If a nonprofit is going to thrive in today’s environment of increased financial scrutiny, it must have the right capabilities under its roof. This means a Chief Financial Officer or Director of Finance, an Accountant and a Bookkeeper. For small to medium-size nonprofits, however, having a full financial bench is a nearly impossible challenge. The funds don’t exist to cover three separate positions, and there’s not enough work to employee three full time staff.
So understandably, many nonprofits try to find someone with skills directly in the middle. The idea is to combine what should be three separate financial positions, with different skill sets, into one position filled by a single person. However, while this may seem like an acceptable compromise, it leaves nonprofits exposed to real risk.
The reason is that the skill sets don’t really overlap. The Chief Financial Officer is someone who has a detailed understanding of the organization’s finance and operations and a broad understanding of the organization’s vision, mission and objectives. It is someone who can be a right hand to the Chief
Executive, can listen and provide counsel, raise tough issues, and help implement strategies. The Accountant is someone who understands generally accepted accounting principles and can apply these principles to an accounting system and financial reporting. The bookkeeper is someone who can accurately enter data into the system and follow procedures.
Each of these skill sets makes a valuable and separate contribution to finance. Nonprofits need to take care of the day-to-day transaction processing
and financial reporting, and they also must leverage financial information strategically in pursuit of the organization’s vision and mission. When nonprofits
combine these skill sets into one person, they compromise the entire finance function. And they suffer issues with performance and efficiency that can
limit their opportunities for growth.
In my experience as a nonprofit financial leader, I have seen three common approaches to this dilemma, each of which has distinct trade-offs.
The bookkeeper-auditor combination
With this approach, nonprofits will bring in a full-time bookkeeper with limited knowledge of accounting. They then rely on their auditor for financial counsel. While bookkeepers may know basic bookkeeping principles, they lack a comprehensive accounting education and experience. Accounting is more complex for nonprofits than for-profit organizations given multiple programs and funding sources, which must be tracked separately. This requires an in-depth understanding of nonprofit accounting rules integrated into the organization’s daily routines. The auditor, in order to not impair their independence, is prohibited from providing this daily counsel. So the organization ends up with some general financial advice about rules, but they have no one who can implement them effectively.
The do-everything CFO
Another way to approach the problem is from the top down, hiring a CFO or Finance Director to cover all financial matters. Again, this strategy potentially shortcuts a nonprofit’s accounting responsibilities. CFOs and Financial Directors often are not professional accountants. While they may understand the strategy and mission of the organization and can communicate effectively with organization leaders and donors, they may not have the ability to design and manage the most efficient accounting and reporting system possible. And the nonprofit ends up paying a senior level salary for entry-level work.
The accountant in the middle
The most common approach is to split the difference. Nonprofits will hire an accountant, though typically not a CPA, or a very experienced bookkeeper. This person can handle the bookkeeping and some basic accounting, but this strategy falls short in designing and managing the most efficient accounting and reporting system, as well as in the area of financial communication and leadership. Most accountant/bookkeepers lack the acumen to implement a top notch accounting and reporting system, explain the significance of a nonprofit’s financial figures or offer strategic counsel.
There is a much better approach for small to medium size nonprofits that need each of these skill sets on a part-time basis. They should consider outsourcing financial management to a firm that specializes in nonprofit financial services. This way, they can get expertise at all skill levels in proportion to their need.
An efficient bookkeeper
The bookkeeper will be someone with the attention to detail and patience that is required to get data accurately entered into the system. They will also be able to follow procedures with diligence and consistency. They will work within a system that they are familiar with and have an established relationship with their supervisor.
A focused accountant
The accountant on the team will be an experienced CPA with a thorough understanding of nonprofit accounting and reporting rules. Unlike the auditor, this person will also be experienced working with nonprofits so he or she can apply those rules to day-to-day processes and carry out or supervise all aspects of the accounting system.
A financial leader at the helm
Lastly and most importantly, the nonprofit will have a senior person on the team who understands the vision, mission and goals of the organization and
sector in which the nonprofit operates. This person will understand the details of accounting and finance so they can supervise the entire financial function. And they will be an excellent communicator and strategic advisor.
Outsourcing financial management and leadership functions gives a nonprofit expertise in proportion to its needs which leads to maximum efficiency and
consistency. This stretches dollars and leads to better results not only in finance, but for the entire organization. It results in confidence in finances and allows the chief executive and Board of Directors to spend their time strengthening and expanding key programs and raising the money needed to grow and achieve the mission.