Today, I attended a Rotary club meeting, and the speaker was a former NCAA and NFL referee. In addition to the obligatory technical interpretations of “pass interference” and “holding” penalties, he described the extent of the background check that referees undergo. It was interesting to learn that investigators will question the neighbors of a referee to determine whether the referee’s family “lives beyond its means.”
Of course, the investigators are looking for evidence that a referee might be “on the take” — that is, accepting bribes to influence a game’s outcome. There has been increasing evidence that match fixing is more prevalent in sports than we would like to believe.
There’s an important lesson here for organizations that live beyond their means. In every business operation (whether it is for-profit or nonprofit), there is an obligation to operate responsibly and in the best interests of the stakeholders.
A company seeks to produce a sufficient profit to reward the risk taken by the stockholders. When the gap between revenues and expenses is insufficient to produce a reasonable profit, there is a problem that needs to be addressed. Maybe it will fix itself over time, but more often than not, it won’t. Instead, the only remedy will lie in sober analysis and difficult decision making.
The same could be said for a nonprofit operation where expenses exceed revenues. Without affirmative action, the organization will no longer be able to fund the pursuit of its mission.
It is common for all types of organizations to face these challenges, and the solutions are, at the same time, both complex and simple.
First, there needs to be an honest assessment of the revenues. Can they reasonably be improved? Is there a credible plan for improvement?
Second, the expenses must be assessed with the same candor.
It would be difficult to find a business where the staff didn’t feel stressed by the level of business activity. This may be partially attributed to Parkinson’s Law — “Work expands so as to fill the time available for its completion.” On the other hand, it may also be a function of employees who perform processes that need to be reexamined and refined.
In the end, the level of business activity (i.e., the processes being performed) should not define the level of staffing. Instead, the revenue should dictate the staffing, because a measure of expenses as a percentage of revenues is the most useful tool for controlling bureaucracy.
Do you need help determining the metrics to measure your success? Contact Counterpart CFO for a free, no obligation consultation.