[00:00:31] Patrick: Hello, everyone. Is spring here yet? It can't get here fast enough for me, but I think I complain about that just about every episode now. I do not like the cold weather. Let's go, spring. Anyway, glad you're here. We got a really cool episode today. We're going to talk finance.
Exciting subject, right?
It actually kind of is. It got more exciting for me in my organizational leadership journey when I started to actually understand a little bit of it. It actually got kind of exciting, but it's critical. And we've got a guru on the line, and I do mean guru.
This guy knows his stuff and he knows his way around not only the corporate sector, but the nonprofit sector. And he is Jason Krueger. He is the president and founder of Signature analytics. And really, they're just kind of shaking up the way that business leaders and owners run their businesses through how they look at their data and how they manage their finances. So when I first saw signature analytics, I thought, okay, this is a data company.
And then I realized after talking with Jason, this is a data company, but it's also a financial leadership company and helping organizations of all types and sizes with accounting and with business sort of advisory work, strategic work when it comes to their finances. And I love that. I think there's been a lot of, in my coaching career and in my nonprofit career, a lot of people who see finance as numbers, accounting, reporting, balancing a budget, all of that. But it is far deeper and more strategic than that. And when I had my first conversation just on the phone with Jason not long ago, I got excited about how they look at that, too. So we're just going to have a conversation about what the world of financial leadership looks like today, particularly in nonprofits. But we're not limited to that. Just know that most of our listeners are in the social sector, so we'll just see where it goes. Jason, I just want to thank you first of all for connecting with me and carving out time to come on and share some of your expertise and insights and perspective on this whole thing. Welcome to the show.
[00:02:55] Jason: Thanks so much, Patrick. Glad to be on.
[00:02:57] Patrick: Well, tell us the story. Tell us about how you got where you are, what you're doing for the world and why I didn't cover, I'm sure, one little tiny sliver of it in this introduction.
[00:03:09] Jason: Yeah, no, that's fine. I think my background, obviously, is in finance and accounting. I started my career in public accounting, spent a lot of close to nine or ten years in public accounting, most of it with Deloitte, which is one of the large national or global public accounting firms. And what I really saw being there, we worked with a lot of mid market. I worked with a lot of mid market clients while I was at Deloitte small mid market. I also worked on some Fortune 500, but I really gravitated to the small mid market. And I also had developed a pretty solid foundation within the nonprofit community as well. I know that's the focus of our conversation today. And what I would observe a lot of times with for profit and nonprofit companies is that in the small mid market, they really deserve better than what they're getting. And what I mean by that as it relates to finance and accounting, and what I mean by that is a lot of companies in the small mid market, they've experienced some level of growth. But a lot of times they're coming from a point where they've always looked at accounting as almost a necessary evil. Right, where we got to pay our bills, we have to invoice or make sure we contact our donors or receive our donor funding. We have to make sure that we make payroll every two weeks, and we have to file, if you're for profit, file your tax return. If you're nonprofit, we got to file the 990, maybe do the financial annual audit every year. And that was about it. And as these companies matured or organizations matured and grew, they started to feel the pain. Point of not having better sophistication as it relates to the financial side of their business. And so being at Deloitte, I had exposure to hundreds of different companies, organizations across the country, and really thought that there was an opportunity in this space to provide this space with the top talent, but that's in a fractional or flexible way. And so I started signature analytics. I left Deloitte, started signature analytics in 2008.
So just over 15 years ago now, with the idea that we can bring the top talent to this small mid market, that one they may not be able to afford because the top talent is expensive. And the second is they may not need that full time person, they may not need a full time CFO, they may not need a full time controller. They may not need different levels. And we can provide that flexibility. That financial leadership that you mentioned before and really help them to shift the mindset of finance and accounting as a cost center to more of a value add to the organization that allows them the clarity and information to be able to make decisions to achieve their mission or the goals that they have for the organization.
That's really focus when we talk to companies is what are your goals, what are you trying to accomplish and how do we help get you there?
[00:06:22] Patrick: I love the business model framework you anticipated. Actually my first question, which was around what attracts you more to the sort of mid market and companies, and you nailed it with that. It's that you are in a position. Your unique value proposition, it sounds like, is you can help smaller companies think like bigger ones without the cost of that sophistication that the big ones have.
[00:06:48] Jason: Right, exactly.
Larger organizations and companies, they have an advantage because they have more resources and we want to bring that and we are bringing that to the mid market. And these companies also that are experiencing growth. Most of our clients have a growth mindset. They want to grow. They've started to experience challenges with managing cash flow. They've outgrown the ability to manage it in their head, obviously, with the financial statement audit process, with banking relationships, financing opportunities.
And the first question that you get when you talk to a third party about your organization is, let me see the financials. And if you don't have the ability to provide good, credible financial information and speak to them, it's very difficult to move your organization forward.
[00:07:42] Patrick: It's that speaking to them that's a big deal, too.
You can have an accountant or a chief financial officer or an outsourced firm that can put together all the accurate statements. But if the CEO can't speak to what story those financials tell.
That's been one of my biggest revelations throughout my career, is that I'm definitely not a finance person.
It's a place that always intimidated me. Finance and accounting, which are not exactly the same thing, but those areas always intimidated me until I got enough working knowledge of what the basic tenets actually say and how to look at them. I know we're going to talk about that a little bit more, but I do appreciate that. And it leads me into the first question that I think a lot of our listeners, well, I know they do because I hear it in my coaching world, I hear questions like, boy, we don't know what to do next about our finance department. And sometimes it's our CFO, retired, and we're trying to consider whether or not we want to replace them, or if we want to downsize that role, or if we want to upsize that role, if we want to try to find a new CFO. Is now the time to maybe contract with an outsourced sort of fractional firm to help do that work?
What to you are the markers that say outsourcing or partnering with someone like your company?
This might be a good time to do that. What are those markers that leaders can look out for and say, we might be good candidates for maybe outsourcing some of that work?
[00:09:25] Jason: Yeah.
A couple of comments on that. I think organizations or companies that have a CFO, and they're in the small or mid market, it's important to understand, how do we define the role of the CFO?
[00:09:42] Patrick: Right.
[00:09:44] Jason: The CFO for a very small company will have a significant different skill set than a CFO for a Fortune 500 company. And I think in a lot of cases, the CFO gets interchanged between strategy and then also overseeing accounting. Right. So a lot of smaller companies that may hire a full time CFO, they may or may not have the strategic side of things, and they're spending a lot of time looking in the past, making sure the accounting gets done. And that's not the true value of a CFO. The CFO should be there really, from a strategic perspective, should be working with the accounting team so that the accounting team can produce good reporting in a format that the organization can use to make decisions and analyze and understand.
And then the CFO should be meeting with the executive team to help them understand the trends of what's going on, the direction that they're going, and be able to look into the future. As far as simplest form is cash flow, do we have cash availability? Are we meeting the expectations?
Does the team, and from a nonprofit perspective, do the program directors have visibility into their budget and what's happening in their aspect of the organization?
What is our path forward? What are our goals and mission, and how are we going to accomplish that? Does it make sense financially? So if an organization says, hey, I need a CFO, that role should not be designated to accounting per se. And what we find is most organizations in the mid market or small, they don't need a CFO for 48 plus 50 hours a week. They need a CFO for 40 hours a month or 20 hours a month or sometimes even 10 hours a month. And the true, what they really need is actually somebody that can provide that leadership on the accounting side as well. And that's more of a controller role. And so you don't want to overpay for a CFO to do the lower level stuff, and you don't want to bring on a controller and have them try to do the CFO higher level stuff. And so that's where we really come in, is we can break up those roles. You don't need that CFO full time, but we can provide that leadership, that strategy, that strategic thinking.
You don't need a controller full time. So we can provide that, break that up at a lower cost point, better blended rate, some that financial, that accounting leadership within the department. And then again, we're not trying to replace your team. So outsourced accounting, some people think, well, we'll outsource everything and they'll do it all and we'll never talk to them again. We want this to be very collaborative. We want to understand who is your current team and how can we leverage them to be more successful. We're not trying to replace your current team. We're trying to leverage them to be more successful, especially at the lower levels, provide them the support, the opportunity to grow in their position.
But we're trying to give the organization and the company more flexibility during unknown times in some cases, but also the flexibility to be able to grow and scale. So those are the real advantages. If you look at outsourced accounting from a strategic perspective, as opposed to, well, I'll just let them do all my accounting. It should still be, even though it's an outside provider, we want to be part of your team, and we still want to really collaborate very closely with the client to work with them to achieve the goals they have.
[00:13:25] Patrick: And how often is it an additional benefit that it actually saves the organization money to outsource?
[00:13:36] Jason: Yeah, I mean, a lot.
What I will say, I'll add a caveat.
A lot of times we talk to organizations or companies where they're understaffed within their accounting and finance function. And so they're seeing the pain points of that. They haven't built the infrastructure to support them as they take that next leap in their organization. So in a lot of cases, they do need to invest in their business or organization to help to take that leap. They can do that by hiring us, which may be an additional cost point to accounting and finance, but if they didn't hire us, they'd likely be hiring a full time employee. And so that cost and sometimes that investment has to be there. If you don't have the infrastructure to support the growth into the future or where you are even now, you have to consider that. So there may be an additional investment, but that investment has to be made. It's just a decision of how. Now, once we come in, obviously we're looking at a lot of different things associated with the business. We're looking at how you're managing from a nonprofit perspective. Obviously, your donors, your donor database, your systems, your donor management system, how are you managing your donors?
We're looking at cash flows. A lot of times when you get government or foundation grants, they're cost reimbursement based. So that comes back to what we were talking about before, which is you have to have cost flexibility to be able to incur the costs and then get reimbursed because you haven't incurred the costs up front and then reimbursed later, and then just overall expenses within the organization.
Is each expense associated with the organization, is it really focusing on the mission at hand and what you're looking to accomplish? Maybe you made investments last year that haven't gone as planned. Do we need to look at cutting those costs? We've seen a lot of overspend just simply in the software component and in tech stack of organizations.
They have Salesforce over here, which is very expensive. They have another CRM over here. They got something else over here. And just being able to really understand the expense structure and component, make sure you have the right people doing the right things within the organization, and that you have the right budget in place, which is critical for a nonprofit to be able to manage against that effectively. So there's definitely a lot of opportunities to streamline and create efficiencies in organizations as a whole.
[00:16:24] Patrick: I'm interested in your take on this. What would you say to a CEO?
I guess in any sector that they need to know. So you have a chief financial officer, maybe you got an accountant. Your finances are in. You got skilled people. That that's what they do. They're trained, they're educated. That's what they do. And sometimes the ceos, I've seen ceos take so much of a hands off, it's like I don't know nothing about the finances. You got to ask John about that.
But there are certain things you need to know. You might not need to know how to calculate the weighted average cost of capital, but you might need to understand what the balance sheet is really telling you today versus what it looked like last year. Right. You might need to understand the cat. What would you say to a CEO of a small to mid size? We'll say company or nonprofit? What are the basic tenets? They need to have a good grasp on.
[00:17:23] Jason: Yeah. I mean, at its base level, we hear that it's over said, but cash is king, right?
[00:17:30] Patrick: Yeah.
[00:17:31] Jason: We'll make the assumption that they're getting accurate, relevant, or timely financial information, which is a large assumption in that space. So, number one, get good. Are you getting monthly financials that represent your business, and can you trust them? So that's number one, making that assumption. Understanding cash flow and the impact of decisions you're making now on future cash flows is critical.
When you talked about the balance sheet, patrick, accounts receivable, accounts payable, the flow of cash, your revenues may look good, but if you're not collecting any of that revenue, there's going to be an issue, especially in organizations or companies that have inventory.
There's a large investment made to buy that product.
So that cycle of cash can be longer and can create significant challenges in growing organizations and businesses.
[00:18:35] Patrick: Yeah.
[00:18:36] Jason: Listen, what I would say is cash. Understand cash flow and what future cash flow looks like. Make sure you have timely, basic financial information and statements. And then once you have that information, you can start to break it down and segment it out to really understand different aspects of your business. But the baseline is, hey, you got to have at least monthly good financials you can trust, so you can really try to understand the business or the organization, and you need to understand your cash flows. And all companies, but especially nonprofits, should have a budget, an annual budget, where they're managing against that budget on a monthly basis, so they understand where the organization is performing and adjustments that they may need to make.
[00:19:25] Patrick: I have seen, many times, I've seen organizations whose ceos do understand what they're looking at when they see it, but they have not been given good information.
[00:19:39] Jason: Right.
[00:19:40] Patrick: And I've also seen good information given, and the CEO didn't know what they were looking at. And by virtue of that, they weren't able to make the kind of strategic decisions that they needed to make. And both of those are fatal for an organization. And when you talk about cash, it took me a while to get as simple as the concept is of cash flow. It took me a while to sort of figure that out, because if you're not a finance person, you hear the word cash and you just think, money, right?
[00:20:11] Jason: Money in the bank. I can look at my bank account and I know how much I got, right.
[00:20:14] Patrick: Or I can look at my balance sheet and it says millions in assets. And I think, well, assets is money. I got cash. That's not cash. And the cash flow and the ability to be able to cycle through payroll and pay your bills and manage your debt is all a matter of, you know, you can see an organization who is otherwise financially healthy. Like, they've got some assets and they've got some, but they run. I remember I worked for a small united way. That was my first nonprofit. And I remember that there were times during the spring when cash got really tight. And it's because we had seasons of when United Way pledges came in. People would make payroll deducted gifts, and those gifts, they'd start out, and then they'd get lower and lower throughout the year as people leave their companies, and there's another deduction that falls off, and cash would drop. And then in the spring, when we're not getting a whole lot of cash and we're not campaigning, it got tight to make payroll at times. So I was in the crucible of learning that at that point. But it sounds simple. And yet so many people still misunderstand what you're saying. When you say cash is king, it doesn't mean, hey, the more money you have, the better. That's not what you're saying.
[00:21:36] Jason: Yeah, I mean, the reality is, at a minimum, every company should be able to understand with a good degree of confidence how much cash they will have looking out three months. So on a weekly basis, the standard is the 13 week cash flow, and that's roughly one quarter or three months worth of time frame. And so every company needs to have confidence that they can forecast their cash out over the next 13 weeks or three months. Beyond that, it gets more difficult, because the further you look out, the more difficult it is. But if you have a three month look forward, you should have enough time to make decisions to continue driving your business forward and manage that effectively and not get stuck in a situation where, oh, no, are we going to make payroll this week?
[00:22:31] Speaker A: Right.
[00:22:31] Jason: I mean, that's the worst feeling ever.
[00:22:34] Patrick: Well, in our case, the case I just described to you at the United Way, we could forecast very well because most of those decisions were based on past trends. We had five years of what April looks like.
We know, hey, this April, things are going to get every April, we can see this happening. There's obviously other variables, though, like what's happening with sales. Are we growing? Is the economy changing?
So there's different factors there. There's a story I tell a lot.
I might have mentioned this to you on the phone. I went to one of those week long executive education programs at Harvard years ago, and it was on strategic leadership in nonprofits. And one of the days with our work groups. We were broken into these little cohort work groups of, like, eight, and we dormed together, and we studied together, and we built cases together. And one of our assignments was groups were given ten sets of financial statements. Each set was from a different nonprofit, either a national or an international nonprofit, mostly ones with big brand names that you would relate to. And our job, the statements didn't have the name of the organization on them. They were just the balance sheet, the income statement, and the cash flow statement, the three primary ones. And our job was to look at those statements and analyze them. We had a list of ten nonprofits, and we had ten statements, and our job was to match them up just based on looking at the numbers. And that was such a revelation for me to realize what you can tell from looking at financial statements. Now, we had a nonprofit CPA in our study group, and he grabbed the statements, and he's looking through it. We're all talking and debating, well, this must be that. And this. Well, I don't know what this. What does this mean? How are we supposed to know? And he's just sitting back there quietly thumbing through the things, and he's writing down his notes, and he throws out the sheet in the middle of the table, and he goes, there's the answers. And we were like, what do you mean, there's the answers? We need to talk about this. He goes, no, those are the answers. We're like, did you cheat? Do you have the cheat sheet? Have you been through this program before? He goes, no, but trust me, those are the answers. So we said, okay, explain it to us. And he said, well, all right, let's look who on this list has lots of land.
We look at it, and we're like, oh, Boy Scouts. Like, they have all these ranches and camps and things, right? Boy scouts have tons of land. He's like, exactly. They're on the list. Look at the balance sheet under assets. Look how much of it is cash and how much of it is land and equipment. It's sky high. It's the highest one on here. It's got to be the Boy Scouts. He says, who on this list has more in pledge receivables than they do in who would have high pledge receivables? Who raises most of their money through pledges rather than hard gifts? We're like, united Way. Exactly. And he's looking at these different things and going, this just makes sense. Based on I can look at your financial statement, and I can almost tell you what you do and how you run your organization. It was mind blowing for me. I've never forgotten it.
[00:25:55] Jason: Yeah, absolutely.
The financial statements tell the story. Right?
And that's the critical piece, too. When you're providing those financials to a third party, even if it's the board or a bank or a large donor or somebody. Right. They tell the story of your organization, and a sophisticated individual will be able to read that story. And so what I tell people all the time is, if a third party wants to see your financials, don't just hit print on Quickbooks and send it to them, because you're going to lose a lot of credibility doing that. You want to provide a good package that shows credibility and tells the story of the organization and the mission of the organization and what's happening.
[00:26:53] Patrick: Right. So true.
[00:26:54] Jason: And just hitting print on Quickbooks with all the different chart of accounts and account numbers and everything doesn't do that. As well as sophisticated financial statements that are summarized the right way and show the right trends and the right story, that's really good.
I'm not saying to do anything erroneous to the financials. I'm just saying it's just how you present them. It tells the story.
[00:27:21] Patrick: That is super advice, because, for example, staying with the nonprofit, one of the financial metrics that forever people have looked at with nonprofits is overhead percentage, which I hate. I don't even like the term in the nonprofit sector, overhead. It's capacity. It's the amount of money we have to spend on our capacity to deliver on our mission. But all overhead is not the same.
So, to your point, you print the financial statements or even send the 990, which is where you calculate your overhead from, and someone looks at it, oh, your overhead is 50%. Forget it. That's too high.
It's not too high. If you understand what that overhead is and how it's being used to deliver on the mission, and when you can juxtapose the overhead with the return on investment, what are you creating with that overhead? If I'm creating impact and I'm changing lives, and I can do that better at 50% capacity than I can at 20% capacity, I'm more interested in the ROI. So I think you're so right. We have to be able to tell the story in a summarized way, particularly for people who don't know what they're looking at, right.
[00:28:32] Jason: When they see, yeah, that's a good example of the overhead. Because a lot of times, like you said, it's like, wow, that's too high. Or we need to reduce or limit costs on everything that's not associated directly with programs. But the reality is, any company has to invest in their infrastructure if they want to continue to grow.
And what we saw a lot during COVID is companies were received, or organizations, nonprofits especially, were receiving significant amount of donations. I mean, donations were coming in like crazy. It was especially in certain segments, they had more funds than they knew what to do with.
[00:29:15] Patrick: Right.
[00:29:16] Jason: And so then they ramped up programs, and they ramped up a bunch of things, but they didn't necessarily build the foundation to be successful in those areas. And we were looking at a client of ours, and I was talking to our nonprofit leader at our company yesterday in preparation for this, and she says, yeah, we came on to a client, and they had grown so much. But their administrative, I looked at their functional expense statement, which is part of one of the statements associated with nonprofits, which kind of shows the allocation of where your expenses are. And their administrative costs were at 1.6%, and industry standard is probably around 5%. And they're wondering why they're having challenges.
They don't have the infrastructure in the back end to support the mission effectively. So what it did is it created significant inefficiencies in what they were trying to accomplish, and it really limits their ability to be effective in a lot of ways, too, and to sustain that growth. And so that's a huge factor is in organizations, is we all agree the money's got to go to the programs, and everyone wants to see that, but you've got to have the infrastructure if you really want to grow effectively.
[00:30:47] Patrick: Infrastructure is a good word. It's better than overhead. Infrastructure and capacity, I think, are more appropriate. And it's not just admin. Marketing is another one. Right.
I've looked at board members who look at the marketing budget and say, we just can't spend any more in marketing. And I look at it and I go, it's less than 1%.
I said, raise your hand around this board table. If your company spends less than 1% of its budget on marketing, and of course, no hands go up, why do you think a nonprofit could do this without making the case, without marketing, what would you think?
[00:31:26] Jason: That again, whatever is happening, we always want to tie it back to the RoI, like you mentioned.
[00:31:31] Speaker A: Right.
[00:31:32] Jason: So sometimes marketing is brand awareness and those types of things. But if there's a way to tie it back to an ROI, if it's less than 1% and it's generating a significant ROI, you may want to consider increasing your marketing. Right. Because if you cut it off, then maybe your results are going to decrease. So tying in the return on any expense you can, I think, is important, and that's what I was referring to a little bit before on understanding your expenses.
When you look at your expense, is it contributing and maximizing value to the organization? And in some cases, it doesn't mean cut everything. It means, hey, in some cases, you reallocate and you need to maybe even spend more.
[00:32:23] Patrick: Yeah. I have a couple of questions for you that I think would be of great interest to anyone that's still on, right. That's still listening.
I hope a lot of people didn't start the show and go, oh, this is about finance. That's not my department, because this is great learning for everybody.
My first question for you is, what are the top two or three tenets that you would say are the keys to weathering the financial storms that organizations often have to weather? The pandemic, as you said, for some they flourished and for some they shut down. And it wasn't always because they mismanaged the opportunity or anything like that. It was just that the nature of their business just did not survive that.
And it could have been because they didn't have continuity planning strategically to be able to say, hey, if we ever run into a situation where it's tough, how are we going to weather it? What are those sort of two or three tips that you would give to say, look, there's going to be another storm. It might not be a pandemic, but it's going to be something. Here are two or three things you need to keep in mind today.
[00:33:40] Jason: Yeah. So I think we talked about this offline before, too, and I think it's critical. It's nonprofit or not for profit does not mean you run with a zero budget, net zero budget every year.
[00:33:55] Patrick: That's exactly right. You better not.
[00:33:58] Jason: What ends up happening is if things go down and impact your budget negatively, you can go out of business pretty quickly.
[00:34:08] Speaker A: Right.
[00:34:08] Jason: So I think having that, what I've seen most effective is nonprofit leaders that see their organization as a run it similar to a for profit company.
Now, you can't disassociate yourself from the people that are working within the organization and love the mission because I've also seen that a negatively impact. I've seen an outsider come in as a CEO with a for profit experience and try to run everything like a for profit, and you disassociate it.
The people did not respond well. The people within the organization did not respond well. So number one, obviously is culture. But when you look at a nonprofit organization, budget is the number one, is the most important thing. And managing reality against the budget is critical, so that you know every month where you're at and how you're trending, so that's critical. But also managing a budget that will allow you to have a certain level of reserves.
So if things do go down, and also scenario planning, where, hey, here's our budget.
If our contributions, if our donors, if our grants don't pan out at a certain level, what are the things that we're going to do?
[00:35:41] Patrick: Yeah, what's the new budget?
[00:35:42] Jason: Right? It's not like, hey, here's our budget. Yay, we're all happy. Throw it in a drawer and be done, here's our budget. Let's manage against it. If we're not meeting the expectations on the revenue side, what are we going to do to adapt? So that's the second we've called it internally. I was talking to our leader yesterday. I mentioned, she says the term that we see a lot is a generosity crisis right now. So there was so much generosity during COVID that organizations received all this cash influx and donations that they didn't even have a budget to do anything with. And now that's tailed off. And so a lot of these organizations now, they set the next year's budget expecting something similar, and they didn't see it. And so now they're trying to adapt and manage. And if they don't have the reserves in place or a structure to ensure they have reserves and what that means, they're in some significant challenges right now. In the nonprofit community, I would say, again, weatherproofing is understand your expense structure. Make sure that your people are all the costs of your people, because a lot of times that is the most expensive cost is really efficient and maximizing the mission of the organization.
Make sure you're managing your cost structure and your revenues and your cash inflows against the budget, and then have scenario planning to it just in case things don't plan out as expected in a negative way and also in a positive way. Right. Hey, if there's opportunity and we can get additional funding, how can we use that effectively to move the mission forward?
[00:37:31] Patrick: One of the things I coached some of my leaders on during the pandemic who were struggling with my board, is freaking out, my staff is freaking out.
We don't really know what's going to happen. And we were all in that place. It was uncertainty, and not because I'm a finance wizard, because I'm definitely not. But in the leadership realm, what we do know is that people are more afraid of the unknown than they are of the known negative. So, for example, people would rather know in three months we're doing a big layoff and I'm on the list, or I'm going to be laid off. I'm on that list. They'd rather know that than there's big layoffs. Am I one of them?
[00:38:19] Jason: Right.
[00:38:20] Patrick: It's the uncertainty that creates more angst than anything because people don't know what to do with it. So the scenario planning that you talked about resonates most with me because we just happened to co create this with a single client, and then I started sharing it with everybody. Just an a, b and C budget during the pandemic was great.
Made boards feel so much more in control.
And we just said, look, a is best case. Right? Best case is we actually get more money because of the kind of nonprofit is going to draw some cash during COVID we manage it well, we don't count on it next year. We manage the rest of it and we actually thrive. That's best case. So here's our budget for if that happens, budget b is the worst case scenario where we have to lay off half the people and we have to cut two programs and whatever that is. But we have a budget for it. We can survive it with that. And then here's budget c, which is what we believe is the most likely at this point. This is our best guess on what it appears is probably going to happen. And that's the budget we're going to manage from in either direction. And when board saw those and we're able to sort of say, okay, we have a path forward for any of those scenarios. It puts so many people at ease in that way. And of course, we applied it to lots of other leadership sort of applications as well. But that was the thing, is that managing that kind of financial storm, the biggest angst and stress your organization is going to feel is fear.
And the more you can shine a light on the various scenarios, then it turns from fear to, I really certainly hope this doesn't happen, but if it does, it does.
[00:40:14] Jason: We have a plan for. We know what we're going to do.
[00:40:16] Patrick: And know what we're going to.
[00:40:18] Jason: When Covid first hit, that's the first thing we did is we made sure, I mean, we were on the front lines with our clients because nobody knew what was going to happen. And this was potentially worse than option B.
[00:40:29] Patrick: Right.
[00:40:29] Jason: And so it was like okay. Based on what's happening, what are we doing? Right. And we wanted to be very proactive. We were doing a lot of webinars on different things that was happening in the market.
And so we were working pretty hard with our clients to make sure that they were in a position to be successful and ride this out, no matter depending on what it was. Right. And the interesting thing is, some clients, they thrived as a result of COVID and others shut down completely because they were just in an industry where we had a client in corporate events. Right. Well, national corporate events in person. Right. And that shut down for a year.
And so those are big challenges.
And that was a very significant scenario.
[00:41:27] Patrick: Planning in many cases. It was two years, I know, of organization conferences and all kinds of things that they put off for. I went through two years of virtual conferences with a number of my sort of networks and connections. So, yeah, you're right about that.
Let me shift real quick to the second question. And then I've actually thought of a third one, too. So in the vein of, okay, how do I prepare for a tough financial cycle or time? Here's another question. I think a lot of organizations would love to have just sort of three or four. What are the three or four main things a nonprofit needs to consider in order to never have a problem with their annual audits?
Nervous. It was nerve wracking for me as a CEO of a nonprofit when that time came that the CPA was going to come and write it up, and here it is, and it's going to go to our board and do we have any material whatever, and all these things, what are three or four things that can kind of put our mind at ease? If we just pay attention to these things, we won't ever have an issue with our audits.
[00:42:36] Jason: Yeah, I think the first is have that the sophistication in the department is critical. And we talked about financial leadership before. Right. So if our top person managing all of our accounting is, for lack of a better term, a bookkeeper, doesn't have experience having gone through an audit, doesn't have a background in audits, it's going to be challenging because audits can be pretty comprehensive, and it's going to be a challenging process. If you have somebody within or associated with the organization, either in house or a firm like ours, let's say, that can drive that process and manage the audit relationship with the audit firm and make sure that they're getting the information they need in the format they need it, then that process can go very smoothly.
That's the process. But leading up to that, it's critical that if the organization has a good process to close the books every month and produce monthly financials, and each of those, all of the numbers on the, we call it the balance sheet, or for nonprofits, the statement of financial position especially, can be supported by supporting schedules every single month. And there's a process to do that. That's 80% of the audit right there. So if you're doing that every single month, by the time you get to the year, year end, whether it's December or, a lot of nonprofits have June 30 year ends, 80% of what they're going to ask for, when they ask for their schedules or whatnot, is going to be what you already are doing on a monthly basis. And then it comes down to, okay, now they need to test those schedules, and are we organized to be able to provide them the right supporting information?
So, to summarize, it's make sure you're closing the books every month and you have supporting information and schedules to support every balance.
To do that effectively, you really have to have somebody with some level of sophistication guiding and working with your team to be able to do that, and somebody that has experience in the audit environment, working with auditors, and really at that financial leadership role. And that's where it can get tricky, too, with the CFO. Right. A lot of cfos have a finance background. They can be very strategic, they can be very effective. But if they don't have an accounting background, they're going to struggle, because that's not their background. And accounting and finance, there's a number of differences, obviously, and so they can struggle quite a bit if they don't have the team under them that they can count on and rely on to get them through the audit.
[00:45:28] Patrick: I'm curious, in your experience, do you find more audit issues to be functions of.
I made an error in the math. I misclassified something.
There's an actual material problem with the actual numbers aligning. Or do you find more audit issues to be those of practice and internal control policy kinds of things?
[00:46:03] Jason: Yeah, it's both. To be honest, I can't say it's one or the other. Most of the times it's both.
Again, if an organization doesn't have a good process to close the books, and especially if they're nonprofit, have a process to manage against their budget on a monthly basis, then they're likely going to have a number of errors in the numbers. The numbers are not going to be accurate, especially the balance sheet, because it takes more sophistication to be able to understand that. But what business owners and executives and individuals don't quite understand in a lot of cases is that if there's an error on the balance sheet, your income statement is likely not accurate as well.
And so those two are directly related. And so we don't want to just look at an income statement, or again, for nonprofits, the statement of activities, and just say, okay, well, I don't understand the balance sheet, but here's our income statement or statement of activities. Because if the balance sheet is wrong, then there's likely issues there.
[00:47:15] Patrick: That makes sense. They're getting their data from the same sources.
[00:47:18] Jason: Yeah, exactly. As it relates to controls. The controls impact, the ability, how you close the books and what you're doing. And I think what actually gets a little bit trickier from an audit perspective is that the auditors will a lot of times ask for sops or what's your soP?
Or memo or documentation on certain processes or how you account for different things. That is another level of sophistication as it relates to how you're accounting for certain things. Leases is a big topic these days. For profit companies, it always has to do with revenue recognition, but now it's how you account for your leases, rent, when you're leasing office space, and those types of things. And so the auditors are always going to ask for a memo. They're going to ask for information on how you account for it. They want you to point to the applicable accounting guidance, and somebody who doesn't have that experience is not going to be able to do that. And it takes longer and longer and longer, and things just never get done. And before you know it, the audit that we were hoping to have done in a couple of months is now six months out and a year out. And sometimes we see two years out, and that's how things kind of snowball.
[00:48:32] Patrick: Yeah. And I also learned that the internal control piece is partly about the way that we're accounting for things, as you say, but it's also in the way that we're stewarding our resources from the standpoint of, like, I remember in United Way, going back to that know, we would go out and pick up packets from companies with all their pledge forms, and anyone who wrote a check, the check goes in there, and anyone who gave cash, it all goes in the same envelope. This is years ago. They don't do it this way. It's all online now. But I'm old, so back in those days, and we would go and we'd pick up the packet and. Okay, so the coordinator at the company is supposed to add it all up, put a sheet inside the envelope with the money, seal the envelope, write the thing, sign off on it, hand it to us. We take it back. I don't take it back. If I'm the representative for that, know, if I'm the United Way rep handling that company, I don't bring it back and open it up and put all the money in the accounting system. Right. So I bring the envelope to somebody else. Somebody else opens it, then somebody else inputs the money. Those kinds of internal controls help you from things like fraud.
[00:49:54] Jason: Exactly.
[00:49:54] Patrick: It's real easy to take out $100 bill out of a campaign packet, and no one ever knows the difference.
[00:50:00] Jason: Yeah.
Nonprofits, especially, are ripe for that type of fraud, and it's especially unfortunate because they're there to serve mission.
[00:50:12] Patrick: But I've seen it. It does happen. Yeah.
[00:50:14] Jason: They're there to help people, but it happens so much. And I think for profits, especially in the small mid size, it is a significant risk if an organization or company has one individual that has control over everything like that.
I've seen a situation. The worst situation I've seen is where the individual in accounting had control over everything, of course. And they stole a significant amount of money from the organization through payroll.
One, they gave themselves a raise without anybody knowing. Right. Because they felt they deserved it.
Nobody's seen the payroll journal register. Nobody's looking at the financials. No one understands what's happening. Right. In the right way. So they gave themselves a raise. They were able to run through what they called expense reimbursements through payroll as well, for expenses that they did not incur.
[00:51:20] Patrick: Yeah.
[00:51:21] Jason: So they were taking significant funds from the organization, and ultimately, we came on after it was too late, but ultimately it was found through a bank audit or something like that. But she had been doing this for three or four years, and significant cash coming out of the business. So I guess the moral of the story is, if you don't have that financial leadership, you don't have those checks and balances, as you were mentioning before, and you just have one person that's overseeing everything that's significant risk. You don't have somebody that really understands how those processes work.
[00:52:01] Patrick: All right, I have one more sort of financial leadership question for you, and then we'll start to wrap up. I want to be respectful of your time, but let's talk about the board for a minute while we're talking about nonprofits. Oh, I've seen it. All right. I've seen the micromanaging board, who has some business controller or something on that, and you're questioning everything, and they're almost dictating how the organization manages its finances, and no one's going to argue with them because they have all this expertise. I've seen it where you have.
We send out the monthly financial statements in the board packet every month, a week before the meeting. And then the meeting comes and we take a motion to approve it, and maybe there's a couple of questions on it, and then we move on. So I've seen everything from a little too hands on to not anywhere near hands on, and really missing the mark on everything.
What are your top tips for nonprofits, in terms of what's the role of the board in the financial piece, and what have you found to be the best practices and the best balance between managing the organization and governing the organization and its financial practices?
[00:53:16] Jason: Yeah. Nonprofit boards are unique because a lot of times there may be 2030, 40 people on the board.
You have your local banker, you have your insurance broker, you have people that are on the board because they want to do. Obviously, they believe in the mission, but also the purpose is to network and to build relationships. Right.
There's a lot of individuals like that, and they're doing great service, don't get me wrong, but it's a different structure than a for profit board. In many cases, more people in a lot of cases, and just different diversity in people. What I would say as far as the finance and accounting and the numbers associated with the organization, the critical aspect of that is really ensuring that the board has a finance committee, which they all should have, and really building a strong rapport and relationship with the finance committee. The finance committee is really what represents the board from the financial arm. And they typically are individuals that have a background, have experience in prior life or currently, and have some level of financial expertise. And so really working closely with the finance committee, I think is important.
I've been involved with organizations where, when times are tough, they're meeting with the finance committee weekly. But at a minimum, I think there needs to be separate meetings with the finance committee and management outside of just the general board meetings. So to me, that's a critical relationship that helps to drive awareness and success as the organizations move forward. As.
[00:55:12] Patrick: Now, why am I drawing a blank on the Sarbanes Oxley act of a number of years ago?
Created the. I don't remember if it was a requirement or a high recommendation for an audit committee that was separate from the finance committee, do you see that in practice much. And what are really the differences between those two?
[00:55:36] Jason: Yeah.
So the audit committee, their focus is a lot of that is what I would call more reactionary oversight. Right. So they want to make sure that the audit process is going smoothly. They want to make sure that the organization has recorded things effectively and appropriately historically, and they want to make sure that they understand from the auditors what the auditor's input is, the recommendations, et cetera. So that ultimately, yes, we can potentially act on those recommendations.
And so you hear about, well, we don't want to upset the audit. If we have too many adjustments, the audit committee is going to be upset. Right. During the audit process. So the audit committee, again, is focused on that. They're focused on that certain aspect. The finance committee is crucial because that, I think should be your partner in how you're driving the organization forward and looking at the organization as you move forward. And you want to be step in step with them because if you have a strong relationship, they will have your back in difficult conversations and discussions with the greater board. And in most cases, the board will defer to the finance committee because that's why they were in that position to begin with. And so it's really critical in difficult times to have that relationship and to be aligned with them as you move forward.
If you're not, then that's when you have a lot of, there's a lot of challenging discussions with the financial committee.
[00:57:17] Patrick: Then the audit committee is going to have a problem with you.
[00:57:19] Jason: Yeah, people lose their jobs, all that kind of stuff. But if you have a good, solid relationship, you then are in lockstep with them. And on decisions and recommendations that are being made, you're all ultimately accountable for those decisions because you've brought them in. So I think with the board, that's critical. And then being proactive with them on talking through the organization, but also proactive on asking them how they want to see the financial information of the organization.
Yes, there may be a board package, yet they can make recommendations on the board package, but also they may want to see a little bit more or more schedules or some additional information that doesn't go to the general board as well. So having those deeper discussions, you can almost leverage them in some cases as almost a quasi CFo because a lot of these members on the finance committee have that level of experience. And if you're there and they're a nonprofit, you should be leveraging them.
[00:58:19] Patrick: Yeah, that's a good distinction as you're talking. I guess having an audit committee and a finance committee is another check and balance, too, another separation of duties, like keeping the finance committee honest as well, right? Yeah.
[00:58:32] Jason: If there's a number of errors or misstatements within the audit process, it's a good question. Hey, with the audit committee. Hey, what have you guys been doing?
[00:58:42] Patrick: Yeah, what is this? Explain this. Yeah, I'll close out the functional part with this. I say this a lot to boards, and this is my view on the strategic nature of the financial role and the financial function of the organization is in a nonprofit, a large percentage of finance committees kind of work like this.
You have, let's say, a strategic planning committee of the board, and you have a marketing committee, a finance committee, all these advocacy committee, whatever. And what happens is the strategic planning committee's job is to hire a consultant every five years and coordinate the process for how we're going to go through about our strategic planning in this cycle and keep an eye on that. And so they do it. And they, boy, great process. We have a beautiful plan. It's branded, it's documented, it's all right here. This is the stuff we want to do. This is our future.
And then several months later, the finance committee gets together because it's time to do the organizational budget and the first document, most of them pass out.
Tell me if your experience is any different. But the first document usually passed out at a finance committee, a budgeting meeting, is last year's budget and how we did. And our job is to take last year's budget and redo it for this year based on our projections of where expenses might need to go up here and there and where we think revenue might go up here and there. And we do what we call baseline budgeting or historical baseline budgeting. And I've always wondered what would happen if finance committees, if the first document they passed out was the strategic plan and said, our job is to figure out and propose how our organization, not last year, but how our organization next year and over the next five years is going to manage our resources in such a way that we can drive this strategic plan. Yeah, that'd be amazing, wouldn't it?
It's a game changer. It'd be a game changer. Because what happens is at the end of the three year or five year cycle, people look at their strategic plans and they go, well, how are we doing on marketing? Well, we just don't have a budget for it. You don't have a budget for it because you didn't create a budget for it. Or what about your strategic plan? Said you were going to get in the 20th century with technology.
How'd that go? We didn't have the budget for it.
[01:01:29] Jason: Well, no, you did a lot of those needed investments. It's very difficult for nonprofits year over year. Right. We'll do it next year. We'll do it next year. And it never comes. And technology is a big part of it.
[01:01:40] Speaker A: Right.
[01:01:40] Jason: There's so many nonprofits that are so far behind on technology that that investment does need to be made. And we take a bottoms up approach.
It goes back to what I mentioned earlier, which is every expense within the organization.
We need to understand the impact. We need to understand, are we getting maximum value out of this expense that's aligned with the mission that we have? And so we need to be asking ourselves that question, or is it just an expense we're incurring that we've always occurred because it was on last year's budget incurred and the organization is getting no value out of it. So really understanding the impact of those expenses and to have something like you mentioned, which is a strategic plan, allows you to think through that in a better way and say, okay, are we actually aligning the budget now with what this plan is? And really, yes, you can use last year as a baseline, as how the organization performed, but then using that strategic plan and then developing a budget, which may be completely different than last year's budget, but at least you now have something that justifies what you're trying to accomplish, and the budget works, and, you know, it'll work and you manage against.
[01:03:11] Patrick: Yeah, yeah, that's it. Well said, boy. I mean, there's a whole lot of other areas we could unpack and get into, but we'll again, be respectful of your, um. I want to ask you a couple of questions that I actually ask all my guests, Jason, and the first one is, I love to hear stories of the leaders in people's lives that have most impacted. Sometimes you hear, like, world famous people that we've never met, but they've had a great impact. Other times, it's a mom or a dad or whatever. I just love the different stories. But who comes to mind for you, when you think about a leader in your life that has had a tremendous impact on your success, your outlook on leadership, and just your philosophy, who would that be and why?
[01:04:03] Jason: Yeah, I think you kind of mentioned mine. I guess there's a couple of people, but my dad obviously has been a big impact on my life and kind of how I try to approach things. And his background started in finance as well, and he ran a few businesses. He had a little bit of entrepreneurial spirit as well.
And so I was able to learn a lot and see a lot just through those experiences on what works, what doesn't, and really how to really behave, not behave yourself, but how to act and how to communicate.
And really what I found to be most successful is, and I think this is leading into maybe your next question, but a good leader does not want to be the smartest person in the room.
[01:05:03] Speaker A: Right.
[01:05:05] Jason: A leader who wants to be the smartest person in the room. They're letting their ego get in the way because there's always somebody smarter. There's always somebody that can really help you to achieve the goals that you have as an organization or as a company. And one thing that we did, I think it's been about seven years ago now, is I brought in a CEO because I always know I can use all the help I can get. Right. And we brought in a CEO, and he's still with us, and he's great. And we partner up, and we're very clear on our roles and responsibilities within our company, but I could use all the help I could get. And he has experiences in some areas that I didn't. And also building a very strong management team that aligns with that as well is critical.
So I think those are a lot of the things that I learned from him, and then I've learned from our CEO. Right.
And those have been, our strengths and weaknesses balance out very well. And we admit what our weaknesses are and our strengths, we say what they are, and we work together to achieve the common goal of growing a good company that can really provide a lot of value to that space in the mid market that we know is lacking.
[01:06:24] Patrick: And that last thing you just said about being able to share with each other the vulnerabilities, that's back to that humble leadership and not letting the ego get in the way. And so, yeah, I'm guessing that may be your answer to my last question, which is you're given a megaphone on a mountaintop to talk to all leaders of the world for 15 seconds. What's your sound bite? Yeah.
[01:06:46] Jason: So one is what I mentioned. Don't be the smart. You don't need to be the smartest person in the room. The other is that culture is critical.
[01:06:53] Patrick: Right.
[01:06:55] Jason: Culture, you can get so far without culture or without a good culture. But to really take that next leap, the best companies have the best culture, and that's something that we're constantly working on and we're in a tough environment. It's consulting, it's fast paced. The culture is critical to having good people. And the other thing I'll mention actually for leaders, it's really know your business or know your organization as a whole.
The CEO may not have a background in sales and marketing, but they need to understand that. And if they think they can just hire somebody that's going to run marketing and hire somebody that's going to run sales, they're not going to get the results they want and they're going to be disappointed. And it happens all the time.
Hire good people with the expertise, but make sure you manage them effectively to ensure their success and guide them to make sure that they're being successful.
That's critical. And what I see all the time is, hey, yeah, we grew up, we've been growing. Now I'm just going to hire a salesperson and they're going to take care of everything. It's me. Great. Nine times out of ten that doesn't work.
[01:08:11] Patrick: Same with finance. I mean, just this whole conversation, I.
[01:08:15] Jason: Didn'T want to my own horn, but yeah, same thing with finance. Right? Even us. It's like you can't just hire us and then say, oh, you guys do that. It's, hey, it's collaborative. We want to work with you.
We need your input as a leader.
And you need to learn this stuff. Right. You need to be educated. You don't need to know it to the level of debits and credits that we do, but you need to know this stuff so that you can make better decisions and grow the organization.
[01:08:41] Patrick: Yeah, good stuff. And your remarks on culture are spot on as well and resonate with me. It's accredited to the great Peter Drucker. I've actually never actually seen the actual quote, but it's one of those legendary quotes.
Culture eats strategy for breakfast. We say that a lot. And you can have all the great plans, you can have a wonderful budget and you can even have a healthy balance sheet. But if the culture isn't there, man, this is great. I appreciate it. I appreciate you really weaving this in through the lens of leadership, Jason. And I appreciate your work for people to get in touch with you or learn more about what you're doing. Signatureanalytics.com, is that correct?
[01:09:20] Jason: That's right, yeah.
[01:09:21] Patrick: Signatureanlytics.com. We'll have the link in our podcast episode page here for people to just click on. And again, thanks, Jason, for sharing. Thanks everyone else for listening along, and we'll see you next time. I think we're going to have Ron Harvey back in the studio with us. Our sort of perennial occasional, I don't know, probably not frequent enough, but he'll be back with us and we'll see you then. In the meantime, lead on.