5 lessons finance officers want to teach execs, board

Published in the October 14, 2005 edition of Columbus Business First.

Every chief finance officer worth his or her salt has a secret wish: To teach. 

This isn’t motivated by a desire to change careers or to guide our nation’s youth into enlightenment. Rather, it is inspired by the need to remind their presidents and board members of some budget lessons that repeatedly are forgotten, often with unfortunate results.

The need for a refresher course is just as true in the largest and most prestigious universities as it is in a small social service agency. To test this point, I informally surveyed the chief financial officers at some universities to find out the lessons they wanted to teach their deans or presidents. 

The lessons they picked may be familiar, but putting them into practice evidently remains elusive. Here’s what they said: 

• Lesson One: Avoid the pitfall of assuming more money is the only way to achieve greater quality. 

It is tempting to improve a program by adding more people or by spending more money. Unfortunately, throwing money at a program does not always make it better, but it always makes it bigger and, therefore, harder to pay for. Sometimes quality can be improved by taking money or people from the weaker programs and putting them into the stronger programs. 

Reviewing what you do and how you do it, re-engineering processes and zero-basing departmental budgets are legitimate ways to improve quality. Sometimes the benefits are more reliable and sustainable than what you could get just by spending more money.

• Lesson Two: Budgeting is about making choices and setting priorities.

A budget is an investment of resources: Pick the right investments to achieve your goals. Too often budgeting begins and ends with forcing revenue to equal expenditures. 

Try this exercise: Write down the strategy and priorities you believe are guiding your nonprofit’s future. Now, take your nonprofit’s budget and write down the strategy and priorities suggested by how money is spent.  Most times you will find they don’t match very well. 

Make sure strategy and priorities are specifically identified in the budget. How resources are allocated in each year’s budget is as central to the strategic plan as the annual board retreat. 

• Lesson Three: Be sure you anticipate what effects your budget will have on staff behavior. 

For every budget rule you create, a behavior or a relationship will be changed. Consider, for instance, two common rules in public-sector budgeting: The budget is specified at the line item rather than by broad category – that rule shifts discretion from the executive to the legislature. Money must be used by the end of the year – that rule gives departments an incentive to spend every dime by the end of the year, even if the money goes to low-priority items. 

Make sure your budget rules prompt behaviors that match your priorities.

• Lesson Four: Development and maintenance of human resources is as necessary as development and maintenance of buildings and equipment.

Most nonprofits are service organizations, yet while they will have capital campaigns for buildings, they rarely have fundraising campaigns for people skills, and they too often have insignificant programs to train or retain staff.

No organization is static; people come and go; program needs evolve. Good budgets provide resources to replace the skills lost due to staff turnover and to build the new skills required by change.

Many nonprofit boards have building committees that do engineering reviews of physical facilities; how many boards have anything more than a compensation committee for their “human facilities?” 

• Lesson Five: Decisions to invest in bricks and mortar should focus most heavily on what happens after the ribbon is cut.

Over time, the costs of operating a building and of running the programs in the building are vastly higher than the construction cost. Too often new facilities have turned a fiscally sound institution into one that is continually strapped for cash.

The ability to raise funds for a new building is the least of your financial worries. After your donors have reached deep into their pockets for your capital campaign, they may have less available for your annual campaign. Ironically, now your annual campaign will probably ask for more. Go back to Lesson One. 

These lessons are what the best finance officers want to teach over and over again. You could do worse than to put this lesson plan on your organization’s agenda.

Allen J. Proctor was chief financial officer of Harvard University and is the author of “Linking Mission to Money, Finance for Nonprofit Board Members.” Reach him at www.proctorconsulting.org

Copyright 2005. Reprinted with permission, Business First of Columbus Inc.