Real Risks

ngos donors financial management
Wednesday, 6 November, 2013 - 12:25

This article discusses the challenges faced by NPOs when there is growth in resources, and advices upon the importance of financial management systems

There are many risks that confront nonprofit organisations today and some arise where an organisation has a phase of rapid growth in resources. We have noted this, particularly in relation to new ‘social movements’, with activism at their core, which have been achieving significant success in raising public awareness and in raising funds.

Charles Tilly defines social movements as ‘a series of contentious performances, displays and campaigns by which ordinary people make collective claims on others.’

A number of such movements have received substantial initial funding leading to rapid growth, others are still growing or are poised to grow.

With growth comes both increased numbers of paid staff (employees), who are often deployed over a wide geographical area, and increased levels of activities. Together, these areas of growth result in an increased need for effective financial management systems and controls and for an organisational infrastructure that few can afford, or are prepared to pay for.

Bigger budgets!

As budgets get bigger (due to increased monthly financial commitments), the need for good financial management increases but the associated costs become more difficult to finance, especially if the initial funders later withdraw or reduce their support.  We are now seeing large, previously well-funded and effective organisations using up their hard-earned reserves (built up over many years) in order to meet their on-going obligations to pay staff and other running costs. What is happening?
Shifting funds!

With some exceptions, we are seeing funding shift away from established organisations, some of the funding is then switched to emerging social movements and related organisations which are seen to offer a new dynamism, mobility, profile and exposure at a lower cost than the more established organisations with a longer track record.  Whatever your views are on whether this is a wise move on the part of funders / donors and on whether such funding will be for the longer-term, our experience tells us that, if you do not invest in the very necessary costs of systems, controls and infrastructure or the lack of them will come back to bite you!
Disastrous consequences!

Lack of effective financial management systems, controls and infrastructure may result in one or more of the following:

  • Inability to account for, and report back to funders and supporters on, funds received;
  • Disgruntled staff, funders and other stakeholders;
  • Waste and/or misappropriation of resources (including, but not limited to, cash);
  • Damaged reputation;
  • An inability to carry out necessary financial planning and strategic financial thinking;
  • Cash flow crises.

The list goes on!

Financial management expertise

Failure to set up appropriate financial management systems from the beginning is a big mistake and a patch-up job later, when the gaps and negative consequences  are already obvious, may prove to be more expensive than the implementation of good systems from the start would have been. At a later stage, it will also become even more difficult to secure funding to implement / upgrade systems. Every organisation (regardless of size and track record) needs access to financial management expertise. Good finance administrators, bookkeepers, accountants and financial managers are in short supply and are expensive to employ, but all organisations need the skills they offer.  This is not an expense to hold back on and it is wise to:

  • Employ or contract experienced and well trained finance staff or service providers from the outset; and
  • Ensure the finance staff are given adequate support and training in line with their responsibilities. 

By delegation from the governing body, financial management responsibility rests with the executive director of each organisation, but such directors often have little time for this function and/or feel out of their depth. If your organisation cannot afford a full-time or even part-time financial manager, please remember that CMDS is available to assist you and to walk with you in the set-up and maintenance of effective financial management systems, including, if necessary, the recruitment and screening of finance staff.

-  This article first appeared on the CDMS Website.

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