Balancing the Mission Checkbook

I’m pretty sure that every nonprofit would love to have enough money that some of the funds can be invested for the future. In the past month, though, nonprofits may have seen their investment portfolios buffeted by the markets. If that wasn’t enough of a concern, this week we read about losses for some local nonprofits from investments related to the Petters Company fraud case. News reports this week in both MinnPost and the Star Tribune describe the negative impact on organizations that may lose millions from investments that were made to provide short-term loans to companies for inventory purchases. As Scott Russell said in the MinnPost article, these cases are “a wake-up call for other nonprofits to review their investment policies and portfolios.”  As an outside observer, it’s easy to say that these investments seem like an unlikely fit for a nonprofit organization, but we don’t know what standards or criteria those boards were using to evaluate and select investments. This is a good time, though, to review some fundamental guidelines for investments by nonprofits.

• Time Horizon – Funds that may be needed within a few months must be invested in highly liquid, safe investments. This is the most common type of investment fund for most nonprofits, composed of operating funds and reserves. In order to be assured that the funds will be available as needed, the investment choice must be readily available. The recent financial news has even raised red flags about some short-term investments – see my earlier post It’s 10 AM, do you know where your cash is?.

• Risk Tolerance – One of the fundamentals of investing is the balance of risk versus return. Investments with a higher return almost always also come with higher risk. The key question for nonprofit leaders and boards is to understand how much risk is involved and to decide if they can accept the risk. As an example, if the funds to be invested represent the balance of a large program grant that will be spent over the next year, then the organization can’t afford to risk the loss of any of the funds. A permanent endowment fund, on the other hand, is usually invested in a diverse portfolio that includes more risk in return for a higher long-term return.

• Responsibility – The nonprofit’s board of directors is responsible for overseeing this balance of risk and return for the health of the organization and any legal requirements. In order to fulfill this responsibility the board must act as prudent and loyal stewards of the organization’s assets. The board may decide to employ professional staff or outside advisers to manage the investments if the amount if large enough.  At minimum, the board needs to adopt and follow an investment policy. I highly recommend a booklet from BoardSource, Minding the Money: An Investment Guide for Nonprofit Board Members.

In this economic environment, every nonprofit needs to take a look at their investments and understand any risks that may have been taken for granted. It’s better to spend some time now and avoid surprises later.

I’ve been looking for something positive to write about following last week’s downer message about the economy. The best I can offer today is the suggestion that you consider approaching the current uncertain environment as if your nonprofit were in a turnaround mode. Turnarounds make great case stories after the fact - when the organization is revitalized and builds a new reputation for connections with the community, strong leadership, and financial health.  Who wouldn’t want all that? So why wait until things are bad?

Brandeis University Press has just published The Art of the Turnaround: Creating and Maintaining Healthy Arts Organizations by Michael Kaiser, president of the John F. Kennedy Center for the Performing Arts in Washington DC. While the book’s title and cases are from the arts, the advice and lessons are relevant to nonprofits in social services, community development, or any other field.

A short excerpt from the book is available from The Chronicle of Philanthropy. Kaiser offers ten basic rules for every turnaround:

1. Someone must lead
2. The leader must have a plan
3. You cannot save your way to health
4. Focus on today and tomorrow, not yesterday
5. Extend your programming planning calendar
6. Marketing is more than brochures and advertisements
7. There must be only one spokesperson, and the message must be positive
8. Fundraising must focus on the larger donor, but don’t aim too high
9. The board must allow itself to be restructured
10. The organization must have the discipline to follow each of these rules

Read this excerpt and find out which turnaround steps can help your organization through this difficult and uncertain period. We’ll call it preemptive turnaround.

My first blog entry this year, What about the economy?, posted on January 10, 2008, began with this comment:

“Reading the headlines reflecting concerns and jitters about the direction of the economy is causing leaders of nonprofits to ask how it will affect their organizations. For some people, a state of worry has set in.”

We can now say with certainty that all nonprofit leaders share a deep concern about the rest of this year and the prospects for the next couple of years. In that same blog post I encouraged organizations to understand their income mix and focus on what they could learn about the trends affecting their dominant income sources. Different income sources typically have different triggers and cycles. Foundation grantmaking, for example, changes at a slower pace than individual contributions because foundations calculate their endowment “payout” based on average balances over two years or more, while individuals make giving choices partially based on how confident they feel right now.

A lot has been written, and will be written, about the impact of the economy on nonprofits. Some hopeful news comes from the Philanthropy Journal’s article Past sheds light on recession giving, which notes that overall giving doesn’t drop as much as you might fear. Other stories, however, add to the worry, such as A gloomy giving outlook about corporate giving. I sympathize with the reporters who are writing these stories, though, because the real answer to questions about how the current economic environment is affecting nonprofits is “We don’t know yet.” Every week brings more questions and we all hope that the direction for the future will start to be clearer after the election.

On top of everything else, now is the time for all nonprofits to pay attention to developments that will impact the state budget next year. The forecast doesn’t look good according to the Minnesota Budget Bites blog. State funding dominates for human services, education, and many health care organizations, and it is important for many other nonprofits. This is the time and place to prepare for policy discussions, and you need to be a part of them. It’s easy to stay up to date through the blog and other information and meetings sponsored by the Minnesota Council of Nonprofits.

Because of this uncertainty, and the fact that all the indicators look weak, what had been concern has risen to the point of anxiety.  Emily Saunoi-Sandgren, who blogs at the Humphrey Institute’s new pubTalk blog, wrote Much ado about the economy last week looking for signs that these challenges might lead to some bigger ideas and discussions. Yes, it is time for some big discussions (such as the conversation around public policy and the state budget). Unfortunately, the reality for many nonprofits is that they need to be very cautious and careful.

I’m being blunt here, and it makes me feel like a depressing economics professor, but I have a lot of conversations with nonprofits that don’t have a lot of reserves and so their options are limited. So what’s a nonprofit to do?  Here are some fundamental steps you can take:

• Dig in to analyze what income is reliable and what is not.
• Understand the costs of delivering programs and services.
• Keep close track of increases in demand for services and how much of that increase is driven by the same economic factors.
• Scrutinize any plans for expansion carefully until you are confident that the funding is available to fully support the expansion.
• Double check every assumption.

At Nonprofits Assistance Fund we frequently talk with managers of nonprofit organization that are facing cash flow shortfalls. It’s really common that the of timing income and expenses gets out of sync.  Income is received according to grant, contract, and contribution cycles, which are often irregular. Meanwhile, payroll and rent payments have to be paid very regularly.  While this is an everyday topic for our staff, cash flow problems cause concern and worry at the nonprofits that are feeling the pinch.

To all those nonprofits, current news reports can help you understand that cash flow is important for every nonprofit, business, and even government.  Large businesses are scrambling to obtain short-term cash from borrowing through what’s known as commercial paper.  Over the weekend, the state governments of both Massachusetts and California notified that US Treasury Department that they might need short-term cash flow assistance. These are big numbers, too. Next time your nonprofit needs some help in tiding over a cash flow dip, take heart. You’re in good company, and this is a day to day reality for any organization.

If you are interested in assessing your organization’s cash position, you can download our Cash Flow Template to make your own cash flow projection.

Cash is cash, right? Then why are so many nonprofit directors and board members suddenly so concerned about the safety and security of their bank accounts?  All it takes is one alarming story, such as today’s report that some Minnesota private colleges couldn’t access all of their short-term funds. It sounds like the funds will be available, and how would you feel if you couldn’t arrange a transfer of some funds that you consider to be “liquid?”

So how concerned should you be? In general, you shouldn’t panic, but you also can’t make assumptions that all is well just because you haven’t had a problem before. It depends on how your short-term cash accounts are actually invested or deposited. Many nonprofits have balances of funds that are needed for payroll and regular expenses, for reserves, and to hold funds that are restricted or designated for a specific program or purpose. It’s common to have a checking account, other bank accounts, and some money market funds or short-term investments.

However, over the last 20 years the distinction between keeping funds in a bank account and a range of other investment options has gotten pretty fuzzy. We’ve become a little lazy about using terms - like money market account, money market fund, and short-term investments - interchangeably. But they are not the same.  Your first priority is to find out where, in fact, your nonprofit’s cash balances are - do you have a bank account or a mutual fund? If it’s a bank money market account deposit, what is the FDIC insurance coverage? Some banks offer a service to provide additional coverage or work with other banks to enhance the coverage by exchanging funds within a network. If your funds are invested in a money market mutual fund, it’s wise to read the prospectus or other information from the fund manager to learn about the types of investments that are owned by the fund. Money market funds range from ultra-conservative investments in treasury bills to investments with a little more risk. If you have made direct purchases of short-term investments, read up on what you have and how those investments are valued or affected by the current market.

Again, know what you’ve got and then have a discussion with the finance committee about any risks, concerns, or restrictions. Then you can decide whether to make any changes. This might also be the trigger for you to re-visit or create an investment policy and educate yourself and the finance committee on fiduciary duties and nonprofit investment practices. I highly recommend a short book published by BoardSource, Minding the Money: An Investment Guide for Nonprofit Board Members.