Research Friday: Financial literacy: understanding money for today’s activities and tomorrow’s security
Welcome to Research Friday! As part of a continuing weekly series, each Friday we invite a nonprofit expert to highlight a research report or study and discuss how it can inform and improve day-to-day nonprofit practice. We welcome your comments and feedback.
You serve on a nonprofit board of directors. Or, you are a member of management for a nonprofit organization. You are expected to understand the organization's finances. And your role (board or staff) determines how you contribute to the overall security of the nonprofit with which you are affiliated.
When those who are responsible for an organization's overall fiscal management responded to a study by The Moody Foundation, it was found that nonprofits need to "fortify their financial skills to better forecast future needs, navigate economic instability, and manage risk."1 This study, Financial Literacy and Knowledge in the Nonprofit Sector (PDF), "engaged a random sample of primarily human service nonprofits, as well as health, civic, environmental, arts, and education nonprofits."2 Again, the study surveyed nonprofit financial managers such as CEOs and CFOs.
The report is divided into five areas of study: I) financial knowledge and literacy, II) indicators for programmatic and financial decision-making, III) the board role & governance, IV) controls and procedures for financial management, and, v) some closing thoughts.
Of note in the first section, financial knowledge and literacy, an interesting shift in overall financial priorities was reported with nearly two-thirds of the midsize organizations ($1-$5 million in revenue) reporting sustainability as the main driver over subsistence. This means there is a greater emphasis on the development of cash reserves.
The study defines cash reserves as follows:
The operating reserve is an unrestricted fund balance set aside to stabilize a nonprofit's finances by providing a "rainy day savings account" for unexpected cash flow shortages, expenses or losses. These might be caused by delayed income payments, unexpected building repairs, or economic conditions.
The second section of the study addresses indicators for financial and programmatic decision-making with some helpful data for CEOs and CFOs who appear to be the primary financial decision-makers, especially in the mid-size and larger nonprofits. Of interest is the question, "What are important macroeconomic finance indicators for nonprofits?" The report suggests that "besides education and experience, the ability of nonprofit managers to make accurate financial and economic decisions depends on the information and tools that nonprofit organizations can access."
This portion of the study also addresses the audit committee: when to develop one and what its responsibilities are. Interestingly, 60.7% of the nonprofits involved in the study do not have an audit committee.Sources:
The fourth study area looks at controls & procedures and includes data on budget procedures, financial manuals, and other policies and controls that strengthen an organization's financial management.
This study "underscores the need for many nonprofit organizations to assess their financial monitoring mechanisms in light of the environment of analysis and accountability."10 Clearly, the role of the audit committee is enhanced with the increased focus on good governance and fiscal responsibility.
In the fifth and closing area, it is noted that one of the goals of the study was to help provide tools to assist in the ability to forecast financial strategies, including understanding external factors. "While this study found that managers are aware of the importance of financial scenario planning, most board members are not actively involved in this type of planning, which demonstrates areas for growth or education."11
I commend this study to nonprofit financial managers and board members as it provides good information that may help nonprofits make "different decisions from the ones they might make in the absence of particular pieces of information."12
Patricia Lewis' role as Sr. Professional-in-Residence at the Lodestar Center is to help bridge academia and practice. She has a long career as a nonprofit executive and as a "pracademic," having previously served as President and CEO of the Association of Fundraising Professionals, Executive Director of Camp Fire Boys and Girls in Seattle-King County, Development Director of the Childrens' Home Society of Washington State, and as the Nonprofit Professional-in-Residence at George Mason University. She has written and lectured throughout the world about various leadership and management topics for the nonprofit sector.
^  "Financial Literacy for the Long Term," Philanthropy Matters, Vol. 19, Issue 2 – 2011.
^  Ibid.
^  The Center on Philanthropy at Indiana University, Financial Literacy and Knowledge in the Nonprofit Sector. The Moody’s Foundation, 2011. Pg. 22
^  Ibid. Pg 18
^  Ibid. Pg 16
^  Ibid. Pg 17
^  Ibid. Pg 27
^  Ibid, Pg. 30. Sources: Green & Griesinger, 1996; Middleton, 1987; Miller-Millesen, 2003; Ostrower & Stone, 2006
^  Ibid, Pg. 29
^  Ibid. pg. 38
^  Ibid. Pg. 38
^  Ibid. Pg. 39