Want to Be a Nonprofit CFO? Much Will Be Familiar

Even in the nonprofit world, finance chiefs often view things differently than their C-suite colleagues do.
David McCannJune 12, 2018
Want to Be a Nonprofit CFO? Much Will Be Familiar

For corporate finance executives who want to de-stress their lives, moving into the nonprofit world is one obvious avenue. But some of the issues they would face there might remind them of their for-profit jobs.

For one, their fellow C-suiters may not fully appreciate some of the challenges CFOs face.

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Professional services firm BDO USA recently surveyed 100 executives at nonprofit organizations, 48% of whom were CFOs. Asked how challenging it is to maintain adequate liquidity, more than a third of the finance chiefs characterized it as a high or moderate challenge. But among the other executives, only half that many saw it the same way:

Similarly, the CFOs were much more attuned to the difficulty of dealing with regulatory and legislative changes. Less than 40% of the non-CFO executives perceived a high or moderate challenge in that area, compared with slightly more than half of finance chiefs.

Like their for-profit counterparts, nonprofit CFOs have been tasked with assessing the impact of the new tax-reform law, implementing the necessary changes, and determining the most beneficial tax strategies going forward. They’re also in various changes of implementing accounting changes for revenue recognition and leasing arrangements.

Rising overhead costs was another area of greater concern for nonprofit finance chiefs (67% called it a high or moderate challenge) than for their executive colleagues (50%).

Finally, the CFOs were somewhat less concerned about cybersecurity than were the others. Exactly half of the former, but 57% of the latter, said it’s a high or moderate challenge for nonprofits’ boards.

BDO appeared to lightly criticize the finance chiefs for not taking cybersecurity seriously enough, saying that “CFOs could be overlooking tech-related challenges.”

“While information technology is often not under [nonprofit] CFOs’ immediate responsibilities,” BDO says in its survey report, “the security of financial technology systems — including donor databases — is a crucial element of a nonprofit’s overall cyber hygiene.

“Anecdotally,” the report continues, “protecting organizations from cyberthreats is consistently on board agendas. A CFO’s role might primarily live within the organization’s finance arm, but as veterans of the nonprofit space know well, an effective leader in the dynamic nonprofit world is a jack of all trades.”

Meanwhile, corporate CFOs used to working with myriad revenue streams would find a hodgepodge of funding sources in the nonprofit world as well.

An average of about a quarter (25.8%) of nonprofit revenue comes from fees charged for services and salable items that support an organization’s mission, although that varies widely from organization to organization.

Another quarter (24.8%) of revenue comes from investments, including mutual funds (43.0% of total investment returns), bonds/fixed income (22.6%), and alternative investments (15.4%). And like a majority of companies today, nonprofits tend to hold a sizable chunk of cash or cash equivalents (accounting for 14.8% of investable funds).

Smaller buckets of revenue come from individual contributions (13.9%), government grants (9.0%), foundation grants (7.6%), fundraising/special events (6.9%), corporate contributions (6.3%), membership dues (4.6%), conferences/meetings (2.1%), and publications (1.1%).

The individual contributions, representing almost one-seventh of nonprofits’ revenue, are perceived to be at risk in the new tax environment. “Nonprofits’ greatest tax-reform fear is that overall charitable giving could decline due to the increased standard deduction and the new limitation on deduction of state taxes,” Laura Kalick, tax director in BDO’s nonprofit and education practice, tells CFO.

Indeed, while many for-profit companies expect to benefit from the Tax Cuts and Jobs Act, for nonprofits the changes wrought by the law are virtually all negative, according to Kalick.

The new tax law also provides that tax-exempt organizations can only use losses from an unrelated trade or business to offset gains from the same unrelated business. “That provision is extremely problematic,” Kalick opines.

With respect to the new revenue recognition and lease accounting standards, the effects are quite similar for nonprofits as for for-profit companies, notes Lee Klumpp, a partner in BDO’s nonprofit and education practice.

The revenue recognition standard applies to revenue from contracts with customers. “Nonprofits don’t consider the individuals they serve and support as ‘customers,’ so initially many organizations didn’t think it applied to them,” Klumpp says. “But nonprofits actually are subject to both revenue recognition and lease accounting.”

The Financial Accounting Standards Board is expected to soon release guidance related to revenue recognition aimed at clarifying how nonprofits should account for state and local grants and contracts.

“CFOs will need to assess how they currently account for grants and may need to adjust their financial statements to comply with the new guidance,” says Klumpp.

“Overall, the new guidance is expected to have a positive impact and lessen the revenue recognition compliance burden. More grants will likely be classified as contributions, which are not included in the scope of revenue recognition.”