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.

In the post Nonprofits Will Never Be Respected Until We Start Respecting Ourselves, Rosetta Thurman confronts the self-induced damage of low wages, chip on the shoulders image of many nonprofit employees. She then builds up to this call to action:

With all of our own moaning and groaning about our sector, it’s no wonder other people emphasize the “non” in our nonprofit field. Believe me, I’ve been guilty of all of the above. But what’s happened is that in all of our “insider baseball” talk amongst ourselves about what’s wrong with our sector, we have somehow internalized it all to conclude that this is just how it is. This is just the nature of “nonprofit culture”. We forget that WE are nonprofit culture. The nonprofit “sector” is made up of individual organizations, which are made up of individual people, which means that this is all up to us. It is what we make it to be. So when are we going to be the change we say we wish to see?

Echoing the “take charge” message in An Open Letter to Arts Administrators, Adam Thurman (Two bloggers named Thurman, hmmm) describes the painful position of mid-level arts administrators who don’t feel supported, respected, or valued.

It doesn’t have to be like that.  I know you’ve probably convinced yourself that all the garbage you deal with is just the cost of being in the field.

It isn’t.  If the group you work for is being run poorly it is because people are ACTIVELY making choices that allow that to happen.  It isn’t just a matter of circumstance.  It’s an outcome of choice.

You deserve better then that.  You deserve to work at an organization that produces great art, treats people with respect and pays fairly.  No matter how much people may tell you otherwise those three goals are NOT mutual exclusive.

He then advises that these arts administrators give themselves a year to help bring about change - or to leave.  I love the simplicity and enormity of that advice.

Be a leader, or leave.

But how can you be a leader if you aren’t the CEO, Executive Director, CFO, Director of Development, Board Chair, etc, etc?  By leading, that’s how. I know of many cases where a new board member, mid-level program manager, or finance staffer stepped into the void, told the truth, and brought about important change. To be frank, there is risk and a lot of work involved.

Our new Recession Risk Assessment resource includes suggestions for actions to take based on the risk level. For organizations with high level of leadership risks, the advice is: “The organization urgently needs a leader to step forward to call attention to the challenges, even if it causes discomfort.”

Be a leader - why not you? Why not now?

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.

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.

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.

What I’ve missed most were the Small Business Development Centers that offer workshops and one on one help and the SBA loan programs that provide crucial growth funding. In a way, Nonprofits Assistance Fund and other capacity building organizations have filled this role for nonprofits.

Potential Nonprofit Resources

I’m very glad to know that the beginnings of some new resources for growing strong nonprofits are contained within the Serve America Act, passed in the last week in both a Senate version and House version. The President is expected to sign it next week. The amendment that creates a new program for nonprofit capacity building is summarized here by Independent Sector.

Housed within the Corporation for National and Community Service, the bill authorizes $25 million over five years to provide organizational development assistance to small and mid-size nonprofit organizations, in particular to “strengthen small charities around our country, especially where resources are scarce.”

I’m hopeful that we can get these resources out in the community soon, focused on building strong community organizations that know how to balance mission and management. I’ll keep waiting for an SBA loan program for nonprofit businesses. In the meantime, if you are in Minnesota and need working capital or a line of credit, Nonprofits Assistance Fund’s loan fund is here.

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.

Considering the importance, scale and scope of the economic proposals, I am really disappointed that that the number one, highest priority, most important issue for many in the nonprofit world is the proposal contained in the President’s budget that would limit the extent of deductions for charitable contributions for those in the highest tax bracket, reported here in the Chronicle of Philanthropy.

Typical of the outcries in response is a statement from Independent Sector:

Independent Sector believes that this change could be a disincentive to some donors who might further cap their gifts on account of the new limit.

Most of the comments made by our well-known leaders include the phrase “In these hard economic times” and forecast doom if this change comes to pass.

I’m disappointed in this knee jerk reaction that’s just a version of NIMBYism at a time when we really need to pull together and work for the greater common good, which may involve sacrifice. Beyond that disappointment, I’m skeptical that doomsday will come. First of all, the change wouldn’t be effective until 2011, so it won’t impact donors “in this tough economic environment.” And if you really believe that your donors are in it for the tax deduction I think that you need to re-write your case statement. Surveys, like one conducted in 2006 by Center on Philanthropy at Indiana University for Bank of America, report that over 50% of the high net worth people interviewed would not decrease their giving even if there was no tax deduction at all. From what I’ve read, the tax deduction is more likely to impact the timing and form of a gift rather than whether a gift is made. It’s easy to get this form confused with substance. Consider this from Charity Navigator’s blog:

The data that we have seen over the years has shown a big spike in donations through our site during the last several days of the year, especially on December 31st which of course is the last day to make a qualified tax deductible charitable contribution (see our Tax Benefits of Giving article). This data indicates to us that the tax benefits really do motivate people to donate.

This logic needs checking - do the tax benefits “motivate” people to donate, or have we in the nonprofit world trained our donors to give in December regardless of their motivation? The New York Times article Limiting Deductions on Charity Draws Ire quotes several other experts about the relationship between tax deduction and reasons for giving and their confidence that taxes are at the low on the list.

Even if this tax code change would have an impact on total giving, it’s important to focus on the forest, rather than the leaves on the trees. The proposed federal budget blueprint represents a seismic shift in priorities and structure. I agree with blogger John D. Columbo’s comment:

So let’s not turn this into a doomsday scenario, folks. The truth is, if Obama can fix our health care system, charities as a whole (and everyone else, from GM to the local barbershop) are going to be much better off in the long run.

Independent Sector’s statement (quoted above) includes only one other paragraph about the rest of the 140 page blueprint for the federal budget:

The budget outline also calls for winding down spending for the war in Iraq, boosting funding for domestic priorities, and creating a “reserve fund” of $634 billion to cover health care expansion. The President has stated that his outline will cut the deficit in half by 2013.

Well, maybe that doesn’t seem that important to them.

Harsh is the word for it. When I read the article in print today, this statement in the conclusion really jumped out for me:

“Those of us in leadership roles should remember that this time will be judged by the actions we take or the actions we fail to take.”

That’s a lot of weight being carried by leaders of nonprofits.

David Brooks described the pressure in his column in yesterday’s New York Times:

“It’s no fun being a leader in a financial crisis. You’ve got to be bold but reassuring, free-spending but disciplined. You must decisively crush the short-term problem without freaking everybody out and leaving a long-term mess.”

He was writing about Treasury Secretary Tim Geithner, but I think many nonprofit directors share the feeling.

Nonprofit Leadership

Leadership in nonprofits has been the subject of many articles, studies, forums, and institutes. I have benefited from some of these greatly, learning about my personal style and how to nurture my strengths, include other viewpoints, and work collaboratively to create a team. Sometimes, being a leader requires you to take responsibility for tough problems and be held accountable for the results. Commenter Claudia Dengler’s response to one of my December posts really hit a nerve. She said:

“And on the personal side, if you thought you were lonely at the top before…even the most transparent leader will find they have to hold information close, thinking deeply, often privately, about the full weight of their impending decisions.”

If you’re the one who has to stare at the budget column or read the letter informing you of a funding reduction you know what this feels like. As David Brooks said, it’s no fun.

Ideas about Support and Resources

What kinds of support and resources do leaders of nonprofits need to manage the personal demands and the pressure of leading in this environment? Based on the number of people I’ve seen at the various meetings and forums about managing in difficult times, there are a lot of people looking for something - some skills, some information, even some secret solutions (there aren’t any). I also think that we’re all looking for some reassurance that we’re not alone in the struggle.

This is a time to learn a new leadership approach or adapt well developed leadership practices. I have some ideas about what needs to change and I hope that you will weigh in as well.

I offer three suggestions to start:

• Nonprofit directors often lack support networks of true peers because they’ve learned to manage the relationship with their board and to treat other nonprofits as competitors. We need to lower our guards and be more honest and open with others in our field.

• There are hundreds of different ways that staff leaders and board leaders work together. Many executive directors don’t really know what to expect from with their boards right now. Executive directors and board chairs need to have a conversation about how the board’s role, practices, and composition will need to change to adapt to long-term financial and community uncertainty.

• Find a friend with whom you can confidentially share your fears and pressures, get some reassurance, sympathy, and care - and then do something fun.

What are your ideas?

How does this impact Minnesota’s nonprofits?

When people lose income and important benefits they turn to the state’s nonprofits for assistance with everything from food and shelter, support and counseling, and job search and retraining. As reported in Minnesota Council of Nonprofits’ Current Conditions Report published in December 2008, 42% of surveyed organizations reported increased demand for services. But over 50% of the nonprofits also reported actual and anticipated decreases in income.

If service demand goes up and income goes down, where are the reports of job cuts at nonprofits? There have been a few reports locally and nationally including American Red Cross Twin Cities, Neighborhood House, Metropolitan Opera, and Harlem Children’s Zone. I know, though, that there are many more organizations that have already made staff reductions or that will have to make some cuts because of their budget shortfalls. One reason that we don’t read about it every day is the different requirements and expectations for disclosure between publicly traded companies and nonprofits.

But I think that many nonprofits feel that speaking openly about cuts is their “family business” and are afraid that it reflects poorly on management and the board. There is actually an odd dynamic at work now - more calls and emails from recently laid- off corporate people who would like to “explore a shift” into the nonprofit sector. As a “shifter” myself I can’t be too cynical, but I’ve got to tell the truth about their prospects right now. (I encourage volunteering.)

Nonprofits are Businesses

I’m starting to think that nonprofits need to be much more public about their staff reductions. At the same time that the community needs nonprofits to provide more and more help and support, income of all types for nonprofits is declining. Let’s not hide the reality that there will be an impact from these changes. The recession is impacting corporations and nonprofits alike.

For years I’ve been a part of discussions about how the public doesn’t understand how nonprofits work. Now is the time to start the tutorial. By being open we can educate the community about how the business of nonprofits actually works - the complex web of financial and volunteer resources, staff and program costs, and role in the economy as service provider and employer.

I like the logo of the V3 Campaign - Nonprofits Are Businesses. It’s an effort to educate the general public about the economic impact of nonprofit organizations.

What do you think? Is it risky to announce cutbacks and program reductions, or could these news stories ultimately strengthen understanding and support for the sector?