Balancing the Mission Checkbook

Worrying about cash shortfalls is, without a doubt, at the top of the list of stressors for nonprofit directors and finance managers. In this situation, everyone’s dream is to have a stash of cash - a cash reserve account set aside to tap at a moment’s notice to solve the problem. I’m reluctant to endorse a universal standard for reserves, but there are “rules of thumb” and accepted practices calling for nonprofits to hold reserves of three to six months of operating expenses. Well it turns out that this “best practice” is a practice in theory only for many nonprofits.

A study by the Urban Institute, reported in the Washington Post this week, Nonprofits Imperiled By Low Reserves found that 57% of the Washington area nonprofits studies had less than three months of reserves, and 28% had none. The June 2009 Nonprofit Current Conditions Report published by Minnesota Council of Nonprofits found new cash flow concerns caused by slower payments from county and state agencies. Surveys in Minnesota have found that at least 35% of nonprofits anticipate cash flow problems this year and 30% have one month or less of operating reserves. Low reserves and cash flow problems are not restricted to small or struggling nonprofits - it’s a widespread management challenge. The Urban Institute study contained an interesting finding, according to the Post article:

According to the study, larger groups were less likely to have sufficient operating reserves than smaller ones, a finding that surprised researchers. Seventy percent of charities with expenses over $5 million had low operating reserves, compared with 50 percent of groups with less than $100,000 in expenses.

This shouldn’t be that surprising when you do the arithmetic. Imagine that you run a nonprofit with an $8 million annual budget. Maintaining a three month reserve would require a $2 million cash account. That’s (a) a big number and (b) very difficult to build up in the low surplus, service delivery model of most nonprofits. Rather than dwelling on the best practice or target for designated cash reserve accounts, maybe nonprofits need to learn to be more sophisticated managers of cash and its relative, working capital. This financial concept was described well by Ben Cameron of the Doris Duke Charitable Foundation last week in a Chronicle of Philanthropy live online discussion, The Changing Role of Foundations.

Ben Cameron:
Most businesses recognize the need for ongoing working capital–it’s the heart of funds that allow a business to make strategic decisions around launching a new program or line of business, investing in a new facility, etc. I have been in discussions with some business executives who have been adamantly opposed to general operating support for arts organizations–thinking it gives organizations free license to be unstrategic and undisciplined–but instantly supportive of flexible working capital. In essence, the purposes are the same–the difference is in how the two terms are heard.

I’ve been advocating for better understanding of Nonprofit Capital for years. In the “nonprofits should be like business” debate, this is the one area where we do have a lot to learn. There aren’t many businesses that strive to hold a three month cash reserve account. That would be viewed poorly, in fact, because it’s an inefficient use of capital.

For peek at how the very largest and most sophisticated nonprofits solve a cash flow problem, read about how Dartmouth Joins Harvard, Princeton in Tapping Credit Markets. Because of the drop in endowments, Bloomberg reported that Dartmouth College just issued $250 million of 10-year notes “for liquidity and general working capital,” according to Julie Dolan, associate vice-president for fiscal affairs at Dartmouth.

Learn to love these words: Working Capital.

This is not a breakthrough idea, but I am completely convinced that leadership will be the only determining factor for the survival and success of nonprofits throughout this recession. I see signs of it all the time. As the months of recession drag on, the effects of the presence and absence of real leadership at nonprofit organizations becomes more and more clear. A couple of really interesting recent blog posts got me thinking about these leadership voids and how to fill them.

In the post Nonprofits Will Never Be Respected Until We Start Respecting Ourselves, Rosetta Thurman confronts the self-induced damage of low wages, chip on the shoulders image of many nonprofit employees. She then builds up to this call to action:

With all of our own moaning and groaning about our sector, it’s no wonder other people emphasize the “non” in our nonprofit field. Believe me, I’ve been guilty of all of the above. But what’s happened is that in all of our “insider baseball” talk amongst ourselves about what’s wrong with our sector, we have somehow internalized it all to conclude that this is just how it is. This is just the nature of “nonprofit culture”. We forget that WE are nonprofit culture. The nonprofit “sector” is made up of individual organizations, which are made up of individual people, which means that this is all up to us. It is what we make it to be. So when are we going to be the change we say we wish to see?

Echoing the “take charge” message in An Open Letter to Arts Administrators, Adam Thurman (Two bloggers named Thurman, hmmm) describes the painful position of mid-level arts administrators who don’t feel supported, respected, or valued.

It doesn’t have to be like that.  I know you’ve probably convinced yourself that all the garbage you deal with is just the cost of being in the field.

It isn’t.  If the group you work for is being run poorly it is because people are ACTIVELY making choices that allow that to happen.  It isn’t just a matter of circumstance.  It’s an outcome of choice.

You deserve better then that.  You deserve to work at an organization that produces great art, treats people with respect and pays fairly.  No matter how much people may tell you otherwise those three goals are NOT mutual exclusive.

He then advises that these arts administrators give themselves a year to help bring about change - or to leave.  I love the simplicity and enormity of that advice.

Be a leader, or leave.

But how can you be a leader if you aren’t the CEO, Executive Director, CFO, Director of Development, Board Chair, etc, etc?  By leading, that’s how. I know of many cases where a new board member, mid-level program manager, or finance staffer stepped into the void, told the truth, and brought about important change. To be frank, there is risk and a lot of work involved.

Our new Recession Risk Assessment resource includes suggestions for actions to take based on the risk level. For organizations with high level of leadership risks, the advice is: “The organization urgently needs a leader to step forward to call attention to the challenges, even if it causes discomfort.”

Be a leader - why not you? Why not now?

Where do you send the condolence card after the death of a nonprofit?

Today’s Star Tribune reported that the Senior Federation to Shut Down because of financial challenges resulting from drops in both grant support and memberships. The economy is certainly a big factor since the Federation’s funders include several health care organizations that are cutting budgets everywhere. Membership declines reflect both demographic shifts and changes in the needs of their constituents. Founded in 1973, the Federation really made its mark in the 1990s with advocacy and action to make prescription drugs more affordable with bus trips to Canada and online sales.

This news about the Senior Federation is not the first or the last time that a nonprofit will close. Two weeks ago Centro Legal closed its doors after almost 30 years of providing legal services to low-income, Spanish-speaking clientele with issues related to housing, domestic violence and immigration. The loss of these services has a very real impact on the community.

The current economy has exacerbated the already fragile financial state of many nonprofits which is likely to result in more closures. Every closure is hard, painful, and sad. This sadness made me think about the sadness I’ve seen in the past month after the cancer-related deaths of three acquaintances. These losses were hard, painful, and very sad. Each of these wonderful people were remembered at memorial services billed as “A celebration of the life of … ”  The events were indeed celebrations with music, laughter, tears, stories, and food. Friends and members of the community even bring the food, passing out turkey sandwiches and brownies in church basements and park shelters.

I think that we need to organize memorial services for nonprofits. A celebration of the life of the Senior Federation, a celebration of the life of Centro Legal, a celebration of the life of _______ . Current and past board and staff members, clients, members, funders, and the community could gather to tell stories, cry a bit, remember the history and changes, take pride in the impact and significance of the organization, and say goodbye. Invite me and I’ll bring a tray of brownies.

I think that I’m losing my ability to be patient and finesse conversations about how nonprofits can deal with the recession. Instead, I’m becoming a blunt instrument with one recurring message - Act Now.

Unfortunately, quite a few nonprofits are in very fragile financial condition and don’t have much elbow room. In other circumstances, I like to work through the possibilities and understand the complexities and reasons behind a nonprofit’s structure and history. Now it’s all about speed.

For example, in the last two weeks I’ve made these very direct and difficult comments to leaders of three different nonprofits:

• Direct comment 1: “I think that your grant budget is unrealistic. I think that you need to create a scenario budget plan to reduce expenses by 30%.”

• Direct comment 2: “Based on your history of recurring operating deficits, you need more than a few expense reductions. You need to reconsider the entire structure of your programs.”

• Direct comment 3: “You don’t have time to research some new grants. You’ll be out of cash in one month.”

Not much finessing here. Because of this need for urgency, we developed a Recession Risk and Preparedness Assessment for nonprofits to quickly identify how urgently they need to act and where to start. These twenty questions cover financial condition, financial information, organizational change factors, and leadership. Use it to find your starting point.

In this week’s issue of The Chronicle of Philanthropy, consultant Pat Nichols described how frustrating it is to watch ineffective and slow reactions to urgent situations in the article A CEO Survival Guide for Touch Times. Because this requires a paid subscription to access, here’s an excerpt of some key points in this excellent piece:

Center all decision making on the mission. If, in facing tough choices, we are not explicit and rigorous about how the decisions we make serve the mission, we have fallen short of our responsibilities.

Be open and engage everyone. Everyone will find this period and the process unsettling. No one, at the outset, can guarantee an outcome. What we can do, though, is find creative means to discuss what is happening and encourage participation from all quarters.

Move quickly but systematically. When uncertainty reigns, people draw comfort from knowing that, though there is no resolution at present, there is rapid and systematic movement toward a resolution.

Be hopeful in style and rigorous in analysis. This balancing act is, perhaps, the toughest of these principles to observe. As leaders, our colleagues depend on us to set a tone, and to convey hope. However, it is also crucial that we ask the tough questions and discount our desire to believe the best.

Live with ambiguity, acknowledge uncertainty. We must act on incomplete and imperfect information; we must make assumptions and decisions that will prove to be wrong. This requires that we acknowledge what we don’t know and be prepared to adjust when we are mistaken.

The time to act is now - for all of us.

At the pace we’re all traveling it’s easy to forget what you said last week, much less a few months ago. It’s interesting, then, when we receive a comment on a past post and go back to re-read it. So much is happening and developing in the nonprofit world that I’m taking this week to update three topics.

Transparency

In December 2007 I wrote about Transparency and Financial Information:

I would strongly suggest that nonprofit organizations make the effort to make usable financial information available on their website. The IRS 990 is already a public document, so it seems like the obvious tool for financial disclosure. However, I think we should go past the 990 to share better information, especially since everyone seems to agree that the current version of the IRS 990 is overly complex, confusing, and very difficult to use. A better solution would be having the audited financial statement easily available on the website.

Guidestar recently published The State of Nonprofit Transparency Report, which included these findings:

A high percentage (93 percent) of nonprofits are embracing the Internet to disclose information about their programs and services.

Only 13 percent posted their audited financial statements on their Web sites. The results of our survey show a reluctance to disclose audited financial statements publicly. Although not all nonprofits obtain audits of their financial statements, our survey sample reflects organizations of the size for which an audit is both prudent and a necessary tool for assessing management’s financial capabilities and the organization’s financial health.

Let’s hear it for more audits online!

Mergers and Strategic Collaborations

In June 2008 I suggested Speed Dating for Nonprofits:

No one would say that mergers are the right answer for every nonprofit, but if you do think that joining forces would make sense and help your organization maintain stable services, where do you find your mate? I think I’ve found the answer - speed dating for nonprofits! Speed dating is an organized event to help singles meet a number of people in one evening with the intent of finding one or two for an actual date.

I’m excited that MAP for Nonprofits and the MACC Alliance for Connected Communities have organized a Speed Dating event on May 20^th to explore strategic partnerships.

Low-profit, Limited Liability Corporation (L3C)

And in May 2008 in Where For-Profit and Nonprofit Meet I was excited about the new hybrid Low-profit, Limited Liability Corporation (L3C) that had been adopted in Vermont.

The idea is to create businesses that can attract some private capital, bolster that with more patient philanthropic or socially motivated investment, and result in value to the community (jobs, housing, local revitalization) and a below-market return to investors. This structure is not a fit for every nonprofit, or even for every social enterprise. The L3C is all about raising capital, and when the need for capital is significant, this is worth considering.

This post continues to attract readers and questions. The most common confusion is about the fit for nonprofits that need subsidy (i.e. grants and contributions), rather than capital. The L3C is designed for capital but doesn’t offer any incentive for contributions. For more information, the experts on the L3C are Americans for Community Development. We’ll explain this new hybrid form at the May 14^th meeting of the Social Enterprise Network.

Since the post was written several other states have adopted the model, with others in the legislative process. I’m hoping that Minnesota can get on the bandwagon in the next year.

For years I’ve wished that the programs of the Small Business Administration (SBA) were available to nonprofit organizations. The SBA is all about strengthening the country’s economy, and as a business banker the SBA was at the top of my list of resources for entrepreneurs as they started and grew their businesses. When I made the change to work exclusively with nonprofit organizations I was disappointed to lose access to those programs. Nonprofits are businesses, after all, with a significant role in employing people and generating economic activity. Minnesota Council of Nonprofit’s Minnesota Nonprofit Economy Report for 2008 reports that nonprofit employees represent about 10% of the states’ workforce, paying $12 billion in wages.

What I’ve missed most were the Small Business Development Centers that offer workshops and one on one help and the SBA loan programs that provide crucial growth funding. In a way, Nonprofits Assistance Fund and other capacity building organizations have filled this role for nonprofits.

Potential Nonprofit Resources

I’m very glad to know that the beginnings of some new resources for growing strong nonprofits are contained within the Serve America Act, passed in the last week in both a Senate version and House version. The President is expected to sign it next week. The amendment that creates a new program for nonprofit capacity building is summarized here by Independent Sector.

Housed within the Corporation for National and Community Service, the bill authorizes $25 million over five years to provide organizational development assistance to small and mid-size nonprofit organizations, in particular to “strengthen small charities around our country, especially where resources are scarce.”

I’m hopeful that we can get these resources out in the community soon, focused on building strong community organizations that know how to balance mission and management. I’ll keep waiting for an SBA loan program for nonprofit businesses. In the meantime, if you are in Minnesota and need working capital or a line of credit, Nonprofits Assistance Fund’s loan fund is here.