Jack Hoey & Associates

Successful Nonprofits Know This Secret: Part 3

Click here to read  The Secret Part 2

The most successful nonprofits are the best-managed financially.  The two critical dimensions to good financial management are:  1) the ability to budget and plan effectively, and 2) an effective system of controls over resources. 

 

The importance of effective financial controls is under-rated.  It doesn’t seem to have positive benefits because it’s primarily defensive in nature; it protects the organization from theft and other forms of attack.  And it belongs in the realm of financial specialists who have nothing to do with the organization’s mission.

But strong financial controls can be critical to the organization’s survival.  Even more important than the loss of funds through theft is the loss of credibility, particularly with donors.  In recent years, a number of prominent nonprofit organizations have lost loyal, long-term support when they failed to protect their resources, in some cases from theft by outsiders, in others from misuse by insiders for personal benefit.  If donors lose their trust in management’s competence, they’ll contribute elsewhere. 

 

Organizations that can afford it should have annual financial audits.  Encourage the auditors to focus on assessing systems and making recommendations for improvements.  Review their findings carefully and assure that good recommendations are implemented.

 

This is a critical area for board involvement.  Each board needs members with strong financial expertise, preferably with internal control systems, who are willing to work closely with outside auditors.  Nothing is more central to the board’s role than safeguarding the organization’s viability; nothing can destroy an organization faster than failure of its internal controls.

 

If your organization can't afford an audit, seek consulting support that you can afford.  It's immensely valuable to get an outsider's view of your systems.  Those who work with systems every day tend to become so accustomed to the systems' shortcomings that they fail to see them for what they are.

 

Nonprofit organizations are rarely founded by financial people.  They tend to be founded and led by women and men who are passionate about the cause they serve.  Good financial management doesn’t substitute for their passion or vision.  But without it, that passion and vision is unlikely to achieve its goals for very long.

Successful Nonprofits Know This Secret: Part 2

Copyright 2010 by Jack B. Hoey, Jr.  All rights reserved.

Click here to read The Secret: Part 1   

The Secret: Part 2

The most successful nonprofits are the best-managed financially.  There are two critical dimensions to good financial management:  1) the ability to budget and plan effectively, and 2) an effective system of controls over resources. 

 

Budgeting and planning is a proactive tool.  The organization I described previously used its planning disciplines to navigate 2009’s economic slump.  Before the recession began to bite, its staff examined a range of scenarios that projected lower income.  They decided to set their budgets based on conservative assumptions.  Setting a priority of protecting staff as much as possible, they cut non-staff expenses to the bone, and required senior management approvals for all purchases.  As the year unfolded, they met their revenue goal and reduced expenses even more than planned.  This gave them resources at year-end to expend on priority projects that had emerged during the year.  In a tough year, they were able to accomplish more than they expected.

 

Planning is not important because it helps you see into the future.  No human tool can do that.  But it provides a baseline for management.  You construct a plan that enables the organization to maintain or improve its financial health, based on well-thought-out assumptions.  As the future becomes the present, you will need to make adjustments.  The planning system enables you to make all the adjustments needed to achieve a well-balanced result.

Successful Nonprofits Know This Secret

The Secret: Part 1

 

The most successful nonprofit organizations I know share a common trait.

 

I realized this as I drove home from a board meeting the other night, and reflected on management’s good report.

 

The organization had navigated the bleak economic environment of 2009 with remarkable success.  While revenue growth lagged behind demands for services, at least there was some growth.  A few staff positions were eliminated – all through attrition – but this enabled the organization to redeploy resources to high-impact programs that had enhanced both its reach and its reputation.

 

What was their secret?  Excellent financial management.  In my experience, the most successful nonprofits are the best-managed financially.

 

Today’s difficult economy magnifies the importance of financial management for nonprofits.  Donors gravitate to well-managed organizations – that know how to use their resources to achieve their goals.  When times are hard, donor scrutiny is heightened.  Successful organizations tend to receive an even bigger share of contributed funds; struggling organizations struggle all the more.

 

You may wonder whether I’m confusing efficiency with effectiveness.  Just because an organization has good financial practices doesn’t mean that it’s meeting the most important needs in the community.  In fact, sometimes organizations lose their focus as they add layers of bureaucracy in the name of good management.

 

That’s all true.  But it’s also true that efficiency and effectiveness tend to go together.  All good leaders want to assure that the organization’s resources are being used for the purpose intended, and are not being wasted through poor practices.  To make this good intention a reality requires a systematic approach, and the discipline to manage systematically.  Well-designed information system enable managers to gauge both efficiency and effectiveness. 

 

There are two critical dimensions to good financial management:  1) the ability to budget and plan effectively, and 2) an effective system of controls over resources.  In the next two days we’ll examine these two dimensions more closely.

Part 2: Performance Measurement is Powerful – For Better or For Worse

To read Part 1, see below.

 

I showed the supervisor the capacity analysis I had brought with me.  I explained to him how crucial to the plant’s overall performance was every hour of production in his department.  I pointed out that if we assigned additional machinists to assure the machines didn’t stop during breaks, it would help the plant’s output significantly.

He looked at me like I was the dumbest thing he’d seen in a long time.  Then he showed me his numbers.  His performance as a supervisor was based on his department’s labor utilization.  This is calculated by dividing the number of hours that his machinists were actually making parts on machines divided by the number of hours that they were paid for.

I was absolutely right:  Every additional hour on those machines would have benefited the plant no matter how much they cost. 

But he was right too.  If he had done the far-sighted thing for the good of the company, his labor utilization would have dropped, and his manager would have been down on him like a literature professor on a vampire novel. 

This supervisor was being measured solely on his department’s efficiency.  In this case, his efforts to achieve maximum efficiency, as defined by the way his performance was measured, actually led to lower output for the plant as a whole. 

This highlights the key challenge with bottom-up measurement systems.  It is very difficult to assure that a series of grass-roots measures lead to the best overall result.  There are almost always unintended and unanticipated side-effects.  In some cases, they can actually motivate managers to work against the company’s overall mission.

Performance Measurement is Powerful – For Better or For Worse

Here’s a fact of managerial life I’ve learned from experience:  When managers measure results from an activity or process, the results almost always improve.

I realize that’s not an original insight.  In fact, it’s one of the oldest truisms in management theory.

 

But there’s a follow-on question that’s a little more difficult:  If measurement is such a powerful tool for improving results, why aren’t results always improving?

 

There are two basic approaches to measuring performance.  Some managers prefer a bottom-up approach, seeking to focus on processes at the lowest possible level.  When more information is provided to front-line employees on the shop floor or in the customer service team, those employees are able to make better decisions.

 

But it’s not uncommon to see uniformly good performance indicated by these process measures within a company that is not succeeding.  One reason this happens is that the measures are poorly designed.

 

Some years ago I was studying a large manufacturing plant that was struggling to keep up with demand.  It produced incredibly complex machine tools with many component parts.  Due to exacting specifications, many of these components were produced in-house.  The plant housed the largest machining operation I’d ever seen.

 

Working with the plant’s industrial engineers to understand where production bottlenecks were occurring, I saw that, by most indicators, production capacity was adequate.  Only a few machining centers seemed to be overloaded.

 

I went to visit the supervisor of one of the overloaded machining centers at lunchtime so I could gain his perspective.  When I got there, I was shocked to see the machines sitting idle.