New Study Shows Value of Strengthening Financial Management Capacity of Nonprofits

(Press release, Feb. 26, 2015) — Nonprofit organizations deliver many of the crucial social services Americans receive, yet weak financial management often threatens their ability to continue doing so. A new report released today, The Skills to Pay the Bills, an Evaluation of an Effort to Help Nonprofits Manage Their Finances, demonstrates how building the skills of nonprofit leaders can help them improve the financial management of their organizations.

The study, conducted by MDRC and Child Trends, examined an initiative sponsored by The Wallace Foundation that provided 25 nonprofit organizations that offer out-of-school-time programs for Chicago young people with two years of one of two types of professional development - a customized model that included intensive training for organizations' staff, and a group learning model composed primarily of workshops. Both strategies produced long-lasting improvements in financial management for nearly all the organizations served - with organizations receiving the less-expensive group model improving almost as much as those receiving more intensive customized coaching. In addition, Wallace funded a policy advocacy group to work with public funders to make their requirement less burdensome.

"These are important findings," said Edward Pauly, director of research and evaluation at The Wallace Foundation. "It is rare that staff training results in consistent and sustained behavior changes, and in this case it did. The fact that both strands had positive results, and that the less expensive intervention had very cost-effective results, is also exciting news. It signals to funders and non-profit leaders that an investment in smart management can help those organizations pursue their missions effectively."

The release of the study follows the 2013 launch of StrongNonprofits.org, The Wallace Foundation's website of free resources to help an even wider range of nonprofits bolster their financial know-how and navigate everything from budgeting to working with their board on financial accountability.

Why Is Good Financial Management Important for Nonprofits?

Weak financial management is pervasive across the nonprofit sector. Strong financial management can allow for long-term budgeting and offer buffers against lean months, but it is often hard to develop in organizations that have grown organically out of community need, funders' interest in particular programs, and a social mission rather than a profit motive. Ironically, weak financial management can lead to a cycle of understaffing, uncertain funding, operational deficits, and high staff turnover - all of which threaten the ability of these organizations to deliver on their social mission.

High-profile failures of non-profits continue to generate headlines, including the 2012 closure of Hull House, one of the first settlement houses in the U.S., which could no longer pay its bills and was millions of dollars in debt, and the 2015 closure of the Federation Employment and Guidance Service (FEGS), one of the nation's largest social service agencies with 2,000 employees and an annual budget of $250 million. FEGS, too, announced an unexpected shortfall of millions of dollars. In each case, hundreds or thousands of employees lost jobs, and thousands more community residents lost critical services.

What was the Wallace Foundation Initiative?

The Wallace Foundation became interested in strengthening the financial management of nonprofits in response to an unanticipated consequence of its work in another area: helping cities build partnerships across the community to improve afterschool. Chicago was one of five cities to undertake this work with Wallace, beginning in 2005.

"As programs worked across cities to lift quality and expand access, they were often stretched financially, and some even risked closure," said Nancy Devine, Director of Learning and Enrichment at The Wallace Foundation. "A study by Fiscal Management Associates of high-performing youth serving organizations in New York City and Chicago found that good financial management was directly connected to the ability to provide high-quality afterschool services."

To better understand the issue and what it would take to enhance the effectiveness of organizations, The Wallace Foundation engaged the management consulting firm Fiscal Management Associates (FMA) to provide intensive training and coaching in financial management. Between 2009 and 2013, FMA provided the 25 Chicago organizations with one of two models of engagement: (1) a customized model that included substantial individual consulting as well as group learning for organizations' leaders, or (2) a model that provided primarily group learning opportunities. The organizations' annual budgets ranged from $800,000 to $36 million, although most had budgets of $3 to $8 million. At the same time The Wallace Foundation funded the Donors Forum, a Chicago-based organization, to undertake an effort to improve the public funding environment for nonprofit organizations in Illinois.

What Are the Key Findings of the MDRC/Child Trends Study?

The study relied on interviews with CEOs and CFOs, conducted every 9 to 12 months for four years; annual visits to a selection of the organizations; and document reviews. It carefully examined the costs of the intervention, including both the costs of the assistance provided to the organizations and the time and money expended by the participating organizations themselves. The main findings are:

• The initiative improved the financial management practices of nearly all of the participating organizations. The nonprofits demonstrated improved financial skills; better - and better-used - computer systems; more useful internal financial reports and procedures; and more - and more effective - collaboration across program and financial divisions, which strengthened the organizations' ability to create good budgets and monitor them effectively. Overall, organizations improved the quality of their financial decision making.

• Nonprofits that received the less expensive form of professional development - group training - improved nearly as much as the ones that received customized coaching, but did so more slowly (in three years rather than two). This suggests that the group learning approach could be cost-effective in cases in which time is not an issue. The median four-year cost per organization of the professional development was $96,000 for the group model and $247,000 for the customized model, which included the cost of the professional development provided and the organizations' expenditures. The nonprofits in both groups invested between 800 and 1,000 hours of executive, financial, and program staff effort over the course of four years to reach their financial management goals.

• Efforts to improve public funding practices through the Donors Forum met with mixed results. The state created a repository that permitted nonprofit organizations to submit standard financial information once a year instead of multiple times a year. However, the biggest challenge that the nonprofits faced - late payments from the state - was not addressed because of the severity of Illinois' budget crisis.