The same is true for organizations. One of the values of scheduling retreats and off-site meetings is to change the pace and build in some down time, but the need for slack is ongoing. In the article Organizational Slack (or Goldilocks and the Three Budgets), published in the Spring 2007 issue of Nonprofit Quarterly, Woods Bowman offers this definition of slack from management literature:

A cushion of potential resources which allow an organization to adapt to internal pressures for adjustment or to external pressures for change in policy, as well as to initiate changes in strategy with respect to the external environment.

It’s easy to think of all the times when our organizations have needed this. While we may initially think of financial resources, organizations also need a cushion of management, time and staff capacity. Recently many nonprofits in Minnesota needed this kind of slack really badly. In the six weeks or so leading up to the state shutdown, nonprofit staff and board members spent many hours (and many brain cells) developing scenarios, contingencies, communication and HR plans. Every nonprofit I talked with during that time was doing all of this on top of their already overloaded schedules. None of them had built much, if any, slack time in to their schedules or annual plans. In Woods Bowman’s definition, these organizations needed “a cushion of potential resources to adapt to external pressures”. The shutdown’s impact taxed everyone’s capacity. We at Nonprofits Assistance Fund also invested an enormous amount of time in shutdown preparation and response (read the summary of what we did here). Lots of other projects and plans were put on hold, and now the must-do list is really long. Without sufficient slack in our organizational capacity, our choices leave two options: require everyone to work unreasonable hours or take some projects off the list.

Another type of cushion, of course, is financial. Nonprofits that have operating reserves and reliable cash flow were able to prepare for and weather the shutdown with less disruption than those without. Bowman’s article delves into financial capacity as an indicator of organizational slack. Operating reserve balances seem like the obvious measure, but he emphasizes the importance of planned surpluses, capacity to borrow when appropriate and including contingency funds in the budget. Financial slack allows nonprofits to manage cash flow and budget hiccups AND to jump on new ideas, experiment with new strategies, and invest in program redesign. Financial slack also pays for  staff capacity and critical time, especially when needed surrounding the state shutdown.

The lesson I’m hoping I’ve learned is that both organizations and people need some slack all the time, not just for crises. If you’re headed into a planning cycle of any kind, think about how to build organizational slack. You know that you’ll need it.

In just the past week, our hypothetical charter school director has seen these reports:

• State charter schools program is ‘out of control’, reports the Star Tribune in an investigative article about the use of bonds for financing of 18 buildings for charter schools.
• The Pioneer Press reported Strapped St. Paul charter school to close midyear on the decision by the board of directors of Skills for Tomorrow school to close at the semester break because of declining enrollment.
• Last week, in Payment shift makes rough waters for charter schools Minnesota Public Radio provided background and examples of the impact on charter schools of the state’s new deferred payment schedule for all public school payments.

While each news story is accurate, it does not paint an accurate overall picture. The individual schools don’t have the chance to explain all of their plans, budgets, and curriculum philosophy to the community. I have a deep enough understanding of charter schools to respond to each with the comment that “it’s more complicated than that.” I don’t want to gloss over some very real issues with finance, leadership and governance at some charter schools, but I am trying to figure out why this small group of nonprofits is such a magnet for news, investigation, and opinion.

As some background, Minnesota was the first state in the nation to create “charter schools.” Today Minnesota has about 150 operating charter schools, with roughly half in the Twin Cities Metro area, and the remainder in Greater Minnesota. Together, these schools serve about 33,000 students. Charter schools are true public schools. They are created by state law, are funded by government, and are subject to most state laws governing public education. They cannot charge tuition and they cannot discriminate in admissions. They are subject to state graduation requirements and the mandates of the federal No Child Left Behind legislation. Structurally, charter schools are both nonprofit corporations and independent school districts.

This structure presents complexities that affect both governance and financial management. As I detailed in a previous entry, Charter school myths and realities, the reality is that the management quality of most charter schools in Minnesota is on par with the management of nonprofit organizations overall. The vast majority of charter school directors and teachers are hardworking, mission-focused, committed educators, and I thank them for their work.

For such a small group of organizations, charter schools attract an awful lot of attention, scrutiny, and criticism. As a community, we feel strongly about education and about the use of taxes and public funds. Charter schools are right in the middle of both.  The field needs to find a way to communicate their value to the community – unless they like opening the paper every day to read another report about problems.

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?

• 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.