The role of nonprofit chief financial officers continues to evolve as they confront a changing environment brought on by a confluence of events, two experienced professionals told those attending a session of the Foundation for Accounting Education's 45th Annual Nonprofit Conference on Jan. 19.
The top challenge for nonprofit CFOs is the workforce, said Amy West, the executive vice president and CFO of AHRC New York City.
“Surveys say this will be the number one challenge for all, not just not for profits,” she said. “Recruitment and retention will be difficult in 2023.”
Inflation and the economy were her next top challenges because “unlike the private sector, we cannot pass along increases to customers.”
Travis Carey, founder and CEO of Carey & Co. and the chair of the NYSSCPA's Tax Exempt Organizations Committee, agreed.
“What we are watching now is the cumulative effect,” he said. “We are facing a different macroeconomic environment than we have seen.” He noted that after the 2008-09 financial crisis, there had been steady economic growth, stock market gains, low interest rates, stable employment and supply chain predictability.
That is no longer the case, he said, pointing to problems such as uncertain revenue and rising costs, which make forecasting more difficult. He added that it has never been harder to get a group to agree on a set of assumptions, and that pandemic stimulus, remote work and the economy have made traditional comparable data less reliable.
The long-term consequences—such as the sustainable amount of expense, the amount of the operating reserve, accounting pronouncements and interests rates’ impact on financial statements, to name a few—can be addressed with a few solutions, he said. They include being strategic with time and effort, understanding that comparable data isn’t what it used to be, providing scenarios and analyses, making longer projections but being willing to adjust them, and making tough choices.
“We know that there are a lot of things that we cannot control,” said West. “The more we identify risk, [the more] we can be prepared to manage it.”
Broadly defining risk as “the potential for harm or financial loss,” Carey said that it can hit in any of five areas: financial costs, loss of funding, management time and effort, employee turnover, and insurance costs.
“Risk is impact and livelihood,” he said.
West mentioned funding as another challenge for CFOs. “Without question, grant funding will decrease because of dependence on financial markets,” she said.
Outsourcing was another prominent part of the conversation.
“What we’re seeing is more accounting and HR functions being outsourced,” said West. “Seventy-five percent [of nonprofits] outsource payroll function or some portion of it.” Other areas commonly outsourced by nonprofits are fundraising and gift processing, information technology, marketing and communications, risk management, legal services, strategic plan development and auxiliary services, she said.
An advantage of outsourcing is that it “provides specialized skills,” she said. “It helps smaller organizations that lack infrastructure. It also helps them build capacity, increase access to technology and navigate a tough regulatory and compliance [environment].”
There are challenges as well arising from outsourcing. “Loss of control is number one,” she said. While outsourcing may free up staff to do more important things, it could also hurt morale. Managers “must explain to staff why the function is being outsourced,” she said, adding that outsourcing can increase risk.
“Organizations can outsource tasks but can’t outsource responsibility,” she said, outlining good practices, such as evaluation of cost and operating effectiveness, due diligence and selection of service providers, and contract provisions.
Moving to a discussion of the role of the nonprofit CFO, both agreed that it continues to expand in scope, as the CFO takes on more responsibilities, in addition to keeping up with the day-to-day ones.
“Very few of the CFOs I meet today are just solely doing financial stuff,” said West. While “still responsible for maintaining cash flow and financial processes, working with auditors and, of course, learning the new lease accounting standard,” nonprofit CFOs are now expected to drive long-term performance, she said. She noted that some of her peers disagree, maintaining that they should focus on financial responsibility.
“The CFO sees everything that goes on in an organization and can identify where it has gaps and how to fill them,” West said. To address the CFO’s growing portfolio, it is important to enhance collaboration by aligning the different C-level functions, she said.
Talent management is a key component of this portfolio, too. She urged nonprofit organizations to invest in their employees.
“How does the CFO manage talent? Do you have the right people in the right jobs?” she asked, citing finance as one of the critical positions. “Once we find these people that are really hard to find, how do we keep them? And it’s not all about compensation. Yes, you need to pay them fairly, but career development and growth opportunities are proven retention tools.”
CFOs can help themselves in this environment by doing a number of things, she said. They include leading by example, proactively shaping the organization’s agenda, stepping outside of their financial comfort zone and communicating, she said.
“The strategic CFO needs to spend more time working with the board on strategic vision,” she said, by expanding the board’s focus and updating the board's governance structures to address new challenges and issues.
In order for nonprofit CFOs to be successful in their rapidly changing roles, the duo concluded, they should build the right finance team, optimize the use of automation, effectively use real-time decision-making tools and increase collaboration with their peers.