Nonprofits are similar to for-profit companies in that they run businesses with the same type of accounting, budgeting, and forecasting as any company does. But, the fundamental financial reporting rules that a nonprofit operates under are different from the standards for businesses in general. Nonprofits have the added responsibility of making sure that donors know how grant money is spent and of being able to show that they have adhered to legal requirements.
Fractional CFO support could be one solution here. A fractional CFO can assist the nonprofit management team in understanding financial reports, managing funds, planning budgets, board meetings, and implementing financial controls that don't come with the cost of a full-time CFO.
However, financial management of nonprofit organizations is not only limited to the traditional business accounting methods. For instance, tracking fund use in different areas, restricted contributions, grant conditions, donor stipulations, program reporting and nonprofit compliance are elements of how an accountant tracks and presents financial data.
A clear differentiation between a for-profit business and a nonprofit organization when it comes to finance is that besides accounting they also have a legal obligation towards their benefactors i.e. their fund donors that the organization is spending the money based on the purpose that was outlined.
How Fractional CFO Services for Nonprofits Differ From For-Profit Engagements
Probably, the most major difference is the aim of financial reporting and resource utilization.
While a company that makes money mainly wants to show profits, shareholders' value, cash flow, and return on investment, there is another type of non-profit organization that should illustrate how well the management of resources was done apart from its own progress about its mission.
As a result, fractional CFOs of non-profits may pay more attention to restricted funds, program expenses, grant compliance, liquidity, and board oversight.
Although a non-profit CFO might still do revenue expense margin, cash flow, and forecast analysis, these figures will be viewed in non-profit systems.
To take one instance, a rise in revenue doesn't automatically mean that there is much money to use. The donor's gift to a certain program might be restricted, or there might be specific restrictions set out for the grant money to cover a particular kind of spending. The CFO is expected to assist the management staff in finding out not only the amount of money the organization has, but also the amount of money that they are entitled to use.
Fund Accounting and Restricted Grants Explained
Fund accounting is a method employed by non-profits for managing their assets by identifying different restrictions or purposes for each set of resources instead of simply treating all their finances as one big general fund.
The fund itself refers to a collection of resources which can only be used for the stated specific purpose or restriction. The organization has a necessity to monitor separately how such resources were acquired, spent, and reported.
A case in point: a nonprofit would get
- An unrestricted donation which senior staff members can allocate for regular operations activities.
- A donor-restricted gift meant exclusively for a single program.
- A grant conditioned only to eligible capital expenditures.
- Assets marked by the board of directors internally for a certain aim
All of these funds might be used in helping the organization to achieve its goals financially, but they won't have the same type of spending liberty.
To clarify why dividing up business revenues through different departments or cost centers only scratches the surface of the issue, note that fund accounting emphasizes the accountability and use of resources that are under certain restrictions, whereas nonprofit financial reporting statements adhere to the same accounting standards, e. g. for net assets and activities.
Still, an external business strategist could be instrumental in the design of financial reporting systems which would let management comprehend at a glance the company's overall financial health alongside its individual restricted or designated financials,
What Nonprofit Boards Expect From Fractional CFO Services
Nonprofit Boards really help in their organization by providing effective supervision.
They rely on financial information that not only enables them to assess the financial viability of the organization but also helps them identify the possible risks and support the decision making process at the board level.
Because of this a Fractional CFO service package usually contains a feature of providing/creating board-level financial reports.
In most cases, directors of boards do not require the details of every single transaction or accounting entries. Rather, a clear view of the main areas is all that would be a help to them.
Some of the items that could be part of an effective board financial reporting package:
- Statement of the financial position
- Statement of income or activities
- Statement of changes in cash and cash equivalents
- Comparisons of budgets and actuals
- Liquid money and emergency reserve funds
- Work involving grants or restricted-funds
- Key patterns in revenues
- Fund and expense of operations
- Estimates and financial scenarios
- Major financial risks or impending obligations
A Fractional CFO can also assist in explaining these financials. For instance, in case the total expenses exceed the budget the board should be informed of whether this disparity was just short term, was linked with the program, resulted from timing, or signalled the budget needs to be changed.
This approach transforms financial reporting into a governance tool rather than only a matter of meeting regulations.
Budgeting for Grant Cycles and Donor Restrictions
Budgeting is complicated more when a nonprofit Mostly depends on grants and restricted contributions.
The revenue management for an ordinary business is usually based on expected operational expenses. In a nonprofit However they may have to deal with funds received through different agreements and each one of these might limit the types of expenses, frequency of reports required, and other conditions.
This is the main reason that managing funds from grants plays a large role in the financial planning of a nonprofit organization.
If a nonprofit is hiring a Fractional CFO, management can connect the grant spending to the company's general financial planning, together with these matters:
- The grant award amount and spending restrictions
- Grant period and reporting deadline
- Eligible vs. not eligible expenses
- Salary and program expenses
- Matching or cost-share requirements
- Timing when the grant money is collected
- Balance of restricted contributions
- Unspent grant balances
- Fund raising forecasted
Throughout the course of a grant period a Financial Officer can be also checking the difference between the actual figures and the grant budget.
To give an example, if a grant allows only certain program personnel funding while in practice personnel costs are less than the granted amount, management would have to assess whether the savings can be transferred or whether the leftover should be returned or carried forward as the grant's clauses.
We can expect a nonprofit to come under financial pressure even when they are being well funded through grants since reimbursement-based grants might not provide actual money until eligible expenses have already happened.A competent Financial Officer team looks after both fund and expenditure restrictions at the same time when estimating the company's availability for cash.
Compliance Requirements Unique to Nonprofits
Nonprofit financial management covers the responsibility of compliance which is usually a part of the nonprofit world and may not be required for normal for-profit company operations.
Nonprofit financial compliance can include federal state grantor, and organizational rules.
How these are to be applied really depends on various factors, such as the nonprofit's entity activities, sources of funding, and its exempt status.
Beyond being tax-exempt, a U.S. public charity or a qualified organization will be under the federal requirement to file form 990 annually with the IRS, except when they qualify for some kind of applicable exception. The other case is grantmaking entities, if a nonprofit gets a Federal grant, the nonprofit should be required to be subject to Federal grant rules that, e.g. the uniform grant Guidance structure shall be applicable where it is so required. Charitable solicitation registration, annual reports, tax filings, and other obligations can also be a source of state-level requirements.
A fractional CFO can help set up routines for watching compliance to meet these requirements and also making sure there will be sufficient financial records to support mandatory reporting. Yet, the scope of the CFO should be strictly the financial matters and not legal or tax advice ones. Because of the organizational setting and other relevant factors, a nonprofit may require a CPA, tax professional, attorney, or one in the field of grant compliance Beyond the CFO.
Financial Controls as Means of Increasing Accountability
Internal controls, which serve the purpose of making the compliance possible, are a natural partner to compliance itself. In fact, a nonprofit might need clear, well-written internal controls on these issues:
- Expenditure approval
- Delegation of financial responsibilities
- Payment authorization
- Restricted gift recording
- Tracking expenditure incurred in implementing grants
- Bank account and financial reconciliation
- Budgetary results review
- Records of financial decisions
Using a part-time chief financial officer can assist in finding whether or not these processes are appropriate given the size of the nonprofit and its risk profile.
Establishing controls is not intended to add paperwork, but to make the protection of your nonprofit's resources easier; to allow financial statement preparation on a reliable basis; and to demonstrate good resource stewardship, which will help to gain and keep donor confidence.
Building a Financial Strategy Around the Mission
The best nonprofit financial strategy links financial decisions to the mission.
A fractional CFO can help leadership answer questions such as:
- Are existing programs really 'aimed at sustainability' in the light of current level of funding?
- To determine the available unrestricted cash costs should be examined.
- Is the money being used for its intended purpose?
- What if the centrally funded major grant no longer exists?
- What level of reserves should the organization hold?
- What funding is needed by each program?
- Is it viable to support planned recruitment or growth?
- How Will the Future Cash Flow be Impacted if Funding Changes?
- This forward thinking perspective is one of the most important advantages of services to nonprofit CFO.
Instead of simply asking if the organization got within this year's budget, command staff can ask whether the financial structure of the organization aligns with the mission for the next three to five years.
Create rolling forecasts, scenario models, reserve forecasts, and funding requests that will enable the board and management team to anticipate various scenarios.
Leading the finances of a nonprofit organization demands more than just a simple adaptation of a business model of accounting for a purpose driven mission. The role of the financial team in the nonprofit must reflect In reality the organization's accounts are a fund-based accounting, donor-imposed restrictions exist, grant regulations have to be obeyed, the board has its role and responsibilities, there needs to be a compliance regime and that the organization is sustainable.
Hiring a fractional CFO is a great way for a nonprofit organization to get the expertise of an experienced CFO at a fraction of the cost. A fractional CFO can support the nonprofit in numerous ways, e.g. enhancing board reports, managing the use of grant money, developing internal controls, and making strategic forecasts, helping the leaders to make more informed choices, yet still being responsible to the resources that are being handed over to the organization.
For a nonprofit that does not merely need correct figures but wants to understand the figures, their meaning, possible uses of resources, restrictions on it, and whether the organization's financial design allows it to continue supporting its mission is the final aim of the financial department.
