Balancing the Mission Checkbook

Unfortunately, the news has been full of stories of struggling nonprofit organizations. Every nonprofit is grappling with budgets and growing community needs in the face of economic pressures. Fundraising is mixed right now, with individual giving as the biggest concern for many organizations, and corporate giving still an open question. Meanwhile, utilities and transportation costs are up and programs are trying to serve more clients. Balancing mission and money is always hard work.

It seems that every article includes a comment by either the director or board chair that identifies the current economic downturn as the cause of the financial problems. The next time you read something similar, consider the possibility that, in some cases, “it’s the economy” might be a masking a different story.

By doing a little financial detective work, I’ve found that some of the nonprofits that identify the current economy as their problem have actually been operating with deficits for several years. They spend more than they bring in – and eventually it catches up with them. Checking this out requires a few steps. Access to IRS 990s on Guidestar is a gift for this kind of research. Page 1 (Part I) of the 990 reports all income and expenses and the resulting surplus or deficit. Because this section consolidates all unrestricted, restricted, capital, and endowment activity, though, it isn’t helpful in reporting the operating results. Page ahead to Part IV, the balance sheet, and look at Line 67 – Unrestricted Net Assets. If the organization had an operating surplus, this balance will increase from the beginning to the end of the year. If they had an operating deficit, then the balance will decrease.

There are a wide range of reasons and circumstances that result in operating deficits. Recurring and unmanaged operating deficits are the number one red flag of financial problems and raise questions about ongoing viability. If deficits recur, the management and board must take the time to understand the causes and make needed changes in income and expenses. Raising money is challenging in every economic environment, especially during a downturn. Make sure you can distinguish between the economic, management, and program considerations that result in deficits and take the steps needed to address each one.

Jeanne Bell at CompassPoint wrote a wonderful column about surplus and deficit planning, Nonprofit Budgets Have to Balance: False!. She asks strategic questions about budgets:

Instead of “How can we make the budget balance?” the annual budgeting cycle should begin with the question, “What financial outcome does our organization want or need this year?”

I can’t think of a single nonprofit that would answer that question by saying, “Our desired financial outcome is to run out of money and close our doors.”

A couple of weeks ago The Financial Times posted an online article, MBAs lift non-profit sector, which sings the praises of MBA degrees for those seeking leadership roles at nonprofits. The article portrays those with MBAs as possessors of a set of skills and abilities that have been unavailable to nonprofits. The FT article and similar postings over the past few months have generated a variety of responses, both from fans of MBAs and from contrarians. There’s the “nonprofits need to be more business-like” school of thought, and then there’s the “but we’re really different” argument. At the PhilanTopic blog, Tracy Kaufman posted What’s so great about an MBA? with a skeptical view of MBAs. She hits it exactly right, I think, with this comment, “But to suggest that what nonprofits really need to be effective is a couple of MBAs and more business discipline strikes this nonprofit employee as, well…beside the point.”

Exactly. It is beside the point what degrees the leaders or staff have. It’s the skills and knowledge that matter, and the ability to use those skills, knowledge, experience, etc. to effectively impact the community. It’s worth considering why this needs to be a debate at all. Is this an example of a chip on the shoulders of the nonprofit sector?

The best hope for the next era of leadership depends, I think, on flexible, adaptable, and smart people of all stripes. The Future Leaders in Philanthropy blog has a nice post that describes the benefits of, and distinctions between, MBA and MPA degrees. My advice is that (1) graduate degrees are great for learning, opening your mind to new and emerging ideas, and working collaboratively with different people; (2) any professional degree program with rigor will be a good experience; and (3) you should pursue the degree program that sounds like it will get you where you want to be.

Disclaimer: After two decades in a for-profit business, I spend my days helping nonprofit organizations navigate the most business-like aspects of their organizations – the finances. I’m pretty good at it. I do not have an MBA.