HAVING spent most of my working life as a slave to profits and shareholder return, I am intrigued by the starkly contrasting financial dynamics and challenges faced by FDs across organisations in the not-for-profit sector.
Unlike certain businesses that are non-profit by accident, this is a sector whose organisations exist to serve purposes above and beyond making shareholder returns, and where the word ‘profit’ is substituted by the more tasteful ‘surplus’.
This is not distributed, but utilised to facilitate the organisation’s mission, purpose or impact. Beyond charities and public bodies, this sector includes healthcare, education, housing associations, research and many NGOs. The characteristics of their structures are varied: some are trusts, some are limited by guarantee, and many are registered charities, although not charities in the pure sense.
The application of financial measures must be very challenging within this sector. How is it possible to put a financial value on the outcomes achieved by some of these organisations? Who are the stakeholders? How are priorities decided in a model of limited resource? How is success measured? Is there ever sufficient funding? How do they compile financial forecasts? Are these organisations run as businesses? Fundamentally, how influential is the FD in these circumstances?
Of course, no single solution fits all and it is obvious that a sudden humanitarian crisis would present more immediate and different challenges than, say, the demands faced by universities and hospitals. And many organisations suffer the stresses of heavy regulation.
Additional challenges lie in the area of governance, where the traditional NED role may not exist but there may be governors, trustees or councils. Boards may consist of stakeholder representatives and volunteers, with accountability and capability open to interpretation. Public scrutiny and the duty of candour may be also become a heavy burden.
Competition can be confused, with examples of charity shops trading at an advantage over other businesses as they enjoy favourable business rates, taxation and unpaid volunteers. Charity status creates an unlevel playing field when set against shareholder organisations. On the other hand, private sector groups have pursued what they thought were lucrative contracts that they have subsequently found not to their appetite, resulting in the not-for-profit sector having to step in to maintain continuity of essential services.
What is the role of the FD in all of this? The relentless pursuit of efficiencies, cost avoidance and optimum cashflow is a given, along with the day-to-day financial management, governance, accounting and reporting. However, the FD might not be the primary force in allocating resources. In these situations, the FD might be seen as the team member with the responsibility to facilitate the provision of financial resources or to point out where doing so would put other commitments at risk. But doing this without objective financial measures of success has its limitations, and being the ‘bad guy’ might be an unattractive role.
One organisation – whose FD I know well – has developed an economic model which utilises a full cost approach to every project. The operational staff must provide a coherent justification, articulating the projected outcomes and using subjective measures supplemented by a range of statistical but non-financial measures. Projects are reviewed by an investment committee selected from across the organisation, and a pot is set aside to cover sudden needs.
I have spoken to a number of CEOs in this sector who say they seek maximum support, creativity and contribution from their FDs. They typify the attitudes and demands of most CEOs that I know in the commercial sector where the CFO and FD roles are hugely influential. That must provide a great opportunity for FDs across the not-for-profit sector. ?
Last month, the SFD was in New York – on business – home to some huge non-profit organisations sitting alongside some of the world’s most profitable, where altruistic giving is a lifestyle statement