Nonprofits: When To Hire A CFO Versus A Director of Finance

By Frank Tsai

At FLG Partners, we provide clients advice and counsel exclusively at the Chief Financial Officer level. Nonprofit organizations, in particular, often struggle with whether they need a CFO’s level of experience versus a well-qualified Director of Finance to add to their management team. Is the cost of a CFO justifiable? Do they need a CFO’s level and mix of skills?

This issue matters particularly in the context of today’s tight job market where nonprofits compete with private sector companies for CFO and director talent and due to the high cost of finance team member turnover. Matching the right candidate with the true requirements of the organization couldn’t be more important.

Director of Finance or Chief Financial Officer at your Nonprofit?

Some nonprofits are ideal prospects for director-level finance leaders. Smaller non-profits that are not growing rapidly, have a stable source of donors, and “steady state” cost structure, fall into this category. FLG provides part time CFO expertise to many non-profits (those under $15M, for example) which may pencil out better than making an expensive hire at this size. It enables these organizations to only pay for what they need.

Nonprofits with established program models who are not making acquisitions, expanding their mission or extending their geographic reach are prime examples of director-appropriate enterprises. No crisis is imminent, and the organization has already put in place well established business processes and policies. A well-qualified director of finance can easily handle the financial requirements of such steady-state operations from budgeting to forecasting, the monthly close to annual audits and tax reporting.

But what if your nonprofit doesn’t look like this? In today’s environment, many smaller nonprofits are moving towards new models of organizational relationships – from partnerships to service agreements to acquisitions. Donors and funders are increasingly pressuring all non-profits to be both more accountable and more efficient with their “investment” dollars. Scaling through geographic expansion, programmatic expansion or via these new external relationship models is on many Board and leadership team agendas. Other nonprofits are at pivot points caused by financial “crises” relating to losing an anchor donor or sponsor putting them at breakeven (or below). Forecasting deficits and negative cashflow, these nonprofits have no choice but look for more seasoned talent in the CFO role.

Hiring a CFO may also be necessary at nonprofits who are launching significant initiatives, such as a capital campaign, where face time is needed with key donors and funding groups (e.g., foundations and banks) to help sell-in the investment opportunity. Effectively articulating the nonprofit’s rationale for the “ask” and convincingly telling the ROI story to potential “investors” requires experience and talent. Lenders making “program related investments”, in particular, will want to clearly understand the potential for repayment of effective “loan” amounts to nonprofits.

Larger nonprofits and those with capital campaigns also need CFOs because they typically are responsible for managing the investments made by the organization post fundraising. An investment support function must be created to manage nonprofit investments and governance procedures and oversight policies established with both the executive team and the board.

Other nonprofits have grown into complex organizations with a variety of grant-funded programs, each demanding their own unique set of reporting and review requirements. As the finance team expands to handle these, a more seasoned executive is needed to build the right size and level of finance organization. Beyond a knowledge of fund accounting, these leaders must stay on top of new regulatory and tax reporting requirements and technicalities.

Finally, CFOs with longer pedigrees are better able to navigate the sometimes-challenging landscape at nonprofits who serve multiple types and levels of stakeholders. From the executive team to the board, from donors to sponsors, and from grant-making organizations to lenders, a seasoned leader will help your nonprofit better demonstrate the relationship between mission and effectiveness so critical to “evidence-based” decision making and credibility.

At FLG, our recommendations here are very clear. If your nonprofit is considering partnerships or acquisitions, geographic growth or mission expansion, capital campaigns and investments, you and your board will be better served by hiring at the chief financial officer level of finance leader. And if you need financial advisory consulting, we’d be happy to help.