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The Trust Factor and Nonprofit Financial Management

The following article was originally featured on the Nonprofit PRO website, December 2016.

The impact of nonprofit organizations in changing lives and communities for the better can never be fully calculated.

The wonderful goodness of combining the resources of knowledge, ability, funding, and delivery of service, in order to accomplish good - optimal assistance and transformation - is something nonprofit employees, funders, donors, advocates and volunteers should be proud of.

It could be said that the whole is greater than the sum of parts when it comes to nonprofits and their function in society.  And, it could be said that the connection and deployment of the parts springs from collective commitment to the mission.  

Stewardship is entrusting the careful and responsible management of the mission to the nonprofit.  While funding has often been referred to as the lifeblood of an organization, trust is the primary prerequisite.  Without trust, there is no gift or grant award.  

In light of that, what consideration does the trust factor have in your organization?  What does your organization and the individuals running your organization do to protect the trust that ultimately ensures your mission?


Follow the Money

Whether you rely on donations or grants, agencies and donors want to follow the money and expect you to be following the money very carefully as well.  

Simply verifying funds were spent as designated isn’t enough anymore.  Donors expect you are already doing that.  Donors want to know the impact of their gift in the scheme of things: what is the outcome of their $50 gift?  What could the outcome be if their gift was $100?

Grant funders want to know that you are following the money as well. In most cases the next installment of the award won’t be released unless proper reporting is submitted.  Usually organizations have developed the processes to meet grant demands.  However, the processes can be limiting.  The more manual the reporting, the more time and resources it requires – severely limiting the ability to analyze new sources of funding, expand services and outreach.

Savvy nonprofits are investing in technology and software to automate the repetitive requirements of financial reporting and report distribution.  The more you can trust the numbers internally, the better you can develop trust with external stakeholders.

In the Functional Expense Reporting On-demand Webinar, GAAP guidelines and requirements are reviewed as well as desired methodologies for allocating key costs, and answers to commonly asked questions around performing all necessary internal, funder, board and FER reporting.

Know Your Impact – Intimately and Immediately

The reality is, if your financial reporting is delayed for days or weeks, it’s difficult to have a clear picture of your financial status and the necessary data to be optimal stewards.

Transparency and accountability begin with accurate, up-to-date financial reporting.  The greater the distance between the present moments (real-time data) and when your financial packets are delivered, the more your challenges and risks will be amplified.

The ability to have real-time information at both a summary and granular level, delivered and presented automatically, frees up your time, the development director’s time, and the executive director’s time, to analyze and present the information in the most meaningful way for critical audiences – be they donors, grantors, or the board.

Being able to tell your story immediately, complete with the most recent data to back it up, engenders the trust and loyalty that will safeguard your supporters’ commitment to your organization.

There is a danger in leaving their inquiries unanswered for a period of time in order to compile and create the supporting reports – in the meantime they may be investigating other organizations to see if their gifts might be better utilized elsewhere.  Increasingly, research data is showing that donor loyalty is tied to the organization’s ability to show the impact of the donor’s gift.  Today’s donors are more disposed to shifting their support if they believe their gifts can be put to better use elsewhere.

For detailed insights and best practices of Nonprofit Reporting, download the Reporting on a Mission White Paper.

Better Stewardship Entails More Than Good Intentions

Feeding the hungry, providing educational opportunities, helping at-risk youth, protecting the environment, fighting disease – and many other worthy causes – all clamor for funding.  

Sustaining your mission requires more than a vague “we are helping.”  Your advocates believe in your good intentions.  Safeguarding that trust requires that you demonstrate that your stewardship is continuously improving – your organization is committed to looking at every opportunity to expand the reach, scope and impact of the mission.  

The trust factor is strengthened by every step you take to make sure that funding is easily translated to impact the desired outcomes – we have fed 10,000 and will be positioned to feed 15,000 in the next six months; we have provided education services to 3,000 with 80 percent graduating this year and are on track to see graduation rates increase next year by another 5 percent; we have increased our greenbelts by 40 acres and have identified another 15 acres to be preserved in the next quarter, etc.  

The trust factor intensifies with each piece of evidence that shows impact and mission fulfillment.


Threats to the Trust Factor

There are passive and active threats to the level of trust an organization has built with its advocates.  Failing to consciously maintain and strengthen trust is the biggest threat.  Not knowing areas of vulnerability, or knowing and not addressing the weaknesses, blinds the organization to factors eroding trust.  

We see three areas of risk all too frequently in our work with nonprofits:  organizational inertia, vulnerability to fraud, and underestimating the need for timely, thorough reporting (reporting that enables organizations to be responsive and proactive in telling their story – maintaining and strengthening trust among key supporters).

1. Organizational Inertia

The root of organizational inertia is aversion to change.  Evidence of reluctance to change, especially in the area of nonprofit accounting, comes in the form of comments like, “We can’t afford a new accounting system,” or “Yes, we need to invest in a better accounting solution, but the funds are needed more elsewhere.”  

Trust begins with credible numbers.  If your organization has been limping along with inadequate reporting, trust is eroding.  Inadequate reporting can come in the form of inaccurate reporting – the worst-case scenario, or much delayed reporting.  In either case, decision-making is not informed with the best information possible.

For thought-provoking questions and topics for assessing your organizations’ needs, download the executive paper, 5 Key Factors to Consider When Investing in a New Nonprofit Accounting System.

2. Fraud

Warren Buffett said, “It takes 20 years to build a reputation and five minutes to ruin it.  If you think about that, you’ll do things differently.”  The news headlines are full of examples of nonprofits that are victim to fraud.  Most of the time, sadly, it’s an inside job.  

Failure to update accounting systems, automate processes and segregate duties put your organization at risk.  Investing in a nonprofit accounting software solution, combined with documenting accounting processes and internal controls, adds a layer of protection against fraud.

Fraud can destroy donor trust overnight.  Donors are not willing to put their gifts at risk and will opt to find another organization in which they can trust.

For additional insight on activities or functions a nonprofit can take to reduce the chance of fraud in their nonprofit, read our earlier blog article, Nonprofit Financial Fraud – Internal Vulnerabilities and Steps to Address Them.

3.  Underestimating the Need to be Proactive in Telling Your Story

The trust factor is not something that can be left alone.  It must be nurtured or you risk erosion.  One of the best ways to nurture trust is to be proactive in telling your story.  Not just once, but over and over again. How have you been successful in fulfilling your mission?  How have lives been changed?  How much of an impact are you making?

The need to tell your story goes beyond a one-time summary in the Annual Report or gathering information when writing grants.  Increasingly, individual donors want to know how their gifts translate – how many children were clothed, elderly fed, or at risk adult put to work, for example.  Answering these questions shouldn’t involve days and weeks of data export and spreadsheet work.  This information should be available with a few clicks of a mouse.

Being proactive in telling your story inspires donors and prospective donors alike, building the trust factor.

Conclusion

Your nonprofit provides critically needed services for individuals and our communities.  Funding your programs requires building the trust necessary to ensure an ongoing stream of grants and donations.  

Take some time to rigorously evaluate whether you are taking the necessary measures to protect the trust you’ve earned and strengthen the trust required for ongoing sustainability.

Peter Stam