Balancing the Mission Checkbook

What amount is the right size of donation for your organization? Most of us would laugh at the question and answer “$1 million, of course.” But ask again, with a dose of both reality and prudence. What is the amount that would have a long term, stabilizing impact on your organization if you could rely on annual gifts from many donors? It’s probably far, far below $1 million. It’s probably even below $1,000. Many nonprofits overshoot this number, though, chasing larger gifts and grants, thinking that bigger dollars are the answer. I’m not sure that’s ever a realistic strategy, but I think it’s too risky in the midst of the recession.

The Value of Smaller Gifts

I’m pleased that smaller gifts are drawing greater attention and wanted to highlight a few noteworthy examples. The article Save Our Ship in American Theatre Magazine describes the efforts of theaters to rebuild from financial struggles:

The hero who emerges from emergency campaigns is the small donor. Practically every artistic leader I spoke with used the words “grassroots” and recounted anecdotes about donated piggy banks. Over and over, artistic leaders said that it was not one single donor that saved them but rather many, many modest donations - gifts of $100 and $150 that added up to serious money.

The value of many, many small donations was proven on November 17th. At the end of the fundraising-palooza of Give to the Max Day, 38,778 gifts had been made totaling $14,000,406. That divides to a $361 average gift. Many of the most impressive Give to the Max Day campaigns yielded great numbers of both donors and dollars with pretty small average gifts. The organizations with the largest numbers of donors had average gifts ranging from $75 to $100. Organizations receiving the most dollars also had modest average gifts between $65 and $325.  Other examples of the power of small donations can be seen in the international response to the recent earthquake in Haiti, such as the American Red Cross raising $3 million as of 9am EST in $10 increments through a text message campaign.

In his book The Art of the Turnaround, Michael Kaiser describes the process of Alvin Ailey Dance Company’s financial recovery. He offers this advice:

Aiming to fill a deficit with one extraordinary gift is usually just a pipe dream. We need to focus on “right-sized gifts,” gifts that make sense given the budget and the profile of the organization. For the Alvin Ailey American Dance Theater, with a $6-million budget and a $1.5-million deficit, $50 was too low and $1-million was too high. At Ailey, while we did receive larger gifts, we focused our fund-raising on $1,000 gifts. Our board felt comfortable asking for this amount from friends and associates, and this was an amount that would make a difference to us.”

If you prefer to hold out hope for large gifts and grants, be aware of the risks. The Minnesota Council on Foundations just released their 2010 Funding Outlook based on a recent survey. The survey found that overall funding by Minnesota’s foundations will stay fairly level in 2010 compared to 2009, for which we should be thankful. There is wide variation, though, in the grantmakers’ forecasts. More grantmakers expect decreases in giving in 2010 than expect increases: 30 percent expect to give less compared to 25 percent who expect to give more. At least 20% of foundations expect to decrease the number of grants awarded, as well.

Keep up the grantwriting, RFP submissions, and lunches with prospective large donors. But take Michael Kaiser’s advice to heart - make the priority for 2010 to build a reliable base of “right-sized” gifts.  They really do amount to something very important.

How many surveys have you completed that gathered information about how the recession is affecting your nonprofit? I think that we’ve gotten at least ten requests to complete surveys in the past six months (and have responded to at least five or six). With the ease of surveying using SurveyMonkey, Zoomerang, and other services, it seems like everyone with a computer has recently conducted a survey about the recession. I gathered the various reports I’ve received lately and searched for others, finding many, many more.

Surveys are great and provide some reliable data and a lot of anecdotal information for use in case statements and meeting discussions. The surveys range from large, national organizations collecting data from several thousand organizations to local groups who reach a few dozen. Some surveys employed carefully planned research techniques, while others sent out a shotgun email and let respondents self-select. Whatever the audience, method, or response rate, all of the surveys I read came up with the same information: funding is down, demand is up, and nonprofits are turning themselves inside out - including deep cost cuts - in order to maintain services in the community.

• Guidestar’s survey (2,979 organizations) identified the basics: reduced income, reduced services, reduced expenses. The size of the respondent pool is impressive.

• Nonprofit Finance Fund (986 organizations) warned that nonprofits are “In Danger” and “Strained to the breaking point” with over 80% anticipating deficits this year and cash reserved down.

• Bridgespan Group’s survey (100 organizations), which was a follow up to last fall’s report, found that the situation had worsened and nonprofits were turning to tough measures, including deep costs cuts and use of reserves.

• Impact of the 2007-2009 Economic Recession on Nonprofit Organizations issued by Listening Post Project at Johns Hopkins University employs a recurring panel of selected and random nonprofits in several fields (363 organizations). The in-depth analysis reports that 80% of respondents are experiencing financial stress, but that most have maintained or increased the number of people served.
  • A particularly interesting comment is that “nonprofits appear to be at least partly buffered by government policies that are designed to be counter-cyclical, i.e. to expand when economic conditions deteriorate.” Reading this month’s headlines about state budgets, I’m surprised to read that government funding offers an offset to reductions in other sources.

• In direct contrast, the May 2009 Current Conditions Report from Minnesota Council of Nonprofits (571 organizations) reported that nonprofits are “bracing for extended impact” that is exacerbated by reductions in state and local funding and uncertainty about further reductions.

• Similar reports of financial strain can be found from the Christian Leadership Alliance (250 organizations), United Way of the Bay Area (391 organizations), and state nonprofit associations in Louisiana (312 organizations), New Jersey (351 organizations), and Arizona (87 organizations), among many others. There are many, many other surveys - for the arts, hospitals, environmental organizations, and on.

Thanks to the 6,390 nonprofits for taking the time to respond to the surveys listed above

Each survey report has its own focus, tone and summaries, although with some interesting contrasts. All report declines and reductions, but some use phrases like “struggling to survive” and “threats to well-being,” while others are more upbeat about the creativity, adaptability, and resilience (one of the most frequently used words). There are lots of comments about difficult decisions, uncertainty, program redesign and modification, new collaborations, focus on core mission, and contingency planning.

What they also all report is the great commitment and sacrifices being made by those who are employed by and volunteer for the responding nonprofits. One of the common themes is reductions in personnel costs through freezes, salary reductions, and furloughs at the same time that the organizations are serving more people with new and more complex needs. This is my greatest concern - for how long can nonprofits rely on staff and volunteers working more and harder, for less, to meet growing community needs?

I’m always cautious when I read reports since this kind of quick action survey relies on answers from a self-selected sliver of the sector. The surveys provide interesting and useful data to start planning, but it’s not sufficient to draw reliable conclusions. I’m interested now in reading some case stories of change and transformation. That is likely to take more time to achieve than a 10 minute survey, but it will be worth it.

Worrying about cash shortfalls is, without a doubt, at the top of the list of stressors for nonprofit directors and finance managers. In this situation, everyone’s dream is to have a stash of cash - a cash reserve account set aside to tap at a moment’s notice to solve the problem. I’m reluctant to endorse a universal standard for reserves, but there are “rules of thumb” and accepted practices calling for nonprofits to hold reserves of three to six months of operating expenses. Well it turns out that this “best practice” is a practice in theory only for many nonprofits.

A study by the Urban Institute, reported in the Washington Post this week, Nonprofits Imperiled By Low Reserves found that 57% of the Washington area nonprofits studies had less than three months of reserves, and 28% had none. The June 2009 Nonprofit Current Conditions Report published by Minnesota Council of Nonprofits found new cash flow concerns caused by slower payments from county and state agencies. Surveys in Minnesota have found that at least 35% of nonprofits anticipate cash flow problems this year and 30% have one month or less of operating reserves. Low reserves and cash flow problems are not restricted to small or struggling nonprofits - it’s a widespread management challenge. The Urban Institute study contained an interesting finding, according to the Post article:

According to the study, larger groups were less likely to have sufficient operating reserves than smaller ones, a finding that surprised researchers. Seventy percent of charities with expenses over $5 million had low operating reserves, compared with 50 percent of groups with less than $100,000 in expenses.

This shouldn’t be that surprising when you do the arithmetic. Imagine that you run a nonprofit with an $8 million annual budget. Maintaining a three month reserve would require a $2 million cash account. That’s (a) a big number and (b) very difficult to build up in the low surplus, service delivery model of most nonprofits. Rather than dwelling on the best practice or target for designated cash reserve accounts, maybe nonprofits need to learn to be more sophisticated managers of cash and its relative, working capital. This financial concept was described well by Ben Cameron of the Doris Duke Charitable Foundation last week in a Chronicle of Philanthropy live online discussion, The Changing Role of Foundations.

Ben Cameron:
Most businesses recognize the need for ongoing working capital–it’s the heart of funds that allow a business to make strategic decisions around launching a new program or line of business, investing in a new facility, etc. I have been in discussions with some business executives who have been adamantly opposed to general operating support for arts organizations–thinking it gives organizations free license to be unstrategic and undisciplined–but instantly supportive of flexible working capital. In essence, the purposes are the same–the difference is in how the two terms are heard.

I’ve been advocating for better understanding of Nonprofit Capital for years. In the “nonprofits should be like business” debate, this is the one area where we do have a lot to learn. There aren’t many businesses that strive to hold a three month cash reserve account. That would be viewed poorly, in fact, because it’s an inefficient use of capital.

For peek at how the very largest and most sophisticated nonprofits solve a cash flow problem, read about how Dartmouth Joins Harvard, Princeton in Tapping Credit Markets. Because of the drop in endowments, Bloomberg reported that Dartmouth College just issued $250 million of 10-year notes “for liquidity and general working capital,” according to Julie Dolan, associate vice-president for fiscal affairs at Dartmouth.

Learn to love these words: Working Capital.

Where do you send the condolence card after the death of a nonprofit?

Today’s Star Tribune reported that the Senior Federation to Shut Down because of financial challenges resulting from drops in both grant support and memberships. The economy is certainly a big factor since the Federation’s funders include several health care organizations that are cutting budgets everywhere. Membership declines reflect both demographic shifts and changes in the needs of their constituents. Founded in 1973, the Federation really made its mark in the 1990s with advocacy and action to make prescription drugs more affordable with bus trips to Canada and online sales.

This news about the Senior Federation is not the first or the last time that a nonprofit will close. Two weeks ago Centro Legal closed its doors after almost 30 years of providing legal services to low-income, Spanish-speaking clientele with issues related to housing, domestic violence and immigration. The loss of these services has a very real impact on the community.

The current economy has exacerbated the already fragile financial state of many nonprofits which is likely to result in more closures. Every closure is hard, painful, and sad. This sadness made me think about the sadness I’ve seen in the past month after the cancer-related deaths of three acquaintances. These losses were hard, painful, and very sad. Each of these wonderful people were remembered at memorial services billed as “A celebration of the life of … ”  The events were indeed celebrations with music, laughter, tears, stories, and food. Friends and members of the community even bring the food, passing out turkey sandwiches and brownies in church basements and park shelters.

I think that we need to organize memorial services for nonprofits. A celebration of the life of the Senior Federation, a celebration of the life of Centro Legal, a celebration of the life of _______ . Current and past board and staff members, clients, members, funders, and the community could gather to tell stories, cry a bit, remember the history and changes, take pride in the impact and significance of the organization, and say goodbye. Invite me and I’ll bring a tray of brownies.

I think that I’m losing my ability to be patient and finesse conversations about how nonprofits can deal with the recession. Instead, I’m becoming a blunt instrument with one recurring message - Act Now.

Unfortunately, quite a few nonprofits are in very fragile financial condition and don’t have much elbow room. In other circumstances, I like to work through the possibilities and understand the complexities and reasons behind a nonprofit’s structure and history. Now it’s all about speed.

For example, in the last two weeks I’ve made these very direct and difficult comments to leaders of three different nonprofits:

• Direct comment 1: “I think that your grant budget is unrealistic. I think that you need to create a scenario budget plan to reduce expenses by 30%.”

• Direct comment 2: “Based on your history of recurring operating deficits, you need more than a few expense reductions. You need to reconsider the entire structure of your programs.”

• Direct comment 3: “You don’t have time to research some new grants. You’ll be out of cash in one month.”

Not much finessing here. Because of this need for urgency, we developed a Recession Risk and Preparedness Assessment for nonprofits to quickly identify how urgently they need to act and where to start. These twenty questions cover financial condition, financial information, organizational change factors, and leadership. Use it to find your starting point.

In this week’s issue of The Chronicle of Philanthropy, consultant Pat Nichols described how frustrating it is to watch ineffective and slow reactions to urgent situations in the article A CEO Survival Guide for Touch Times. Because this requires a paid subscription to access, here’s an excerpt of some key points in this excellent piece:

Center all decision making on the mission. If, in facing tough choices, we are not explicit and rigorous about how the decisions we make serve the mission, we have fallen short of our responsibilities.

Be open and engage everyone. Everyone will find this period and the process unsettling. No one, at the outset, can guarantee an outcome. What we can do, though, is find creative means to discuss what is happening and encourage participation from all quarters.

Move quickly but systematically. When uncertainty reigns, people draw comfort from knowing that, though there is no resolution at present, there is rapid and systematic movement toward a resolution.

Be hopeful in style and rigorous in analysis. This balancing act is, perhaps, the toughest of these principles to observe. As leaders, our colleagues depend on us to set a tone, and to convey hope. However, it is also crucial that we ask the tough questions and discount our desire to believe the best.

Live with ambiguity, acknowledge uncertainty. We must act on incomplete and imperfect information; we must make assumptions and decisions that will prove to be wrong. This requires that we acknowledge what we don’t know and be prepared to adjust when we are mistaken.

The time to act is now - for all of us.

We’ve heard a lot from nonprofit clients in the last week or so about cash - too little, too restricted, or just right. Maybe the right amount, but the wrong timing. Maybe the right timing, but too risky or some other problem that results in cash on the balance sheet ending up as only “cash” on paper.

Here are three stories:

• Organization 1 has been holding a nice balance in a money market investment account for the last two years. The funds were earned from a special grant-funded project but no one ever figured out whether there was an ongoing restriction on the earnings. Now they wonder if they can use this idle cash as an operating fund.

• Organization 2 has a substantial balance in a building reserve fund and no money in operating reserves. There are no improvements planned and the building has been well maintained, but the policy keeps this cash out of reach to address immediate needs.

• Organization 3 has operating reserves invested in a bond fund and realized that the value of the account has dropped with the market. The treasurer thought that the fund was like a money market account and didn’t realize there was risk of market fluctuations.

In all three cases the nonprofit was accurately reporting the asset balance on financial reports. Beyond verifying an accurate number, though, it’s important to have a solid grasp of all the strings and restrictions that might hinder your ability to use that cash when you need it. Some restrictions are external, such as temporarily restricted grants. Other strings on cash result from internal decisions related to investment decisions, reserve policies, or overly-complex designations and conditions.

Thomas McLaughlin addresses the problem of illiquid cash in this week’s Streetsmart Financial Manager column in The NonProfit Times.

How Liquid Are We, Really? Cash is king, or queen, depending on the realm. As long as you have sufficient cash you can outlast most blows the environment delivers. But you need to be sure that the things listed as cash really are cash.

Nonprofits Assistance Fund has created a quick cash analysis resource to help nonprofits easily distinguish cash that’s liquid and available from other types of restricted, designated, or hard-to-access funds. You can download this Cash and Investment Analysis worksheet now.