Navigating Change in the
January 8, 2014
• The challenges facing nonprofit organizations going into 2014 are
1) Government funding sources, particularly at the local and state level, have become far
less certain, challenging many long-standing operating models.
2) The individual donor community is changing, with high-end donors seeking more
collaboration as well as increased reporting demonstrating a social return on investment.
3) In the drive to continue serving their mission, too many organizations have equated
mission-focus with resistance to change, leading to disastrous results for all involved.
• Recent years have seen the bankruptcy and restructuring of storied
nonprofit organizations, including St. Vincent’s Hospital in New York, the
Philadelphia Symphony, Girl Scouts of the USA, and others.
• Now is the time for nonprofit leaders to be proactive to ensure that their
mission not only survives, but thrives in the new market environment.
Increasingly, the status quo is not an option.
• Government funding sources, particularly state and local government
sources, are looking considerably less stable in the wake of the 2008-9
recession than they once did.
• In many niches, government funding sources are actively communicating a
desire to have the number of nonprofit providers reduced, in some cases
• The impact of increased risk in the main source of funding for many
nonprofit organizations is to challenge long-standing operating models.
• As painful as it may be, organizations must acknowledge that the
government funding landscape has changed, that the change shows signs of
being long-term, and make the necessary adjustments in order to thrive
under new conditions.
• A rising generation of individual donors have begun to look to their
charitable donations in terms of “social return on investment”, and as such
are challenging the nonprofit organizations they support to prove their
efficacy in all areas served.
• The rise of analytics and their importance to prospective donors is likely to
only increase in importance over time, and organizations should look
carefully at their systems and personnel to determine how they will better
present compelling, data-driven pitches to the donor community.
Serving the Mission
• Too often nonprofit organizations have unwittingly embraced a short-term,
tactical view of serving their mission, at the expense of the longer-term,
• In the coming years consolidation, partnerships, and substantial internal
reorganizations will be necessary as the nonprofit community seeks to
right-size itself for the challenges of the current environment.
• There remain considerable opportunities to grow in size and scope, but
doing so will require disciplined leadership making fact-based decisions,
and a willingness to move beyond outmoded operating models.
• No nonprofit organization, regardless of reputation, can afford to rest on the
strength of prior accomplishments.
Leading the Change
• Nonprofit CFOs are well-placed to take a leadership role in driving
necessary changes in their organizations.
• The key outcomes that nonprofit CFOs should be aiming for are 1) to
increase awareness of and ownership for budget numbers, 2) To foster a
culture of questioning, and 3) To improve understanding of the connection
between operational and financial performance.
Leading the Change (Cont.)
• By adopting a more holistic approach to functions traditionally in their
purview, CFOs can drive profound change in nonprofit organizations.
1) Budgeting. By driving a change to an ongoing, iterative budgeting process that takes in
and utilizes feedback from multiple stakeholders, a CFO can increase a management
team’s sense of ownership in a budget.
2) Variance Reporting. By moving beyond simply reporting financial performance and
toward explaining what caused (good or bad) performance, a CFO can increase overall
insight into the key drivers of an organization’s performance.
3) Metrics. Creating and broadly disseminating a metrics dashboard to the management
team creates a common set of financial and operational measures that everyone quickly
becomes familiar with. This both enhances the management team’s understanding of
different aspects of an organization’s operations and increases the overall understanding
of what operational measures drive financial performance (and what financial
performance is necessary to support operations).
The Budgeting Process
• Robust budgets are developed with a bottom-up approach in which
assumptions are made regarding the key drivers of performance and the
relationships between those key drivers.
– This approach, though more time-consuming, allows for managers to easily refine their
budgets, and to test the impact of changes in key assumptions.
• It is not uncommon for managers to suggest that the time commitment
necessary to develop a robust bottom-up budget is not worth the effort.
– This line of thinking generally presupposes that the identification of key drivers and how
they interact is an overly complex exercise of limited value.
• It is important to understand that all budgets contain assumptions.
• Assumptions come in two forms:
1. Explicit assumptions which are detailed and highlighted by the developers of the budget
2. Implicit assumptions that logically follow from a detailed analysis of a budget
The Budgeting Process (Cont.)
• Any budgeting process that seeks to trade the explicit assumptions of a
robust, bottom-up budgeting process for the implicit assumptions of a topdown budgeting process is effectively sacrificing rigor for speed.
– It is up to individual managers to determine what is most important for their particular
• Assumptions of one type or another will necessarily drive any budget.
Working to minimize the impact of implicit assumptions is the job of every
manager tasked with developing a budget.
• First quantifying and then understanding the differences between actual and
budgeted financial performance is a crucial aspect of the financial skillset
of any manager.
– These are crucial skills that, while central to the accounting and finance functions of an
organization, must be possessed by managers outside of those departments
• Variance analysis provides an invaluable check on the budgeting process by
assessing the accuracy of the budget at discrete intervals (generally
monthly, quarterly and annually).
Variance Analysis (Cont.)
c = a-b
d = c/b
General and Administrative Expense
Cost of Goods Sold
Gross Margin %
Other (Income) Expense
Total Operating Expenses
Operating Margin %
Net Margin %
EBITDA Add Backs
EBITDA Margin %
Variance Analysis (Cont.).
• The variance report on the prior page contains a great deal of interest to a
manager. In particular:
– Sales exceeded the budget (forecast) by $125,000, or 5.0%
– Both gross profit and gross margin were lower than forecast
– Operating expenses were 6.8% above forecast, outpacing the increase in sales
• This variance analysis indicates that despite higher than forecast sales,
Company XYZ underperformed in all profitability measures.
– Variance analyses can alert managers to emerging issues such as Company XYZ
experienced in this case.
• The most important aspect of a variance analysis is the “Notes” section.
– Getting beyond “what happened” and moving to “why did that happen”, is essential.
• A well-conceived metrics dashboard can be a powerful tool in fostering
increased collaboration among a management team.
• By their very nature, metrics dashboards blend financial and operational
measures, and as such are often among the only cross-functional outputs
reviewed across an organization.
• Good dashboards will have a mix of leading and trailing indicators.
Representative Key Metrics
Leading: Measures that are effective
predictors of future outcomes.
Lagging: Measures that provide a useful
framework for recent performance.
Sales – (Lagging / Financial)
Donations – (Lagging / Financial)
Call volume – (Leading / Operational)
Website visits – (Leading / Operational)
Clients Served – (Lagging / Operational)
Revenue per Client - (Lagging / Financial)
Cost per Client - (Lagging / Financial)
• The central operating theses of many nonprofit organizations will be
challenged over the coming years, as change continues to roil traditional
sources of funding.
• In the current environment a desire to maintain the status quo is naïve and
potentially dangerous. All nonprofit executives should be seriously
considering what they can do to help ensure the continued success of their
organizations through the current challenges.
• Nonprofit CFOs are logical change agents in many organizations. These
professionals can look to improve collaboration and understanding
throughout the management ranks by using areas in their purview to better
answer the questions of: 1) What (Budgeting), 2) Why (Variance
Reporting), and 3) How (Metrics).
David Johnson is a founding partner of ACM Partners. His
advisory experience spans North America and ranges from prerevenue startups to Fortune 500 companies.
An active member of the Chicago business community, David
currently serves on the board of directors of Gateway
Foundation, a nonprofit organization focused on providing
substance abuse treatment. Additionally, he is an active member
in several professional associations.
David’s writing has appeared in several industry publications,
and he has lectured at the University of Chicago, Northwestern
University, the University of Wisconsin-Madison, the University
of Illinois-Chicago and Loyola University Chicago.
David earned his MBA from the University of Chicago. His
undergraduate studies were completed at Fairleigh Dickinson
About ACM Partners
• ACM Partners is a boutique financial advisory firm providing due
diligence, performance improvement, restructuring and turnaround
• David Johnson can be contacted at:
– Email: email@example.com
– Ph: 312-505-7238
• For more information visit: www.acm-partners.com.