I encourage you to read the full article (and subscribe to the magazine!)  Here is the brief “Executive Director’s Finance Cheat Sheet” of the eight key business principles that we believe are essential for financial leaders.

1. Develop your annual budget with a commitment to its net financial result—whether surplus or planned deficit—and then adjust spending during the year if income is not coming in on pace to yield that net result. Then, complement your annual budget with rolling financial projections that incorporate your most current information about probable future financial results.
2. Diversify your income cautiously, ensuring you have the capacity to develop and sustain the programmatic and operational requirements of attracting each new resource type well.
3. Develop cash flow projections along with the budget and rolling projections so that you can anticipate any cash flow problems well in advance, when you have more options.
4. Plan goals for financial reserves based on your typical cash flow cycles and risks and incorporate reserves into all financial plans and policies. Be sure to foster a financial culture for staff and board that understands the importance of a regular operating profit or surplus.
5. Pursue restricted funding from those foundations and corporations that understand and value your organization’s mission and particular strategies for achieving impact. When pursuing restricted funding, develop proposal narratives and accompanying budgets that link staff development to program design to superior outcomes, including all related costs as direct.
6. Ensure that your finance function is always properly staffed; if necessary, use a mix of staff and expert contract consultants to achieve this.
7. Discuss expectations for financial roles and responsibilities with board leadership to create accountability and information flow that matches the size and life stage of the organization. Make sure to invest time to develop meaningful financial report formats for the board that reinforce organizational strategies and goals and supports the board in fulfilling their responsibilities.
8. Introduce the concept of enterprise risk management to your team and initiate an internal assessment of a full range of risks.

Read the article and let me know what you think and what other principles we should add. For those of you in Minnesota, we’ll have a chance to hear directly from Jeanne Bell at a conference coming up in April that Nonprofits Assistance Fund is co-hosting with Minnesota Council of Nonprofits. Watch for more information soon!

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!

This focus makes me wonder about something: How much impact does the departure of an executive director have on a nonprofit? Of course the executive leadership role is important (as an ED myself, I certainly hope so). But if nonprofits are thrown into chaos or disaster by the loss of their ED, they have systemic problems that need to be addressed. A succession plan will give the board a roadmap to react to a departure, but building leadership within the organization is more proactive and effective. Some nonprofits groom another person to step into the ED role. There are lots of reasons not to lock into a selection prematurely, though.

Shared leadership is one approach to strengthening organizations by distributing authority and responsibility broadly. The article “Doing More with More: Putting Shared Leadership into Practice” in a recent issue of Nonprofit Quarterly reports on a two year study of 27 organizations that put this into practice. The concept of shared leadership isn’t radical or new, but as the authors note:

Most organizations continue to accept a hierarchical structure, with the executive director shouldering an enormous burden of responsibility for organizational success. The LLC participants generally reported that this was true of their organizations. However, we found that this concentration of power was not because executive directors were power hungry. Nor was it even deliberate. It was due to a lack of familiarity with the alternatives.

Implementing this approach requires nonprofits to un-learn some common practices. Success depended on senior leadership’s commitment to change, time to educate and plan fundamentally sound management practices, and engagement and accountability. They found that the 27 organizations adapted the practice to their organizations. One result was that “These organizations’ leadership capacity has expanded. (…) This reduces the stress and potential burnout on the part of executive directors, while helping to advance, develop, and retain other staff.” It seems to me that this would also make the departure of ED more easily managed. Boards could rely on the distributed leadership to maintain stability and agility and help define the profile of the next ED.

I’m also intrigued with the possibilities of this finding, “In many cases, shared leadership has also led to programmatic changes, and many of the participating organizations are beginning to think about how to expand the concept of shared leadership to their boards and allies.” Sharing leadership outside the staff chart could change relationships and impact significantly.

Another proponent of this kind of shared leadership is Leslie Crutchfield, one of the authors of the book Forces for Good. The book examines high-impact nonprofits to discover the common traits and practices. One of the six practices that help these nonprofits to produce results is to share leadership across staff, board members, and external networks.  I’m hoping to learn more about shared leadership and how to implement these practices from Crutchfield when she’s in Minneapolis this fall for United Front 2011. Crutchfield is speaking at the luncheon that is also part of the schedule for the MCN’s Annual Conference.

Nonprofits that develop broad leadership by sharing authority and responsibility effectively will be well positioned for transitions and departures – whether they have a written succession plan or not.

Part of the value comes when you pull together all the pieces to have the form completed. The new 990 requires information about mission, program accomplishments and costs, board members and key staff, policies and governance practices, compensation, fundraising, finance, and much more. While many nonprofits rely on their audit firms to complete the 990, most of the required information is not financial and must be supplied by various departments or staff of the organization. The second part of the value comes from continuing to use the 990 as a communication and analysis tool. Here are four suggestions.

As an organizational tutorial

Read the whole 990, front to back. New managers, board members, emerging leaders, or anyone else on staff who wants to know more about the organization can get a complete overview of the organization by reading the complete form including all of the schedules. This assignment will also help you identify any questions or sections that need to be clarified or completed more thoroughly.

As a financial analysis tool

The 990 contains a complete financial report in a standard format. The new form expands the financial information, particularly the income section, to provide more complete data. Most financial analysis steps can be conducted using the 990. To make it easier, Nonprofits Assistance Fund created a new tool that we call the “990 Decoder.” Transfer the three financial pages from the Core Form onto this spreadsheet and you will generate a familiar looking Balance Sheet and Income Statement and a page of six standard nonprofit financial ratios. These can easily be used for comparison with other years or with other, peer nonprofits. Just “decode” their 990, too. We’re happy that the Minnesota Council on Foundations likes to decode 990s, too.

As a source of comparable compensation data

A month ago we were fielded a number of requests for help from board members of nonprofits who were responsible for obtaining information about executive director compensation from comparable organizations. In many cases, salary surveys fit the bill, such as the thorough review that Minnesota Council of Nonprofits compiles. Another simple approach is to create your own peer group of 4 or 5 nonprofits that are of similar size and type of service. Compile a custom comparison by using Guidestar to collect compensation data from your peers’ IRS 990s. Compensation is usually listed in Part VII on page 7. Guidestar registration is easy and free for the basic search. The information will be at least a year old, but as we told the board members we talked with, no one got much in the way of salary increases last year anyway.

As a communications tool

One of the unique features of the 990 is the Program Accomplishments section that is now the second page of the form. Hopefully you have taken advantage of the opportunity to communicate specifically what activities you completed, who you served, and how this work had an important impact in the community. Take an hour or so and read the Program Accomplishments for your nonprofit and then read the section for a few other organizations that you admire. How well did they communicate their work? How did you do? Learn from other organizations and look for ways to promote your 990 as another communications tool. Post it on your website (along with you audit, please).

Don’t let the IRS 990 sit around gathering dust. Give it a workout and help both your organizations and the nonprofit sector show the value of transparency and accountability.

Surveys are great and provide some reliable data and a lot of anecdotal information for use in case statements and meeting discussions. The surveys range from large, national organizations collecting data from several thousand organizations to local groups who reach a few dozen. Some surveys employed carefully planned research techniques, while others sent out a shotgun email and let respondents self-select. Whatever the audience, method, or response rate, all of the surveys I read came up with the same information: funding is down, demand is up, and nonprofits are turning themselves inside out – including deep cost cuts – in order to maintain services in the community.

• Guidestar’s survey (2,979 organizations) identified the basics: reduced income, reduced services, reduced expenses. The size of the respondent pool is impressive.

• Nonprofit Finance Fund (986 organizations) warned that nonprofits are “In Danger” and “Strained to the breaking point” with over 80% anticipating deficits this year and cash reserved down.

• Bridgespan Group’s survey (100 organizations), which was a follow up to last fall’s report, found that the situation had worsened and nonprofits were turning to tough measures, including deep costs cuts and use of reserves.

• Impact of the 2007-2009 Economic Recession on Nonprofit Organizations issued by Listening Post Project at Johns Hopkins University employs a recurring panel of selected and random nonprofits in several fields (363 organizations). The in-depth analysis reports that 80% of respondents are experiencing financial stress, but that most have maintained or increased the number of people served.
  • A particularly interesting comment is that “nonprofits appear to be at least partly buffered by government policies that are designed to be counter-cyclical, i.e. to expand when economic conditions deteriorate.” Reading this month’s headlines about state budgets, I’m surprised to read that government funding offers an offset to reductions in other sources.

• In direct contrast, the May 2009 Current Conditions Report from Minnesota Council of Nonprofits (571 organizations) reported that nonprofits are “bracing for extended impact” that is exacerbated by reductions in state and local funding and uncertainty about further reductions.

• Similar reports of financial strain can be found from the Christian Leadership Alliance (250 organizations), United Way of the Bay Area (391 organizations), and state nonprofit associations in Louisiana (312 organizations), New Jersey (351 organizations), and Arizona (87 organizations), among many others. There are many, many other surveys – for the arts, hospitals, environmental organizations, and on.

Thanks to the 6,390 nonprofits for taking the time to respond to the surveys listed above

Each survey report has its own focus, tone and summaries, although with some interesting contrasts. All report declines and reductions, but some use phrases like “struggling to survive” and “threats to well-being,” while others are more upbeat about the creativity, adaptability, and resilience (one of the most frequently used words). There are lots of comments about difficult decisions, uncertainty, program redesign and modification, new collaborations, focus on core mission, and contingency planning.

What they also all report is the great commitment and sacrifices being made by those who are employed by and volunteer for the responding nonprofits. One of the common themes is reductions in personnel costs through freezes, salary reductions, and furloughs at the same time that the organizations are serving more people with new and more complex needs. This is my greatest concern – for how long can nonprofits rely on staff and volunteers working more and harder, for less, to meet growing community needs?

I’m always cautious when I read reports since this kind of quick action survey relies on answers from a self-selected sliver of the sector. The surveys provide interesting and useful data to start planning, but it’s not sufficient to draw reliable conclusions. I’m interested now in reading some case stories of change and transformation. That is likely to take more time to achieve than a 10 minute survey, but it will be worth it.

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.

How does this impact Minnesota’s nonprofits?

When people lose income and important benefits they turn to the state’s nonprofits for assistance with everything from food and shelter, support and counseling, and job search and retraining. As reported in Minnesota Council of Nonprofits’ Current Conditions Report published in December 2008, 42% of surveyed organizations reported increased demand for services. But over 50% of the nonprofits also reported actual and anticipated decreases in income.

If service demand goes up and income goes down, where are the reports of job cuts at nonprofits? There have been a few reports locally and nationally including American Red Cross Twin Cities, Neighborhood House, Metropolitan Opera, and Harlem Children’s Zone. I know, though, that there are many more organizations that have already made staff reductions or that will have to make some cuts because of their budget shortfalls. One reason that we don’t read about it every day is the different requirements and expectations for disclosure between publicly traded companies and nonprofits.

But I think that many nonprofits feel that speaking openly about cuts is their “family business” and are afraid that it reflects poorly on management and the board. There is actually an odd dynamic at work now – more calls and emails from recently laid- off corporate people who would like to “explore a shift” into the nonprofit sector. As a “shifter” myself I can’t be too cynical, but I’ve got to tell the truth about their prospects right now. (I encourage volunteering.)

Nonprofits are Businesses

I’m starting to think that nonprofits need to be much more public about their staff reductions. At the same time that the community needs nonprofits to provide more and more help and support, income of all types for nonprofits is declining. Let’s not hide the reality that there will be an impact from these changes. The recession is impacting corporations and nonprofits alike.

For years I’ve been a part of discussions about how the public doesn’t understand how nonprofits work. Now is the time to start the tutorial. By being open we can educate the community about how the business of nonprofits actually works – the complex web of financial and volunteer resources, staff and program costs, and role in the economy as service provider and employer.

I like the logo of the V3 Campaign – Nonprofits Are Businesses. It’s an effort to educate the general public about the economic impact of nonprofit organizations.

What do you think? Is it risky to announce cutbacks and program reductions, or could these news stories ultimately strengthen understanding and support for the sector?

You must maintain unwavering faith that you can and will prevail in the end, regardless of the difficulties, and at the same time have the discipline to confront the most brutal facts of your current reality, whatever they might be.

Vice Admiral James Stockdale was a prisoner of war in Vietnam for seven years. When asked by Jim Collins, author of Good to Great, how he survived, he described balancing hope and realism. Stockdale said that the optimists didn’t survive capture because they told themselves that release was right around the corner and they died “of a broken heart.”

What nonprofits can learn from this philosophy is to maintain the conviction that their work in the community is essential, vital, and will be valued. Carry this passion with you in advocacy, fundraising, and communications as you tell your story and share the impact. At the same time, confront the brutal facts of economic downturn and budget cuts by being disciplined about financial information, contingency budgets (with multiple scenarios) and cautious use of reserves. I’m afraid that the optimists who approach next year with an upbeat attitude that funding will arrive “because it just has to” will be the ones that fail. The survivors will commit to and believe in their mission and be realistic in their decisions.

This is also a good time to leverage the networks in which your organization operates. Nonprofits work together in many ways, and will be called upon to increase network activities for both mission and financial reasons. At the Minnesota Council of Nonprofits’ Nonprofit Fundraising and Economic Outlook forum this morning several organizations shared their experience working with peers and community to navigate the downturn. MCN also released the Nonprofit Current Conditions Report based on a survey conducted just this month. This report gives us some real time information about the immediacy of the impact of this recession on nonprofits and their clients. All of this information, research, and peer conversations will be important – and remember to be confident, hopeful, and honest.

“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.”

We can now say with certainty that all nonprofit leaders share a deep concern about the rest of this year and the prospects for the next couple of years. In that same blog post I encouraged organizations to understand their income mix and focus on what they could learn about the trends affecting their dominant income sources. Different income sources typically have different triggers and cycles. Foundation grantmaking, for example, changes at a slower pace than individual contributions because foundations calculate their endowment “payout” based on average balances over two years or more, while individuals make giving choices partially based on how confident they feel right now.

A lot has been written, and will be written, about the impact of the economy on nonprofits. Some hopeful news comes from the Philanthropy Journal’s article Past sheds light on recession giving, which notes that overall giving doesn’t drop as much as you might fear. Other stories, however, add to the worry, such as A gloomy giving outlook about corporate giving. I sympathize with the reporters who are writing these stories, though, because the real answer to questions about how the current economic environment is affecting nonprofits is “We don’t know yet.” Every week brings more questions and we all hope that the direction for the future will start to be clearer after the election.

On top of everything else, now is the time for all nonprofits to pay attention to developments that will impact the state budget next year. The forecast doesn’t look good according to the Minnesota Budget Bites blog. State funding dominates for human services, education, and many health care organizations, and it is important for many other nonprofits. This is the time and place to prepare for policy discussions, and you need to be a part of them. It’s easy to stay up to date through the blog and other information and meetings sponsored by the Minnesota Council of Nonprofits.

Because of this uncertainty, and the fact that all the indicators look weak, what had been concern has risen to the point of anxiety.  Emily Saunoi-Sandgren, who blogs at the Humphrey Institute’s new pubTalk blog, wrote Much ado about the economy last week looking for signs that these challenges might lead to some bigger ideas and discussions. Yes, it is time for some big discussions (such as the conversation around public policy and the state budget). Unfortunately, the reality for many nonprofits is that they need to be very cautious and careful.

I’m being blunt here, and it makes me feel like a depressing economics professor, but I have a lot of conversations with nonprofits that don’t have a lot of reserves and so their options are limited. So what’s a nonprofit to do?  Here are some fundamental steps you can take:

• Dig in to analyze what income is reliable and what is not.
• Understand the costs of delivering programs and services.
• Keep close track of increases in demand for services and how much of that increase is driven by the same economic factors.
• Scrutinize any plans for expansion carefully until you are confident that the funding is available to fully support the expansion.
• Double check every assumption.