Do the Math: Deciding if You Need a CFO
Marva Flanagan, CPA
Not-for-profits work hard to make the world a better place in one way or another. Their ability to pursue their mission depends greatly on their financial health and integrity. That is why it is beneficial for not-for-profits to employ a chief financial officer (CFO).
What are the CFO’s responsibilities?
Generally, the not-for-profit CFO (also known as the director of finance) is a senior-level position charged with oversight of the organization’s accounting and finances. He or she works closely with the executive director, finance committee and treasurer and serves as a business partner to your program heads. CFOs report to the executive director or board of directors on the organization’s finances, investments, capital, budgets and financial strategies.
The CFO’s role and responsibilities will vary significantly based on the organization’s size, as well as the complexity of its revenue sources. In smaller not-for-profits with budgets of $1.5 million to $10 million, CFOs often have wide responsibilities — possibly for accounting, human resources, facilities, legal affairs, administration and IT. Midsize organizations, with budgets running up to $40 million and fairly simple funding and programming, also may require their CFOs to cover such diverse areas.
In larger not-for-profits, though, CFOs usually have a narrower focus. They train their attention on accounting and finance issues, including risk management, investments and financial reporting. CFOs of midsize organizations with diverse programs (for instance, several programs that generate revenue) or governmental funding may have a similar focus.
What are your requirements?
Not-for-profits with small budgets and straightforward operations probably assign these responsibilities to the executive director or choose a more affordable option. (See “The outsourcing alternative.”) As organizations grow and their financial matters become more complex, though, CFOs can help steer the ship.
Experts suggest weighing the following factors when determining whether or not to bring a CFO on board:
- Size of the organization;
- Complexity and types of revenue sources;
- Number of programs that require funding; and
- Strategic growth plans.
Static organizations are less likely to need a CFO than not-for-profits with evolving programs and long-term plans that rely on investment growth, financing and major capital expenditures.
Who’s right for you?
With CFOs playing such an essential role, your not-for-profit should devote considerable time and effort to hire someone with the right qualifications. At a minimum, you want a person with in-depth knowledge of the finance and accounting rules particular to not-for-profits. A CFO who has only worked in the for-profit sector may find the differences difficult to navigate. Not-for-profit CFOs also need a familiarity with funding sources, grant management and, if your not-for-profit expends $750,000 or more of federal assistance, single audit requirements.
What about educational and professional credentials? The ideal candidate should have a certified public accountant (CPA) designation and optimally an MBA.
In addition, the position requires strong communication skills, strategic thinking, financial reporting expertise and the creativity to deal with resource restraints. It also is useful if the CFO has had experience in an organization with a wide range of functions — for example, human resources and IT — so that he or she can identify when outside professional expertise vital to the success of your organization is needed.
Finally, you’d probably like the CFO (and every employee, for that matter) to have a genuine passion for your mission — nothing motivates employees like a belief in the cause. Additionally, in the case of a CFO, this makes it easier to understand that success for a not-for-profit isn’t only about the bottom line.
Asset to your organization
CFOs bring many advantages to the table. Not only can they help maintain fiscal health and assist the organization in achieving its goals, but they also can boost your credibility with potential donors and watchdogs. If your budget is growing and financial matters are becoming more complicated, you may want to add a CFO to the mix.
Sidebar: The outsourcing alternative
Does your organization lack the size or complexity to warrant having a full-time chief financial officer (CFO) on staff, but desire the financial peace of mind the position can provide? You might consider outsourcing CFO responsibilities to your CPA firm. Outsourcing can produce several benefits at far less cost.
With outsourcing, you can obtain cost-efficient access to top-notch expertise. Not-for-profits often look to their existing staff when filling the CFO position, but your in-house accountant may not possess the requisite financial expertise. Outsourcing will likely cost far less than hiring someone new with the appropriate background.
You also could improve efficiency due to the outsourced CFO’s resources. An outsourced CFO, with other not-for-profit clients, may already have developed risk assessment or budgeting techniques that would be time-consuming if built from scratch. This person may have useful industry contacts as well.
Finally, outsourcing CFO services frees up your staff to focus on their core competencies. This increases the odds of accomplishing your organization’s mission.
Caitlin Gibbs, CPA
This issue’s Newsbits covers findings by psychologists that fundraising appeals are more successful when they target shared goals or individual achievements, a proposed Accounting Standards Update that would affect accounting for grants and contributions, congressional interest in college endowments, and a mobile payments application that’s popular with millennials.
Not-for-profits need to appeal to donors’ self-images
New research published in the Journal of Experimental Social Psychology suggests that charitable appeals should take into account prospective donors’ self-concepts. Study participants viewed appeals that emphasized the pursuit of shared goals, such as “Let’s save a life together,” or individual achievements, such as “You = Life Saver.”
Psychologists found that people who earn less money were more likely to donate in response to an appeal that emphasizes community. However, those with incomes of more than $90,000 responded better to appeals focused on personal achievement. The researchers concluded that, rather than trying to persuade prospective donors to see the world as they do, not-for-profits may find it more effective to “meet them where they are” when tailoring appeals.
FASB proposes changes to grant, contribution accounting
The Financial Accounting Standards Board (FASB) has released a proposed Accounting Standards Update (ASU) that could result in more grants and contracts being accounted for as contributions. The ASU, Not-for-Profit Entities (Topic 958): Clarifying the Scope and Accounting Guidance for Contributions Received and Contributions Made, explains how to determine whether transactions should be considered contributions (which generally are recognized when pledged) or exchange transactions (which are subject to the revenue recognition standard, ASU No. 2014-09, Revenue from Contracts with Customers). The ASU also clarifies when a contribution is conditional rather than restricted by the donor, which affects the timing of revenue recognition.
The ASU would follow the same effective dates as the revenue recognition standard, with application for most not-for-profits in periods beginning after December 15, 2018.
Congress eyes endowment tax issues
Federal legislators have expressed concern that the wealthiest educational institutions are sitting on huge and growing endowments — without paying taxes on their investment returns — while many students struggle to pay tuition. As a result, the Tax Cuts and Jobs Act instituted a new 1.4% excise tax on net investment income of not-for-profit colleges and universities with assets of at least $500,000 per full-time student and more than 500 full-time students. It’s too soon to determine if this new tax will entice larger scholarships or if there is a negative effect and scholarships will be decreased by the amount paid in excise tax.
Venmo explores not-for-profit application
Venmo, a mobile payments app particularly popular with Millennials, is working on a channel that not-for-profits can use to accept donations. Venmo is commonly used to transfer funds between friends who, for example, are splitting a restaurant check. With its emoji-filled news feed, the app could offer the opportunity for young people to donate, share their cause and perhaps subtly pressure their friends into donating, according to MarketWatch. The not-for-profit program is currently undergoing testing with a limited number of organizations.