Steward Leadership: Differentiate Strategic from other Financial Roles

Posted by Matthew Thomas

matthew-thomas-2Essential to any financial strategy, no matter whether an enterprise is upscaling, downsizing, or trying to hold a line, is the differentiation of financial roles between strategy, management, and procedure. Most enterprises focus on the procedural: making sure there is adequate separation of roles and powers to reduce the risk of fraud or theft. While certainly an essential part of any organization's structure, this procedural role differentiation is only a small part of the whole. It is also, of course, commonplace to group procedural work by task: Accounts Receivable, Accounts Payable, General Ledger, Payroll, and so forth. This is because a certain degree of efficiency can develop from task repetition and focus, as Henry Ford demonstrated long ago. Modularizing tasks and separating powers is often a technical solution to snarled bookkeeping and accounting. So whether procedural roles sub-divide along tasks or certain powers (or, usually, both), this kind of role takes up most of the "best practices" manuals and accounting standards most enterprises focus on.


The management and strategy roles, then, tend to get less attention. Part of the reason for this is that they tend to operate outside the finance and accounting departments and non-financial-titled people often are responsible for them. Nevertheless, to maintain organizational excellence and implement creative, innovative approaches to challenges, steward leadership requires that strategy and management roles must have their due.


Like what you're reading? Subscribe Now! Strategy roles often reside in the executive-level staff and the governing board(s) and/or other accountability structures which work on behalf of the owner(s). Strategy begins with the overall financial model in which the enterprise operates. Questions of financial goals, where money generally comes from, where it gets expended, where profits go, what does long-term growth, sustainability, and viability look like - these are strategic questions. Specifically financially-titled executives support the chief executive's capacity to develop strategy within the owner(s') and governing body's parameters.


These strategic roles are supported by those in the management roles. Management roles provide the forecasting, planning, analysis, and reporting functions that support the overall enterprise. They also provide the day-to-day decision making within strategic parameters to advance toward longer-term goals. They work at the trend level, observing trends and intentionally working to create trends within their scope of responsibility. Some of these roles may have explicitly financial titles (like Financial Analyst, Office of Budget), but others may not.


One of the reasons that many enterprises end up focusing on procedure, even when they want to develop and manage strategy, is because the normal financial reports most accounting systems produce are quite procedural, and many organizations try to use the same, basic reports at all levels. In smaller enterprises, this happens easily since the roles are not very differentiated, and so people who work at a procedural level often are asked to report at the higher levels. And some executives and managers, fearing to reveal their own (perceived or real) lack of financial savvy, just go along with it.


Our free Financial Services Roles Tool groups these three types of roles - strategy, management, and procedure - from top to bottom. Using the tool, steward leaders can list out the different needs of their organization at the various levels, and define who is doing what role. It's usually best to start with the procedural roles and work up - procedural roles are easier to define, and the rest may take some thinking and working. Don't be surprised if there are gaps! Don't be surprised, either, if certain roles exist as outside contractors rather than within the organizational chart.


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Topics: financial confusion, Matthew Thomas, financial management, Financial Health, Financial roles

Financial Health: Modularizing Financial Tasks in Small Organizations

Posted by Matthew Thomas

matthew-thomas-2The Challenge - Staffing

Small businesses, nonprofits, and religious organizations often face similar challenges in maintaining separation of powers in financial procedure. Often, smaller enterprise systems may only have one or two people managing the financial operations. Enterprises of this size typically prioritize staffing elsewhere. 

Error Needles in the Accounting Haystack

While risky from an oversight standpoint, small enterprises have limits as to how much they can spend, in time and money, on financial management. The small number of people available limits how much they can divide the role. Setting aside fraud risk for the moment, the small number of people involved lends itself to the risk of errors in recording and reporting. Even the most careful bookkeeper or accountant can make mistakes - and then, in small organizations, they have to have the kinds of procedure and process in order to be able to find their own mistakes and correct them. And as they will tell you, it is often harder to find their own mistakes than it is to find others', as they sift through the stacks of numbers produced by the regular accounting reports. Nevertheless, in small systems, this is often the way things must be.

Staffing Options

Some enterprises work around this by hiring out an accounting firm to do their books, and that can work well. It helps keep compliance with the laws for reporting and taxes, and builds in error checking and correcting into the system. Other enterprises, seeking more internal control (and often, some reduction in cost), will hire in an embedded contract CFO, finance director, or bookkeeper, depending on the level of functionality required. These are the services I often provide through my consulting practice, particularly in organizations seeking to outsource at least a portion of their financial management - either in a long-term or transitional/transformational situation. Still others maintain full internal managment of their financial health and functionality, but do so with relatively few people. 

The Why and What of Modularization

Modularization_helps_catch_and_correct_errorsIn all three basic cases, modularization of tasks can help particularly with the error checking and correcting that would naturally come otherwise from having more people involved. Modularizing tasks for financial health involves establishing procedures that are designed to stand alone, as though different people were doing them in each module, even though, in the cases of these enterprises, the same person is often executing multiple modules. For example, one person may be reconciling the enterprise's bank accounts to the accounting system, and also checking transaction-level reports for errors on a daily, weekly, or monthly basis. Modularization argues that those two tasks stay distinct, as though different people were doing the tasks. That way, the procedure design allows for catching errors missed in one procedure through the completion of the other procedure. If the two procedures are worked simultaneously, or otherwise conflated or interwoven, the likelihood of finding errors is significantly lower. 

Retail Example

A retail manager is responsible for reconciling Point of Sale receipts from the cash registers to deposits made to the bank and card transaction deposits made by the merchant servicer to the bank account. The manager is also responsible for accounting accurately for inventory, and overseeing regular bill payment. Making certain these tasks are modularized, so that the franchise owner can review them independently, will improve the accuracy of the tasks themselves and the information they report. 

Religious Organization Example

A church has two volunteers managing its finances. One volunteer and her team manage weekly contributions; the other manages bill payment, payroll, bank reconciliations, and governance reporting. (This is a pretty standard breakdown for many small churches.) The two volunteers must reconcile the deposits against the contributions on a weekly basis. The volunteer responsible for all the non-contribution side of the books must keep all of the tasks modularized to catch errors in bill payment, bank reconciliations and report creation, so that he doesn't introduce systemic errors into the system and propogate them forward - particularly since they only obtain a CPA's compilation or review every few years. 

Process, not just a compilation of best practices.

Much of the modularization of tasks makes sense on an enterprise-by-enterprise basis, and must be fine-tuned to the particular division of labor, task, and oversight used by that enterprise. While there are some "best practices", for small organizations, many times the staffing availability dictates making do with the same person carrying out multiple modules of financial management. This is why process design is often so essential to developing how the modules work in any given system. Modularization is a tool in the process arsenal to help design self-correcting systems where staffing is minimal and the risk of fraud is low.



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Do you have gaps in needed positions? How might you staff your system for optimal financial health?

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Topics: Matthew Thomas, financial management, Financial Health

Nonprofit Financial Management: Managing Endowments with UPMIFA

Posted by Matthew Thomas

matthew-thomas-2Endowments often have an image problem: to outsiders, they look like a lot of money sitting around doing very little. To those inside the organization, they look somewhat untrustworthy, since they typically fluctuate with market conditions. Nevertheless, endowments can be very helpful instruments at building an organization's capacity to carry its mission far into the future. Whether the organization is a community service organization, a symphony orchestra, a university, or a religious organization, endowments can support core operations either through general endowments or through endowments tied to specific designated areas of need or interest. Prudent financial management of endowments requires a basic understanding of the law relating to them. The purpose of the law is to maintain the long-term buying power of intitutional endowment funds in the face of inflation.

In 49 states, the District of Columbia, and the US Virgin Islands, the funds held in endowments are covered by each state's version of the Uniform Prudent Management of Institutional Funds Act (UPMIFA). You can find the full text of the uniform version of the law here. Only Pennsylvania and Puerto Rico have not enacted some version of this law, and as of the time of writing, do not appear to be inclined to do so. 

What does UPMIFA cover? UPMIFA_Purpose-1

  • Uniform standards of conduct for managing institutional funds: how donor intent must be considered, and then the charitable purpose of the institution;
  • What prudence looks like in managing individual and pooled funds;
  • Diversification;
  • What fund restrictions apply and when;
  • What level of expenditure, under what circumstances, constitutes prudence;
  • The requirement to maintain the buying power of the fund (and not just historical dollar value) over the intended duration of the fund;
  • Delegation of agents and managers; and,
  • Release or modification of restrictions on specific funds.

UPMIFA helps organizations manage funds in a way that protects the longevity of the funds they manage. Any organization that holds endowments (or funds that have been treated like endowments by the board of directors) must manage these funds according to the version of UPMIFA passed in its home state.

Management of endowments gets particularly exacting in volatile and down markets, as we wrote about previously. Nevertheless, endowments are a strong way for donors who value your organization to leave a legacy that can sustain your cause, mission, and operations for generations to come!

+Matt Thomas

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Topics: Matthew Thomas, financial management, endowments

Nonprofit Financial Management: Sustainability in a Volatile Market

Posted by Matthew Thomas

Even small nonprofits often have endowment funds invested to sustain long-term work toward the cause for which they were founded. Large nonprofits typically have a significant source of their annual revenue generated by earnings off of investments. So when the market begins to jump around, as it has done since the middle of the summer, nonprofit leaders begin to get nervous about what downward market trends might do to their revenues. This induces some to pull their funds from the markets, or hesitate putting funds into the markets. 

matthew-thomas-2Downward markets trends tend to cause no small amount of panic. However, sound financial management suggests that there are four things we can do intentionally, and four others we can avoid, that will strengthen our organizations' financial health, and ride out downturns in the markets.

  • Do: Follow your Investment Policy Statement (IPS), even in a market downturn. An IPS specifies the investment objectives, who is responsible for achieving those objectives (and who is responsible for monitoring), asset allocation, diversification, rebalancing, and so forth. Rebalancing should typically take place on a regular, predetermined basis, rather than at the whim of the managers. 
  • Don't: Try to time the market. In the moment, it's never clear where the market bottom is, or its top. In the long term, markets show trends; in the short term, they're a little (a lot?) crazy. If people could predict where the market was going to go in the short term, a lot of people would be making a lot of money. Most people want to sell during a downturn and buy as the wave rides higher. The problem is, that for most people, this means buying high and selling low, which is just the opposite of what would create a strong return. The best option is to buy and sell on a regular basis, according to the IPS, as the budget dictates, taking advantage of the lows to buy more shares, and taking advantage of the highs to gain more appreciation. 
  • Do: Maintain a cash reserve large enough to sustain your organization through a short-term dip in the market, to prevent having to sell securities low, if at all possible. Once the markets rebound, replace the cash reserve.
  • Don't: Focus too much investment in one type of security, or one sector of the market. Diversify. Chasing hot stocks does not typically work for funds that expect to remain in perpetuity. 
  • Do: Allocate assets based on risk tolerance and goals. Can your organization handle the risks associated with the potential rewards of investing? Remember, too, that inflation is a risk - and that securities that offer returns below the rate of inflation are actually losing buying power. 
  • Don't: Rebalance based on short-term swings in the market. Set a time window, and asset allocation variance window, and stick to it.
  • Do: Make sure your organization maintains compliance with the Uniform Prudent Management of Institutional Funds Act (UPMIFA) in a down market. UPMIFA requires that the long-term purchasing power of a fund be maintained, not just its historical dollar value. Prudence (the P in UPMIFA) requires sound judgment in a market downturn. The law requires a seven-point test for prudence. (Ohio's version is here, which matches UPMIFA Section 4(a), applicable in all states (and DC, and USVI) with the exception of Pennsylvania.) We have helped organizations implement UPMIFA. We'd be glad to help. 
  • Don't: Panic. Take a deep breath. This, too, shall pass.

These do's and don't's will help sustain your organization's financial health in a market downturn. Taking a step back from the day-to-day headlines, looking at the long-term trends, and focusing on your organization's mission will help get you through the days when the market seems crazy. We're in this with you!

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This article is for informational purposes only and does not constitute an offer or solicitation to sell shares or securities. Design Group International and its associated consultants are not brokers, dealers or registered investment advisors and do not attempt or intend to influence the purchase or sale of any security.

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Topics: nonprofit leadership, Matthew Thomas, financial management, Financial Health

Organizational Design: Simplifying Finances

Posted by Matthew Thomas

As organizations grow, their finances naturally become more complex. Particularly in churches and non-profits, financial complexity increases drastically when people begin to earmark funds. Earmarks can be helpful when raising funds for specific causes and projects. However, many organizations hand out earmarks and designations like candy, and this increases their accounting complexity drastically.

Before making designations, consider the use of the funds: for a specific project, earmarks work well. For things that are part of the usual and general operations of the organization, consider broader uses of funds, so that there is less complexity and greater flexibility in accomplishing the core mission purpose of your organization. Use your most restrictive funds first, leaving you with more freedom down the road.

Design Group International Consultants can assist you and your organization in bringing simplicity to your financial structure. Click on the button below to contact us to see how we might work together!

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Topics: Simplicity, Matthew Thomas, financial management, Design Group International, organizational design

Financial Leadership: Do You Have to Get There All at Once?

Posted by Matthew Thomas

Amidst the Fiscal Cliff conversations in Washington, DC, organizations are asking about their own financial outlook. Equities markets dropped nearly 4% in the first half of November, after dropping nearly 2% in October. Uncertainty is high.

communication negotiationThe American government has negotiated itself into an all-or-nothing deal-making, deal-breaking situation to work out questions of revenue, expenses, deficits and debt. However, this approach is often not the right approach for an organization running chronic deficits. (Most organizations cannot borrow money as cheaply and as plentifully as the US Government, so that is not typically as much as an issue for organizations as it is for governments.)

Most organizations’ financial woes did not erupt overnight, and will not necessarily be solved overnight, either. Unlike the US Government, the negotiations typically do not have to create all-or-nothing negotiating positions.

Organizations running chronic deficits do have to exhibit fiscal discipline to get healthy – revenues should exceed expenses for any organization. However, strategically using assets to generate new sources of revenue can help an organization reach true health. The results of strategic asset use are not immediately knowable, but should be clearly measurable.

Therefore, it makes the most sense to make fiscally-disciplined decisions for the short term while using assets to do new things. This means you won’t get there all at once – which is probably where the “Fiscal Cliff” will end up, too.
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Topics: Financial Leadership, Matthew Thomas, financial management, Organizational Leadership, Design Group International, Fiscal Cliff

Financial Management: Longer-Term Budgeting

Posted by Matthew Thomas

If you have created a trend-based budget for a single fiscal year, you might consider projecting out 3 to 5 years out into the future to see where those trends lead.

Of course, projections are subject to all sorts of on-the ground realities as the unexpected happens or the expected doesn’t happen. Nevertheless, most organizations have enough history to be able to project forward with enough certainty to see where the current income and expense structures will land.

Financial Management: Budget NumbersIn many cases, this longer-term approach will show the balance points between short-term and longer-term goals. In a growing organization, these can indicate how far out the possibility of new hiring, facilities, programs/services/product lines are from being fully funded. In a shrinking organization, these balance points can show where cuts really can compromise the organization’s mission and how balancing a budget one year may still leave long-term deficits, depending on how the cuts are handled and the balanced budget is achieved.

Longer-term budgets can give leaders insight into what interventions need to happen, when, and in what order to keep an organization fiscally sound. Leaders need the longer-term budget to maintain a strategic viewpoint in their organization – rather than merely react to annual line-item requests.

Has your organization had a financial health assessment recently? Click here for an overview of the tool.


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Topics: Matthew Thomas, financial management, budget, Design Group International