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Should Your Nonprofit Adhere to Common Financial Management Norms? Three Questions Board Members and Executives Can Ask and Why it Matters for Your Organization

BY TERESA HARRISON

April 02, 2021

Most nonprofit practitioners are acutely aware of the conventional financial management norms for their sector and recognize the impact that such norms may have on giving decisions by donors. As part of the Gupta Governance Institute Center for Nonprofit Governance and National Center on Nonprofit Enterprise’s (NCNE) seminar series, George Mitchell and Thad Calabrese suggest three broad questions that nonprofit boards and executives can ask and use as a launching point for meaningful discussions. As discussed below and in the paper, they find that adhering to common financial norms may lead to less mission impact over time.

1. How important are financial ratio norms for our nonprofit?

For many social service sectors, obtaining clear metrics related to program activity and outcomes can be extremely costly to obtain, particularly as a comparison across organizations or across nonprofit industries. In lieu of such activity and outcome data, nonprofits are most often held accountable through financial reporting and signal their fiscal integrity to engender trust. Boards and executives should assess any misalignment between financial reporting goals and mission performance goals and develop clear communication about any potential inconsistencies. Identify examples that clearly show how increased impact for your constituency might require, for example, higher operating costs, and why funding such measures better serves the mission.

2. How does adhering to common financial norms constrain our nonprofit?

Signaling your integrity by following conventional wisdoms about appropriate nonprofit financial management practices may have detrimental effects. In a recent working paper, Mitchell and Calabrese find that adhering to some widely held financial norms—minimizing overhead, being fiscally lean, avoiding debt, and diversifying revenues—can reduce a nonprofit’s total impact by nearly half over a decade. Assessing which financial norms might be constraining your organization’s long-term impact is an important step in financial and strategic planning.

3. How can our organization help to change these norms?

Much more attention needs to be given to careful analysis of these conventional wisdoms and how they may potentially harm the long-term mission performance and resiliency of nonprofits. Funders, scholars and executives all play roles in advocating for the need to reconsider financial norms that may be misaligned with nonprofit missions. Stakeholders need to develop thoughtful strategies that balance financial and mission objectives so as to engender trust in a nonprofit’s financial stewardship without sacrificing its long-term impact.

To learn more about how financial management norms could be limiting your nonprofit’s impact, you can read more by the authors. For more information, contact Teresa Harrison at tharrison@drexel.edu or visit our event page to sign-up for upcoming seminars.