Balancing the Mission Checkbook

The acronym “CDFI” is a clumsy one for an elevator speech or for a holiday dinner table conversation. Not many know what the letters stand for, let alone what it means to be a CDFI.

A CDFI is a community development financial institution. As a CDFI, Nonprofits Assistance Fund works on the fringes of lending, finding financing opportunities that are credit-worthy but just beyond the reach of more traditional sources credit. Where other lenders see risk, we often see opportunity. In over thirty years as a loan fund, Nonprofits Assistance Fund has built the expertise that allows us to make working capital and real estate loans to nonprofits with a loss ratio of less than 1%. By gaining CDFI designation from the Department of Treasury’s CDFI Fund, we are able to access specific federal dollars and tax credits to increase our impact.

The CDFI industry is broad.  It includes loan funds, community banks, credit unions, and venture capitalists. The common goal of our work, as articulated by our nationwide trade association the Opportunity Finance Network, is “investing in opportunities that benefit low-income, low-wealth, and other disadvantaged communities across America.” While many CDFI products and services are aimed at individuals, small businesses, or a specific type of nonprofit, Nonprofits Assistance Fund is unique in that we lend to a very wide range of 501(c)3 nonprofit organizations. Nonprofits Assistance Fund’s mission “to build financial healthy nonprofits that foster community development” is often times achieved by providing deserving nonprofits with access to credit. (Our mission is additionally accomplished through our training and financial assistance programming.)

Why is access to credit a justice issue?

Opportunity Finance Network hosted their 2011 annual conference November 11-14 in Minneapolis.  Over 1,000 individuals attended to learn more about the work of “aligning capital with justice.”

CDFIs are credit providers. Credit is simply borrowed capital. I invite you to close your eyes and say that word aloud: “capital.” Capital. It drives our world. Here are just some of the reasons why capital matters:

• Capital drives returns. In our world of nonprofits, capital investments can drive both financial returns (i.e. an invested endowment or start-up money for a profitable social enterprise) and social returns related to our missions (i.e. reduced incidence of drug use or increasing youth civic engagement). In many cases, capital investment in nonprofits yields both financial and social returns.
• Capital minimizes disruptive crises. In the case of households and businesses (including nonprofits), access to flexible credit, like cash, is important to successfully manage unexpected events.  For a nonprofit, insufficient access to flexible capital can inhibit our ability to fulfill our mission.
• Capital enables innovation. Individuals, businesses, and nonprofits alike, are often unable to take risks that lead to innovation due to insufficient capital. Without capital, great ideas are often left sitting on the shelf.
• Capital can disrupt the forces that perpetuate low-income and low-wealth environments for individuals and communities. As the well-known model of micro-lending has demonstrated, having a little access to capital can go a long way toward income generation and wealth building.

At Nonprofits Assistance Fund and at other CDFIs across the country, we are motivated every day in our work to align capital with justice in our communities. We place the highest value on our incredible community partners that work for justice while being good stewards of our dollars.

To learn more about the CDFI industry, watch this 4-minute video produced by the Opportunity Finance Network with support from Citi Foundation.

To learn more about other CDFIs based in Minnesota, you can view a directory here.

To support the CDFI industry, you may contact us, or simply purchase a Create Jobs for USA bracelet for $5 at a Starbucks location near you.

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.”

Nonprofits Assistance Fund regularly gets inquiries from nascent nonprofits seeking help in getting their first round of funding to begin their work. Some come to us because they believe our name means we can give them a grant (we can’t) or that we can help them with a loan (for an organization without a financial history, we can’t).

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.

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.

A large percentage of nonprofits view their strategic plan as an essential part of managing the organization. The process of developing a strategic plan clarifies the purpose of the organization in a mission statement, and gets the staff and board on the same page by setting goals and priorities. The most commonly used tool for financial planning, on the other hand, is the annual budget. For many nonprofits, the financial goal represented by the budget boils down to this: “we hope we can raise enough money to pay for programs and overhead this year. We’ll work really hard to get this done.” Unfortunately, that’s a lousy way to plan.

What nonprofits need is the financial equivalent of the strategic plan that sets goals for programs and organizational development. This kind of financial plan is not for one year. It includes big goals, a clear path to accomplish goals, resource and capacity needs, and benchmarks for monitoring progress. Just as the process of strategic planning brings everyone together to set goals and sort through options and priorities, developing a strategic financial plan reveals the strengths and weakness of the current financial structure and sets goals that are more than annual revenue targets. What’s the right cost structure for delivering programs with measurable impact: paid staff, volunteer, intern, national service corps? These decisions will determine program, management, and financial structure. This idea is illustrated well in the article about Nonprofit Business Model Statements published on Blue Avocado last year.

Most nonprofit strategic plans that I’ve read give limited attention to the financial structure that will be needed to be successful. Some include some projections in an appendix, but most include a short set of financial goals such as “increase fundraising”, or “implement new individual donor program.” Our resource article Transforming Nonprofit Business Models describes the four components of business models: mix of revenue sources, cost of effective programs, infrastructure, and capital structure. A strategic financial plan needs to address each inter-related element of the model both now and what will be needed for the organization to achieve its goals over the next three to five years.

The steps followed in developing a strategic plan include agreeing on the vision and mission, gathering internal and external information to assess community needs and organizational capacity, establishing three to five year goals, and describing more specific objectives for implementing the plan. Strategic financial planning requires similar steps:

• Agree on a vision for financial sustainability
• Analyze financial history and trends
• Conduct a SWOT assessment of the business model
• Identify the current business model
• Evaluate the financial requirements to fully implement the strategic plan
• Assess the external community and market drivers and internal capacity for changing the financial structure
• Describe the business model that will be needed in five years
• Create a three to five year implementation plan

Strategic planning needs the commitment and participation of many skills and perspectives from inside and outside the organization. In the same way, strategic financial planning requires technical expertise for analysis and projections, strategic thinking about structure and alternatives, and creativity to weave together vision, mission and business models.

I’ll be presenting a more thorough session on the need for financial strategy and strategic financial plans at United Front 2011 on Thursday morning. This is going to be a great conference with lots of bold topics about strategy, leadership, and impact. Join us if you can!

Personnel costs are the number one expense for most nonprofit organizations. Many of our clients have made some very difficult choices in the last few years to reduce expenses, including reducing staff, cutting wages or eliminating some benefits. These emotionally-difficult changes can have serious impacts on services, but may be necessary for the long-term health of the nonprofit.

The second-largest expense in most organizations is spent on rent or mortgages and related costs.  Facility expenses can sometimes evoke nearly as much emotion as staff costs, but often generate less examination and conversation at the board or community levels. In tight times, there are some critical issues to keep in mind when thinking about space.

• Your space can impact your mission and vice-versa. Some organizations are very tied to a neighborhood or even to a specific building. Planning for the costs to stay in an area is a priority for some organizations where others may be less tied to a community and could move for less-expensive rent. If you are restricted to a space (through a long-term lease or ownership), changes in your community over time may force your mission and programs to shift.
• Ownership isn’t right for everyone. Many nonprofits consider the idea of buying space as a great way of locking in costs and gaining equity over time, but owning real-estate requires a different set of commitments and management, and can distract from mission-related questions. Buildings may even lose equity if the organization doesn’t reinvest in the property (ask us about funding depreciation in your reserves policy!).
• The costs of a move can outweigh the costs of staying put. A five-percent increase in a lease may seem unbearable in a market with lots of vacancies, but if your nonprofit can make the decision to move, it’s best to understand all costs involved. Compare your current costs against the prices of moving. Think about all the additional expenses that add up such as running new phone lines and data cabling which can consume potential savings. To help you plan ahead, IFF offers nonprofits templates to consider costs for your current space, future space, or a move.

Many other factors can impact what is the right space at the right time for your organization and your mission. Join us at the Minnesota Council of Nonprofits Annual Conference for a break-out session on facilities costs. We’ll be joined by brokers from Northmarq to talk about professional representation in space decisions. Sneak peek: your landlord will often cover the costs of your broker to get professional advice without breaking the bank. Stay tuned — learn more ways to cut down on facility costs at the conference!