FINANCIAL MANAGERS

Financial managers are board members and staff who participate in making strategic financial planning, implementation, monitoring, and reporting decisions for an organization. Therefore, members of the board of directors, the chief executive officer (CEO) or executive director, the chief financial officer (CFO), program or project managers who participate in the budgeting and budget-implementation process are all financial managers. In other words, the board of directors is as responsible as the CFO and the CEO for the financial management of a nonprofit organization.

FINANCIAL MANAGEMENT AND NONPROFIT FINANCIAL MANAGERS

In most key aspects of financial planning, financial decision making, monitoring, and accountability, there are no significant differences between the financial management of a nonprofit organization and that of a for-profit corporation. However, as indicated in Chapter 1, nonprofit organizations and for-profit corporations manage their profit differently. For example, contrary to for-profit corporations, which distribute part of their profit to shareholders in the form of dividends, nonprofit organizations use their profit to maximize services to clients or communities. Further, nonprofit organizations have different standards of flexibility to make financial reallocation decisions. Donors may make donations to a nonprofit organization either for general use (unrestricted fund) or a specific purpose (restricted fund). As a result, the nonprofit manager must be a good steward of all donations received, especially restricted funds. The nonprofit manager must ensure that the organization maintains an accounting system that allows for effective management, monitoring, and reporting about restricted and unrestricted funds.

Financial management of not-for-profits is similar to financial management in the commercial sector in many respects; however, certain key differences shift the focus of a not-for-profit financial manager. A for-profit enterprise focuses on profitability and maximizing shareholder value. A not-for-profit organization's primary goal is not to increase shareholder value; rather it is to provide for some socially desirable need on an ongoing basis. A not-for-profit generally lacks the financial flexibility of a commercial enterprise because it depends on resource providers that are not engaging in an exchange transaction. The resources provided are directed toward providing goods or services to a client other than the actual resource provider. Thus the not-for-profit must demonstrate its stewardship of donated resources—money donated for a specific purpose must be used for that purpose. That purpose is either specified by the donor or implied in the not-for-profit's stated mission. The management and reporting activities of a not-for-profit must emphasize stewardship for these donated resources. The staff must be able to demonstrate that the dollars were used as directed by the donor. The shift to an emphasis on external financial reports about donor restrictions has made the use of fund accounting systems even more critical.

Budgeting and cash management are two areas of financial management that are extremely important exercises for not-for-profit organizations. The organization must pay close attention to whether it has enough cash reserves to continue to provide services to its clientele. Cash flow can be extremely challenging to predict because an organization relies on revenue from resource providers that do not expect to receive the service provided. In fact, an increase in demand for a not-for-profit's services can lead to a management crisis. It is difficult to forecast contribution revenue in a reliable manner from year to year. For that reason, the control of expenses is an area of increased emphasis. Budgeting therefore becomes a critical activity for a not-for-profit organization.

 
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