Performance Practice Introduction: Financial Sustainability

Introduction: Financial Sustainability

Performance Practice Learning Module

Do your organization’s financial practices help you produce good results in the long run?

Whether you’re struggling to prevent a month-to-month financial crisis, pay for infrastructure, or build reserve funds, financial sustainability affects your organization’s future.

This learning module is one of seven Performance Practice modules that help you and your team reflect on how your organization’s behaviors and practices align with the principles of high performance. Review the questions below—and share them with your colleagues—for an introduction to the principles and practices of financial health and sustainability.

What can you learn about financial sustainability by discussing these topics?

Does your board and senior management take charge of your organization’s financial destiny? Do they articulate the value your organization delivers and then develop overall financing strategies, tightly aligned with your mission, to support and sustain it?

  • Does your organization track major revenue and expense assumptions and key financial-health indicators using a rolling, multiyear financial plan? At least semi-annually, do you assess your financial performance and make course corrections as necessary?
  • Is your organization’s financial plan designed to help you generate the resources you need to deliver meaningful results—not just whatever resources are readily available?
  • Does your organization’s financial plan aim to maximize sustainable sources of revenue—so you’re not overly dependent on sources that are short term or subject to shifts at any time?

Does your board and senior management establish strong systems for financial stewardship and accountability throughout your organization?

  • Does your organization’s CFO and finance staff have the requisite training, expertise, and systems to manage all financial affairs, including accounts receivable/accounts payable, budget management, capital budgeting, cash management, investment management, debt financing, third-party reimbursement (where applicable), grants management, and audit/compliance requirements?
  • Does your organization’s board monitor financial performance through formal finance, audit, and investment committees with:
    • clear charters?
    • different leadership for each committee, which provides for diverse perspectives as well as checks and balances?
    • a willingness to engage outside experts if needed?
  • Has your organization clearly defined its fiscal policies and procedures? Does management, staff with budget responsibility, board (especially audit and finance committees), and key stakeholders understand these policies and procedures? Does your CFO hold staff accountable for following these policies and procedures?
  • Does your organization’s CEO and some board members review the performance of your CFO (or equivalent) at least once a year? Do you assess the previous year’s goals (individual and organizational) and set goals for the following year?

Do your board, management, and staff build and participate in budget processes that are oriented toward achieving results and not just conducting activities? This means allocating adequate resources for monitoring and evaluation. And it means making hard choices, especially in tough financial times, to direct money where it needs to go to drive intended results.

  • Does your organization’s finance team understand your programs, supporting operations, and the results you aim to achieve? Do you educate and support managers and staff in developing their area budgets, managing their expenses, and understanding the implications of their decisions?
  • Does your organization’s budget allocate resources for monitoring and evaluation to ensure you’re on course to deliver strong programmatic results?
  • Does your organization’s board finance committee review and have an opportunity to shape your budget before it goes to the full board for approval? Does your oversight focus on ensuring that all assumptions about revenues and expenses are reasonable and that the budget supports achievement of outcomes?

Do your board and senior management share your financial results transparently with key stakeholders at regular intervals?

  • Do your organization’s monthly financial reports include an analysis of financial performance, a variance analysis (plan/forecast versus actual results), and a cash-flow analysis? Do you share these reports with all leaders and appropriate managers?
  • Does your organization share quarterly financial reports that focus on critical financial issues as well as operational or external issues that have financial implications with the board?
  • Does your organization produce financial reports for external stakeholders (e.g., funders, lenders) in response to reasonable requests?

Do your board and management nurture the external financing relationships required to support your operations? Do they treat fund development as a strategic function that requires focus, management, capital, and specialized skill sets? Do they ensure clearly defined roles for the board and staff?

  • Does your organization invest in a dedicated, disciplined fund-development function? Does it build internal capacity so that the organization is not overly reliant on consultants or the heroic efforts of one staff or board member?
  • Does your organization invest time in building and sustaining relationships with current and prospective financing partners, such as donors, foundations, banks, and other financial services organizations? (Do you recognize that these relationships are critical during trying financial times?)
  • Does your organization manage to a fund-development plan aligned with your strategy? Do you ensure that your projected costs and revenues are structurally balanced and that we have sufficient liquidity to fund operations?
  • Have your organization’s board, management, and staff defined—and are accountable for—their respective roles in fund development?

Does your organization operate with margins that allow you to build your balance sheet? Do you fund depreciation on buildings and equipment? Do you build internal cash reserves that brace you for unknown events, put you in a position to finance your own receivables if necessary, and enable negotiation for a line of credit with a financial institution?

  • Does your organization maintain an operating reserve to sustain cash needs for at least three months?
  • Does your organization reserve funds to cover the depreciation on buildings and equipment?
  • Does your organization maintain a capital budget and a capital reserve fund for planned and unexpected capital expenditures or major repairs?

Do your board, management, and key staff understand your organization’s cost structure, which aspects of it are required to produce high-quality programs and/or services, and how it aligns with reliable revenue sources for funding it year in and year out? Are they relentless in making necessary investments with an eye to costs and benefits while being equally relentless in reducing unnecessary costs?

  • Does your organization continuously work to eliminate unnecessary costs? Is your organization good at distinguishing between expenditures that are essential for driving desired results and those that aren’t?
  • Does your organization understand the full cost of delivering programs and services (including all direct, shared, and administrative costs)? Is the full cost of programs and services delivery incorporated in your financial plan?
  • Does your organization’s leadership ensure that you only grow your programs when you can also grow your program capacity and administrative infrastructure—to ensure reasonable alignment of costs and revenues?

Does your senior management use financial models to make the organization’s financial condition clear and transparent? At any given point, can you predict how your organization will end the year financially (and what will make the prediction more or less reliable)?

  • Has your organization developed a multi-year financial model that comprehensively considers critical cost and revenue assumptions?
  • Does your organization conduct a “what-if analysis” at least annually to prepare for the possibility of significant economic changes or other disruptive events? Do you also identify ways to mitigate these disruptions if they were to occur?

Does senior management instill an organization-wide discipline of compliance with all regulatory requirements?

  • Does your organization annually review all regulatory changes and adapt internal procedures to ensure timely compliance?
  • Does your organization implement policies, procedures, and an accountability structure for managing government grants/contracts and financial obligations?
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