Balancing the Mission Checkbook

This month, Nonprofits Assistance Fund announced a new training service designed to help members of nonprofit boards understand and use their financial reports titled Financial Clarity for Nonprofit Boards. This idea has been brewing for a couple of years in response to the many nonprofit directors who come to one of our workshops and say, “I wish my board were here.” One of the most important factors that we considered as we were developing this new training was the diversity of nonprofit boards. Not all nonprofit boards are the same – and that’s a good thing. Unfortunately, I have read too many books and articles about board roles and responsibilities that describe a one-size fits all approach.

In a typical chapter about boards, the list of responsibilities includes: hiring and evaluating the executive director, fundraising, strategic planning, financial oversight, and identifying future board members. Beyond that list, board members are warned, they should not meddle. Well, this list may be appropriate for organizations with sufficient resources and staff to carry out all of the ongoing activities but there are many nonprofits that are not at that point – and may never be. Young organizations with a small staff need more involvement, and nonprofits that are reaching into communities with deep and specific needs may need a different kind of board – community involvement. How the board actually gets its work done needs to vary depending on the organization’s current needs (which will change). With this understanding, we created the financial training for boards to be flexible and allow us to meet the board where they are and build the capacity that fits them.

I recommend a report from a study that was completed in fall 2006, “Coloring Outside the Box: One Size Does Not Fit All in Nonprofit Governance” by Kim Sundet Vanderwall and Ellen Benevides for MAP for Nonprofits. The study reports on discussions about how boards work in 40 small grassroots nonprofits and organizations based in cultural or rural communities. What they found was a variety of different ways that organizations had created to get the work of the board done. In few cases were the boards following the “textbook” model.

Common strengths the researchers discovered were the level of shared commitment, values and connection between board members. Common struggles were attendance and engagement, clarity of roles, and some of the specific roles and structure. It’s interesting to read the differences in perceptions about the board given by board members compared to directors and staff members.

The report concludes not with a prescription for all boards to follow, but a list of five core recommendations:

1. Know what you must do as a board.
2. Find a way to make that happen in as streamlined a way as possible.
3. Be creative and think outside the box.
4. Keep the spirit of the organization alive in all you do.
5. Challenge those who provide technical assistance to boards to present standards and best practices in a way that takes size, resources, and culture into account.

Another consultant who frequently writes about a variety of approaches for boards is Mike Burns at Brody Weiser Burns. Mike’s article “Avoid Pigeonholing Your Board into Traditional Models” was written almost 10 years ago but it’s still very timely. Mike also has a blog on nonprofit board issues now, Nonprofit Board Crisis.

The Minnesota Office of the Legislative Auditor issued the Office of the Legislative Auditor’s report on January 5, 2007 that evaluated state agencies’ methods for awarding and administering grants to nonprofits. The report was critical of state agencies for their lack of consistent and transparent systems. However, the report was not critical – in any way, shape or form – of any of the nonprofit organizations who receive state grants, of any of the grant programs, or even of the value of the community work that is funded by these grants. Unfortunately, there were those in the public and nonprofit sector who were quick to jump to conclusions about the report and conclude that the report implied that there were problems with grants and the nonprofit recipients. Some nonprofit directors have expressed concern that their work will get more cumbersome with additional reports and reviews. Please, everyone, slow down, read the report, and consider the recommendations.

According to the report, in 2005 the State of Minnesota made $4.7 billion in payments to nonprofit organizations for a wide range of services in health care, education, environment, and human services. The Office of the Legislative Auditor reduced the pool of payments for review by removing payments of $3.7 billion made to hospital, health plans and similar “institutions”. Of the remaining $1 billion, about $700 million flowed through counties and was therefore not granted to nonprofits directly by state agencies. That left $300 million (approximately 1% of the state budget) for the purposes of this review and resulting report. The report states that the use of nonprofits to deliver services to citizens of the state is appropriate and valuable. The purpose of the report is to evaluate the systems and practices used by state agencies, not the programs and services delivered by nonprofit grantees.

The report includes three primary conclusions:

1. The state’s approach to managing grants to nonprofit organizations is fragmented and inconsistent, and does not provide adequate accountability.
2. Many state agencies have grant-making policies and procedures, but they vary considerably in the degree to which they provide for oversight and accountability.
3. Agency oversight of grant recipients is especially weak when the Legislature selects and names a recipient in law, rather than allowing the agency to select the recipient.

These conclusions don’t seem revolutionary to me. Anyone who has dealt with more than one state agency for grants, or even more than one program within an agency, could tell you that the process for applying for, reporting, and receiving payment for grants is not always consistent or easy for a new grantee to access. The recommendations from the Office of the Legislative Auditor follow their findings – to establish a Grants Management Office in the executive branch to strengthen accountability and improve management of state grants; to formalize and require agencies to follow the best practices discussed in the report; and that the Legislature should not name grant recipients in law but allow agencies to select recipients through a competitive process.

In general, I think that all nonprofits in Minnesota could embrace the concept of a clear, consistent, easy-to-access process for applying for and administering grants from state agencies. Imagine if all of the grants a nonprofit received from the State of Minnesota used the same budget format, report requirements, and payment system. Rather than worry about more cumbersome requirements we could work with the state to simplify, streamline and make both the state government and our nonprofits become more efficient in serving our citizens and clients. The Minnesota Council of Nonprofits has also responded with support for the overall goal of creating a more efficient, transparent, and consistent process for state grants.

In late November, I wrote an entry about the deluge of year-end appeals for individual contributions. As promised, I kept all the solicitations we received at my house between Thanksgiving and December 31. Here’s my report. We received 66 solicitations for funds in the mail from 55 different organizations (we got more than one each from nine organizations). The nonprofits range from arts, housing, international relief, youth and health care. I know why we’re on some of the mailing lists while others baffle me. My best guess is that I know someone who knows someone who volunteers or is on the board of directors. As I said in November, we responded with a check to a select number of the requests and put the others aside. I saved them all in a show box.

The most interesting way to analyze them, I decided, was to categorize the appeals into four types.

• First, and most compelling to me, were the thirteen requests that told a great story about their work.
• Second are the nine appeals that shared clear numbers and statistics about services and impact – numbers of meals served, children taught, small business financed, etc.
• There is a third group that I call “neutral”. These seventeen letters describe the organization and their work but fail to tell a story or to give much detail.
• The last category – ten letters – are the needy letters. “We need money to pay our rent!” “We face cuts in our budget without you!” “We can’t get enough in grants!” This type of request might make the case for some people but it doesn’t work for me. I want to know what the nonprofit does, not about how bad off they are.

The Chronicle of Philanthropy reported that 2006 was a good year for fundraising, with some organizations exceeding their goals. Anecdotal reports indicate that giving from IRA accounts made possible by tax law changes in August 2006 account for some of the surge, as well as a strong stock market and economic stability. The tax law change is a short-term opportunity so learn about it from Independent Sector for 2007 fundraising. Recent research conducted by Harris Interactive for the Wall Street Journal revealed that 83% of Americans donated to a charity in the last 12 months. These reports are good news for everyone who understands the role that nonprofits play in the community and the world.

I also wrote in November about recent research and trends in donor relationship management. Donors want to have more say about how they hear from organizations they support and what kind of information and solicitations they receive. I was pleased that three of the letters offered us some choices about communications, and one was clearly customized based on our attendance at a specific performance. Now I need to get back to all the other organizations and either get off their lists and save them some postage or start the kind of relationship that I - the donor - want to have.

Instead of New Year’s resolutions, my first entry for 2007 is a list of ten common mistakes (with comments) that nonprofits make in managing their financial life. This list is excerpted from a terrific paper submitted by one of my students, Nick Eoloff, in a Financial Management for Nonprofits class at Hamline University. I thank Nick for giving me permission to share his paper.

Ten Mistakes Nonprofits Make in Financial Management:

1. All your eggs in one basket – Pay attention to your reliance on any particular source of revenue, in particular government contracts.
2. Cash flow analysis done annually – You can’t know everything at the beginning of the year. Management cash flow never stops.
3. Financials that are opaque – Nonprofit financial reports can be complex and difficult but that’s not an excuse for board members that don’t understand them or poor communication about your financial situation.
4. Inflexible – Things always change – go with it.
5. Little to no overhead – Some organizations still believe that infrastructure and overhead are not a good use of resources. This decision never turns out well.
6. Low operating reserves – Everyone wants to have operating reserves but the only way to build them to by planning and managing surplus budgets.
7. Never leverage – Using loans and credit lines to build the organization and grab opportunities is smart management.
8. No long term plan – Strategic plans are great, but how much better if they include a basic financial plan for three or five years.
9. Preparing financial projections, but never reading them – See above.
10. The auditor’s notes don’t mean much – Make sure you read all the pages of your audit report. I know they don’t look interesting, but you’ll be surprised at how informative they are.

For a complete copy of Nick Eoloff’s paper with more description and references, click here. Use this list as the start of your New Year’s resolutions for better financial management.