benefit analysis to ascertain the value of “soft” benefits to stakeholders. The absence of easily quantifiable performance metrics like share price or earnings growth, however, doesn’t absolve nonprofit managers of the responsibility for meeting stakeholder objectives. I would argue that it’s more difficult for an NPO to demonstrate the value of benefits to its members than it is for a publicly-traded company to justify a shareholder’s investment in its shares. What is professional development worth to the membership of an association? Does it justify the cost of membership?

Protecting your organization’s assets

In order to optimize the relationship between inputs and outputs, management must safeguard and protect the organization’s assets. This is accomplished by monitoring and controlling the resources (people, time, technology, cash, equipment, etc.) that are available for use. Using resources requires that management makes decisions about how, why, and when they should be allocated.

The concept of control in a broader context requires management to track its progress toward meeting both quantifiable and non-quantifiable goals. Having adequate control systems in place allows management to focus on doing what it should be doing – allocating resources in the most efficient and effective way possible.

The design and use of control systems is situational, owing to variations in the size, structure, and goals of NPO organizations. As the voluntary treasurer of a national industry association, I identified the need to curtail spending at all levels of the organization. I introduced fiscal responsibility with a budgeting process that identified planned spending down to the program level and assigned accountability for measurable goals. Later, as voluntary president of the same association, I reviewed the organization’s financial statements with the board members on a regular basis. This allowed us to understand where actual performance deviated from budget and highlighted where corrective action was needed. As a result, the board gained a better understanding of how their decisions affected the financial health of the organization.

How can controls work for your organization?

The following quiz will help you identify ways to keep your input-output equation working in peak form. As you work though the quiz, ask yourself the following question: Is this particular concept or control currently being used in my organization? If your answer is no, then ask yourself: Should I consider how it might be used?

1. Do you know, in financial terms, where you want your organization to be in one and five years from now? What must you do really well from a financial perspective in order to achieve your vision?

2. Do managers consider the financial implications of all major operational and financial decisions? Is a cost/benefit analysis done prior to making major purchases?

3. Do you receive a monthly report that details revenues and expenses for each major activity/program? Are financial statements discussed with managers and the board of directors?

4. Does your organization prepare an annual budget that includes an operating statement, balance sheet, and capital budget? Do department managers have input into setting the revenue and expense items in their budget?

5. Are actual results for revenues and expenses compared to expected (budgeted) results on a monthly basis? Are resulting variances thoroughly investigated? Is action taken to correct these variances?

6. Are department and program managers evaluated against their budget objectives?

7. Do you prepare a monthly cash-flow forecast? Do you use forecasts to anticipate future cash shortages or surpluses?

8. Do you have a policy that outlines the accounting treatment for prepaid expenses, inventory, depreciation, reserves and deferred revenue?

9. Do you have controls in place to protect and safeguard assets, e.g. cash, supplies, inventory, equipment?

10. Are financial reports prepared on an accrual basis to provide for a better matching of revenues and expenses?

Jason Orr, CMA, has a unique business background that includes industry experience, entrepreneurship, teaching, and consulting skills. He is the author of the bestselling book How To Make Your Numbers Talk. Jason is currently exploring management opportunities in the NPO sector and may be contacted at (416) 504-2969 or jorr@opglearning.com.