The Philadelphia Folksong Society is broke. I’ve been a member for a long time and a big fan of their summer festival. This nonprofit organization is not alone in their financial struggle. Over the last year I stepped away from multiple nonprofit organizations where I was the accountant, director, or controller under a range of similar circumstances. From my perspective, it feels like a tsunami collapsing these good organizations with great people supporting good causes. The common thread among all of my decisions was the organization’s lack of adequate funding or commitment to do things the way that government, donors and the public expect. Often a crisis emerged as Covid funding dried up. These weaknesses could no longer be ignored. I felt the only option I had was to disengage.
Nonprofit organizations are led by boards of directors. There are no owners or shareholders. The directors are often volunteers and many boards lack representation of anyone with real nonprofit management expertise. Many do not meet what might be considered core competency. (See “What Every Nonprofit Director Should Know” program outline). Too many nonprofit organizations lack a business plan. Most nonprofit organizations that I see lack an adequate sales strategy. Even when “sales” means only soliciting grants or donation, there must be an effective and accountable policy for producing revenue.
It takes time to see macroeconomic treads so I do not have any real insight into what appears to be a trend based on these anecdotal experiences. But it is safe to say, based on consensus of other accountants’ casual sources, that a significant portion of nonprofit organizations are not generating enough revenue to be sustainable. A lack of adequate revenue is often associated with cutting corners, incomplete disclosures, increased business risks, accruing debts, and sloppy accounting.
Many nonprofit organizations maintain an an antiquated belief that boards should be composed of uncompensated members. This is usually a harmful strategy pinned on false beliefs. Too many nonprofits choose directors because they are ‘great people committed to the cause’. That is not enough. It would be easy to launch into a discussion of why this strategy hurts modern day nonprofits for a range of reasons; a discussion that would certainly include pointing out how this excludes the working class people who can most effectively produce more revenue for the nonprofit organization. But that larger discussion is outside of the scope of this post.
How do nonprofit directors gain and maintain these specific skills? Nonprofit management at the board level should include ongoing training for directors in the rapidly evolving field nonprofit governance issues. Board member activity should also include professional engagement with a nonprofit-focused attorney or accountant in an external oversight role. This can be at the board level or as outside counsel. There must be some built-in mechanism or resource available to the board members to ensure that the organization’s management is aligned with supporting the publicly stated strategies. In small nonprofits, maintaining internal and external controls and full disclosure is often challenging. In fact, I would argue that most nonprofits have a disincentive to do this.
It is not enough to have a board made up of people who are accomplished in their roles outside of the nonprofit board position. Nonprofit board skill requirements are quite different than those required for running a for profit company. Specifically, the nonprofit structure adds a level of accountability to external stakeholders and also creates incentives to avoid this responsibility. Board leadership must have both the skills and the drive to produce financial results for the organization or, alternately, the skills and motivation to hire and oversee others in these key roles.
While these challenges affect nonprofits of all sizes, the problems are most acute with the smallest organizations. Almost all of the nonprofit organizations I’ve looked at with revenues under $500,000 face these substantial risks. The only viable strategy seems to be “let’s do as much as we can with as much as we have to work with”. I’m saying that in many cases this strategy is not working.
The simple truth is that the nonprofit business structure has always offered fertile ground for poor financial management practices, self-dealing, and sometimes outright fraud. It would not be reasonable to expect that atmosphere is going to change. Instead, we should focus our expectations on ensuring that the nonprofit organizations we choose to affiliate with have adequate plans in place, including the strong revenue to support these plan, to deal with these inherent operational risks.