Balancing the Mission Checkbook

Maybe it’s a holdover from my former life as a banker, but I often read the business section of the paper first (yes, I still like to hold an actual printed newspaper in my hand). Lately, of course, there is news almost every day about job cuts at some of the best known national and local companies. Some recent examples are Caterpillar, Starbucks, SuperValu, Best Buy, and M & I Bank. As you can see from this list losses are occurring in all industries. Unemployment in Minnesota hit 6.9% in December and is clearly getting worse.

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?

I’m pretty sure that every nonprofit would love to have enough money that some of the funds can be invested for the future. In the past month, though, nonprofits may have seen their investment portfolios buffeted by the markets. If that wasn’t enough of a concern, this week we read about losses for some local nonprofits from investments related to the Petters Company fraud case. News reports this week in both MinnPost and the Star Tribune describe the negative impact on organizations that may lose millions from investments that were made to provide short-term loans to companies for inventory purchases. As Scott Russell said in the MinnPost article, these cases are “a wake-up call for other nonprofits to review their investment policies and portfolios.”  As an outside observer, it’s easy to say that these investments seem like an unlikely fit for a nonprofit organization, but we don’t know what standards or criteria those boards were using to evaluate and select investments. This is a good time, though, to review some fundamental guidelines for investments by nonprofits.

• Time Horizon – Funds that may be needed within a few months must be invested in highly liquid, safe investments. This is the most common type of investment fund for most nonprofits, composed of operating funds and reserves. In order to be assured that the funds will be available as needed, the investment choice must be readily available. The recent financial news has even raised red flags about some short-term investments – see my earlier post It’s 10 AM, do you know where your cash is?.

• Risk Tolerance – One of the fundamentals of investing is the balance of risk versus return. Investments with a higher return almost always also come with higher risk. The key question for nonprofit leaders and boards is to understand how much risk is involved and to decide if they can accept the risk. As an example, if the funds to be invested represent the balance of a large program grant that will be spent over the next year, then the organization can’t afford to risk the loss of any of the funds. A permanent endowment fund, on the other hand, is usually invested in a diverse portfolio that includes more risk in return for a higher long-term return.

• Responsibility – The nonprofit’s board of directors is responsible for overseeing this balance of risk and return for the health of the organization and any legal requirements. In order to fulfill this responsibility the board must act as prudent and loyal stewards of the organization’s assets. The board may decide to employ professional staff or outside advisers to manage the investments if the amount if large enough.  At minimum, the board needs to adopt and follow an investment policy. I highly recommend a booklet from BoardSource, Minding the Money: An Investment Guide for Nonprofit Board Members.

In this economic environment, every nonprofit needs to take a look at their investments and understand any risks that may have been taken for granted. It’s better to spend some time now and avoid surprises later.

When economic times get stressed, as they are now, nonprofit organizations are often urged to consider mergers or other collaborative structures as a strategy to navigate reductions and shifts in funding. The topic came up again at a meeting last week titled “The State We’re In: Fulfilling Human Service Needs in a Time of Economic Uncertainty.” Scott Russell at MinnPost.com wrote a good summary of the tone and comments of the meeting, Nonprofits hear a gloomy forecast about future funding. With financial pressures from all sides, coupled with increased demand for services stemming from employment and housing problems, many nonprofits will be hard pressed to keep up the juggling.

No one would say that mergers are the right answer for every nonprofit, but if you do think that joining forces would make sense and help your organization maintain stable services, where do you find your mate? All of the articles and books I’ve read discuss the importance of finding the right fit with leadership that can work together, board buy-in, and mission alignment. But where do you find them? What happens when the board chair or director of a small nonprofit calls the CEO of a large, established agency to inquire about a potential merger? Do they invite you over for coffee? Do they even return the call?

I think I’ve found the answer – speed dating for nonprofits! Speed dating is an organized event to help singles meet a number of people in one evening with the intent of finding one or two for an actual date. Speed dating for nonprofits would follow the formula. Nonprofit leaders, from large, medium, and small organizations, would be scheduled for a series of 5 to 8 minute conversations about mission, programs, and goals. A bell would indicate time to move on to the next “date.” No commitments or promises are made. At the end of the event everyone indicates on the list which of the nonprofits they would like to talk with further. It’s efficient and direct.

On the other hand, if you’d rather proceed with more control and confidentiality, there are a number of resources available. A short study published in 2004 by a collaborative of Milwaukee funders, Nonprofit Collaborations and Mergers: Finding the Right Fit, lists these key characteristics of successful partnerships: committed leadership, unambiguous goals, clearly defined roles, commitment at multiple levels of the organization, dedicated staff time, and sustainability in the midst of change. Fieldstone Alliance has two workbooks by David La Piana on nonprofit mergers. For hands on assistance, Project ReDesign is a new service from MAP for Nonprofits to assist with any part of considering, planning, and carrying out a merger.