Balancing the Mission Checkbook

An article in the December 7, 2006 issue of The Chronicle of Philanthropy reports that nonprofit blogs are on the rise. (Read the article here.) I’m thrilled to know that I’m on the early side of a trend for the first time in my life. According to the article, nobody knows for sure how many blogs are devoted to nonprofit issues, but the best guess by people who write blogs is that about 100 are now in operation. That is an infinitesimal fraction of the estimated 12 million blogs available on the Internet, according to the Pew Internet & American Life Project, in Washington.” There is a list of “ten blogs to watch” included with a strong emphasis on blogs about philanthropy and fundraising. My own interests are in broader management issues and I have found a handful of blogs that I read regularly.

I have a regular routine now – every Monday morning I read my blogs to see what’s new and who’s found an interesting article or newsbyte. There are three in particular that I recommend to anyone interested in nonprofit management issues.

• First is Mission-Based Management by consultant and author Peter Brinckerhoff. His posts range far and wide on management, boards, and fundraising.
• Second is The Artful Manager by Andrew Taylor, director of the Bolz Center for Arts Administration at University of Wisconsin – Madison. Taylor writes interesting posts about the role of arts in society and how arts organizations can thrive. His blog also has links to more in-depth discussions and articles.
• My third recommendation is the Stanford Social Innovation blog. SSR has a group of authors for this blog with a variety of areas of interests and opinions. I disagree with the opinions sometimes but they are always interesting, thoughtful, and well-written.

I led a workshop this morning called “Monitoring Your Financial Health” that covers a variety of methods for interpreting and analyzing nonprofit financial reports. The group read and compared reports, calculated income, expense and balance sheet ratios, and reviewed key indicators. When we talked about how to communicate the financial analysis to management teams and boards of directors I distributed a few samples of executive summary and dashboard reports (download an example here). As always, several of the workshop evaluations listed these reports as a highlight of the materials. The idea of dashboard reports has been around for a long time in business and nonprofit management. (For a good introduction to the concept see these articles from CompassPoint’s Board Cafe and the October 12, 2006 issue of The Chronicle of Philanthropy.)

I think that the reasons that workshop participants respond so strongly to the reports are their clarity and simplicity. Ideally, a dashboard report conveys in one page the key indicators for the organization and relates those indicators to goals, historical information, or benchmarks. The people in my workshop today know that this type of report is one that every nonprofit board wants to have.

So why don’t we all have dashboard reports? We don’t because they are very hard to develop. The art to creating a good dashboard is identifying what information really matters. The dashboard in your car shows you the speed, fuel level, oil pressure, blinkers, and warning lights. Think of all the other information that could be displayed as well - but isn’t – because too much information is overload. To create a valuable summary or dashboard tool you have to cull through all the possibilities and select the five to eight key indicators that convey the most important measures for your nonprofit organization.

I use two example reports in the workshop. One of the examples is for an organization in the middle of turnaround after several years of financial problems, and the other is an organization that is healthier financially seeking to diversity its contributor base. These nonprofits have very different key indicators. One watches cash and payables closely while the other needs more information on development.

The other challenging task to developing good dashboards is selecting appropriate goals or benchmarks. These deserve some focus because the wrong goal can send you in the wrong direction. One well-intentioned but problematic benchmark that I’ve seen at many organizations is the goal of building a cash reserve equal to three to six months of operating expenses. It’s a terrific goal, of course, but it’s unrealistic for boards to expect a nonprofit to build that level of unrestricted cash balance in one year or less. Fieldstone Alliance published a good book last year on identifying appropriate and useful measures, Benchmarking for Nonprofits. Here’s a link to a free excerpt.

I picked up the December/January issue of Fast Company magazine the other day because the cover story is about their annual Social Capitalist Awards. I know that I’m probably a lot more comfortable talking about capitalists and capital than many of my friends and colleagues in the nonprofit world. Fast Company was regular reading for me for the years when I advised and financed entrepreneurial businesses. I’ve been interested in these awards since the magazine started the annual recognition in 2003, partly because I wondered why a business magazine chooses to venture into the task of evaluating nonprofits. I’ve also been puzzled, frankly, by what the criteria are to be recognized as a social capitalist. There isn’t a clear connection such as earned income ratio, profitability – or surplus as we like to call it.

According to the web site, “From its inception, the Social Capitalist Awards have defined strong performance as a combination of both social impact and organizational effectiveness. This performance is represented by five critical components: Social Impact, Aspiration & Growth, Entrepreneurship, Innovation and Sustainability. The underlying theme through all of our components is the organization’s ability to analyze tough social and organizational challenges and to craft solutions that create significant improvements over the status quo.”

This year the awards went to 43 nonprofits who serve a wide range of communities and needs both in the US and globally. These 43 nonprofits have different income sources, operating systems and service areas. What makes these 43 earn the distinction over any number of other solid, well-run nonprofits?

My understanding of the awards became clearer this year as I read all the articles and expanded information on the web site. The addition of a special category of recognition for partnerships between nonprofits and businesses - with benefits for both – helps to answer the question of why a business magazine sponsors this recognition. The piece I’ve been missing, though, for the last three years is the critical role of metrics for Fast Company and its business readers. All of the awardees are able to provide concrete, quantitative measures of impact for their work. I’ve been making the case for a while that nonprofits need to take responsibility for defining their own measures of success – or else someone else with define them for us. These social capitalists have done that. Whether or not you think that these are the right 43 organizations to be recognized or not, I admire the clarity of the information about their mission, activities, and their impact. The 43 organizations are all great nonprofits, but I am disappointed that the same names appear on this list year after year. I think that about 75% of this year’s awardees have been recognized previously, and 10 or more have been on the list all four years. Get your metrics figured out and watch out for the call for nominations next year!

A second point of clarity for me is the distinction between what Fast Company calls “social capitalists” and the questions I hear about starting a social venture - nonprofits starting an earned income venture. Social capitalists may or may not generate much (or any) earned income from sales of goods or services. Bill Drayton at Ashoka that social entrepreneurship is about innovation and impact, not income. Read more about innovation to solve community problems in an article by Gregory Dees at Duke University.