ROLE OF THE NONPROFIT CFO IN EXECUTIVE MANAGEMENT
Program Managers Part 1
The CFO is often viewed by program managers as the enforcer of rules and deadlines who talks at board meetings about strange things like GAAP, balance sheets, and expense accruals. In my first year as CFO for a large nonprofit, I requested a budget meeting with a program manager I’ll call Justine. After about an hour she became visibly exasperated, even a bit desperate. When she answered the fifth call she said “I’m trapped here in accounting and I don’t know when I’ll be back.” Over the next year or two I learned to run meetings more efficiently and she learned that the time we spent together was helpful to her as she struggled with annual budgeting, grant applications, and grants management.
I earned Justine’s trust by showing that I cared about her programs, by reading the brochures and asking questions about how they operate step-by-step. Her initial attitude was why does a money person have to concern herself with how I operate my program? She eventually discovered that I could use my knowledge and experience to help her maximize her resources if I understood what the staff did and how the department operated from day to day. She also found out that I sometimes served as spokesperson with the ED, the board, and even funding sources. The relationship we forged paid off handsomely over our fifteen years together.
ANNUAL BUDGET
“Budget Deadline” are words that no program manager wants to hear. Well-crafted budgets take an inordinate amount of time. The CFO can endear herself to the program managers by shouldering as much of the burden as possible and demonstrating her commitment to keeping services intact in bad years, and improving services when funds are available.
Payroll detail and cost allocations are the best examples of budget headaches that are improved with friendly collaboration between Program and Finance.
Payroll Detail
An up-to-date payroll schedule by employee is central to the budgeting process. For sure, Finance needs to know about personnel changes and the manager’s plans, but the hard work of making reliable payroll data accessible to the manager falls to Finance.
Cost Allocations
I have seen EDs fall into the trap of giving inadequately funded programs a break on overhead cost. I have also seen cost allocations misused to pad expenses in generously funded programs. My philosophy is to steadfastly stick to the position that programs must show their true costs, including allocations, whatever the effect on the bottom line. Each program budget tells the story of its financial health. If you cover up your strengths and weaknesses your board will not have the true picture of where help is needed, or when hard decisions are called for.
I will also say that allocations are estimates, and different methodologies yield different results. The CFO’s charge is to arrive at the most beneficial allocation method while staying within the bounds of reasonableness.
In organizations with multiple programs, the program manager is often ill-equipped to understand the complexities or the importance of cost allocations. Areas affected are indirect payroll, space costs, overhead, and some operating expenses. The CFO who cares about the program’s mission will take great care in reading funding documents, understanding where staff and supervisors spend their time, and how space is used.
Payroll allocations
Payroll costs for staff and supervisors who divide their time between different programs can be allocated in a number of ways, such as by FTEs, program participants, or expenses. But sometimes the best method is “time spent.” This involves well-thought-out estimates of the average amount of time spent in each program. Carefully written narrative documentation that will pass muster with an auditor is a must when this method is chosen.
Overhead
Program managers have little or no control over health insurance, occupancy, and administrative overhead costs. They are often frustrated by the appearance of these costs in their budgets, especially when the program is struggling. You, as CFO, can help them accept this reality by using reasonable and consistent allocation methods and explaining the importance of even-handed allocation of overhead costs.
Operating expenses
Operating expenses such as office supplies and vehicle costs are also subject to allocation. A group of programs may share a fleet of vehicles or collectively buy office supplies. Various options for allocation are available, such as FTEs, program expenses, or again, a more subjective approach that can be defended with good narrative documentation.
Some additional takeaways from my approach to budgets and allocated costs:
· Budget inaccuracies will reveal themselves when the budget-to-actual reports come out. If the program manager’s estimates don’t smell right, better to have it out with him now than get stuck with explaining the variances to the finance committee halfway through the year.
· Be resourceful in searching for the defensible allocation method that produces the best result for the program.
· Prepare excellent documentation that shows your calculations and your reasoning for the method chosen.
GRANT APPLICATIONS AND GRANTS ADMINISTRATION
Program managers may hate grant applications even more than they hate the annual budget. An experienced CFO sits on a trove of information that the program manager needs. All too often the CFO’s assistance in preparing an application is sought as an afterthought to perform budget calculations and formatting. And sometimes the CFO first learns about a new grant when the contract is received! Your shop can do better than that. The CFO should be a full-fledged member of the team beginning with project design and ending with the final report. What does the CFO bring to the table?
Applications
· Knowledge of GAAP rules
Revenue recognition has become a hot topic in the CPA/CFO-verse and it applies to grant applications directly. The CFO should be consulted at the outset on potential effects of revenue recognition rules.
· Awareness of the importance of cost allocations
Didn’t we just talk about that? Cost allocations are pervasive, and they most certainly affect grant applications. At the initial planning meetings the CFO can ask: How does this project fit with existing programs? How will we allocate costs between related programs? How can we avoid the perils of “double dipping”? Are we sure that spreading costs to the new program will not result in underspending current grants? Will we be able to meet matching requirements?
· Program design support
An application prepared in haste without the CFO’s input leaves Finance holding the bag later when the claims and reports are due. For sure, the CFO who meddles in program design will become unpopular very quickly. However, a well-placed word here or there may be called for if it appears that people are getting carried away with the scale of the proposed activities. Equally dangerous is the tendency to leave out costs. One cannot count the times that a grant application has been submitted with no M&G or occupancy cost.
Grants Administration – monitoring spending
Once the grant application is approved by the funder and the program launched, the program director turns her attention to other things. While it falls on Finance to properly record revenues and expenses, claim funding, and submit financial reports, it is up to the program manager to stay true to the budget. Over- or underspending grants is a hazard to be avoided, resulting in deficits or return of funding. Deficits are a drag on the organization’s financial health, and return of funding is, generally speaking, a gigantic fail for both the agency and the funder. Finance can help with regular reports and warnings when the rate of spending is diverging from the budget.
The CFO is often the wet blanket at the party. There is nothing sexy about deadlines, cost allocations, audit risks, or GAAP rules. But, with some effort, you can prove to the program manager that your purpose is more than keeping the organization on the straight and narrow: In your own geeky way, you are invested in seeing the programs thrive.