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Learning Strategic Financial Management From the School of Hard Knocks

This post was orginally published at The Chronicle of Philanthropy by Richard Modest and Aidan Eyakuze of Twaweza as part of the Bridgespan Group’s sponsored Chronicle of Philanthropy supplement on ending the nonprofit starvation cycle.

Twaweza is a small advocacy organization striving to have a big impact on the quality of life for citizens in the East African countries of Tanzania, Kenya, and Uganda. We have a staff of roughly 40 posted in offices across all three countries to work with local change agents to lead collective community problem-solving, conduct polling to amplify citizens’ views on important policy debates, and promote freedom of expression and association. The research and advocacy work we do at Twaweza calls for flexible, long-term financial resources; however, many funders are reluctant to provide this kind of support. 

Most funders prefer to support activities for one or two years, and they focus primarily on programs rather than internal systems. The emphasis on programs leads to restrictions in how much can be spent on indirect costs, often called overhead. Moreover, it is uncommon for civil-society organizations (CSOs) to receive contributions to financial reserves that can backstop a depleted bank account. Additionally, CSOs like Twaweza that receive grants in U.S. dollars (and other foreign denominations) also must learn how to manage currency conversions to avoid loss of buying power in local markets. Any one of these issues — funding indirect costs, building reserves, or managing currency risk — can pose a significant challenge to achieving desired goals. We have had to deal with all three.

Limited flexible funding and adequate reserves pose an ongoing challenge for us. We aim to allocate up to 2 percent of our annual budget to reserves. Without adequate reserves, CSOs are less able to navigate difficult times and must make painful budget cuts — cuts that reduce impact. For example, in early 2018 Twaweza experienced a funding shortfall in Kenya that resulted in our scaling down operations and staff.

Compared with peers, however, Twaweza has been fortunate in securing funding for systems investments. Three years ago, we used some of our grant funding to cover the significant cost of purchasing Salesforce software to manage and streamline internal processes. While many peer organizations are forced to rely on labor-intensive manual systems, we are now able to track and analyze important data much more efficiently in real time.

We have also learned how to better account for direct program costs versus indirect overhead costs. As a Hewlett Foundation grantee, we were invited to work with The Bridgespan Group on an analysis of our cost structure. This was part of Bridgespan’s review of a number of nonprofits’ expenditures to better understand how much different organizations spend on indirect costs.

The Bridgespan analysis was a real eye-opener on the appropriate allocation and presentation of indirect costs across our activities. Given our character as a research and advocacy organization, staff costs tend to be our largest single expenditure. In our 2016 financial statements, we apportioned all of our staff expenditures, regardless of their activities, to indirect costs. As a result, the indirect-cost rate totaled 93 percent of program costs.

The Bridgespan analysis helped us understand the rationale for linking a significant amount of staff time with direct program implementation. With the exception of a very few staff members, most dedicate their time to delivering a range of programs and activities. Although shared across different projects, their time nevertheless represents direct programmatic costs rather than indirect overhead costs.

Based on this key insight, we changed how we captured staff cost in our accounting system in 2017 to ensure proper allocation between direct program and indirect nonprogram activities. For staff whose functions cut across program and nonprogram activities, we now track time accordingly and apportion it to the appropriate cost center as direct or indirect costs. The result: The indirect-cost ratio fell from 93 percent in 2016 to 24 percent in 2017. In addition to deepening our own understanding of our cost structure, this more accurate accounting of indirect costs will aid our fundraising efforts, given how most funders favor financing programs versus overhead.

We also learned the hard way to manage currency conversions more carefully after incurring a significant exchange loss. Like many CSOs, we receive a substantial amount of our funding in U.S. dollars. We convert roughly half into the local currency to pay for goods and services. Three years ago — after we had converted a large sum of U.S. dollars — the shilling rapidly lost 24 percent of its value. All told, this depreciation meant the buying power of the shillings in our bank account dropped by US$200,000. To avoid such a loss in the future, we started monitoring our cash on hand and converting dollars to shillings only when needed. The result was more frequent transactions of smaller amounts. This new approach to managing currency exchange has prevented another huge loss from any precipitous drop in the value of the local currency.

We have learned a lot about financial management over the past several years. Indirect costs, financial reserves, and currency exchange may not have been top of mind as we set out to build Twaweza into a high-impact advocacy organization. But it is clear to us now that the more we know about sound, strategic financial management, the stronger and more resilient Twaweza can become.

Richard Modest is Twaweza’s finance manager, and Aidan Eyakuze is executive director

 

 

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