Nonprofit Finance Pain Points: Staff Resources and Internal Controls By Mano Koilpillai, MBA, CPA
Nonprofit CFOs and other nonprofit financial leaders are tasked with a difficult dictate – to ensure financial excellence with staff, systems, and processes that are often limited, and sometimes severely so. CFOs face seemingly endless, serial operational problems that serve to detract, and may even derail them from the ever-important financial strategic focus to ensure the organization as a whole achieves its mission.
What are two of the major pain points nonprofits struggle with across the board, and what are some practical ways to tackle them?
Pain Point No. 1: Staff Resources
The lack of staff or staff with skills unmatched to requirements is one of the biggest ongoing problems for nonprofits. Without the right type and/or number of staff on board, a finance department can virtually become paralyzed as errors mount that require time-consuming reconciliations to correct, or valuable leadership time is expended trying to manage underperforming staff. The right staff or lack thereof can be considered the number one factor that separates a high-performing finance function from one that frequently falters.
Here are some staff options that nonprofits should consider:
1. Recruitment by a qualified professional.
Consider using a recruitment specialist who understands the unique requirements of finance recruitment in a tight job market. When considering this option, recruitment fees should be weighed against potential costs due to process inefficiencies caused by underqualified staff and the enormous costs of turnover, which are estimated at 33 percent of a worker’s annual salary according to the 2017 Retention Report, Trends, Reasons & Recommendations by Lindsay Sears, PhD.
Outsourcing is a viable option for organizations that either don’t have the funds to hire qualified staff, or don’t feel they have full-time requirements warranting fulltime staff. Outsourcing involves hiring a qualified firm to assume entire functions such as (a) accounts payable; (b) payroll; (c) month-end and year-end closings; (d) grants management; or € management and Board reporting. If you desire the outsourced firm to assume responsibility for an entire function, ensure that the firm provides regular and ongoing supervision of the outsourced staff as part of its service offerings.
3. Interim staffing.
Interim staff can be a viable option to stabilize a finance department when there are staff vacancies or staff who are on extended leaves of absence. Interim staffing can also be an excellent way to evaluate a candidate for a permanent role. A normal interview process may involve only three to five hours of candidate face time, which may not provide enough important information on how he or she would perform in the role. Interim staffing might help fill that information gap prior to making an offer of permanent employment.
Pain Point No. 2: Internal Controls
Many nonprofits have sketchy or nonexistent internal controls that significantly increase risks of fraud and regulatory noncompliance. Nonprofit organizations are especially vulnerable to fraud as indicated in the Report to the Nations on Occupational Fraud and Abuse, 2016 Global Fraud Study by the Association of Certified Fraud Examiners. According to the report, nonprofit organizations suffered a medium loss from fraud of $100,000, mostly as a result of poor internal controls.
Lack of expertise and/or time are frequently the culprits that prevent nonprofit CFOs from focusing on strengthening the internal controls in their organizations. More often than not, internal controls are only evaluated after a catastrophic event such as an embezzlement occurs. Unfortunately, at that point significant time and resources must be spent on developing communications for the Board and donors, identifying the amount taken and how it occurred, and developing the proper controls to ensure the incident never happens again. Nonprofit organizations would do well to preemptively evaluate their current controls and institute stronger ones where required.
Some key internal controls steps to consider are:
1. Ensure segregation of duties.
This is especially important in key risk areas such as vendor creation, accounts payable, cash receipts, and payroll.
Begin with a high-level evaluation of the state of your controls to identify areas that are in good shape and others in which you may need to focus.
A more detailed evaluation might involve the creation of process flows using Visio or some other similar software. This will clearly show, in pictorial form, the key staff involved in the process, segregation of duties, and approvals and signoffs. This is an effective way to determine specific controls that may need strengthening.
4. Obtain professional assistance.
If time, resources, or expertise are factors impeding your evaluation of internal controls in your nonprofit, it would be well worth the investment to engage with a professional who is an expert in evaluating and instituting internal controls.
If not dealt with directly, the two finance pain points discussed in this article may bring a finance department to a virtual standstill, crippling efforts at progress. Don’t delay! Take proactive steps today to ensure staffing and internal controls in your organization are at a high level to properly support the overall financial health of your organization.