Balancing the Mission Checkbook

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.

Who needs to be accountable now?

Last December I posted an entry in response to a Wall Street Journal column by Sally Beatty in which I chafed at her observation that charities were not accountable enough about how they used donated funds. She said:

“It’s time to make sure our gifts are being used as intelligently as possible. Instead of showering hard-earned dollars on charities and hoping for the best, we need to demand clear, detailed information on the results of their efforts. We ask the government and public corporations to be transparent and accountable. Charities should meet the same standard.”

It seemed that a lot of business leaders held this same view of nonprofits. It seems like a good time to revisit this notion and ask about whose standards of accountability to use now.

In the past few months we heard about the three page proposal from the Secretary of the Treasury asking for a $700 billion check to intervene in the financial meltdown (that ended up to actually be a blank check). The bailouts have continued, leading columnists like Floyd Norris of the New York Times to shout, Accountability needed with bailouts. Most recently, when executives of the Big Three automakers struck out with a request for their own bailout, House Speaker Nancy Pelosi said:

“It’s all about accountability and viability. Until we can see a plan where the auto industry is held accountable and a plan for viability on how they go into the future — until we see the plan, until they show us the plan, we cannot show them the money.”

Ask any nonprofit executive director or grant writer to guess how far they would get with a foundation or government agency if they submitted a three page request, or if they sat down at a site visit without a detailed project plan, budget, and evaluation outcomes. The answer is, not far.

Here’s a suggestion for how the nonprofit sector can contribute to the bailout – we can teach workshops and classes on accountability for government agencies and public corporations. Maybe it’s a new earned income opportunity.

Earlier this year, I proposed Accountability Lesson Number 1: Questions Must Be Asked to encourage directors of nonprofits to overcome their hesitancy to ask questions. In particular, when financial or governance issues are unclear or incomplete, they should continue to pose questions until they get answers. In some ways, asking questions is one of a board member’s primary jobs. What comes next, though, after the questions are answered?

Next lesson: Action must be taken. One of the most interesting dynamics in nonprofits is the relationship and shared authority of executive directors/CEOs and their board of directors. We could debate infinitely the question of who is really in charge. In day to day life, most nonprofits find a way to make it work if they have assembled and hired the right people, agree on roles, and know how to share and use information. There are times, though, when the board needs to assert its real and legitimate authority to make a big decision - to take action in the face of urgent needs for the nonprofit and its mission. In Lesson Number 1, I said that asking questions is one of the board member’s most important roles. I will state here that I think the primary role for board members, especially board chairs, is to know when they need to take action, and then to do it. I think this is an urgent issue right now because I have often seen the sometime dire consequences of reluctant, slow decisions. Too often, board members who have been expected to be good supporters and cheerleaders can’t seem to change gears and be the leaders they need to be. If the board’s practice has been to ask for more information and then defer decisions to the next meeting, and then the next, then real problems can grow while the options shrink.

The need to step up and take action is always applicable, but it seems to be more urgent right now. If income sources are less reliable, or costs are harder to identify and match with impact, then boards simply must ask questions and then follow up with real decisions - and real governance.

What do you think about these Accountability Lessons?  Do you have an example where asking tough questions and then taking action led to positive change? Or do you have lessons learned that may be helpful to others?  I invite you to share your experiences in the comments section.

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.

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.”

How do you know what you don’t know? Someone asked this question last week in a workshop on the topic of board oversight and some high-profile problems. It’s such a great and critical question. There’s been a swirl of conversations in the last week or so about financial problems and governance issues at a number of nonprofits, both local and national. No matter what the details are, questions have been raised in every situation about the board’s role – what did they know, when did they know it, and what did they do? But what’s the first step for the board, since they are relying on reports from the staff and have little or no access to the raw information. Boards that ask for lots of details are accused of micro-managing and not trusting the staff. So how do you know what you don’t know? There has to be a balancing act between accepting reports at face value and asking questions that go beyond the information presented. I think that there’s an art to asking good questions – my favorites generally start with either “Why…?” or “What if…?” (I actually have those two words up on the wall in my office). Speaking last night to a group of people who had recently joined boards of nonprofits, I suggested that asking questions is their primary job. It’s great if they get an answer that makes sense. However, the role of governing requires further action and follow up when the answer doesn’t make sense, or when the answer is “Don’t worry about it,” or “I’ll find out later.” The distinction between hyper-questioning and prudent questioning depends on circumstances, but in every one of these recent governance and financial situations there were some “why” questions that needed to be asked and then carried through.

This complex balancing act between supporting and governing is discussed in the article Why Boards Don’t Govern available from CompassPoint. One point raised in this article is the importance of creating an atmosphere and culture at board meetings that encourages questions and disagreements. I know in financial matters, many board members feel like second-class citizens because they are not the “financial” board members. The fact is that if they have a question, or if something doesn’t make sense, they need to feel free and encouraged to ask the question. It just might be the question to unlocks the truth.

There was no telling what people might find out once they felt free to ask whatever questions they wanted to. (Joseph Heller, Catch 22).