Treasury and finance professionals for nonprofits have to work with stakeholders who are often far more active and diverse than corporate stakeholders. Furthermore, nonprofit stakeholders often have conflicting interests, which can affect financial reporting.

The primary interest of stakeholders, including funders, donors, board members, communities, beneficiaries, governments or any other interested parties is whether the nonprofit has achieved its mission. Recognizing tensions between ‘upward accountability’ (to donors, governments and senior managers) and ‘downward accountability’ (to beneficiaries/customers), helps nonprofits strike a reasonable balance between competing interests, hence securing cooperation and support from both parties.

Managers of nonprofits have the fiduciary responsibility to efficiently manage resources provided by donors and members efficiently, and to act as stewards for those resources, including responsibility for overall performance of the nonprofit organization. This means they also have to measure whether the nonprofit is using the donated resources effectively and ethically to achieve its mission.

Accounting challenges

Tensions between stakeholders affect the way accountants in nonprofits present financial reports. While for-profit accounting generally has one “equity” section, with capital and retained earnings, non-profit accounting must separate this section into “net assets” and must report each category as unrestricted, temporarily restricted and permanently restricted. This means having to maintain a clear understanding of any donor or other stakeholder-imposed restrictions; a fact unique to non-profits.  Nonprofit accountants must also separate expenses into administrative, fundraising and programs elements thus increasing complexity. There is no requirement for this in for-profit corporations.

An accountant in a non-profit institution must stay on top of understanding Generally Accepted Accounting Principles (GAAPs), possess detailed understanding of the reporting requirements of the different stakeholders, including the goals and the mission of the nonprofit itself. Strangely though, sometimes varied stakeholder interests even conflict with the GAAPs.

Accountants also must be acquainted with objectives that are beyond the ambit of accounting. They have to know the donor reporting timelines, covenants, program delivery schedules, as well as beneficiary and other stakeholder interests and concerns. Accountants must know how their individual actions align to the mission of the nonprofit and contribute to the delivery of the required change.

Another very important consideration is the impact of unethical behavior. While in both for-profit and nonprofit agencies the impact is negative, there are varied dimensions of the same in non-profits; for example while a for-profit may not necessarily have to consult its customers on every decision (though it is good practice) not consulting beneficiaries in non-profits is considered unethical. Minimizing cost so as to achieve shareholder value through profit maximization may be comfortable in for-profit entities, but may not be considered ethical in nonprofits. Spending less to increase surplus is usually not acceptable in nonprofits because the objective is rarely to have more money left but utilize funds to meet the nonprofit’s mission.

Having big cash balances (low burn rate) so as to “save” will not only impair the financial sustainability, but also diminishes the organization’s credibility among stakeholders and endangers its long-term mission achievement, thereby bringing to question the nonprofit’s going concern standing. Whatever the mission statement outlines as the ultimate goal, the performance measurement system needs to ensure that the impact of unethical behavior is measured and reported, in both financial and program impact terms.

The challenges in effectively managing nonprofit organizations are complex, and not easily compared with the for-profit sector.  A finance professional in a nonprofit organization has to be more than a number cruncher. He or she has to be apt in understanding the organization’s mission, being sensitive to the varied stakeholder interests and consciously aligning his actions and counsel to the desired change.

Apollo Ekelot, CPA, FCCA, is finance director for ChildFund International in Kenya.

This article will appear in an upcoming issue of AFP Exchange.