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.

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.

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.

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!

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.

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.

It’s probably not a surprise that nonprofits are everywhere – and that’s a good thing, right? So maybe we should push back the next time someone brings up the argument that there are too many nonprofits, or that “someone” should prevent new nonprofits from forming. While I was on my nonprofit tour, in fact, there was a blog exchange on this very topic that you can find at Give and Take. I’ll confess that I’ve contributed to this idea on occasion, but my trip and the time I had to reflect on the presence and role of nonprofits has made me re-think this. Come on in! If a group of people have the commitment and passion to help the community, and are entrepreneurial enough to pull together an organization and programs, then I hope they can find their role and support. It isn’t easy. The field may be crowded, and funding is competitive, but important work is being done. Thanks.

The key is to understand your income mix. There are essentially five distinct sources of nonprofit income and each income source expands or contracts depending on different factors in the economy. If you understand the sources of income that are most important to your organization, then you can focus on following movements and trends that will matter. One overall trend to keep in mind is that the “nonprofit economy” tends to lag the general economy by about a year. Here are some ideas for trend watching the economy.

Program service revenue, or payment for directly providing services, is the largest total source of income for nonprofits. Income from contracts for service, especially from government agencies, is determined based on tax receipts and state and local budgets. We know how many reductions occurred a few years ago and most of these sources haven’t rebounded. If this is your primary income source, the keys are the reports from the state and the budget process. You can track these through the Minnesota Budget Project. To survive with contracts, it’s important to understand the true costs of delivering the services (which is probably not the amount you are paid for delivering the services) and having your eyes open about the need for additional subsidy – and where to get it.

Program service revenue that is paid directly by the user of the service – like tuition, memberships, tickets, and fees – is a lot like business income and reacts to market downturns depending on the buying power of your customer. If your service is considered discretionary, like entertainment, then consumer spending is worth tracking by reading the business section of the paper.

If foundation grants are an important component of your income, watch the stock market. Because endowment payouts are calculated in a way that evens out big increases and decreases, there is no reason to expect a big decrease in 2008. However, pay attention to the excellent surveys and analysis from Minnesota Council on Foundation including Grantmaking Outlook and Giving in Minnesota. If the market performs poorly over time, some reductions in grants could develop. Keep in mind, though, that even with the poor market performance several years ago, grants from Minnesota foundations have increased total dollars almost every year (more details in the MCF reports). If your endowment is an important source of income, the same market trends described above apply.

For nonprofits that rely on individual donors it’s a mixed bag of economic news. This recent online discussion about the Outlook for 2008 hosted by the Chronicle of Philanthropy highlights some opportunities for planned giving and large gifts that transcend the economy, and emphasize the importance of relationships and communications in maintaining a building a donor base.

So don’t assume the worst or start a chorus of woe about the poor economy. Yes, there will be challenges, but you can understand how economic trends will affect your nonprofit. Knowledge is power and will help you anticipate and plan for any changes.

Tucked in the Business section of the Saturday, December 22, 2007 New York Times was a wonderful story, Emerald City of Giving Does Exist, about the Twin Cities’ enviable amount of corporate philanthropy and commitment. I hope you don’t miss this in the flurry of the holidays. We may wish there was even more to go around, but we are the envy of many nonprofit leaders in other cities, and I thank the business community for that.I have three books to suggest. First, I recommend that everyone interested in developing great boards read Governance as Leadership: Reframing the Work of Nonprofit Boards by Richard Chait, William Ryan, and Barbara Taylor. This book, published in 2005 by BoardSource, starts with the premise that many boards do not really have a problem of performance, they have a problem of purpose. The book will open your eyes and mind to a new way of thinking about board roles and leadership.

The two other books were published in 2007 and offer interesting ideas and thinking on important nonprofit management topics. I’m still reading both of them, so my reviews will wait for another time. Forces for Good: The Six Practices of High Impact Nonprofits by Leslie Crutchfield and Heather McLeod Grant offers an analysis of twelve organizations that the authors selected based on their impact, reputation, and scale. One important finding was that the high impact nonprofits achieved this impact not only through their direct services, but also by deliberately rallying others to the bigger cause through networks.

ROI For Nonprofits: The New Key to Sustainability by Tom Ralser (published by Wiley) offers a detailed study of how to translate the work of nonprofits into the increasingly important frame of venture capital and business. Whatever your personal opinion of this trend, it is here now and it’s worth your while to understand it.

Finally, a few favorite blogs to read next year:

• Mission-Based Management: Smart, interesting, and useful management perspective
• Gift Hub: Incredibly timely and interesting references, links, and thoughts on philanthropy
• Stanford Social Innovation Review: In-depth analysis and ideas, requires some time to read and consider.
• Nonprofit Technology Blog: Even if you’re not a tech person, we all need to pay attention to trends and new uses.
• Nonprofit Accounting Boot Camp: How can I resist a regular blog about nonprofit accounting issues?
• Give & Take from The Chronicle of Philanthropy: The editors read all the blogs and compile interesting posts in one place – a timesaver.

Cheers, and Happy New Year to you all!

The most interesting way to analyze them, I decided, was to categorize the appeals into four types.

• First, and most compelling to me, were the thirteen requests that told a great story about their work.
• Second are the nine appeals that shared clear numbers and statistics about services and impact – numbers of meals served, children taught, small business financed, etc.
• There is a third group that I call “neutral”. These seventeen letters describe the organization and their work but fail to tell a story or to give much detail.
• The last category – ten letters – are the needy letters. “We need money to pay our rent!” “We face cuts in our budget without you!” “We can’t get enough in grants!” This type of request might make the case for some people but it doesn’t work for me. I want to know what the nonprofit does, not about how bad off they are.

The Chronicle of Philanthropy reported that 2006 was a good year for fundraising, with some organizations exceeding their goals. Anecdotal reports indicate that giving from IRA accounts made possible by tax law changes in August 2006 account for some of the surge, as well as a strong stock market and economic stability. The tax law change is a short-term opportunity so learn about it from Independent Sector for 2007 fundraising. Recent research conducted by Harris Interactive for the Wall Street Journal revealed that 83% of Americans donated to a charity in the last 12 months. These reports are good news for everyone who understands the role that nonprofits play in the community and the world.

I also wrote in November about recent research and trends in donor relationship management. Donors want to have more say about how they hear from organizations they support and what kind of information and solicitations they receive. I was pleased that three of the letters offered us some choices about communications, and one was clearly customized based on our attendance at a specific performance. Now I need to get back to all the other organizations and either get off their lists and save them some postage or start the kind of relationship that I – the donor – want to have.