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.

There was a breakthrough last week for nonprofits. In a joint announcement, Guidestar and other major charity “watchdogs” made a very strong case that overhead ratios are meaningless. The phrase used in the opening paragraph says the ratio is “useless for evaluating a charity’s impact.” Read the full release The Worst (and Best) Way to Pick a Charity This Year and then copy it to share far and wide. Some of the reasons for de-emphasizing this ratio cited in the announcement will be familiar to nonprofit leaders:

• It tells you nothing about the impact the charity has on the people it’s trying to help.
• It discourages charities from investing in tools and expertise that would make them more effective.
• The rules for determining overhead costs are vague and every charity interprets them differently.

Hooray! I’ve been one of many voices speaking out on this problem for a long time, most recently in the post Donors and Overhead: Maybe They Don’t Care. This step by some of the most prominent national watchdogs, especially Charity Navigator, is huge. Ken Berger, CEO of Charity Navigator, elaborated on his own blog:

We do concur with the fundamental truth that the most critical dimension in evaluating a nonprofit has to do with achieving meaningful results.

Charity Navigator has been criticized for relying too heavily on the overhead ratio and other simplistic measures for their rating system. Berger has been blogging about their plans to shift to a more comprehensive approach, and this announcement is a breakthrough.

This feels like a gamechanger because now we can stop arguing about whether overhead is an accurate measure of charity performance. It’s not. Clearing that hurdle doesn’t get us to the finish line, though. Everyone in the nonprofit sector should cheer that the watchdogs are encouraging donors to review the impact and effectiveness of nonprofits - but how? There is not a single, simple alternative method to evaluate the effectiveness of all nonprofits. It’s essential for nonprofits to invest some time and brainpower to figure this out.

The organizations behind the press release have their own approaches:

• Consumer reviews: The personal experience approach of Great Nonprofits relies on a broad network of people who are involved with nonprofits to submit comments and ratings. Users of the website can search and browse for stories that interest or inspire them. Think of this as the Amazon reader reviews or TripAdvisor comments equivalent for nonprofits.

• Experts: Philanthropedia, on the other hand, relies on panels of experts in four different fields to pool their knowledge and assessment of which nonprofits are the “top” in effectiveness. Their “mutual funds” of nonprofits can become your vehicle for giving. In some ways this is a global, scaled up version of how we’ve used the local United Way.

• Data: GiveWell has a laser focus on reliable research and evaluation at nonprofits to support anecdotal stories or claims about impact. Read about their low opinion of the way nonprofits currently evaluate effectiveness. If better quality outcomes supported by good evidence is needed, then GiveWell will be there pushing us all.

Whatever approach you trust or endorse, get to it now. It will take us a long time reverse course for all the donors, advisers, and institutions that have used the program cost ratio as a stand-in for value. You’re going to have to offer some other data to replace it. Make it mean something. Ken Berger of Charity Navigator issued this call to action:

The nonprofit sector must get its act together and make sure it is really helping provide meaningful change in communities and peoples lives. It is life or death for many of those we serve whether we are effective or not. So let’s work together to measure, manage and deliver what is really important to make our world a better place.

Three cheers, at least, are deserved for Grantmakers for Effective Organizations (GEO) new publication On the Money by Nancy Burd. You can download either the executive summary or full report from the website.

As summarized on the GEO website:

This publication highlights the financial challenges nonprofits face and the ways in which grantmakers are both improving the situation as well as perpetuating the problem.

The first section, Assessing the Problems, identifies five problem areas:

1. Restrictions on Funding
2. Misperceptions Around Sustainability and Growth
3. “Too Many Masters”
4. Onerous Grantmaking Practices
5. Knowledge Gaps

The other sections discuss Barriers to Smarter Grantmaking and Ideas for Grantmakers.

It’s impressive how in 28 pages the author distills a variety of ideas, research, and practices about the realities of financial instability faced by nonprofits. The report also provides helpful and realistic suggestions for grantmaking organizations based on practices that have already been developed and implemented by foundations.  The advice and guidance for funders is great, but this guidebook is a must read for everyone in our sector.

I’m pleased that GEO will be focusing on nonprofit finance and encouraging foundations to understand how “many prevailing approaches and practices in philanthropy can unwittingly create problems for the nonprofit sector.” Many nonprofits have experienced these unintended consequences and will welcome a dialogue on this topic.

However, nonprofit organizations also have a lot to learn from the report’s comprehensive overview of grantmaking. Misconceptions about the true cost of programs and capital needs apply equally (or more) at many nonprofits. We can’t expect a seismic shift in foundation practices and investment unless we nonprofit leaders understand and can effectively communicate what it takes to sustain ourselves.

Download this report, read it, and copy it for your board and senior staff.

The New York Times published an article this week about the Gilmanton New Hampshire Year-Round Library Association and their efforts to raise money for operating costs. Led by dedicated and committed volunteers, a facility has been built by moving and refurbishing an 18th century barn, but no funds are in hand to open the doors. The article reports that they are “looking for someone who will provide at least $1 million for a private endowment” to support the ongoing operating costs. Wouldn’t every nonprofit like to “find” someone who will donate $1 million! This is a case for Mythbusters - Nonprofit Finance Edition.

There are no magic donors. In the article, one of the volunteers hopes that “Maybe someone out there has had a dear loved one that’s passed away, or a child or parent they’ve given everything possible to, and this would be a special new gift.” I don’t mean to pick on the volunteers for their effort. And I certainly love the picture of the barn/library, having grown up in New England with a lot of time spent in a picturesque, cozy library. I hear that kind of wishful thinking elsewhere, though, and am concerned that the myth of the elusive, secret donor is dangerous. Hoping and waiting for One Big Gift that solves everything might just be an excuse not to do the hard work of fundraising. Now, as always, fundraising involves identifying those who care about the cause, building relationships, making the case, and demonstrating responsibility - step by step.  I recommend this recent blog post from PhilanTopic that smartly translates the core principles of donor cultivation and planning into useful advice for today.

If you’re like me, you’re reading a lot of reports, surveys, and advice right now looking for useful data and direction. To help you cull through this material, Nonprofit Assistance Fund has launched a new blog, Nonprofit Harvest.  Our goal is not to post every available resource, but to consistently provide useful content that will help nonprofits.  I encourage you to read the blog, share resources you have found helpful, and offer your own suggestions for how nonprofits can navigate this challenging economy.

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.

Wouldn’t every nonprofit, and the nonprofit sector overall, love to be able to increase contributions by 50%? No problem!

I don’t actually have the magic trick to make more dollars come in the door. The big increase in contributions is already in our hands in the form of volunteer labor. It’s a fact. When the value of volunteer labor is included, the total amount of contributions to US nonprofits increases by over 50%.

Here’s the data in a nutshell: The Corporation for National and Community Service just released their annual Volunteering in America study. They report that 61 million Americans volunteered in their communities in 2007, donating 8.1 billion hours of service worth more than $158 billion. The recent Giving USA survey for 2007 reported that cash contributions exceeded $300 billion for the first time. This includes individuals, bequests, corporations, and foundations. The actual value of charitable giving, when donated labor is included, is over $450 billion.

Think about that – 8.1 billion hours is roughly equivalent to 4 million full-time employees. Wow.

Where does this $158 billion calculation come from? Every year, Independent Sector calculates an hourly equivalent for volunteer time. The current value is $19.51 per hour, which is reportedly based on the average hourly earnings of all production and non-supervisory workers on private, non-farm payrolls as determined by the Bureau of Labor Statistics. Independent Sector takes this figure and increases it by 12% to estimate for fringe benefits. (I will leave for another discussion the fact that many employees of nonprofit organizations earn less than this amount.) I encourage every nonprofit with volunteer labor to calculate this value for themselves.

Unfortunately, it’s too easy for this important economic information to be lost because of accounting rules. Most of this economic value is never reported in audited financial statements or IRS 990s. The applicable accounting rule, FASB 116: Accounting for contributions, limits the recognition of the financial value of volunteers to a very narrow definition. Because of this, the actual economic profile of many nonprofits is skewed. When comparing nonprofits to for-profit enterprises, we usually dwell on the role of contributed income and subsidy. The importance of contributed labor is easily lost. I understand why the accounting profession is concerned about accuracy and reliability when recognizing the value of volunteers. However, it’s time to revisit these accounting rules. We’ve been willing to overlook this financial under-reporting for years, but I think the importance and value of volunteers is becoming too significant to ignore for much longer.

End note: There’s a bit of local pride to be found in the new volunteering study. Minnesota ranks #3 by state and the Twin Cities is #1 for large cities in the percentage of the adult population who volunteer. Learn more about how to make the most of volunteers from Hands On Twin Cities.