The CFO'S Perspective

Originally published: Dec 20, 2022
Updated: April 8, 2024

According to the Society for Human Resources Management (SHRM) the U.S. job market has finally ushered in positive employment growth after several years of decline. However, growth is occurring far slower than employment analysts would have liked to see. In the nonprofit space, hiring remains challenging, especially within more skilled, technical, and senior-level roles.

How should nonprofit organizations overcome today’s hiring challenges?

Our team is used to discussing what’s included in a CFO’s job description. But this type of conversation usually centers around the commonalities that unite all CFO roles, not the nuanced differences for a specific industry or type of organization. But when talking about what a CFO for a nonprofit does, there are some unique elements to the role that are important to understand.

Just the other day we were working with a client who came to us and said, “We need help with an important grant request. How do we know which expenses to include in our overhead costs? And how should we word those expenses appropriately in our proposal?” We were able to help and now we want to share the wisdom that we offered him to help you the next time you write a grant proposal.

Anyone who has ever worked with grants knows that budgeting can be one of the most difficult parts of the grant request process. To be effective a grant proposal needs to include both the direct costs of running the program(s) that the grant will be used for as well as the indirect costs (or overhead costs) associated with offering programming.

Organizations that do not appropriately account for overhead costs such as payroll, rent, utilities, and technology will not be entirely compensated for the full cost of running the programs that they offer, which can jeopardize their long-term sustainability. Simply put, an organization that cannot cover their overhead costs won’t have the operating budget needed to provide their programs and offerings to their community, which in turn can:

• Reduce reach and effectiveness.
• Negatively affect morale and increase turnover.
• Threaten the long-term viability of the organization.

Do you truly understand how your organization is funded? And do know why it matters that you do?

Unfortunately, too often nonprofit leaders and board members only have a vague sense of how their organizations are funded and what that means for furthering their missions. This is a problem because funding is an integral part of an organization’s success, and the right funding mix is essential for the growth and maintenance of any nonprofit.

An organization’s funding mix can influence its overall financial health as well as determine its reach, capacity, operational flexibility, and long-term sustainability. To strike a balance between flexibility and sustainability, nonprofit leadership must have a firm handle on how the organization’s funding sources are diversified and what kind of implications that has for the organization.

Over the last decade it has gotten harder to understand and evaluate the indirect cost rates being applied to grants. Nonprofit leadership has struggled to keep up as the requirements and recommendations around indirect cost rate calculations have shifted and changed. And yet, this work remains critically important to the effective financial management of nonprofit organizations because without accounting for indirect costs correctly nonprofits cannot cover their overhead.

Unless the expense of overhead costs such as rent, utilities, technology, and payroll are recouped through funding, an organization cannot be fully compensated for what it costs to run the programs that they offer, jeopardizing their ability to offer not only those programs but maintain other vital initiatives in the community as well. Therefore, properly calculating indirect cost rates is a cornerstone of effective grant management for nonprofits.

Sometimes in our professional lives we do things because we think they are a smart business move. Sometimes we act because we have no choice because the market demands it. Sometimes we take positions or actions because we are thinking about our company’s ethos and reputation in the community.

Every now and then, those things are at odds with each other. And other times, they align perfectly.

Paying attention to and acting on diversity in your business is one issue that can help you align all those facets of your business. It can help you show the world (your employees, clients, and potential customers) who you are, what you value, how the way you value people and business shows up in your work. It can also help you refine your thinking and actions to make all that public positioning real!

As in any industry these days, technology utilization in nonprofit organizations is on the rise. Nonprofits are using technology to shape everything from how they communicate to how they fulfill their missions with greater efficiency and effectiveness than ever before.

In a Harvard Business Review article on the smart tech transformation occurring in nonprofits, Allison Fine and Beth Kanter summarize,

“The use of smart tech by social service agencies and other nonprofits exploded during the pandemic. For example, food banks deployed robots to pack meals; homeless services agencies used chatbots to give legal and mental health advice; and fundraising departments turned to AI-powered software to identify potential donors. At many nonprofits, smart tech is becoming integrated into internal workflows, fundraising, communications, finance operations, and service delivery efforts, freeing up staff to focus on deeper societal changes that need to be made — such as addressing the root causes of homelessness in addition to serving homeless people. While smart tech helped scores of nonprofits to pivot to suddenly remote and digital delivery of programs and services at the start of the pandemic, it may also enable them to turn the page on an era of frantic busyness and scarcity mindsets to one in which nonprofit organizations have the time to think and plan — and even dream.”

It is not difficult to understand that a nonprofit organization needs money to accomplish its mission. And yet, in looking at nonprofits it is clear that they are so much more than the money they have to invest in programs and initiatives around a particular mission or cause. Nonprofits are made up of passionate people that care about making a difference and serving others with whatever resources they have available. But how much they need and how much donors are willing to give them hinges on understanding how they can use what they have to do what they do, which is called their Return on Investment (ROI).

Without knowing what kind of a return a nonprofit can achieve it cannot secure grants or attract donors effectively. So, how do you calculate nonprofit ROI?