Here are some sound ways to begin bringing in money and other resources, such as volunteer time and gifts-in-kind.

1. Start with a budget.  Your budget communicates your plans and tells prospective donors and funders how realistic you are in your work.  A start-up budget is likely to be very modest with minimal staff and facilities. This checklist can help you begin, but keep in mind your first year expenses may need to be very limited to show you understand how to start from the beginning and not take short-cuts. If you have a reasonable plan, supporters are more likely to bring dollars to the table than if you only have good intentions without a roadmap.
2. Your founding donors probably know you.  Covering the first few expenses (even filing the IRS form costs money) has to come from somewhere. People who already know and trust you will be your strongest supporters. Have a party to explain your mission to friends and family, and ask them to help cover the initial costs. Nonprofit founders often stand alone for too long, and paying all the expenses out-of- pocket can cause a lot of stress early on.
3. Think small. Many nonprofits want to request a large grant right away. The big request is much more likely to be successful if you can show a track record at little achievements. There are many local businesses, houses of worship, and community groups which could afford $100-$500 donations if they see a budget and some initial investment from a start-up organization (see 1 and 2 above).
4. Be wary of debt. A loan or a credit card advance can seem like a good way to get the ball rolling, but often this start-up debt can hobble an organization for years to come. The money you get in earnings and donations in years 2 and 3 are going to be needed respectively. Spending income to pay off debt from the first year can significantly impact an organization’s financial situation down the road.
5. Plan long-term. That big foundation request mentioned in number 3? Don’t forget about it completely. Be ready to show how it becomes viable in year 2 or 3 for your new organization. Start looking at funding cycles, timelines, and begin meeting with philanthropic staff. This, along with proven results, will help you get that first application in on time and ready for approval.

Patience is not only a virtue; it is a key to becoming a thriving nonprofit. Take your time, spend within your means and then plan to grow. Since starting from scratch requires time, resources and money, we emphasize how important it is to plan and budget accordingly. Every mighty oak must start as an acorn. If you are expecting something different, make sure you weigh all of your options.

State agencies are developing their own plans to suspend operations if necessary, and they are dealing with uncertainty just like the rest of us. Many state grant and contract managers are contacting their nonprofits contractors to alert them to possible disruptions in payments or the risk that any services provided during a shutdown may not be eligible for retroactive payment. How much impact would a state shutdown have on your organization, and what kind of plans to you need? The answer (as always) is “it depends”. This very fluid situation demands multiple versions of “what if … “

• What if … a state agency pays funds to the nonprofits from a source other than the state general fund budget, including federal funds or a designated source? A worst case state shutdown could either stop or slow down payment processing of contracts and grants – you need to create a conservative cash flow plan.
• What if … the nonprofit has a long standing state contract or grant? Even with an active contract or grant, a shutdown would stop payments for the near term, and could cause a longer payment lag due to backlogs and other disruptions. Review the contract terms, or check with the grant manager, to confirm whether or not payments are certain for services provided during a shutdown. You need a plan for cash flow delays including both immediate term and some lag time.
• What if … the nonprofit has an established contract with the state that is signed annually with a start date of July 1st or later? This situation poses more risk to the nonprofit because of uncertainty whether a new budget will include a provision allowing retroactive contracts. The budget passed in July 2005, the time of the last shutdown, included such a provision (thanks to Minnesota Council of Nonprofits). You need to take this risk into consideration as you plan – is this a cash flow delay, or a possible loss of some revenue? Could your organization absorb the reductions if you provide services without retroactive payments?
• What if … the nonprofit has a new state grant or contract that begins July 1st or later, or is waiting for a final approval or announcement for state funds? These funds are at the highest risk as long as there is not a budget in place. Be very cautious about assuming that the terms will be untouched and retroactive once a budget is in place.
• What if … your nonprofit doesn’t rely on state funds, or receives small amounts from the state? Rather than feel relieved, think about the impact a shutdown may have on your clients, other organizations with whom you partner, and other community services. You may see a ripple effect in new requests for service, higher demand, or service disruptions elsewhere. Spend a little time brainstorming how your organization might be affected and how you could respond.

The what ifs could go on and on. The only way to answer any of them, and many nonprofits have more than one state contract or grant, is to systematically review the terms, check with grant managers (while they’re still available) and consider the options. In some cases, the options may fall into three categories: tough, tougher, and toughest. The Minnesota Council of Nonprofits is communicating policy information, news, and resources through email and a page on their web site. Nonprofits Assistance Fund is working with MCN to sponsor six free Government Shutdown Emergency Briefings around the state that will include background of how we got to this point, crisis communications techniques, financial planning, and open discussion with your peers. Register through the MCN web site.

How concerned should you be? I think that we’re probably all concerned about the broad policy question and impact on the state. How worried should you be in your role as a nonprofit staff or board member? If you receive funds that flow from the State of Minnesota, you should be very worried. There are a lot of variables to consider and information to sort out, and it’s hard to accurately predict exactly how the state government would manage the shutdown if it happens. At the time of the shutdown in 2005 some services were declared “essential” as described in the MPR article, but don’t rely on those decisions made by a different administration. Budget Commissioner Jim Showalter has said that a shutdown this year could be “much, much more extensive.”

We are urging all nonprofits that rely on payments from the state to develop a worst case contingency plan as soon as possible, with an emphasis on one thing: CASH.

Here are our recommended steps:

1. Do you have revenue that comes to you directly from the State of Minnesota? Do you have revenue that is indirectly from the state, even if it is paid to you through another entity, such as a county, a collaborative, or partner?
2. If you do receive state funds, how much do you expect to receive in July and August? What would be the impact if you do not receive any of these payments in July and August?
3. Now is the time to update your cash flow projection or create your first one. We have two good resources, the guide to Managing Cash Flow and the cash flow template (Excel) that you’ll find in the Nonprofits Assistance Fund resource library. If you need some help developing your projection, Contact Us to talk with one of our staff.
4. Do you have internal cash accounts or reserves that could handle the cash flow gap?
5. Do you have a line of credit available that could cover the cash flow gap? Would the loss of state payments affect your ability to access your credit line? If you don’t know, find out.
6. If nonpayment would impact your agency’s ability to maintain services, meet payroll obligations, or sustain basic operations, you need a cash plan fast. To be prepared, consider managing cash flow starting now to accumulate a temporary cash cushion even if you don’t have reserves.

If the cash flow projection gives you bad news, be prepared. There may be very tough choices to make about temporary service reductions, staff furloughs, or expense reductions or delays. There may be ways to lessen the impact with advance planning. That’s what contingency planning is for. Don’t wait.

I find this all fascinating on a policy level, and I’m happy to talk about these kinds of questions over a glass of wine (yes, I know how to have fun).  What happens, though, when theory about state policy meets daily reality at nonprofits that deliver public services? It’s not theoretical anymore. In Minnesota we have a very real case study as a result of an accounting shift for the state public education budget. Charter schools, a type of public school, have been scrambling for two years to manage the cash flow crisis caused by one of the shifts. State aid to public schools is paid beginning in July in even amounts over the year based on the number of students enrolled and attending school.  The state started “shifting” some of the education aid payments to future years to reduce the budget hole. What had been a 10% shift, called the holdback, has been increased twice in the last two years to help address the state’s budget problems. In the 2009-2010 school year 27% of state aid was deferred to the next year. For the current school year the shift is 30% of state aid.  Because of the state’s continuing budget difficulties, the payment shift seems likely to stay in place for years to come.

Earlier this year Nonprofit Assistance Fund, Minnesota Association of Charter Schools and Charter School Partners conducted a survey of Minnesota’s charter schools to understand how charter schools responded to the funding shift, including the availability of credit, the cost of borrowing, and impact on school operations and education services.  This week we released a report on the results of the survey to bring attention to this clash of policy theory and cash flow reality.

Highlights

• Charter schools have used every tool available to them to manage their cash flow, including internal fund balance reserves, renegotiating lease terms, budget cuts, loans from commercial banks, nonprofit loan funds, outside supporters and affiliates, and sale of receivables.
• Given that traditional school districts have taxing authority and a state guarantee of any loan, districts can typically receive loans with a 1% or less interest rate. Charter schools, who do not have these financing mechanisms in place, have faced obstacles to accessing credit and must pay between 6% to as high as 23% in loan fees (includes interest, fees and legal expenses).
• A gross inequity exists between traditional school districts and charter schools as to how the holdback impacts their respected operations.
• A 30% holdback is unsustainable for many charter schools in Minnesota and unless this is addressed, solid, high-performing charters will be at risk of ongoing financial instability.

Recommendations to reduce the inequity

The report recommends three possible policy changes that could address the inequity and help resolve cash-flow gap financing issues for charter schools, including:

1. Reduce the holdback for charter schools from 30% to 15%.
2. Provide a state-backed, low-interest loan pool.
3. Improve access to private capital (market rate loans) via a state-authorized ‘written assignment’ to banks.

You can read the release and the State Education Funding Shift Has a Disparate Impact on Minnesota Charter Schools report here.

This is just one case of the impact of state accounting schemes. There are many others all over the country. The solution isn’t simply a matter of GAAP accounting. If not through accounting, Minnesota, Connecticut, and 46 other states still have a hole to fill. It’s important to remember that theory quickly becomes reality when it hits the ground.

I have a second concern about contest-style philanthropy. Is this an effective way to pick a charity? Do we care that Pepsi’s money may or may not be going to charities or projects that will have a real impact? I don’t know enough about the organizations that won money from Pepsi in 2010, but frankly some of the descriptions are pretty vague and evidence of results is hard to find.  There’s a lot of sincere intention and quite a few competitors are startup organizations, however some appear to have been started in order to compete for funding.

The nonprofit and foundation world has been encouraging donors to seek out high-performing charities, such as in this article by Sean Stannard-Stockton. Nonprofits are working hard to evaluate, measure and communicate impact. Charity contests don’t reward nonprofits with the best results or greatest impact on clients. They reward marketing.

The traditional cumbersome foundation process probably needs a different kind of refreshing, but I have strong misgivings about throwing review and evaluation out the window.  The Technology in the Arts blog asked some good questions last summer in a post about American Express’ online giving contest.

While increased online support and a focus on technology use to reach constituents could provide benefits in this funding model, the prom queens method of distributing support should probably be left where it belongs: high school. This model has no way of insuring the best organizations reap the rewards or that the most efficient and effective programs receive funding. Popularity does not always equal quality, but it will always decide the winner in this funding model.

It’s worth noting that while the marketing department promotes their online contest, PepsiCo Foundation still makes grants the old fashioned way, with criteria including evidence of proven success in the field or scope of work specific to the request, and a method by which to measure and track impact and progress. There is a difference between marketing and traditional philanthropy. Should that matter to nonprofits that need funding to do their work? I think it should.

Want to know who’s winning the Pepsi Refresh contest? According to Mashable, the contest received 61 million votes in 2010. That’s 61 million brand impressions for Pepsi. We have a winner!

The rapid changes in the availability of government and philanthropic funds to pay for and subsidize services have led many nonprofits to examine their financial structure and realize that they can’t afford to continue to offer their services for free or nearly free. That model may have worked when the grants and contributions were available, but it doesn’t any more.

Nonprofits Assistance Fund offers workshops and webinars for staff and board members of nonprofits on financial management topics. We charge a fee for these training programs. What’s the right price for us to charge? Change the specifics and that same question is being raised at nonprofits of every size and scope. The answer, as with everything, is “it depends.”  It depends on the purpose and goals, both programmatic and financial, of offering the service. Should prices be based only on costs, or does market demand factor in understanding what your clients or audience are willing to pay? Some of the fee-based services offered by nonprofits are more naturally based on market and competition. Others are much more sensitive to the ability of clients to pay. Theater tickets and tutoring for low-income students have different economic models.

When you start this analysis, it’s important to recognize that discussions about starting to charge a fee or making changes to prices often get caught up in emotions about money and organizational and personal values. When the suggestion of requiring a payment from clients first comes up, expect some of your colleagues to recoil in horror. Someone may even tell you that nonprofits are not legally allowed to charge for their services. (Please tell that to the two colleges that I’m currently supporting!) Talking about money is uncomfortable for many people, and offering services for no charge is very easy. Unless you have adequate subsidy dollars from contributions or other sources though, it’s not sustainable.

A recent post on the Stanford Social Innovation Review blog, Nine Tips to Better Nonprofit Pricing, provides a good start with the market approach. I highly recommend the article To Fee or Not to Fee?, published in the Summer 2004 issue of Nonprofit Quarterly for a thorough review of whether or not to charge a fee, how fees and program access can be aligned, and how to set prices. The article makes a strong case that charging fees improves the relationship with clients:

The most powerful argument in favor of charging fees is the discipline of the marketplace – that fees increase accountability to the people receiving services.

They include a summary of research that showed that fees may help clients buy-in to the services more and perceive greater benefits.

For most nonprofits, charging fees and setting prices will depend on a number of factors, but most of these can be addressed with operational capacity, program design, and differential pricing. This topic is worth a thorough review whether you currently charge fees or not as a part of long term financial planning and strategy.

Every nonprofit should have a cash reserve equal to three months of expenses.” There’s some truth and some myth to this “best practice.” It is absolutely true that every nonprofit needs to have adequate cash balances available to support the timing of payroll and other expenses, as well as to pay for unanticipated costs or increases. It’s a myth, however, that a single standard applies for all nonprofits. I have two issues with the “three month reserve” standard. One is that different organizations need different amounts of cash on hand. The second is that building a reserve of three months of expenses is not a practical, or even desirable, goal for all nonprofits.

In an article I wrote a couple of years ago, The Yin and Yang of Nonprofit Reserves, I recommended different ranges depending on the stability of incoming cash flow, with reserves as low as one to two months of operating expenses. One reason for my caution about standard reserve ratios has been the business question of whether idle cash is an efficient use of capital.

I take it all back. Well, I take some of it back.

The Value of Cash Reserves

The past 18 months have been a lab test of the value of cash reserves. This isn’t a surprise, I suppose, but it has made me re-think my earlier questions about the focus on reserves. It is clear that nonprofits that have been able to build up a good cash cushion have had options and opportunities in the past year that enabled them to respond to reduced income and increased demand more strategically and carefully than those organizations with few extra dollars in the bank. You know what I mean whether you are affiliated with a nonprofit that has reserves or with one that does not.

In the survey that the Minnesota Council of Nonprofits conducted to prepare the most recent Current Conditions Report, several questions were included about operating reserves. MCN generously shared the survey data with me for an in-depth analysis of these questions. The responses illustrate the differences between nonprofits with and those without reserves.

• How much in reserves? For all respondents, 34% have one month or less, 18% have none, and 6% had a reserve fund but depleted it in 2009.
• Asked if they anticipated dipping into reserves in 2010, 24% of nonprofits replied that they do.
• Not surprisingly, 65% of nonprofits with minimal or no reserves experienced cash flow problems in 2009, and most of them anticipate prolonged cash flow problems in 2010. Nonprofits of all sizes fell into this group, most commonly in arts & culture and social services.

Why does it matter? I sliced the responses further and found that the nonprofits with minimal or no reserves were more likely to have cut budgets, eliminated staff positions, reduced wages and benefits. They were also less likely to have been able to increase services to respond to growing demand.

There’s a caveat that these results aren’t necessarily caused by the lack of reserves. It’s quite likely that other factors are at play, including the broader question of the governance and management practices and business model needed for nonprofits to build reserves over time through operating surpluses.

This survey and the practical cases that we talk with every day have taught me to truly appreciate – to love – operating reserves.

Build the Right Reserve for Your Organization

I still believe that the “right” target for reserves needs to be customized for each nonprofit based on their operating structure, cash flow, and ability to generate surpluses in the operating budget. Building reserves requires an intentional budget strategy and follow through to generate surplus funds. Whatever the target amount, reserves are most useful if there is clear agreement about their purpose and use codified in a written policy. Nonprofits Assistance Fund has developed a new resource, Operating Reserves Overview and Policy Example. If you are interested in a deeper dive on the issues, considerations, and structure for reserves, you’ll love the Nonprofit Operating Reserves Initiative Workgroup White Paper. They answer the “how much” question with a useful chart that sorts through the “it depends” factors.

Now, just in time for my break, CompassPoint released a study titled Creative Disruption about sabbaticals at nonprofit organizations. This summary of the report is affirming for my own sabbatical and for any of you who’ve been thinking about it.

This study exposes the myth that an executive sabbatical will be a chaotic disruption, finding instead that the creative disruption of a well-planned sabbatical can be productive for the entire leadership of an organization.

Organizational capacity is increased as the second tier of leadership takes on new responsibilities. Governance is strengthened as a result of the planning and learning that goes with a sabbatical process. Executive directors come back rejuvenated, with a fresh vision and innovative ideas, and tend to extend their tenure with the organization. And funders gain a deeper perspective on community needs from the feedback, networking, and innovative ideas that sabbatical alumni bring.

The report is an interesting read, including the results of surveys of executives who took sabbaticals and the interim directors who took on a new role. The subjects of the study were all recipients of funding to support sabbaticals, usually for three months.

I’m eager to see what kinds of experiences and ideas I have during the month. I’ll be kicking back for some of the time and using some of it for reading and discussions about the big issues and ideas for nonprofits in the future. (Although I can promise I will not spend all four weeks of February in Minnesota.) I started this weekend by reading an advance copy of the book Switch How to Change Things When Change is Hard by Chip and Dan Heath. The book addresses the reasons why change is so hard with a well-formed framework that makes the concepts accessible and actionable. They offer three essential components needed for change to happen:

1. Direct the Rider – clarity and direction
2. Motivate the Elephant – emotions and energy
3. Shape the Path – plan and influence the situation

The book will be released on February 16th, but you can read an extensive excerpt in Fast Company.

More reading and thinking to come, but you probably won’t hear much from me this month. We’d love to hear any comments about sabbaticals from other nonprofits – what have you done, or wished you could do?

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.

As an example, in just the last week:

• I attended two important meetings where key participants were missing in action.
• Three training events and webinars were canceled.
• A professional associate stayed home with his son for several days.

Two days ago we had to scramble to replace the speaker for one of our own training events.  That really brought this home.

Scramble really describes the activities. There were many emails sent looking for a replacement, and the reply often was “I’m already scheduled for another training, meeting, travel…” Fortunately, a replacement was found (who did a great job) and I am grateful for the size and quality of the network of consultants in the Twin Cities.  But it’s clear that none of us have any slack in our schedules anymore. All the reductions in staff and hours in the past year have taken their toll, removing any elbow room (if there ever was any to start with).

Contingency Planning

The whole process got me thinking about contingency planning. This is going to happen again and again this year and we all need to be prepared. We have a Disaster Recovery Plan, but it wasn’t developed to address this situation. We need to have a plan for deciding when to cancel a meeting or training, when to use a backup plan, and who to call on for reinforcements. We might need to look around for some elbow room again by scaling back a little on commitments for the next few months.

How are you adjusting to more and more absences caused by this flu? Do you have a clear agreement on priorities and steps to take when you have multiple staff members all sick at once?  The Nonprofit Risk Management Center has a number of useful resources and tools, including a list of contingency planning resources and a tutorial on business continuity planning.

As with any planning process, agreeing on the priorities and responsibilities is step one. We’re starting today.

Update: Here is an H1N1 Flu Preparedness Toolkit from the National Council of Nonprofits.