Balancing the Mission Checkbook

Last week, I unplugged from email, Blackberry, and voicemail for a nine-day vacation. I’m sure you’ve all enjoyed the times when you change pace, slow down, and relax. It was indeed a great break – but interestingly, I was not taking a break from nonprofits. They’re everywhere – and that’s a wonderful thing. Our trip started with a few days in Virginia in the Shenandoah Valley and the Blue Ridge Mountains and ended with some time in Washington, DC. With that itinerary, I’d expected that our time would be dominated by businesses, like hotels and restaurants, and by the National Park Service for our visits to the Skyline Drive, the National Mall, and other historic sites. What I hadn’t really thought about was how much nonprofits would be woven into the trip. Both Thomas Jefferson’s home at Monticello and George Washington’s Mount Vernon are owned and operated by nonprofit organizations, and are supported by fundraising, fees, and gift shop sales. In DC, the National Mall is a public park, but many of the events and special features are created and supported by nonprofits. We were lucky enough to be there at the peak of the cherry blossoms and the (nonprofit) National Cherry Blossom Festival. I know that this photo looks like a postcard, but I really did take it myself! To round off our nonprofit immersion, we had dinner at the funky Busboys and Poets restaurant, operated by a nonprofit, Teaching for Change.

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.

Reading the headlines reflecting concerns and jitters about the direction of the economy is causing leaders of nonprofits to ask how it will affect their organizations. For some people, a state of worry has set in. I can see why. Today, the StarTribune posted this article on their website, “Chairman Bernanke says Fed ready to cut interest rates again as needed.” The article predicts further cuts to key interest rates “to rescue a weakening economy.” Factors cited included the unemployment rate, weak real estate, tightening credit, and high energy prices. What’s a nonprofit leader to do? Anyone who has worked for a nonprofit for more than three years has experience with a tough economy, so many directors and managers will be well prepared to respond to lean times. But how worried should you be right now and what are your concerns? I think it’s worth a review of the causes and effects that may have a direct impact on your nonprofit organization.

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.

My last post of 2007 is a few suggestions and recommendations for your leisure time review.

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!

In late November, I wrote an entry about the deluge of year-end appeals for individual contributions. As promised, I kept all the solicitations we received at my house between Thanksgiving and December 31. Here’s my report. We received 66 solicitations for funds in the mail from 55 different organizations (we got more than one each from nine organizations). The nonprofits range from arts, housing, international relief, youth and health care. I know why we’re on some of the mailing lists while others baffle me. My best guess is that I know someone who knows someone who volunteers or is on the board of directors. As I said in November, we responded with a check to a select number of the requests and put the others aside. I saved them all in a show box.

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.

An article in the December 7, 2006 issue of The Chronicle of Philanthropy reports that nonprofit blogs are on the rise. (Read the article here.) I’m thrilled to know that I’m on the early side of a trend for the first time in my life. According to the article, nobody knows for sure how many blogs are devoted to nonprofit issues, but the best guess by people who write blogs is that about 100 are now in operation. That is an infinitesimal fraction of the estimated 12 million blogs available on the Internet, according to the Pew Internet & American Life Project, in Washington.” There is a list of “ten blogs to watch” included with a strong emphasis on blogs about philanthropy and fundraising. My own interests are in broader management issues and I have found a handful of blogs that I read regularly.

I have a regular routine now – every Monday morning I read my blogs to see what’s new and who’s found an interesting article or newsbyte. There are three in particular that I recommend to anyone interested in nonprofit management issues.

• First is Mission-Based Management by consultant and author Peter Brinckerhoff. His posts range far and wide on management, boards, and fundraising.
• Second is The Artful Manager by Andrew Taylor, director of the Bolz Center for Arts Administration at University of Wisconsin – Madison. Taylor writes interesting posts about the role of arts in society and how arts organizations can thrive. His blog also has links to more in-depth discussions and articles.
• My third recommendation is the Stanford Social Innovation blog. SSR has a group of authors for this blog with a variety of areas of interests and opinions. I disagree with the opinions sometimes but they are always interesting, thoughtful, and well-written.

I led a workshop this morning called “Monitoring Your Financial Health” that covers a variety of methods for interpreting and analyzing nonprofit financial reports. The group read and compared reports, calculated income, expense and balance sheet ratios, and reviewed key indicators. When we talked about how to communicate the financial analysis to management teams and boards of directors I distributed a few samples of executive summary and dashboard reports (download an example here). As always, several of the workshop evaluations listed these reports as a highlight of the materials. The idea of dashboard reports has been around for a long time in business and nonprofit management. (For a good introduction to the concept see these articles from CompassPoint’s Board Cafe and the October 12, 2006 issue of The Chronicle of Philanthropy.)

I think that the reasons that workshop participants respond so strongly to the reports are their clarity and simplicity. Ideally, a dashboard report conveys in one page the key indicators for the organization and relates those indicators to goals, historical information, or benchmarks. The people in my workshop today know that this type of report is one that every nonprofit board wants to have.

So why don’t we all have dashboard reports? We don’t because they are very hard to develop. The art to creating a good dashboard is identifying what information really matters. The dashboard in your car shows you the speed, fuel level, oil pressure, blinkers, and warning lights. Think of all the other information that could be displayed as well – but isn’t – because too much information is overload. To create a valuable summary or dashboard tool you have to cull through all the possibilities and select the five to eight key indicators that convey the most important measures for your nonprofit organization.

I use two example reports in the workshop. One of the examples is for an organization in the middle of turnaround after several years of financial problems, and the other is an organization that is healthier financially seeking to diversity its contributor base. These nonprofits have very different key indicators. One watches cash and payables closely while the other needs more information on development.

The other challenging task to developing good dashboards is selecting appropriate goals or benchmarks. These deserve some focus because the wrong goal can send you in the wrong direction. One well-intentioned but problematic benchmark that I’ve seen at many organizations is the goal of building a cash reserve equal to three to six months of operating expenses. It’s a terrific goal, of course, but it’s unrealistic for boards to expect a nonprofit to build that level of unrestricted cash balance in one year or less. Fieldstone Alliance published a good book last year on identifying appropriate and useful measures, Benchmarking for Nonprofits. Here’s a link to a free excerpt.