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!

The drawn out debate and standoff over the state budget was an amped up case study. In comparisons between the Governor’s and Legislature’s versions of the proposed budget many nonprofits could see different futures – reductions, increases, hold steady and eliminations. For weeks, if not months, these directors and program managers continued to provide services and manage their organizations while not knowing what was to come. Because the final budget bills were completed and passed so quickly, holding your breath was the norm.

For example, this Minnesota Budget Bites blog post summarizes some big changes contained in the Jobs and Economic Development budget bill. For some of the nonprofits that provide jobs, training, and economic development services in the community, many of these changes are major and long term. And they’re in effect right away. I know one organization whose budget will shrink by 25%, and another that expected a similar reduction but got an unexpected one year reprieve. Neither organization knew what was in the bill until early morning on July 20^th. In both of these cases the organizations knew that their programs were “in play” in budget talks. They’ve both developed some scenario plans and had board discussions about changes to come.

Scenario planning is only one component of managing uncertainty. Nonprofits must have a solid understanding of their financial structure and what levers they have (or don’t have) to make changes. The “ideal” financial management practice for right now is the capacity to adapt, which requires you to have a system in place for forecasting and managing cash flow.

Last week, we got some great news. We were awarded a $1.5 grant by the CDFI Fund of the US Treasury Department. You can read the press release here. This is award will help us grow our loan fund and serve more nonprofits for many years. I knew when the awards were going to be announced, and I was pretty distracted and jumpy while I waited in anticipation. This award means a lot to our future, but I really had no idea what to expect. About 10 minutes before the scheduled announcement of the awards I realized that I was holding my breath. I wonder if lots of others were holding theirs’, too. We were one of 155 organizations that received good news from the CDFI Fund, but I know many great organizations that got bad news that day. I know the feeling – anticipation, disappointment and let down, and then take some time to re-group.  When decisions that have a big impact on the fate of your organization and its work in the community are really out of your hands, what do you do? Do you have a grounding in structure and options, or do you close your eyes and hold your breath?

I will confess that I’m a finance person and I love financial analysis the way other people love mystery novels – I can follow the clues and tell a story from the numbers. So I’m surprised that I find myself in these discussions taking the devil’s advocate role that ratios are valuable only at certain times and with a lot of conditions. Used as a generic measure, ratios can potentially even mislead. To prove my case, consider the value of the “program service ratio” in evaluating nonprofits. This is the percentage of total expenses that are spent on program services rather than general and administrative and fundraising. Whenever someone attempts to impose a standard ratio that all nonprofits should use, we all bray about how different organizations are depending on their size, years of operation, field of service, client base, etc, etc. I agree with all of those arguments against a single standard and use the same reasoning to argue that ratios are valuable only when used in the right context and with the right information.

The first law of quality financial analysis – always use the right comparative information. Financial information by itself is just a list of numbers on paper. The understanding comes when it is compared – to the budget, the previous year’s reports, a set of goals, a peer organization or industry averages. Ratio analysis follows the same law. Yes, you should calculate ratios to analyze financial information, but then the ratios must be used with the right comparative information. There is no single “current ratio” for all nonprofits, but there is probably a good one for your nonprofit. A small nonprofit with few bills can have a strong current ratio compared to a larger organization with a larger budget, but that doesn’t tell us that one organization is in better financial shape.

After making an argument about the shortcomings of ratios, let me switch sides and offer a resource for ratio calculations.  Analyzing Financial Information Using Ratios has just been posted on our website as part of our Financial Management Resources. It includes an overview of ratios, definitions and descriptions and an excel worksheet for the calculations.

When I argue that ratio analysis is not a complete and reliable method to assess financial health, I have to offer some alternatives. How can we assess nonprofit financial health? What IS financial health? In a word, financial health is stability – the confidence that the organization will be able to serve its community and clients in the future. I can think of only three universal signs of stability that can apply to all nonprofits: reliable revenue, managed expenses and adequate cash. Pretty simple, and even these have to be understood in the context of the organization. Measuring and assessing these three components can take the form of ratios, trend analysis, comparisons with peers, budgets, plans or history. They are the fundamental financial levers that build stable operations. If you are interested in going through an in-depth analysis of your organization’s financial picture, with an emphasis on the types and reliability of income, consider attending Minnesota Council of Nonprofits’ workshop: Planning for Financial Sustainability on May 8th.

The likelihood that control deficiencies will be identified and reported is probably higher. The auditor simply has to consider a much wider range of factors and apply a new and higher standard.

According to accounting firm PricewaterhouseCoopers, “we believe that the new definitions will lower the bar such that more control deficiencies will be considered severe.”

Even for the management letters with the same findings as previous years, the new terminology may cause concern. The term “reportable condition” is replaced with “significant deficiency”. More nonprofits will receive reports of control deficiencies related to their capacity to apply generally accepted accounting principles to financial transactions and financial reports. Think about your internal year-end financial reports. Do you correctly report the following information according to GAAP accounting rules: receipt and release of temporarily restricted funds, in-kind contributions, accrued expenses, and depreciation? If you have relied on your auditors to provide audit adjustments for these items, you should be prepared for a possible finding of a control deficiency. What should you do?

• Talk to your auditor before they come to start fieldwork about SAS 112 and how they will communicate with you during the audit.
• Next, communicate these new standards to your treasurer, finance committee and board of directors. The last thing you want is a surprise when the audit report is presented.
• Last, and most important, do what you can to improve your internal controls and quality of financial accounting. This is the ultimate purpose of the audit standards, and the goal for your nonprofit as a steward of your donor and supporters’ funds.

The phone callers asking about starting a nonprofit tend to fall into categories. One group are of people who are deeply committed to helping their community and they just don’t know about the alternative ways to get involved. A second group are people who are ultimately trying to create a job for themselves and they believe the myth that there are “millions of dollars in grants available for you today!.” I don’t have much patience for them. The last group are those who have already started an informal program or project and want to find a way to get some money or help to continue or survive. These calls are the most complicated and the toughest to help. I can only hope that they have put some effort into the basic research and needs review as described in Dan Kadlec’s article. Otherwise they will confront the harsh reality of funding, boards, and the steep learning curve of a start up.

In a typical chapter about boards, the list of responsibilities includes: hiring and evaluating the executive director, fundraising, strategic planning, financial oversight, and identifying future board members. Beyond that list, board members are warned, they should not meddle. Well, this list may be appropriate for organizations with sufficient resources and staff to carry out all of the ongoing activities but there are many nonprofits that are not at that point – and may never be. Young organizations with a small staff need more involvement, and nonprofits that are reaching into communities with deep and specific needs may need a different kind of board – community involvement. How the board actually gets its work done needs to vary depending on the organization’s current needs (which will change). With this understanding, we created the financial training for boards to be flexible and allow us to meet the board where they are and build the capacity that fits them.

I recommend a report from a study that was completed in fall 2006, “Coloring Outside the Box: One Size Does Not Fit All in Nonprofit Governance” by Kim Sundet Vanderwall and Ellen Benevides for MAP for Nonprofits. The study reports on discussions about how boards work in 40 small grassroots nonprofits and organizations based in cultural or rural communities. What they found was a variety of different ways that organizations had created to get the work of the board done. In few cases were the boards following the “textbook” model.

Common strengths the researchers discovered were the level of shared commitment, values and connection between board members. Common struggles were attendance and engagement, clarity of roles, and some of the specific roles and structure. It’s interesting to read the differences in perceptions about the board given by board members compared to directors and staff members.

The report concludes not with a prescription for all boards to follow, but a list of five core recommendations:

1. Know what you must do as a board.
2. Find a way to make that happen in as streamlined a way as possible.
3. Be creative and think outside the box.
4. Keep the spirit of the organization alive in all you do.
5. Challenge those who provide technical assistance to boards to present standards and best practices in a way that takes size, resources, and culture into account.

Another consultant who frequently writes about a variety of approaches for boards is Mike Burns at Brody Weiser Burns. Mike’s article “Avoid Pigeonholing Your Board into Traditional Models” was written almost 10 years ago but it’s still very timely. Mike also has a blog on nonprofit board issues now, Nonprofit Board Crisis.

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 heard many smart and experienced people talk about important, urgent issues. I learned about technical and financial topics and policy and economics. After all of my conference experiences this month, I have one burning question: what’s the point of PowerPoint? Many of the conference sessions included a PowerPoint presentation, but in very few cases, did the visuals add anything of value. I hate to admit it, but the PowerPoint that I created for one of my sessions was a case study in dullsville. We all complain about it, but when are we going to stop mistreating our audiences and improve the practice?

The typical use of PowerPoint at the conferences was a number of slides with 4 to 8 bullet points containing 40 to 70 words. Most used no visuals except the logo of the presenter’s organization or a Microsoft design template. In many sessions the presenter also distributed printed copies of the slides as a handout. The best of the presentations used the slides as a focus point for the audience with key phrases and issues. Less effective presentations used slides with every word of the information, lots of data and detailed descriptions, and lists of the names of the panel members and topics for the session. The worst users included slides with complex charts that were unreadable both on the screen and on the printed page. Unfortunately, the audience can end up frustrated, confused, bored, or insulted.

Despite my complaints, I don’t hate PowerPoint. Research about learning styles shows that many people learn through visuals, and PowerPoint can be a great communications tool. Here are a few suggestions to improve your use of PowerPoint:

• Learn how to use PowerPoint. It’s not a difficult program but there are features that need practice and testing.
• Good presentations don’t just happen, they require planning and preparation. The problem with templates is they make it easy to take shortcuts and create a bad presentation.
• PowerPoint is a visual tool – make it visually interesting and engaging with pictures and graphics that build on your message. This includes both the pictures and the slide design.
• Get a copy of the book “Why Bad Presentations Happen to Good Causes” published by Cause Communications. This terrific book, less than 100 pages long, is full of practical information to improve presentation content, delivery, and use of PowerPoint. Most nonprofits can get a copy for free.
• Visit David Canfield’s 8 Mistakes of Microsoft PowerPoint Presentations for a list of common mistakes we have all made at one time or another.
  

I’m back from conference-land. Next week I’ll be back with thoughts about financial issues for nonprofits.

In the same way, the financial picture of an individual nonprofit can be understood differently if you understand the bigger economic picture of the nonprofit sector. How does this nonprofit compare to its peers or to the regional trends? What’s changing in revenue and expense composition? Because I believe that it is crucial that we understand this big picture, I was delighted that the Federal Reserve Bank of Minneapolis featured the nonprofit economy, what they dubbed “The economy’s middle child,” in the July 2006 issue of the fedgazette.

The publication includes several articles on revenue trends, services, financial data, and growth. Some of the their observations are especially helpful:

• Any portrait of nonprofit finances are skewed by large, health care organizations.
• Since 60% of nonprofits are so small they don’t have to file an IRS Form 990 and are therefore excluded from the data we’re only seeing a portion of the data.
• If the value of volunteer labor were included in the numbers, Minnesota nonprofits would represent an even larger portion of the economy.

Even with the data and reporting challenges, it is worth the time to understand the entire stage that we perform on as a part of the nonprofit sector.

The Minnesota Council of Nonprofits has also just released their annual report on the economic picture of nonprofits in the state. Read the 2006 Minnesota Nonprofit Economy Report.