The Skills to Pay the Bills

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The Skills to Pay the Bills

The Importance of Strong Financial Management for Organizations Serving Young People

Nonprofit organizations serving young people exist to provide meaningful opportunities for those young people to build their skills; experience positive, supportive relationships; and prepare for the future. No one would judge an organization's worth by its financial soundness alone, but financially unhealthy programs threaten an organization's ability to achieve its mission. Unfortunately, although they are critical to effective management, core organizational capabilities and effective administrative functions often are mistakenly perceived as peripheral to an organization's mission.1

To the contrary, good financial management is essential to effective youth interventions. First, it enables organizations to plan strategically: A clear understanding of the resources needed to serve program participants well serves as a guide to fund-raising efforts. It also provides information on the types of investments in an organization's core capabilities - management, support functions, and infrastructure - that need to be made to sustain program quality. Second, good financial management means organizations can deploy their resources thoughtfully. It enables them to predict the impact of changing circumstances, such as funding delays or shortfalls, and respond to them while managing their effect on program quality. This report examines what happened to a group of organizations that attempted to strengthen their financial management systems from 2009 to 2013.

The Current State of Financial Management

Good financial management is not easily achieved in organizations that often have grown organically out of community need, funders' compassion, and the passion and good ideas of people committed to bettering young people's lives. Indeed, weakness in financial management is pervasive across the nonprofit sector. The following problems were common among participating organizations at the beginning of the current study:

  • Staff members with less than optimal financial management skills, understaffed financial departments, and underdeveloped information technology (IT) systems created inefficiencies in routine tasks. Staff members in organizations' financial departments often operated in crisis mode or were absorbed with daily tasks such as paying bills and responding to funder requests, leaving long-term financial planning functions underdeveloped. This could potentially have serious consequences for organizational sustainability and efficiency.
  • A lack of transparency regarding organizations' financial positions, and an absence of useful forecasts, meant leaders often could not make informed choices about program and organizational needs.
  • Incomplete understanding of the true costs of program delivery, including the support functions necessary for high-quality programs, left those programs chronically underfunded.
  • Organizations' financial staff members operated in isolation, with few connections to staff members who understood the resources needed to support and strengthen programs and who knew how to respond effectively to weaknesses.

The challenges that arise as a result of poor internal financial practices are exacerbated by certain funder practices. Funders place limits on allowable overhead that are often insufficient for organizations to manage programs well. Funding is often insecure, obtained through short-term contracts. And payments for contracted services may be late - sometimes many months late.

The Wallace Foundation Initiative to Strengthen Financial Management in Nonprofit Organizations

Recognizing these challenges, the Wallace Foundation - which has a long-standing commitment to improving the quality of services for young people - set up the Strengthening Financial Management in Out-of-School Time (SFM) project. The aim was to equip organizations with the ability to plan and manage their financial resources and increase their potential to deliver high-quality services, and at the same time to record lessons from the experience to aid the many organizations that face similar challenges. The foundation took a three-pronged approach:

  1. Directly build the financial management capabilities of organizations serving young people.
  2. Work with funders and policymakers to reform practices that strain the ability of organizations to manage their resources well.
  3. Fund research into the project and inform a wide audience about the effects of this approach (or lack thereof).

Staff members from 25 organizations that provided a variety of out-of-school-time programs for Chicago young people participated in the initiative.2 Their budgets ranged from $800,000 to $36 million, although most had budgets of $3 million to $8 million at the initiative's beginning. All fell short on some or many aspects of financial management.

The 25 organizations were divided into two groups based on the Wallace Foundation's assessment of the level of intervention they could undertake. From 2009 to 2013, Fiscal Management Associates (FMA), a consulting firm that works with nonprofit organizations and foundations to strengthen financial practices, provided all of the organizations with access to peer networking opportunities, and provided each of the two groups with one of two models of consulting and training. The two models varied in the amount and type of professional development assistance offered to the organizations involved. This report refers to the more intensive intervention as the "customized learning plus group learning" model (or "customized learning," for short), and refers to the other intervention as the "group learning" model. See Table ES.1 for a brief description of the models. Many of the activities involved the participating organizations' senior leaders, particularly the chief executive officers and chief financial officers (CEOs and CFOs), although other fiscal and program staff members participated when appropriate. Importantly, the professional development support provided mostly occurred during the first two years of the initiative. In addition to paying for that support the Wallace Foundation provided grants to the organizations to enable them to undertake the work, and the amount and timing of those grants also differed between the two groups of organizations.

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  1. Though many organizations use the term "capacity," this report uses the term "capability" throughout.
  2. Twenty-six organizations were initially selected to participate in the initiative, but one dropped out shortly after selection and was therefore excluded from the evaluation. Another closed due to financial problems in the initiative's penultimate year.