Balancing the Mission Checkbook

Worrying about cash shortfalls is, without a doubt, at the top of the list of stressors for nonprofit directors and finance managers. In this situation, everyone’s dream is to have a stash of cash - a cash reserve account set aside to tap at a moment’s notice to solve the problem. I’m reluctant to endorse a universal standard for reserves, but there are “rules of thumb” and accepted practices calling for nonprofits to hold reserves of three to six months of operating expenses. Well it turns out that this “best practice” is a practice in theory only for many nonprofits.

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.

For years I’ve wished that the programs of the Small Business Administration (SBA) were available to nonprofit organizations. The SBA is all about strengthening the country’s economy, and as a business banker the SBA was at the top of my list of resources for entrepreneurs as they started and grew their businesses. When I made the change to work exclusively with nonprofit organizations I was disappointed to lose access to those programs. Nonprofits are businesses, after all, with a significant role in employing people and generating economic activity. Minnesota Council of Nonprofit’s Minnesota Nonprofit Economy Report for 2008 reports that nonprofit employees represent about 10% of the states’ workforce, paying $12 billion in wages.

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.

I’ve been looking for something positive to write about following last week’s downer message about the economy. The best I can offer today is the suggestion that you consider approaching the current uncertain environment as if your nonprofit were in a turnaround mode. Turnarounds make great case stories after the fact - when the organization is revitalized and builds a new reputation for connections with the community, strong leadership, and financial health.  Who wouldn’t want all that? So why wait until things are bad?

Brandeis University Press has just published The Art of the Turnaround: Creating and Maintaining Healthy Arts Organizations by Michael Kaiser, president of the John F. Kennedy Center for the Performing Arts in Washington DC. While the book’s title and cases are from the arts, the advice and lessons are relevant to nonprofits in social services, community development, or any other field.

A short excerpt from the book is available from The Chronicle of Philanthropy. Kaiser offers ten basic rules for every turnaround:

1. Someone must lead
2. The leader must have a plan
3. You cannot save your way to health
4. Focus on today and tomorrow, not yesterday
5. Extend your programming planning calendar
6. Marketing is more than brochures and advertisements
7. There must be only one spokesperson, and the message must be positive
8. Fundraising must focus on the larger donor, but don’t aim too high
9. The board must allow itself to be restructured
10. The organization must have the discipline to follow each of these rules

Read this excerpt and find out which turnaround steps can help your organization through this difficult and uncertain period. We’ll call it preemptive turnaround.

How can you appeal to donors at a time when costs and demands for services are increasing? How about a letter or email detailing your line by line budget increases? Probably not – because what it costs to provide services isn’t compelling. It’s what results from the services that makes the case. By results, though, I don’t just mean a nice story or picture. I mean results. I’ve been reading and hearing more and more frequently about measuring, quantifying, and communicating the results of nonprofit programs, but somehow we (as a nonprofit community) still seem to be coming up short in public perception.

Once again, a study reports that public confidence in charities is declining. Less than 20% of respondents expressed the highest level of confidence in charities’ practices in using financial resources or in managing programs and services. This annual survey, conducted by Professor Paul Light from NYU’s Wagner School of Public Service, was recently summarized in The Chronicle of Philanthropy. Professor Light was the speaker at Charities Review Council’s Annual Forum in Saint Paul last week. After summarizing the survey results and trends, he focused on two key factors related to confidence. The essential question about confidence, he said, is whether or not the public (and your donors) believe that charities spend their money wisely. Not about what line items are in your budget, or how much is spent on program vs. management – the concern is whether money is spent wisely to accomplish something of value. The second, parallel question is how a nonprofit conveys and demonstrates their value. What benefits occur because of your program? Harlem Children’s Zone’s annual report, for example, is full of data about results, progress, and success. The data demonstrates that money is spent wisely because the results are so real. Professor Light repeated his mantra several times - measure something!

A headline last week in Philanthropy Today read “Mass. Charities Urged to Merge and Pool Resources”. The story comments on a report just released by The Boston Foundation on the financial status and condition of nonprofits in the state. The online story offers a few nuggets from the report and summarizes that “Its findings follow what officials at the foundation have been saying less formally in the past several years: that some of the state’s nonprofit groups should merge or pool resources to reduce overhead and offset cuts in state money and waning private donations.” This summary of the report’s recommendations is accurate, but it’s incomplete. The report itself, Passion & Purpose: Raising the Fiscal Fitness Bar for Massachusetts Nonprofits, offers so much more in information, analysis, and recommendations that are important for nonprofits everywhere.

In their analysis, the authors group nonprofits in three organizational/financial categories: small Grassroots Organizations, mid-sized Safety Net Organizations, and large Economic Engines. While it is a budgetary distinction, the authors dig into the financial profiles of these three groups and point out some systemic issues. They raise alarms, for example, about the vulnerable financial condition of the essential Safety Net Organizations caused by reliance on public funding that does not cover the cost of delivering services or building infrastructure and reserves. The report also acknowledges that the growth in the number of young Grassroots organizations can be seen as evidence that there are too many nonprofits, but that this group is often the source of new ideas and direct responsiveness to niche community needs.

The report concludes with three recommendations billed as “A Call to Action” on page 15 of the Executive Summary. The first recommendation, which earned the headline, is for Restructuring and Consolidation including mergers and/or alliances to efficiently provide some administrative and operational foundations. A great Minnesota example of this is MACC CommonWealth. The other recommendations that weren’t headlined are also important. The second is Repositioning nonprofits as an influential group in the state and region through collective action, policy work, and organizing for common goals such as cost savings, efficient regulations, and access to capital. In my view, the third Call to Action is most important – Reinvention and Reinvestment. This broad recommendation encompasses three themes: appropriate program funding structures that cover the cost of services, adequate funding for organizational capacity and stability, and healthy financial management practices. These structural questions are urgent. Nonprofits can’t merge their way out of recurring deficits if the formulas and expectations continue to demand more services for less money. The three recommendations have the most impact as a set – not an either/or choice. The challenges to stable services in the community and healthy nonprofits spring from various practices, systems, and perceptions and require multiple approaches. I hope you read this report and join the call to action.

Right now, about 25% of the nonprofits that we are working with pretty closely are in the midst of a capital campaign, are just finishing their campaign, or have plans to launch one in the next year or so. The meaning of “capital” campaign is evolving, and about one-third of these campaigns include a substantial amount of flexible working capital and infrastructure investment in addition to traditional bricks and mortar. (This is an important trend that I’ve written about before.) Looking at the campaigns and organizations as a whole, it’s clear that the campaigns that are going well were thoughtfully planned out, based on feasibility studies, and focused on donors with whom the nonprofit already had a relationship. The campaigns that have floundered or dragged on were based on some broad assumptions about who “should” support them, plugged numbers to fill out the budget, and the planning happened along the way. These observations lead right to the basics of capital campaigns – lots of planning, being realistic, committing the time and people, and monitoring everything as you progress.

Capital campaigns also demand consideration of external factors, including the competitive impact of other capital campaigns and of economic trends. We in Minnesota can thank the Minnesota Council on Foundations for conducting a survey last month on Capital and Endowment Campaigns in Minnesota, 2007-2008. The survey reports on 62 current and 72 planned campaigns for buildings, endowments, and infrastructure investments. The largest campaigns are for colleges and universities, with human services and health care a distant second and third. Interestingly, the higher ed, health care, and arts organizations expect most of their funds to come from individuals donors, while human service nonprofits expect about half to come from grants. This week’s Chronicle of Philanthropy reports in “Feeling the Squeeze” that some large capital campaigns are running into some resistance from large donors concerned about the economy. The examples in the article, which is only available in its online format to subscribers, indicated that gifts were delayed or stretched out, but that the campaigns continued to be successful in a different environment.

If you are beginning to plan a new fundraising push – whether you call it capital campaign or not – you need to understand the trends, the local landscape, and how many other “asks” will be in the mail.