Nonprofit Harvest

Cash Reserves and Access to Capital

As some organizations are tapping into their cash reserves to minimize the impact of diminishing resources on their programs, the question of how to use and manage these funds keeps surfacing.

On one hand, organizations lucky enough to have this rainy day fund are wise to consider best practices and consult their own internal policies around using reserves.  The Foundation Center recently did a feature, How Much Should My Nonprofit Have in Operating Reserves? Review their article for a list of resources.

However, the time may have come to ask a different set of questions. In Beyond Cash Reserves, Kate advocates for a new kind of thinking about cash – that working capital is king:

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.

The Social Innovation Fund

Tactical Philanthropy is covering the Social Innovation Fund (What Exactly is the Social Innovation Fund? and Why the Social Innovation Fund Matters).  He draws attention to a number of reasons this is an important development, but he keys in on the value of growth capital:

The Social Innovation Fund is the first meaningful incentive for large foundations to provide growth capital to nonprofits.

The Fund is providing cash grants to grantmakers. Most grantmakers are stuck with the endowment they have and do not have access to additional funding. But the Fund requires that grantmakers use this money (plus matching funds from the foundation’s endowment) to provide growth capital and capacity building grants to nonprofits.

L3C – The New Kid on the Block

Increased access to capital is one reason the L3C model is such a hot topic (we have covered it here before).   A new post from Foundation Center does a good job of summarizing the available information and discussion about L3C, including sharing some examples from Vermont. To learn more you can also read Notes from Capital Sources, Options, and Structures.

Another Round of Reports

The Minnesota Perspective

The Minnesota Council on Foundations (MCF) has released an updated 2009 Outlook report.  Key findings include:

• In March 2009, 52% of Minnesota grantmakers said they expect to decrease grantmaking in 2009, more than the 40% who anticipated decreases in November 2008.

• Nearly half of Minnesota grantmakers expect giving will remain the same (31%) or increase (17%) in 2009 compared to 2008. In November, 41% expected grantmaking to remain the same in 2009, while 15% expected increases.

• In relation to the economic downturn, grantmakers say they are most likely to provide support for food, housing and jobs.

• Minnesota grantmakers report the most likely ways they will cut operating costs is by reducing travel and conference attendance, eliminating salary increases, and reducing or eliminating the use of consultants.

Warren Woolfe at the Star Tribune recently covered the struggles of Minnesota’s nonprofits to address rising needs with fewer resources in his article, Anxiety on the rise at area’s nonprofits.  You can also read MinnPost’s three-part story on the Minnesota economy, starting with The big question for economic recovery: Which stresses are merely cyclical and which indicate a cold, new reality?

The National Perspective

The Chronicle of Philanthropy also reported on two national surveys on the impact of the recession on the nonprofit sector:

• Ninety-two percent of the nearly 100 respondents in a survey conducted in May by the Bridgespan Group said they were feeling the effects of the downturn.

• Eighty percent of charity officials reported that their organizations were experiencing financial stress, in another study conducted in April by the Johns Hopkins University’s Listening Post Project. Nearly 40 percent of the 363 respondents described the stress as “severe.”

Two findings from the Bridgespan Survey struck me as particularly timely:

Finding No. 2: More organizations are tapping into reserves. Also, more nonprofit leaders are developing contingency plans, a key step that can help them respond purposefully when crises arise, and also prepare for better times ahead.

Finding No. 3: The deepening recession has led more nonprofits to lay off staff and reduce program activity, while taking action to protect core services and activities. The specific tactics used to cope with the downturn have varied by organization size. But now, more than ever, it is important to identify the people who matter most to an organization, and to keep that group strong.

If you need help grappling with these decisions, you can visit our resource page. It has contingency planning tools and other resources from Nonprofits Assistance Fund and other capacity building organizations.

Nonprofit Harvest

• Finding Inspiration from Founders
• Pawlenty shifts mean schools need loans; charters especially worried
• Nonprofits Carrying out the Stimulus-or Trying to
• IRS Info and Some Questions and Answers
• Just what the prez ordered: $$ for community clinics

Summer Bloggin’

This summer we’re going to be writing this blog every few weeks. We’re working on some exciting projects, so stay tuned for information about new opportunities.

If you need a regular dose of nonprofit financial management news, follow us on twitter. You can also check out Tactical Philanthropy’s Daily Digest, PhilanTopic’s Weekend Link Roundup,  or Not-For Profit Accounting’s Nonprofit News feature.

Minnesota’s Current Conditions

On the heels of last week’s post on the Giving USA annual study, we have more data to digest. MCN recently released their Current Conditions Report for June 2009:

Minnesota’s nonprofits continue to be seriously affected by the recession. Nonprofits are bracing for extended impacts from the reduction in revenue they have already seen and expect to continue to see in the coming months and years.

• Organizations relying on state, local or federal government are seeing varying levels of unreliability in payments to them from government, making it increasingly difficult for organizations to plan accordingly. Exacerbating this is the threat of unallotment for many organizations.
• A majority of organizations report an increase in demand for services, yet many are still having to cut back on staff.
• All major nonprofit revenue sources (contributions, government funding, foundation grants, and earned income) are reported to be down from economic affects.
• Small organizations are feeling the worst affects, with far more reporting declines in revenue and cash shortfalls. Small organizations are also the least likely to have available reserves or a line of credit to fall back on.

These findings are echoed by other studies (here and here).  Although the specifics vary from state to state, and among organization type and size, people in our sector are doing their best to meet demands with fewer resources.

We are all trying to prudently cut costs in ways that minimize the impact on our mission and overall capacity. This is a tall order, especially when combined with increasing needs for service. How do you go about making those tough choices?

A Four Step Framework

Our executive director, Kate Barr and Judy Alnes of MAP for Nonprofits wrote an article for MCF’s Winter Giving Forum, Nonprofit Survival: Four Steps to Take Now:

Economic uncertainty and the threat of impending doom are not unfamiliar territory for nonprofit organizations. We’ve lived through multiple downturns and have “right-sized” ourselves time and time again. Philanthropic organizations have done likewise.

But something feels uncharted about this downturn. Perhaps it’s the fact that it has fallen on the heels of a downturn from which we never really recovered. Perhaps the global nature of the economic stress makes us see ourselves in a broader context. In any event, this fire is real and hot.

Then they lay out four steps to help you make decisions:

• Focus
• Identify Your Most Important Work
• Seek and Speak Financial Truth
• Review Size, Scope and Structure

Read the rest of the article for more information on this helpful framework.

Other Resources

• Improving Cash Flow Management In Challenging Times: A Primer from Nonprofit Quarterly
• Our Cash Flow Template and Nonprofit Scenario Planning Tools
• Nonprofit Layoffs and Furloughs: Do Them Right from Blue Avocado

More resources are available at Sustenance in Lean Times, our resource collection.

This Week’s Harvest

• Governor’s Unallotment Plan
• Check out the Nonprofit Quarterly’s Daily Digest – the Nonprofit Newswire
• Strategies for Hard Times: The Case for Sustainable Funding
• Charities Review Council unveiled a draft of their updated Accountability Standards
• Recession Resources for Artists and Arts Organizations

Charitable Giving: Glass Half Empty or Hall Full?

This week, Giving USA released their report on 2008 giving.  As nonprofits can attest, it was a rough year.  According to the study, total giving decreased by 5.7%, with donations down across the board.

• Individual giving: -6.3 percent
• Foundation grantmaking: -0.8 percent
• Corporate giving: -8 percent
• Charitable bequests: -6.4 percent
• Two-thirds of public charities experienced a decline in donations.

However, even in the worst economic climate since the Great Depression, charitable giving exceeded $300 billion.

Over at Tactical Philanthropy, Sean does some excellent analysis in his post How Much Did Americans Really Give in 2008?

So what’s the take away? I would say that the best way to think about charitable giving in 2008 is that it contracted sharply, but that the contraction was less than many people feared and the total amount given was within the range of the level of giving seen over the past few years. Giving as a percentage of GDP was 2.2%, within the normal range and very close to the 2.3% of GDP that was given in 2007…

Charitable giving behaved more or less as it normally does when the economy sours. This is, by most measures, the worst recession in a very long time and so we’re seeing charitable giving get hit. But it is only declining in line with the way it normally behaves.

As a reminder, if this recession is similar to other economic downturns, it will take the philanthropic/nonprofit sector longer to recover than the rest of the economy.  The Giving USA authors commented in a discussion hosted by the Chronicle of Philanthropy that this recession resembles the one in1974 , when took three years for giving to rebound.  However, they cautioned against assuming that this would be an accurate guide, noting the changes in the world and the nonprofit sector.

Related Coverage

• Charitable Donations Fell by Nearly 6% in 2008, the Sharpest Drop in 53 Years
• Charitable Giving Fell by 2 Percent in 2008, ‘Giving USA’ Says

Other Giving Reports

• Foundation Center 2009 Foundation Giving Forecast
• 2009 Giving Forecast by Minnesota Grantmakers
• MCF 2009 Outlook Report

What’s a nonprofit to do? Start contingency planning

During the Giving USA chat, someone brought up the question of budgeting amidst so much uncertainty:

Question from Hazel, animal charity: How can one do any financial planning or construct a budget for the coming year when it may even be worse than last year and no one knows whom we can depend on?

Nancy Raybin:  Agree on different scenarios, e.g. economy gets worse by 10 percent, economy levels; economy gets better by 10 percent. Make some hypotheses about the impact of different scenarios on your animal charity’s activities and what donors are likely to do. Then prepare different budgets for each scenario. Clearly, you know best how animal lovers respond in these times. You must also have a number of donors on whom you can depend. Focus on those.

Sometimes it feels like I’m beating the scenario planning drum all time, but it really is the best advice we can give to help nonprofits plan and adapt in these uncertain times. Download and use our tools to get started.

This Week’s Harvest

• A Nonprofit News Round-Up from Not-For Profit Accounting,  including:
  • Bringing the Stimulus Plan Home: Obama’s Effect on Nonprofit Jobs
  • 7 Things To Consider For Your D&O Policy
• British Charity Mergers Examined
• FASB Releases Standard for Nonprofit M&A

The administrative cost ratio, always the topic of heated discussion, is in the news again. Not-For Profit Accounting blogged on the topic this week, unpacking the accounting jargon and rules:

A nonprofit’s expenses are classified by what they were used for within the three broad categories / functional areas of administration, program and fundraising.  Program costs are considered direct expenses, expenses that have a direct effect on fulfilling the mission of the nonprofit organization.  Administrative costs are indirect expenses, they affect the mission of the organization indirectly.  The organization can’t get by without those expenses but, according to the IRS and others, they have no direct effect on the mission.

This point, of course, can be argued and I think it is where much of the confusion resides when talking about classifying nonprofit expenses.  But this is the world we operate in and those are the rules, so it is best to make sure we understand the rules so we can present our numbers in the most honest fashion to show what it costs to do the work we do.

He also contributed his take on what the ratio really means:

One financial ratio used in isolation is no true measure of any organization.  Only by looking at both the numbers and the program outcomes can we judge whether an organization is effective or not.

There’s too much at stake right now to use this ratio alone to measure effectiveness, let alone as a way to compete with one another for already diminished resources.  Kate brought up a similar question last year in her post, Irrelevant Ratios:

We need a two-step retirement plan. First is to jointly stop using the ratio as a way to distinguish our organizations from others, in an unhealthy type of competition, as in “our administrative ratio only is 5%, so your donated dollar will go farther with us.” The second is to find a better way to convey the quality and effectiveness of the work that you do, which requires a real method of evaluating and communicating the programs and impact on clients.

Administrative costs are part of doing business.  It takes time and money to run an effective organization, and being efficient with those dollars is not the same as being effective with them.

End of Session Resources

• Weigh-in on unallotment before Governor acts from MCN’s Nonprofit Policy News
• The Legislature has Left the Building, Pawlenty’s Poised to Make Cuts-What’s a Nonprofit to Do? from Philanthropy Potluck

This Week’s Harvest

• The Cohen Report: Finding Nonprofits in President Obama’s FY2010 Budget
• Philanthropists Set Spending Deadlines from the Wall Street Journal
• New to the Nonprofit Sector? Here’s a BRIEF Overview from Nonprofit Leadership 601
  
• Survival Strategies for the Arts from Blue Avocado

This week the Chronicle of Philanthropy and Nonprofit Finance Fund launched their discussion series, Financial Management in Tough Times.

The first topic was Financing Options, which included information about loans, PRIs, and other financing options.  Coincidentally, at the same time we were hosting a Social Enterprise Network on capital sources and touched on many of the same topics.

This week’s post gathers definitions and resources shared by participants of both discussions. For more details, I suggest you read the transcript at the Chronicle of Philanthropy’s website or Not-For Profit Accounting’s summary.

Program Related Investments (PRIs)

A PRI is a tool foundations can use to provide capital to nonprofit organizations.  It is more like a loan than a grant because it must be repaid or otherwise provide a return for the foundation.  In their PRI Primer, the PRI Makers Network lays out the benefits of these investments:

PRIs give charitable organizations or commercial ventures access to needed capital, typically at favorable terms. In return, the funder benefits in several ways:

• It is often able to recycle PRI payments for subsequent charitable investments.
• The foundation is generally able to count PRIs toward its minimum five percent payout of net assets.
• PRIs allow foundations of every type and size to have greater programmatic impact.

Resources

• The Hidden Gems of Foundation Funds from Balancing the Mission Checkbook

• What is a Program Related Investment? from the Foundation Center

• PRI Makers Network

• Program-Related Investing guide from Grantcraft

• Calvert Foundation

Community Development Financial Institutions (CDFIs)

Community Development Financial Institutions are vehicles to foster economic growth and ensure access to capital in urban and rural low-income communities.  Many CDFI’s focus on affordable housing and economic development activities.  Others, like Nonprofits Assistance Fund and Nonprofit Finance Fund, specialize in providing credit and financial training to nonprofit organizations that serve low-income and underserved populations.

• Learn more about the CDFI Fund

• To find a nearby CDFI, use the Member Locator on Opportunity Finance Network’s website

Loans and Lines of Credit

Clara Miller issues an important reminder that “loans are never a substitute for revenue” and makes an excellent case for when credit makes sense for your organization. For more information you can also read our Borrowing Guide.

Download our Cash Flow Template to help assess whether or not credit can help your organization bridge a gap caused by grant timing, delays in government reimbursements, or other accounts receivable.

Nonprofit Harvest

• Now What?

• Nonprofits Buying Into Franchises from The Nonprofit Times

• State And Local Governments Consider Fees on Nonprofit Groups

The Federal Budget

On Thursday, May 7th the Obama Administration presented their 2010 federal budget.  Here are a few resources to help you understand how these budget decisions may impact your organization.

• The Chronicle of Philanthropy has a good overview, Nonprofit Groups Receive Mixed Results in Obama’s Budget.

• Minnesota Budget Bites participated in the telephone budget briefings that highlighted key aspects on the budget.  Read their takeaways here.

• Learn more about what this budget means for your state with the OMB’s state by state fact sheets.
  • Minnesota

• If you’re on Twitter, follow the conversation under the #budgetnp hashtag

2009 Giving Forecast

This week the Minnesota Council of Foundations issued an update on how Minnesota’s foundation are responding to the economic crisis.  I suggest carefully reviewing the information to see if your funders giving priorities or guidelines have changed.

For organizations outside of Minnesota, the Foundation Center is doing a great job of gathering information and analysis on the philanthropic community, including a similar giving forecast for national funders.

Foundation Updates

• Despite Decline in Assets, Foundations Are Responding to Those Affected by Recession

• Responding to Economic Turmoil in the Arts

This Week’s Harvest

• Filing the E-Postcard?  The deadline is next Friday, May 15th.

• Nonprofit News Roundup: Laws and Money from Not-For Profit Accounting

• What’s the Point of a Nonprofit Board, Anyway? from Blue Avocado

• The Chronicle of Philanthropy and the Nonprofit Finance Fund are offering a special series of live discussions on Financial Management in Tough Times.
  • Thursday, May 14: Financing options
  • Thursday May28: New ways for arts organizations to finance their operations
  • Thursday June 11: The changing role of foundations
  • Thursday June 25: Making capital campaigns work in the recession