Balancing the Mission Checkbook

Unfortunately, the news has been full of stories of struggling nonprofit organizations. Every nonprofit is grappling with budgets and growing community needs in the face of economic pressures. Fundraising is mixed right now, with individual giving as the biggest concern for many organizations, and corporate giving still an open question. Meanwhile, utilities and transportation costs are up and programs are trying to serve more clients. Balancing mission and money is always hard work.

It seems that every article includes a comment by either the director or board chair that identifies the current economic downturn as the cause of the financial problems. The next time you read something similar, consider the possibility that, in some cases, “it’s the economy” might be a masking a different story.

By doing a little financial detective work, I’ve found that some of the nonprofits that identify the current economy as their problem have actually been operating with deficits for several years. They spend more than they bring in – and eventually it catches up with them. Checking this out requires a few steps. Access to IRS 990s on Guidestar is a gift for this kind of research. Page 1 (Part I) of the 990 reports all income and expenses and the resulting surplus or deficit. Because this section consolidates all unrestricted, restricted, capital, and endowment activity, though, it isn’t helpful in reporting the operating results. Page ahead to Part IV, the balance sheet, and look at Line 67 – Unrestricted Net Assets. If the organization had an operating surplus, this balance will increase from the beginning to the end of the year. If they had an operating deficit, then the balance will decrease.

There are a wide range of reasons and circumstances that result in operating deficits. Recurring and unmanaged operating deficits are the number one red flag of financial problems and raise questions about ongoing viability. If deficits recur, the management and board must take the time to understand the causes and make needed changes in income and expenses. Raising money is challenging in every economic environment, especially during a downturn. Make sure you can distinguish between the economic, management, and program considerations that result in deficits and take the steps needed to address each one.

Jeanne Bell at CompassPoint wrote a wonderful column about surplus and deficit planning, Nonprofit Budgets Have to Balance: False!. She asks strategic questions about budgets:

Instead of “How can we make the budget balance?” the annual budgeting cycle should begin with the question, “What financial outcome does our organization want or need this year?”

I can’t think of a single nonprofit that would answer that question by saying, “Our desired financial outcome is to run out of money and close our doors.”

How do you know what you don’t know? Someone asked this question last week in a workshop on the topic of board oversight and some high-profile problems. It’s such a great and critical question. There’s been a swirl of conversations in the last week or so about financial problems and governance issues at a number of nonprofits, both local and national. No matter what the details are, questions have been raised in every situation about the board’s role – what did they know, when did they know it, and what did they do? But what’s the first step for the board, since they are relying on reports from the staff and have little or no access to the raw information. Boards that ask for lots of details are accused of micro-managing and not trusting the staff. So how do you know what you don’t know? There has to be a balancing act between accepting reports at face value and asking questions that go beyond the information presented. I think that there’s an art to asking good questions – my favorites generally start with either “Why…?” or “What if…?” (I actually have those two words up on the wall in my office). Speaking last night to a group of people who had recently joined boards of nonprofits, I suggested that asking questions is their primary job. It’s great if they get an answer that makes sense. However, the role of governing requires further action and follow up when the answer doesn’t make sense, or when the answer is “Don’t worry about it,” or “I’ll find out later.” The distinction between hyper-questioning and prudent questioning depends on circumstances, but in every one of these recent governance and financial situations there were some “why” questions that needed to be asked and then carried through.

This complex balancing act between supporting and governing is discussed in the article Why Boards Don’t Govern available from CompassPoint. One point raised in this article is the importance of creating an atmosphere and culture at board meetings that encourages questions and disagreements. I know in financial matters, many board members feel like second-class citizens because they are not the “financial” board members. The fact is that if they have a question, or if something doesn’t make sense, they need to feel free and encouraged to ask the question. It just might be the question to unlocks the truth.

There was no telling what people might find out once they felt free to ask whatever questions they wanted to. (Joseph Heller, Catch 22).

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.