Balancing the Mission Checkbook

On April 19th, the Nonprofits Assistance Fund and the Minnesota Council of Nonprofits hosted the inaugural Finance and Sustainability Conference for an impressive group of over 400 attendees. Even before the conference, there was an energetic buzz among nonprofit finance types about a conference specifically tailored to our field, our vocation, and for some, our passion. But as a career-long nonprofit employee, a nonprofit CFO for over 17 years, I looked forward to the conference with a mix of emotions – enthusiasm on one hand and skepticism on the other.

I joined Nonprofits Assistance Fund last fall. Admittedly, I am still giddy with the excitement of working with such a fantastic organization. I joined the staff after I had been a loyal and enthusiastic consumer of the training and technical assistance resources that NAF offers. After I attended two financial management workshops, I requested follow up one-on-one technical assistance to discuss revenue drivers and dashboard reports. The personalized help I received was a great inspiration and confidence boost. I came away with a clear vision for how to integrate financial drivers with program outcomes, and how to better condense financial reports to be of maximum use to our board.

Now that I work with NAF, I remain one of our most fervent promoters. But I continue to wonder how to best help nonprofit executives, staff, and board members translate the knowledge from NAF’s many resources (including the recent conference) into practical gain. From my previous experience, I know that there are lurking practical challenges that come with each breakthrough in understanding. How do financial leaders transform our latest insights gained from an inspirational conference, a training session, a consultation, or a recently-read article into a tangible benefit for our organizations?

Too often, nonprofit leaders leave some of our best insights in the theoretical dust bin. We nod our heads during conference breakout sessions, have animated discussions in the hallways between sessions, and fire off enthusiastic emails to colleagues after the conference ends. But soon after, we come face to face with urgent demands, short-sighted “budget priorities”, and never ending reporting deadlines. We also lose momentum before we can transfer our enthusiasm to executives and board members. Why, we wonder, don’t program managers and finance committee members want to stop for a long talk about the latest thoughts on nonprofit financial sustainability? Most often we lose our commitment to change when confronted by the pace of our jobs. Our newly gained vision for integrating financial acumen with mission success is scrapped before it is even tested.

It might be easy to resign ourselves and believe that there is no hope of introducing new financial strategies into a seemingly immovable organizational culture. We convince ourselves that our emerging nonprofit is too small and green to adopt sophisticated nonprofit financial reporting systems or that the idea of building multiple reserves is the luxury of a few, rare, well-heeled nonprofits. But these are the attitudes of victims, not visionaries. Instead of shrinking from the challenge, we could rise to the occasion. Wouldn’t you rather be seen as a wild-eyed revolutionary than a grousing bean counter?

I realize today that our responsibility as nonprofit financial leaders is to push our organization’s executives, staff, and boards, and the nonprofit sector to understand that any debate that refers to mission and money as two distinct topics must be called out as naïve and misguided. Having strong financial and organizational infrastructure that support program planning and strategic vision must be championed as a basic program activity – a responsibility, a necessity. We must join in the calls for donors and government agencies to abandon the dangerous and short-sighted focus on overhead percentages and an unproductive bias for narrow funding restrictions. There is nothing auxiliary about having sufficient accounting systems and competently-trained personnel to manage an organization’s finances. There is nothing discretionary about investing in board training and development of financial expertise. As nonprofit financial leaders, we have to be the first to give up these attitudes ourselves.

The Finance and Sustainability Conference put in front of us cutting edge information and ahead-of-the-trend perspectives on financial strategy, sustainability, and infrastructure. But did we simply meet as isolated and pigeon-holed finance geeks? Or will we transform this into an energizing event from which to launch our version of a revolution? I trust that you found an outlet for the creative and transformative ideas you gained at the conference. I hope that my initial skepticism is unwarranted – that many of us will put into action what we have learned.

Two weeks have passed, what are your next steps toward financial sustainability? Please share your stories in the comments below.

We’re an excitable bunch at Nonprofits Assistance Fund. We ring loud bells to celebrate our clients’ successes. We toss homemade confetti when we receive good news from funders. We raise our voices when debating what are the most useful financial ratios. But this spring, nothing puts that excited sparkle in our eyes more than talk of the upcoming inaugural Finance and Sustainability Conference on April 19.

Through our work in lending, training, and providing strategic financial guidance, we work with individuals that serve wide-ranging roles within nonprofit organizations – executive directors, program staff, board members, fundraising staff, and finance staff – and they all have a role in financial leadership.

The broad and diverse skills and knowledge required of these individuals to effectively lead a mission-based organization toward financial sustainability is truly remarkable. Consider these real nonprofit management scenarios that demonstrate the combination of technical and strategic skills necessary in nonprofit financial management.

Scenario 1:

An Executive Director along with her board enters the fiscal year with the goal of an unrestricted operating surplus.  They have different budget scenarios in place to aid in managing the unavoidable uncertainties in their income budget. At mid-year, some program output measures are below projections, and finance staff warn that there’s a risk that a portion of a program grant will not be released from its temporary restrictions before the end of the fiscal year. The E.D. meets with fundraising staff to consider strategies on getting permission from funders to re-purpose the grant funds while also revisiting the aspects of the communications plan that reference the organization’s commitment to financial surpluses.

Scenario 2:

A year-end deficit is keeping an Executive Director up at night, pondering the question, “Why isn’t our business model working?” The E.D. works with program managers and the Finance Manager to develop a comprehensive allocation system. Empowered by an understanding of true program costs, the E.D. modifies grant proposals in order to request funding at a level that fully pays for the services that his agency is providing. The board begins next year’s budget process by discussing the financial expectations of each agency program.

These scenarios and the unique combination of technical and strategic skills that they require are representative of the types of complex challenges that nonprofits face today. To name just a few of the many skills required, leaders must develop competencies in scenario planning, accounting principles, communicating financial information, and engaging others within their organization in financial leadership activities. Financial leadership entails an emerging and evolving skill set that changes with our environment and our organization’s circumstances.

At Nonprofits Assistance Fund, we understand the challenges and requirements that nonprofit leaders face along their quest for sustainability. Accordingly, we’ve worked with our partners at the Minnesota Council of Nonprofits to design the 2012 Nonprofit Finance and Sustainability Conference – a one-day event that will cover a wide gamut of technical and strategic topics that will give you the skills and knowledge necessary to put your organization on a sustainable course.

Our morning keynote will be delivered by a national leader in guiding nonprofits down the path towards sustainability, Jeanne Bell of CompassPoint Nonprofit Services. Our lunch keynote speaker will be Elizabeth Boris, the founding director of Center on Nonprofits and Philanthropy at the Urban Institute, who will highlight resources for nonprofits to navigate the new economy. Morning and afternoon breakout sessions will cover technical topics, such as selecting the right accounting software and ensuring internal controls in an electronic age, as well strategic topics, such as using your budget as a communications tool and managing multiple bottom lines.

Conference registration is open and there are still a few more days to take advantage of discounted early registration. Please join us April 19 for what promises to be a wildly practical gathering.

It’s been gratifying to hear and read the great feedback about An Executive Director’s Guide to Financial Leadership published in the current issue of The Nonprofit Quarterly. I enjoyed writing the article with co-author Jeanne Bell from CompassPoint Nonprofit Services. We have very similar approaches to finance as a tool for mission and community impact. Nonprofit managers and directors have posted online comments and given me direct feedback that they appreciate the practical guidance that goes far beyond bookkeeping basics. These principles help to build strong infrastructure and capacity, and break some habits that aren’t serving our organizations very well.

I encourage you to read the full article (and subscribe to the magazine!)  Here is the brief “Executive Director’s Finance Cheat Sheet” of the eight key business principles that we believe are essential for financial leaders.

1. Develop your annual budget with a commitment to its net financial result—whether surplus or planned deficit—and then adjust spending during the year if income is not coming in on pace to yield that net result. Then, complement your annual budget with rolling financial projections that incorporate your most current information about probable future financial results.
2. Diversify your income cautiously, ensuring you have the capacity to develop and sustain the programmatic and operational requirements of attracting each new resource type well.
3. Develop cash flow projections along with the budget and rolling projections so that you can anticipate any cash flow problems well in advance, when you have more options.
4. Plan goals for financial reserves based on your typical cash flow cycles and risks and incorporate reserves into all financial plans and policies. Be sure to foster a financial culture for staff and board that understands the importance of a regular operating profit or surplus.
5. Pursue restricted funding from those foundations and corporations that understand and value your organization’s mission and particular strategies for achieving impact. When pursuing restricted funding, develop proposal narratives and accompanying budgets that link staff development to program design to superior outcomes, including all related costs as direct.
6. Ensure that your finance function is always properly staffed; if necessary, use a mix of staff and expert contract consultants to achieve this.
7. Discuss expectations for financial roles and responsibilities with board leadership to create accountability and information flow that matches the size and life stage of the organization. Make sure to invest time to develop meaningful financial report formats for the board that reinforce organizational strategies and goals and supports the board in fulfilling their responsibilities.
8. Introduce the concept of enterprise risk management to your team and initiate an internal assessment of a full range of risks.

Read the article and let me know what you think and what other principles we should add. For those of you in Minnesota, we’ll have a chance to hear directly from Jeanne Bell at a conference coming up in April that Nonprofits Assistance Fund is co-hosting with Minnesota Council of Nonprofits. Watch for more information soon!

Here’s a classic chicken-or-the-egg question. What comes first, creating a system to work together for collective impact, or assessing all of the seismic shifts underway? The article on Collective Impact has generated a lot of conversation and momentum for systems thinking. The United Front event in October introduced the concept and practice to hundreds of nonprofit and philanthropy leaders. The article makes the case for a new approach and describes a practical implementation.

A few weeks ago, the Alliance for Children and Families released a thought-provoking report calling on human service nonprofits to take bold action in order to continue to serve communities. The report, Disruptive Forces: Driving a Human Services Revolution is focused on the future, recognizing that while we don’t know what’s coming, we do know that major shifts are underway. In the report, the Alliance describes the massive challenges facing human services. Adapting to respond to these changes will require much more than new fundraising tactics and hard-working staff. They urge nonprofits to consider themselves as a part of a much larger system and then plan how to participate in new kinds of networks to serve community needs. Similar to the conversations about collective impact, the focus is on impact in the community and not on preserving individual organizations.

At the heart of the report are six disruptive forces that nonprofits need to understand and tackle:

1. Purposeful experimentation: Nonprofits regularly hear about the need to innovate and develop new models, but there isn’t a clear path or pattern to follow. We all need to try things, test new ideas, and take calculated risks.
2. Information liberation: Locked down confidentiality has become a barrier to delivery improvements and consumers will take control of their information to find better services within and outside the systems.
3. Integrating science: Delivering human services can be improved, even revolutionized, by applying new scientific research and crossing fields. The walls between disciplines need to come down.
4. Uncompromising demand for impact: Measuring, verifying, and communicating impact is neither optional nor is it an after-thought to service delivery.
5. Branding causes, not organizations: Marketing and fundraising for individual nonprofits may be effective for raising money and name recognition, but branding a cause can change public perceptions and lead to bigger changes. This force may seem to counter a nonprofit’s individual interests but is necessary for the broader vision.
6. Attracting investors, not donors: This force is part of a growing call to recognize the return on investment of human services and translate these benefits into actual returns, either for the public or for financial investors. This may include long term, patient philanthropy, pay for performance funding, and collaborative investments.

The Big Idea of the report is:

“There must be a shift from an organizational-centric focus to an acknowledgement of the importance of networks and collaboration. … This shift will be difficult and will require many key players to set aside their own egos and become less defensive of their ‘home turf’”.

Unlike the Collective Action articles, the report doesn’t offer a guide for how to build a network. The authors encourage nonprofit CEOs and boards to ask a lot of questions about these disruptive forces and their responsibility to stretch their traditional boundaries, take risks, and build the networks that can create real impact. How should they start?

“Call to Action: In this report, we encourage you to seize the opportunities that contradictory, complex situations create.”

Mark Kramer addressed the United Front 2011 session on Collective Impact with great examples and stories, and one particular recommendation which resonates with veterans of less-than-successful collaboration efforts: you need a backbone agency to be successful in collective impact. Kramer has other ingredients necessary for a good cooperative stew, but this particular social agar is often overlooked because… well… it’s new spending. To quote Marcia Avner from the MCN Annual Conference the next day, “get over it.” If we are going to increase our impact, we have to do it right.

Conference attendees talked about how to communicate the need to leverage collective resources, but this collaboration doesn’t happen out of the ether. If we are truly going to coordinate impact – focusing our organizations on what we do best that springboards the work of another – we cannot expect that level of communication to occur without dedicated resources. Any nonprofit rockstar worth her/his salt can tell you just adding more work to the same people means something else will get short-shrift. We have to decide what we can do, and what must be the responsibility of our collaborators. That requires logistics. That requires people.

Like any good fan of framing, supporters of collective impact need to shift both thinking and language around things like logistics, meetings, coordination and the like. Collaborators, funders, partners and clients will have to get used to hearing things like backbone, leverage, and impact. We can spend $1 million across 10 agencies and impact 1,000 people moderately well. Or, we can spend $1.1 million across 11 agencies and impact 2,000 people extremely well. Case number two costs more money, but does anyone really doubt that it’s worth the extra costs? Nonprofits that are ready to take on collaborative work have to be ready to change how they communicate about money. Collaborators should agree on a budget for their backbone organization, and talk to their supporters about how they are intentionally and affirmatively spending money for better coordination and more effective services. Nonprofits cannot run away from this conversation, but rather must get in front of it.

A final stage to leverage impact will be in how nonprofits internally view their backbone collaborators. These allies should be viewed as trusted advisors: to communicate clarity, to consult when there are questions, and to provide great value for the money. Any successful neighborhood hardware store understands this role. Sure, it’s possible to figure out how to fix a plumbing job through trial and error and the occasional “how-to” YouTube video. It is however, faster and easier to ask the experts at the local hardware store. Yes, they have an interest in meeting daily sales, but more importantly, they have a stronger interest in showing value and keeping you as a life-time customer. Your backbone collaborative organization has the same incentive. Rather than viewing them as “overhead”, nonprofits need to start thinking of them as the expert that just saved them enormous time, frustration and misdirected effort so they can get the job done. Viewing the backbone organization this way brings transparency to the collaboration. Service delivery organizations won’t have to wonder if partners are duplicating effort or creating more work just to get resources – their backbone collaborator will communicate the purpose of their efforts and share which results build on each other, adding greater value. Successful nonprofits will embrace this communication, and as soon as we do that, we can shed the resentment which previously sneaked into collaboration work.

Nonprofits can suffer near-allergic reactions to discussions about business models. It seems so distant from mission, so stoic compared to the services delivered in our communities, so … well… business.

Leaders in the business of impact are often passionate about talking in terms of measurable outcomes. A child attends a quality pre-school and goes on to succeed in elementary school. A newly renovated house is sold and surrounding houses spruce-up their yards. A new artist finds an audience in a public space where art has been absent. These outcomes inspire nonprofit leaders to do what we do.  But how we pay for and leverage this impact doesn’t have to be afterthoughts. They can be integral to making change happen.

Every nonprofit, whether consciously or not, has adopted a business model. An all-volunteer scout troop has a business model. Scouts use recruited volunteer time to provide leadership training and development to young people. The small dollars involved are resolved through fundraisers (cookies or popcorn, anyone?), voluntary fees paid by families and the like. A multi-million dollar job-training program has a different business model. With a mix of revenue from state contracts, employer-training fees and general operating support, the program provides services to people seeking work.

Each model has a different scale, requiring different management, but both must share common themes of sustainability and impact. If the scout troop folds prior to the next group of young people joining, their business model isn’t sustainable. If the job-training program can’t help people find work, they are not meeting their mission outcomes. In both examples, the business model doesn’t work and something needs to change.

Nonprofits Assistance Fund offers more detailed information about Transforming Nonprofit Business Models. To make this conversation less jarring, we suggest easing into the language. Many nonprofit leaders are comfortable talking about a theory of change because we enjoy telling stakeholders how our work will impact the world:

• How do low-cost bikes improve options for youth in a targeted neighborhood? We can answer that question – it’s our theory of change!
• How do we balance a mix of earned and donated revenue to hedge against risk and ensure sustainability? Well, maybe we can’t answer that one as quickly.

A business model is a model of change that explains how a nonprofit mission is sustainable and creates impact. The next step is determining how we can aggregate our impact not just into short-term outputs (how many kids went to an after-school program?) but also into long-term outcomes (how many families are self-sustaining?). United Front 2011 will continue this conversation about collective impact.

To quote Aristotle, while “the whole is greater than the sum of its parts” it is also important for individual nonprofits to understand their own model of change in order to be ready to contribute to a larger collective impact.