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We’ve worked with several nonprofit organizations during the difficult period leading up to closing the organization. Sometimes the decision is internally driven and intentional, and sometimes it’s after fighting it, kicking and screaming. How do you know if it’s time to close, and how to make such a monumental decision? I can think of three specific instances with very different characteristics and outcomes.  The first is an arts organization that carefully and systematically paid their obligations and closed their doors after several difficult years of declining earned and contributed income; the second a youth-serving nonprofit that stayed in denial for too long before filing bankruptcy and leaving both students and creditors uninformed; and last is a small organization that remains in operation, though their relevance in the community and support from both donors and volunteers dropped off years ago. They stay alive as long as the director is willing to work with little compensation and little support. In another situation, though, I worked with an organization whose executive director repeatedly suggested closing the doors because fundraising was so difficult. The board realized that the mission was as vital as ever, though, and the solution was a different, less burned-out, director to bring new energy and ideas.  These are important organizational questions that touch on financial, governance, fundraising, and mission questions. There aren’t easy answers or absolutes when it comes to closing or changing structures.

Come participate in an ongoing discussion of these questions in an online discussion at Nonprofit Quarterly’s Web site - see the invitation from editor Andrew Crosby below.

Find out how one organization weighed the decision about whether it should close, and contribute your own analysis of whether they made the right decision in the Nonprofit Quarterly Online Forum.

Beginning today you can join Mark A. Hager of the University of Texas, San Anton, and Kate Barr of the Nonprofits Assistance Fund in the Twin Cities, to discuss "The Ultimate Question," authored by Mark and published in the Fall 2007 issue.

This will be a great discussion for executives, consultants, board members, and funders interested in how such decisions are made -- and may be considering such decisions themselves.

Just register on NPQ's Web site to access the Forum and join us for a thought-provoking exchange where you can offer your experience, pose questions, and comment on those of others.

Once you have registered, a link to the NPQ Forum appears under the User Menu. Inside you'll find a reprint of the case, financial background material, and some starter discussion threads that you can add to, comment on, or create your own.

So register on the NPQ Web site today to participate.

Andrew Crosby,

Editor

p.s. If you have any technical questions, contact webmaster James Morgan. For any questions regarding content, please contact Andrew.

Call it what you want – surplus, positive change in net assets, or profit – nonprofit organizations really need to plan for, and embrace, the importance of building financial capacity by generating a cushion. We don’t have a common language for this, and many nonprofit leaders would be uncomfortable using a term like “profit” when describing their financial goals. The word is much less important than the practice of budgeting and managing to build surpluses. Read "Organizational Slack (or Goldilocks and the Three Budgets" by Woods Bowman, published in the Spring 2007 issue of The Nonprofit Quarterly, for a very helpful overview of the topic.

The definition of slack used by Bowman is “a cushion of potential resources which allow an organization to adapt to internal pressures for changes in policy, as well as to initiate changes in strategy with respect to the external environment.” The benefit of a cushion is probably clear to any nonprofit director. Money doesn’t just fall into your lap to build a reserve. Bowman makes it simple and direct: “Where does financial capacity come from? There can be only one place: annual surpluses.”

Planning for an annual surplus, specifically an unrestricted surplus, is a positive, important, beneficial, and necessary practice for all nonprofits. I emphasize the importance of viewing unrestricted operating results, rather than the total of all unrestricted and restricted funds, because of the volatility in results caused by the timing of project and multi-year grants.

One step that could encourage the practice is to add a measure or ratio that defines the annual addition to the reserve or cushion. In the for-profit world, this is communicated in a fundamental ratio:

Net Operating Income     =  Profitability Ratio
Total Sales, or Revenue

The comparable measure for a nonprofit could be a CINA (change in net assets) ratio:

Unrestricted Change in Net Assets  =  CINA Ratio
Total Unrestricted Income

Try calculating this ratio for your nonprofit organization for the past few years and you will start to see how well the ratio can communicate the building, or depleting, of financial capacity. How high should the ratio be? On this point a for-profit and nonprofit organization will differ. A for-profit company seeks the highest ratio possible. For a nonprofit the ideal amount of surplus depends on what they need – and that balancing act is complicated. Bowman’s article has a whole section on measuring the right amount of slack needed.

Continuing on this theme, how effective are nonprofits at making the case for unrestricted support? Rather than bemoaning the lack of unrestricted funds, what can we learn? An article in last Sunday’s New York Times, "Here's My Check, Spend It All At Once", connects the current financial challenges at the American Red Cross to their Donor Direct policy established in response to the fallout about the use of funds donated after the September 11 attacks. When the Red Cross commits to direct all of your donated funds wherever you choose, what donor wouldn’t take the opportunity to be the master of their own philanthropy? The long-term results, though, may be the kind of deficits that the American Red Cross is facing. Was the Donor Direct policy an extreme reaction – did the Red Cross go too far as a reaction to a communications and PR problem?

Following the references in the Times article, I compared the online fundraising messages of the American Red Cross and of Doctors Without Borders. The choice of how to direct donations is the first question for a donor at the American Red Cross. While the option “Where the Need is Greatest” is the first choice offered, specific funds are immediately listed below. The FAQ section even offers more options:

I don't see the fund that I wanted to donate to. What do I do? 
Due to space limitations, we are limited in how many funds we can make available for online donations. If you would like to donate to a fund that is not listed, please contact Donor Services.

Contrast this with the Doctors Without Borders website, which provides a concise summary of how funding is used to carry out their programs. Note that the information doesn’t offer the donor a choice to designate their funds to a specific use. In the FAQ section, in fact, Doctors Without Borders makes the case for unrestricted gifts:

Can I earmark my donation for a certain area/project? 
We appreciate your interest in supporting our programs. While it is possible to have your gift directed toward a specific program or country where we are currently working, we ask that you contribute unrestricted funding. By not restricting your contribution for a specific emergency or project, you will enable us to allocate our resources more efficiently and where the needs are greatest.

I find it interesting that I’ve read and heard quite a lot lately about foundation leaders discussing the relative merits and challenges of moving some of their grantmaking from program and project grants to general operating support. The New York Times recently published a re-framing piece on this by Denise Caruso, "Can Foundations Take the Long View Again?"  The members of GEO (Grantmakers for Effective Organizations) have been engaged in a long discussion and analysis on this topic. They have published several thoughtful guides (free registration is required to view them).  What I don’t think I’ve heard is a comparable discussion from nonprofit leaders about how much impact and long-term value their clients and communities would gain from more general operating support. If you are the director of a nonprofit, you may think that is an obvious statement – but I don’t think that connection is made very well. There are several issues involved, including different terminology and understanding of budgets.

Do we need some new terminology to cut through this mess?

• General Operating Grant: Apparently, this is a grant to pay for distracting, hard to justify, and uninteresting expenses (like rent and phones).

• Program Grant: A grant that is restricted for a defined set of activities and outcomes that fit with the organization’s mission. All expenses included in the program budget, including salaries, rent, and supplies, are needed to carry out the program’s goals.

• Core Mission Grant: A grant provided to an effective organization to use as their leaders direct in order to support and achieve their mission. Some of the funds may be spent on immediate program and organizational needs and some on long-term investments, such as program development, staff training, and technology.

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. I can see why. Today, the StarTribune posted this article on their website, “Chairman Bernanke says Fed ready to cut interest rates again as needed.”  The article predicts further cuts to key interest rates “to rescue a weakening economy.” Factors cited included the unemployment rate, weak real estate, tightening credit, and high energy prices. What’s a nonprofit leader to do? Anyone who has worked for a nonprofit for more than three years has experience with a tough economy, so many directors and managers will be well prepared to respond to lean times. But how worried should you be right now and what are your concerns?  I think it’s worth a review of the causes and effects that may have a direct impact on your nonprofit organization.

The key is to understand your income mix. There are essentially five distinct sources of nonprofit income and each income source expands or contracts depending on different factors in the economy. If you understand the sources of income that are most important to your organization, then you can focus on following movements and trends that will matter. One overall trend to keep in mind is that the “nonprofit economy” tends to lag the general economy by about a year. Here are some ideas for trend watching the economy.

Program service revenue, or payment for directly providing services, is the largest total source of income for nonprofits. Income from contracts for service, especially from government agencies, is determined based on tax receipts and state and local budgets. We know how many reductions occurred a few years ago and most of these sources haven’t rebounded. If this is your primary income source, the keys are the reports from the state and the budget process. You can track these through the Minnesota Budget Project. To survive with contracts, it’s important to understand the true costs of delivering the services (which is probably not the amount you are paid for delivering the services) and having your eyes open about the need for additional subsidy - and where to get it.

Program service revenue that is paid directly by the user of the service - like tuition, memberships, tickets, and fees – is a lot like business income and reacts to market downturns depending on the buying power of your customer. If your service is considered discretionary, like entertainment, then consumer spending is worth tracking by reading the business section of the paper.

If foundation grants are an important component of your income, watch the stock market. Because endowment payouts are calculated in a way that evens out big increases and decreases, there is no reason to expect a big decrease in 2008.  However, pay attention to the excellent surveys and analysis from Minnesota Council on Foundation including Grantmaking Outlook and Giving in Minnesota. If the market performs poorly over time, some reductions in grants could develop. Keep in mind, though, that even with the poor market performance several years ago, grants from Minnesota foundations have increased total dollars almost every year (more details in the MCF reports).  If your endowment is an important source of income, the same market trends described above apply.

For nonprofits that rely on individual donors it’s a mixed bag of economic news. This recent online discussion about the Outlook for 2008 hosted by the Chronicle of Philanthropy highlights some opportunities for planned giving and large gifts that transcend the economy, and emphasize the importance of relationships and communications in maintaining a building a donor base.

So don’t assume the worst or start a chorus of woe about the poor economy. Yes, there will be challenges, but you can understand how economic trends will affect your nonprofit. Knowledge is power and will help you anticipate and plan for any changes.

My last post of 2007 is a few suggestions and recommendations for your leisure time review.

Tucked in the Business section of the Saturday, December 22, 2007 New York Times was a wonderful story, Emerald City of Giving Does Exist, about the Twin Cities’ enviable amount of corporate philanthropy and commitment. I hope you don’t miss this in the flurry of the holidays. We may wish there was even more to go around, but we are the envy of many nonprofit leaders in other cities, and I thank the business community for that.

I have three books to suggest. First, I recommend that everyone interested in developing great boards read Governance as Leadership: Reframing the Work of Nonprofit Boards by Richard Chait, William Ryan, and Barbara Taylor. This book, published in 2005 by BoardSource, starts with the premise that many boards do not really have a problem of performance, they have a problem of purpose. The book will open your eyes and mind to a new way of thinking about board roles and leadership.

The two other books were published in 2007 and offer interesting ideas and thinking on important nonprofit management topics. I’m still reading both of them, so my reviews will wait for another time.

Forces for Good: The Six Practices of High Impact Nonprofits by Leslie Crutchfield and Heather McLeod Grant offers an analysis of twelve organizations that the authors selected based on their impact, reputation, and scale. One important finding was that the high impact nonprofits achieved this impact not only through their direct services, but also by deliberately rallying others to the bigger cause through networks.

ROI For Nonprofits: The New Key to Sustainability by Tom Ralser (published by Wiley) offers a detailed study of how to translate the work of nonprofits into the increasingly important frame of venture capital and business. Whatever your personal opinion of this trend, it is here now and it’s worth your while to understand it.

Finally, a few favorite blogs to read next year:

• Mission-Based Management: Smart, interesting, and useful management perspective
• Gift Hub: Incredibly timely and interesting references, links, and thoughts on philanthropy
• Stanford Social Innovation Review: In-depth analysis and ideas, requires some time to read and consider.
• Nonprofit Technology Blog: Even if you’re not a tech person, we all need to pay attention to trends and new uses.
• Nonprofit Accounting Boot Camp: How can I resist a regular blog about nonprofit accounting issues?
• Give & Take from The Chronicle of Philanthropy: The editors read all the blogs and compile interesting posts in one place – a timesaver.

 
Cheers, and Happy New Year to you all!

Continuing a theme from last week, during this year-end fundraising season I’ve come across quite a few “tips” for donors about how to select charities to support. Universally, every list includes advice to review the portion of expenses devoted to program compared to administration and fundraising. The responsible advisors generally suggest that program expenses represent at least 70% of the dollars. While I wish that we could move away from using this ratio as a primary measure, I agree that program expenses should dominate any budget. I have a problem, though, when the advice goes further and characterizes administrative and fundraising costs as a poor use of resources. This is especially important when, at the same time, we see more and more opinion pieces that demand greater openness and measurement of impact and effectiveness. The Wall Street Journal published one the other day, December 10th.  The writer chastises charities for failing to disclose and share information about their financial activities and the impact of their work. She suggests better use of websites, annual reports, and evaluation and measurement systems and reports, all of which I wholeheartedly support.   However, these critics need to understand that you can’t have it both ways.  If donors and the public want nonprofit organizations to be accountable, transparent, well managed and governed, then we need to spend some money to build and maintain staff and systems to accomplish these important goals – and these costs are administrative costs.

In the same issue of the Wall Street Journal was an accompanying article, “Checking on Charities,” which offers advice about how to evaluate a charity, including the comment “Let's start with how much the charity spends on its work.”  Communication and disclosure activities would not be considered by our accountants to be part of our “work,” so when we build good systems for measuring and communicating impact, then we will spend more on administration, not less. I fear that we could feel a backlash as the expense ratio inches up.

Part of the problem probably lies in definitions. An outside donor likely has his or her own idea or impression of what is considered “administration,” but the actual expense classifications are dictated by FASB (Financial Accounting Standards Board) and IRS rules. Nonprofits Assistance Fund has prepared a short summary of these rules. As an example, here are some of the expenses we classify as administrative at Nonprofits Assistance Fund:

• Completing the financial audit and 990
• Organizational communication, including annual report and website
• Planning evaluations
• Consultants to create a system to monitor evaluation results and impact
• Submitting information to the state attorney general, Guidestar, and other watchdog agencies

We are committed to strong infrastructure and greater disclosure and accountability, and our administrative expense percentage has increased as a result.  We also do great work in the community. We can certainly do a better job to educate our donors on the value of our administrative costs and how these best practices allow us to do our “real work” most effectively.  And I do worry about the impact of the contradictory clamor.

Are you also concerned about this double bind – do you hear more demand for disclosure and information at the same time that administrative costs are criticized?

In the midst of the big fundraising season of the year, I’m wondering about how much nonprofits really want to be open and forthcoming about their financial information. With all the talk about accountability and transparency, I don’t see a lot of evidence of easily available, freely shared financial information from most nonprofits. While I realize that I have a unique (and probably unusual) interest in financial information, I think that it’s important to walk the walk of transparency.

The Panel on the Nonprofit Sector, convened by Independent Sector, just released their report, Principles for Good Governance and Ethical Practice: A Guide for Charities and Foundations. The report lays out 33 practices “that should be considered by every charitable organization as a guide for strengthening its effectiveness and accountability.”  Number seven on the list reads:

A charitable organization should make information about its operations, including its governance, finances, programs and activities, widely available to the public. Charitable organizations also should consider making information available on the methods they use to evaluate the outcomes of their work and sharing the results of those evaluations.

In the longer description of ways to implement this practice, the panel suggests an annual report and using websites to make available information such as the IRS 990 and other financial statements.

I would strongly suggest that nonprofit organizations make the effort to make usable financial information available on their website.  The IRS 990 is already a public document, so it seems like the obvious tool for financial disclosure.  However, I think we should go past the 990 to share better information, especially since everyone seems to agree that the current version of the IRS 990 is overly complex, confusing, and very difficult to use.  A better solution would be having the audited financial statement easily available on the website.  Many nonprofits already do this, but most do not. I checked the websites of six organizations in Minnesota that I have supported financially in the last few years. Of these six, one had their audit posted, three had a detailed annual report but no audit or 990, and two had no financial information that I could find. Why not post the audited financial report?

I recommend a look at the financial section from the website of The San Diego Lesbian, Gay, Bisexual, Transgender Community Center. In addition to posting their annual report and audit, The Center devotes a page to describing their financial management commitments and policies what a great a model of financial transparency.

I teach a graduate class in Financial Management for Nonprofit Organizations at Hamline University in Saint Paul. This week’s class topic was social enterprise, nonprofit business start-up, and earned income strategies. One of the hurdles the class faced was with the terminology and definitions used in the “field” of social enterprise. The question that came up again and again is this: what’s the difference between “social enterprise” and ordinary, everyday program activities that have a fee for service or a price attached? I stumble over this question myself. On the one hand, we could say that it doesn’t really matter what terms we use to describe the different earned income streams for a nonprofit, but I think that the continual banging of the “social enterprise” drum make it important to face this question. Case in point: theaters generate earned income by selling tickets to audience members. When the same theater sets up a little business renting out the dark theater during the day for corporate events, they are suddenly recognized as a “social enterprise.” What about all those ticket sales?

In the FAQ section of the Social Enterprise Alliance, social enterprise is defined as “any nonprofit business, venture, activity or strategy conducted for the purpose of generating earned income in support of a social mission.” That definition would seem to include all earned income, from the ongoing theater ticket sales and community clinic’s patient fees to the start-up catering business of a daycare center or corporate events at the theater. If you read the books, articles, and research studies about social enterprise, though, you will see a distinct emphasis on the latter type of revenue – something new and different, rather than something tried and true. The Social Enterprise Alliance also has a nice article on this topic, Social Enterprise: Hype or Reality, which acknowledges that earned income has been a part of the income mix in the nonprofit world for years. The newness of these strategies may be more noticeable in social service agencies than in the arts, health care, or community development. This “new” field might be more about the importance of paying attention to the value of earned – and therefore unrestricted – income, as well as taking steps to generate earned income on purpose and purposefully.

The field of social enterprise, however you define it, is certainly well documented and analyzed. In addition to Social Enterprise Alliance, you will find interesting information and research from REDF and Community Wealth Ventures. If you want an in-depth study with lots of cases, read Community Wealth Venture’s report, Powering Social Change.

What do you think – is social enterprise a distinct and definable movement among nonprofits, or is it a just a new name?

I am happy to report that I've conquered my fear and anxiety, and become a believer.  I will credit three terrific, understandable, and approachable professionals - Ellen Shelton of Wilder Research, Stacey Stockdill of EnSearch, Inc., and Leah Goldstein Moses of The Improve Group - for assisting in my personal growth.  The definition I like is that evaluation looks at what you did, what happened, and what difference it made. Evaluation doesn't have to be onerous, complicated, secretive, or expensive.  After listening to these masters talk, and reading some plain language articles, I can now talk logic models and understand the difference between outputs and impact (though I still don't want to get into regression analysis).

It's critical that nonprofits can speak this language to improve the quality of our programs and to communicate with stakeholders.  If you're still harboring a secret fear, look at these resources for understandable guidance on the purpose and strategies for useful evaluation:

• Wilder Research has a series of tip sheets on evaluation concepts and techniques.  Type "tip sheets" in the search box to see this collection of materials.
• The Improve Group has an overview of logic models.
• WK Kellogg Foundation is a leader in publishing resources for nonprofits on evaluation, all available in the Knowdgebase section of their Web site, including their workbook guide to developing logic models.

Imagine this, the development director rushes in to interrupt a board meeting with the news that you have just received an unexpected, and unrestricted, gift of $50,000. How would the management and board decide how to use the new funds? (Assume for this little exercise – or fantasy, if you prefer – that your annual budget is balanced and you have sufficient cash flow to pay the bills.)  For many nonprofits, there would be no doubt about it – every cent of the $50,000 would be used as soon as possible to serve as many people as possible. A homeless shelter would add more beds, a youth center would expand a program, and a clinic would increase free clinic hours. For many members of the board and staff, the decision seems simple and obvious – in the face of so much need out there, how could you not spend the money to increase services?

The long-term result of this way of approaching financial management is what Elizabeth Keating calls the “Current Services Trap.” By using all available resources to meet urgent, short-term needs, nonprofit organizations undermine their long-term stability and viability. Keating described the trap and accompanying organizational and financial characteristics at the Capital Ideas Symposium that was presented earlier this year by the Hauser Center and the Nonprofit Finance Fund. Keating’s article is printed on pages 11 – 16 of the full proceedings – it’s worth reading!

I agree with her basic premise that nonprofits and funders must understand the importance of building infrastructure, cash reserves, professional staff, and appropriate capital to support their mission. One of the toughest things to do, though, is to make the case for these investments in nonprofits, and Keating lays the groundwork for us by describing what she calls the three myths that sustain the current services trap. The myths include the notion that nonprofits address urgent needs that can be solved quickly if we have enough funding. This assumes that providing more services would be (a) easy to do, and (b) would solve the problems. But would homelessness really be “solved” by adding more beds to a shelter? The problems that nonprofits address are complex, difficult, and much bigger than a simple service. To break out of the Current Services Trap, our hypothetical nonprofit board would need to consider ways to use the windfall gift to build infrastructure, innovation, technology, and human capital. The payoff will multiply.

I read a great example of this kind of breaking out of the trap in the November 7, 2007 StarTribune story, Can Metro-Area Hunger be Eliminated in Five Years?  Five Twin Cities food shelf organizations are working together to move beyond providing groceries today, so that they also address the bigger problems the cause their clients to need services. “Instead of trying to incrementally reduce hunger bit by bit, these groups want to reorganize the way food shelves work, with the goal of ending hunger altogether in the metro area by 2013.” There wasn’t a budget included, but you can be sure that this will take a lot more than funds for current services – this would require investment in long term planning, infrastructure, fundraising, staff, and communications. It’s a great case study for the future. 

First, I need to apologize for breaking the cardinal rule of blogging – I haven’t posted in a month. Sorry, but it’s been crazy busy between leading workshops (nine in the past five weeks), traveling to talk to nonprofits around Minnesota , conferences, and working on a federal grant proposal. I am making a promise to myself to get back to a schedule of posting at least two or three times a month.

I haven’t been writing blog entries, but I have been talking to staff and board members at nonprofits about their financial lives – in particular about the constant dance of finding and attracting funding. We’d all like to be able to get “inside the head” of our potential donors and understand what motivates them to give, or not to give. While you can’t know everything about donors, there is some interesting research available about the perception of the general public about nonprofits. A very recent study was published by the Charities Review Council of Minnesota about charitable giving habits and perceptions of charitable organizations. The scientific study surveyed 606 Minnesotans on a range of questions such as: How much confidence do you have in charitable organizations? How much money do you think charities waste today? Other questions touch on perceptions of the quality of programs, salaries paid to employees of nonprofits, and obstacles to charitable giving. Overall, the study results show that Minnesotans are confident in the programs, overall financial management and ethics of nonprofits. There are several areas of concern, though, such as the 25% of respondents who have very little or no confidence in charities, and 58% who believe that charities waste a great deal or fair amount of money. It’s notable that the responses about money wasting by the federal government and private businesses were even worse. The report is available on their web site, or read either the full report or the executive summary.

I am particularly interested in, and bothered by, the areas of the survey about money, including questions about effective use of funds, waste of money, and a question about how much nonprofit staff should be paid. What I conclude from the very mixed responses to these questions is – and it’s not a surprise – that most people don’t understand how nonprofits work. I don’t now why they should, but it seems that this disconnect will continue to be a possible obstacle when nonprofits reach out to make a case for contributions.

The Minnesota study mirrors a national study of confidence in charities that has been conducted annually by Paul Light at NYU. One of Light’s observations in the 2006 report was the ongoing issues about administrative costs and misunderstanding of how nonprofits use funds in order to work effectively in the community.

My conclusion from all of these studies in that we need to continue to bang the drum of infrastructure and management effectiveness – bang, bang, bang.

One of the hidden gems in foundation grant guidelines is a type of funding that is too often overlooked. Program-related investments (PRI) are essentially loans from a foundation, but with terms that are very flexible and preferential. PRIs are a great option for nonprofits that are able to generate cash in the future from capital campaigns or program income. The name program-related investment refers to the requirement in IRS rules that PRIs must be primarily intended to serve the foundation’s charitable mission rather than to generate market-rate income. Because of this requirement, PRIs usually have low interest rates, few fees, and no requirement for collateral. The foundations do evaluate both program plans and financial information carefully for quality of planning and repayment ability. To learn more about PRIs, read the resources available from the PRI Makers Network or the guide from Grantcraft.

I’ve had several discussions lately with board members of nonprofits on financial management topics that had an odd, disconnected feel to them that I couldn’t pinpoint at the time. One was about operating reserves and how much was the ideal amount to have in reserve – 3 months, 6 months, or a full year’s expenses? Another was about how to determine the best mix of income sources for a nonprofit that has grants, government contracts, and fee income. In both conversations I asked the board members my favorite question: Why? This is a set up, of course, since I think that reasonable reserves are valuable to have, and that understanding the sources of income is a key to financial health. The “Why” question has to be asked when financial matters are considered without any connection to the nonprofits’ mission - that’s the disconnect. The purpose of these particular queries had more to do with creating a financial model and satisfying the board members’ perception of their role than with improving the nonprofit’s ability to serve its community. Finding the balance is very hard, though, and we have few guides.

Nonprofit Quarterly has been one of those guides recently with their spring issue titled “Revenue is Destiny”.  I enjoyed reading a preview of the summer 2007 issue, especially this excerpt from an interview with Richard Brewster, executive director of the National Center on Nonprofit Enterprise. NCNE “helps nonprofits make wise economic decisions”.

Do you grit your teeth when an acquaintance tells you about a nonprofit and adds a comment like “well, they’re just a nonprofit, so what do you expect?” The implication is that nonprofits can’t be expected to be well run, but we put up with it because of the mission. “Perception is reality” is a communication fundamental. If a perception that nonprofits are poorly run is widespread, it doesn’t just damage the nonprofit being discussed, it hurts us all.

I’m asking this question in the context of neighborhood and community development planning. In these conversations, nonprofit organizations are usually engaged as providers of services and as advocates. Community development nonprofits, for example, create housing, train entrepreneurs to launch small businesses, and facilitate community planning and participation. But what about the nonprofit organizations themselves – are nonprofits desirable and valuable as neighbors to include in community development planning? Unfortunately, nonprofits are not always viewed as a component of economic development – and sometimes are seen in quite the opposite light. We had an illustrative experience a few years ago. Nonprofits Assistance Fund’s loan funds provide credit to nonprofits for both working capital and facilities.  We applied for capital funds in response to an RFP for funding to spur business growth and job creation in some targeted neighborhoods. We are denied funding with the comment that they didn’t want to encourage more nonprofits to locate in these neighborhoods. What they wanted were small businesses like restaurants and retail shops. Nonprofits were viewed as service providers and fundraisers, not as employers and economic entities. Economic development press releases frequently cite how many businesses were started and grew in the last year – but have you ever read a celebration of how many new nonprofits were started or grew in the same year? Why is there a disconnect between nonprofits as essential service providers and nonprofits as community businesses?

We have a case study for this question in Saint Paul and Minneapolis as the light rail transit Central Corridor line is planned and developed. This 11 mile route will link the downtowns of Minneapolis and Saint Paul via the University of Minnesota campus and University Avenue. The corridor along University Avenue has been a magnet for nonprofits for years because of the proximity to both cities, easy access, and affordable rents and real estate – there are about 800 nonprofits currently located in the Central Corridor. The city of Saint Paul has already invested considerable effort in creating a development strategy for the Central Corridor with a framework for “neighborhood revitalization, reinvestment and growth”.  Fortunately, many nonprofits are engaged in the process already. I encourage everyone to think of the role of nonprofits as both advocates for the community and as small and medium-sized businesses who have much to offer the community as employers, sources of economic activity, community assets – and as good neighbors.

There has been some research and discussion about the role of nonprofits as both providers and as community development assets. One interesting publication is Tom Borrup’s Creative Community Builder’s Handbook: How to Transform Communities Using Local Assets, Arts, and Culture published by Fieldstone Alliance. Please post a comment or send me an email about other resources on the topic.

If you haven’t, you should call them soon and ask about SAS 112, a recent change in auditing standards that will affect audits of nonprofits. Because the new standard was effective in December 2006 we are just beginning to see audit reports using the new standards. SAS 112 establishes new definitions and standards for Communicating Internal Control Related Matters Identified in an Audit.  Auditors have always considered the quality and sufficiency of internal controls as a component of the audit. If weaknesses in internal controls are observed, the auditors submit a management letter to the board describing the weaknesses and recommending further attention to these controls. We often joke that the “Segregation of Duties” comment is printed on the letterhead of the audit firms since so many nonprofits receive management letters with this finding. We all understand that it is very difficult to properly segregate all financial duties with a small staff.

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

How should I answer the question, “How do I start a nonprofit?.”  I need an answer because it’s a question I hear pretty frequently. The common scenario is a phone call to our office looking for assistance to start a new nonprofit organization. (We are the Nonprofits Assistance Fund, after all.) The person on the line feels a personal call to action to address some need in their community – tutoring for kids, beds for the homeless, treatment for victims of abuse, and many other important and urgent issues. The question, though, shouldn’t be “how do I start a nonprofit”. The question should be, “How can I help to address this important community need?.” I try to help them step back a little and consider the real problem, not the conclusion they’ve already reached. If they can think about the bigger picture of how they can add their energy and talent to a community need, the options are vast. The answer is not always (in fact frequently is not) to incorporate another nonprofit organization. Time Magazine has a terrific article in the March 5, 2007 issue on this topic, "Rethinking Nonprofits". Dan Kadlec boils the question of whether or not to start a new nonprofit organization down to three essential questions: Am I cut out for this?, Is my idea different?, and “Is a start-up necessary?”. The reality is that starting a new nonprofit corporation requires focusing the initial time, effort, and money on the start up rather than on the important community need. If someone is absolutely set on starting a new organization, we always send them to the Minnesota Council of Nonprofits web site for all the basic steps required. Note that the very first section of the “How to Start a Nonprofit” section at MCN is titled “Alternatives to Starting a New Nonprofit”.  For a longer, more comprehensive resource about starting a new nonprofit, download the publication "Get Ready, Get Set" from the Center for Nonprofit Management in Los Angeles . The guide discusses how to conduct market research on the community need and available funding, and the legal and organizational steps. The Exempt Organization Division of the IRS also has several helpful publications and a new on-line training program.

We passed a milestone this week at Nonprofits Assistance Fund when we approved our 50^th loan to a Minnesota charter school. We work with nonprofits in every field of service, but when I tell people that we work with charter schools I often get responses like, “Isn’t that really risky?” or “I’ve heard that charter schools have really weak financial management. Can they pay the loan back?”

Our experience with charter schools has been interesting, and largely positive. We have made 50 loans totaling $5.7 million to charter schools in the last eight years. So far, we have written off $5,000. That’s all we’ve lost. I say that our experience has been interesting, though, because at least half of the schools we’ve worked with were facing pretty serious financial problems when we made the loan. That would suggest that I might agree with the comments that schools aren’t well managed. But I don’t agree – I think that’s the myth. Nonprofits Assistance Fund’s mission is to build financially healthy nonprofits and we often work with organizations at a time when a bank is not able to approve a loan within bank lending policies. We take some extra risk and then work closely with the nonprofit, schools in this case, to help them improve. I attribute our success in lending to schools to the combination of the school leaders’ commitment and determination to make the school succeed and NAF’s expertise in school finance and financial management. The fact that most of the schools have emerged from their financial problems is the positive part of our experience and the reality of charter school management.

The reality is that the management quality of most charter schools in Minnesota is on par with the management of nonprofit organizations overall.  It’s hard work to start a new enterprise, and charter schools tend to start and grow pretty quickly. Ask a small business owner what it’s like to manage rapid growth – they’ll tell you that it’s challenging. Most of the serious problems with schools have been in the first few years of operation, and charter schools are a new industry. Minnesota was the first state to authorize charter schools, and the first schools opened just 15 years ago. There has been an unusual amount of attention given to financial problems in charter schools because they operate with public money (since they are public schools). You can learn all about Minnesota’s charter schools from the Minnesota Association of Charter Schools. Minnesota has 131 charter schools in operation and at least another 19 approved to open in the next year or two. Combined, they serve 23,500 students by offering a variety of approaches to curriculum and teaching and learning environments. Since each child has individual needs, charter schools offer an option for families. There has been positive news about schools as well, highlighting the educational innovations for which these schools were created. A bigger question for charter schools will be the long-term measure of their success in raising student achievement and engaging with families and communities. Reports are a mix so far, but this is a young field with a very big job.

You can also read about Metro Deaf School, one of the charter schools we’ve had the pleasure of working with.

We are upgrading our accounting software next month to a newer version of the program we’ve been using for over eight years. We’d hit he point where reports were less efficient and there’s an ongoing technical glitch that can only be solved with the upgrade. Before we took this step I asked for a review of some other accounting packages to make sure that we’re using the “right” software. That begs the question of what is the “right” software for nonprofit organizations. The answer, of course, depends on what you need. The tough part is how to find that answer for an individual organization. Since Nonprofits Assistance Fund is a nonprofit focused on financial management we are fortunate to have a lot of experience and expertise within our staff to complete our own accounting review. For all the nonprofits that don’t have this expertise and rely on other resources to help, the help that’s available is pretty spotty, unfortunately, and complicated with hidden agendas.

Even without accounting expertise, an executive director or board treasurer can complete a basic assessment of accounting needs and insist that this review be used as a selection guide.  Here are the basic questions:

• Start with the end in mind – what kind of reporting will be needed? This includes reports for management and the board, for individual programs and grants, and for audit preparation.
• Do you receive restricted grants or donations? It’s important to be able to maintain separate restricted and unrestricted balances, but you may not need a full “fund accounting” system. Many organizations, even large ones, use Excel spreadsheets for some of this detail.
• Do you need extensive program, project, or grant-based income and expense tracking?
• What other financial functions do you need to include in the system – such as billing for services, accounts payable, payroll, and fixed assets and depreciation?
• Are there any external factors (like a significant government contract) that require you to maintain a specific list of accounts, codes, or report formats?
• Who will make regular accounting entries and what training or experience is needed?
• What reports are standard with the software and how easy is it to create new reports?
• Does it take a CPA or equivalent accounting knowledge to produce regular monthly financial reports?
• The last question to ask a consultant – what is the simplest system available that will meet these needs? The most frequent error I see is selecting accounting software that’s much more than the organization needs or knows how to manage. Keep it simple.

This month, Nonprofits Assistance Fund announced a new training service designed to help members of nonprofit boards understand and use their financial reports titled Financial Clarity for Nonprofit Boards. This idea has been brewing for a couple of years in response to the many nonprofit directors who come to one of our workshops and say, “I wish my board were here.”  One of the most important factors that we considered as we were developing this new training was the diversity of nonprofit boards. Not all nonprofit boards are the same – and that’s a good thing. Unfortunately, I have read too many books and articles about board roles and responsibilities that describe a one-size fits all approach.

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.

The Minnesota Office of the Legislative Auditor issued the Office of the Legislative Auditor's report on January 5, 2007 that evaluated state agencies’ methods for awarding and administering grants to nonprofits.  The report was critical of state agencies for their lack of consistent and transparent systems. However, the report was not critical – in any way, shape or form – of any of the nonprofit organizations who receive state grants, of any of the grant programs, or even of the value of the community work that is funded by these grants.  Unfortunately, there were those in the public and nonprofit sector who were quick to jump to conclusions about the report and conclude that the report implied that there were problems with grants and the nonprofit recipients. Some nonprofit directors have expressed concern that their work will get more cumbersome with additional reports and reviews. Please, everyone, slow down, read the report, and consider the recommendations. 

According to the report, in 2005 the State of Minnesota made $4.7 billion in payments to nonprofit organizations for a wide range of services in health care, education, environment, and human services. The Office of the Legislative Auditor reduced the pool of payments for review by removing payments of $3.7 billion made to hospital, health plans and similar “institutions”. Of the remaining $1 billion, about $700 million flowed through counties and was therefore not granted to nonprofits directly by state agencies. That left $300 million (approximately 1% of the state budget) for the purposes of this review and resulting report. The report states that the use of nonprofits to deliver services to citizens of the state is appropriate and valuable.  The purpose of the report is to evaluate the systems and practices used by state agencies, not the programs and services delivered by nonprofit grantees.

The report includes three primary conclusions:

1. The state’s approach to managing grants to nonprofit organizations is fragmented and inconsistent, and does not provide adequate accountability.
2. Many state agencies have grant-making policies and procedures, but they vary considerably in the degree to which they provide for oversight and accountability.
3. Agency oversight of grant recipients is especially weak when the Legislature selects and names a recipient in law, rather than allowing the agency to select the recipient.

These conclusions don’t seem revolutionary to me. Anyone who has dealt with more than one state agency for grants, or even more than one program within an agency, could tell you that the process for applying for, reporting, and receiving payment for grants is not always consistent or easy for a new grantee to access.  The recommendations from the Office of the Legislative Auditor follow their findings – to establish a Grants Management Office in the executive branch to strengthen accountability and improve management of state grants; to formalize and require agencies to follow the best practices discussed in the report; and that the Legislature should not name grant recipients in law but allow agencies to select recipients through a competitive process.

In general, I think that all nonprofits in Minnesota could embrace the concept of a clear, consistent, easy-to-access process for applying for and administering grants from state agencies. Imagine if all of the grants a nonprofit received from the State of Minnesota used the same budget format, report requirements, and payment system. Rather than worry about more cumbersome requirements we could work with the state to simplify, streamline and make both the state government and our nonprofits become more efficient in serving our citizens and clients.  The Minnesota Council of Nonprofits has also responded with support for the overall goal of creating a more efficient, transparent, and consistent process for state grants.

In late November, I wrote an entry about the deluge of year-end appeals for individual contributions. As promised, I kept all the solicitations we received at my house between Thanksgiving and December 31. Here’s my report. We received 66 solicitations for funds in the mail from 55 different organizations (we got more than one each from nine organizations). The nonprofits range from arts, housing, international relief, youth and health care. I know why we’re on some of the mailing lists while others baffle me.  My best guess is that I know someone who knows someone who volunteers or is on the board of directors. As I said in November, we responded with a check to a select number of the requests and put the others aside. I saved them all in a show box.

The most interesting way to analyze them, I decided, was to categorize the appeals into four types.

• First, and most compelling to me, were the thirteen requests that told a great story about their work.
• Second are the nine appeals that shared clear numbers and statistics about services and impact – numbers of meals served, children taught, small business financed, etc. 
• There is a third group that I call “neutral”. These seventeen letters describe the organization and their work but fail to tell a story or to give much detail.
• The last category – ten letters – are the needy letters. “We need money to pay our rent!” “We face cuts in our budget without you!” “We can’t get enough in grants!” This type of request might make the case for some people but it doesn’t work for me. I want to know what the nonprofit does, not about how bad off they are.

The Chronicle of Philanthropy reported that 2006 was a good year for fundraising, with some organizations exceeding their goals. Anecdotal reports indicate that giving from IRA accounts made possible by tax law changes in August 2006 account for some of the surge, as well as a strong stock market and economic stability. The tax law change is a short-term opportunity so learn about it from Independent Sector for 2007 fundraising. Recent research conducted by Harris Interactive for the Wall Street Journal revealed that 83% of Americans donated to a charity in the last 12 months. These reports are good news for everyone who understands the role that nonprofits play in the community and the world.

I also wrote in November about recent research and trends in donor relationship management. Donors want to have more say about how they hear from organizations they support and what kind of information and solicitations they receive.  I was pleased that three of the letters offered us some choices about communications, and one was clearly customized based on our attendance at a specific performance. Now I need to get back to all the other organizations and either get off their lists and save them some postage or start the kind of relationship that I - the donor - want to have.

Ten Mistakes Nonprofits Make in Financial Management:

1. All your eggs in one basket – Pay attention to your reliance on any particular source of revenue, in particular government contracts.
2. Cash flow analysis done annually – You can’t know everything at the beginning of the year. Management cash flow never stops.
3. Financials that are opaque – Nonprofit financial reports can be complex and difficult but that’s not an excuse for board members that don’t understand them or poor communication about your financial situation.
4. Inflexible – Things always change – go with it.
5. Little to no overhead – Some organizations still believe that infrastructure and overhead are not a good use of resources. This decision never turns out well.
6. Low operating reserves – Everyone wants to have operating reserves but the only way to build them to by planning and managing surplus budgets.
7. Never leverage – Using loans and credit lines to build the organization and grab opportunities is smart management.
8. No long term plan – Strategic plans are great, but how much better if they include a basic financial plan for three or five years.
9. Preparing financial projections, but never reading them – See above.
10. The auditor’s notes don’t mean much – Make sure you read all the pages of your audit report. I know they don’t look interesting, but you’ll be surprised at how informative they are.

For a complete copy of Nick Eoloff’s paper with more description and references, click here. Use this list as the start of your New Year’s resolutions for better financial management.

An article in the December 7, 2006 issue of The Chronicle of Philanthropy reports that nonprofit blogs are on the rise. (Read the article here.) I’m thrilled to know that I’m on the early side of a trend for the first time in my life. According to the article, nobody knows for sure how many blogs are devoted to nonprofit issues, but the best guess by people who write blogs is that about 100 are now in operation. That is an infinitesimal fraction of the estimated 12 million blogs available on the Internet, according to the Pew Internet & American Life Project, in Washington.” There is a list of “ten blogs to watch” included with a strong emphasis on blogs about philanthropy and fundraising. My own interests are in broader management issues and I have found a handful of blogs that I read regularly.

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 indepth 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 think that the reasons that workshop participants respond so strongly to the reports are their clarity and simplicity. Ideally, a dashboard report conveys in one page the key indicators for the organization and relates those indicators to goals, historical information, or benchmarks. The people in my workshop today know that this type of report is one that every nonprofit board wants to have.

So why don’t we all have dashboard reports? We don’t because they are very hard to develop. The art to creating a good dashboard is identifying what information really matters.  The dashboard in your car shows you the speed, fuel level, oil pressure, blinkers, and warning lights. Think of all the other information that could be displayed as well - but isn’t – because too much information is overload. To create a valuable summary or dashboard tool you have to cull through all the possibilities and select the five to eight key indicators that convey the most important measures for your nonprofit organization.

I use two example reports in the workshop. One of the examples is for an organization in the middle of turnaround after several years of financial problems, and the other is an organization that is healthier financially seeking to diversity its contributor base. These nonprofits have very different key indicators. One watches cash and payables closely while the other needs more information on development.

The other challenging task to developing good dashboards is selecting appropriate goals or benchmarks. These deserve some focus because the wrong goal can send you in the wrong direction. One well-intentioned but problematic benchmark that I’ve seen at many organizations is the goal of building a cash reserve equal to three to six months of operating expenses. It’s a terrific goal, of course, but it’s unrealistic for boards to expect a nonprofit to build that level of unrestricted cash balance in one year or less.  Fieldstone Alliance published a good book last year on identifying appropriate and useful measures, Benchmarking for Nonprofits. Here’s a link to a free excerpt.

I picked up the December/January issue of Fast Company magazine the other day because the cover story is about their annual Social Capitalist Awards. I know that I’m probably a lot more comfortable talking about capitalists and capital than many of my friends and colleagues in the nonprofit world. Fast Company was regular reading for me for the years when I advised and financed entrepreneurial businesses. I’ve been interested in these awards since the magazine started the annual recognition in 2003, partly because I wondered why a business magazine chooses to venture into the task of evaluating nonprofits. I’ve also been puzzled, frankly, by what the criteria are to be recognized as a social capitalist. There isn’t a clear connection such as earned income ratio, profitability – or surplus as we like to call it.

According to the web site, “From its inception, the Social Capitalist Awards have defined strong performance as a combination of both social impact and organizational effectiveness. This performance is represented by five critical components: Social Impact, Aspiration & Growth, Entrepreneurship, Innovation and Sustainability. The underlying theme through all of our components is the organization’s ability to analyze tough social and organizational challenges and to craft solutions that create significant improvements over the status quo.”

This year the awards went to 43 nonprofits who serve a wide range of communities and needs both in the US and globally. These 43 nonprofits have different income sources, operating systems and service areas. What makes these 43 earn the distinction over any number of other solid, well-run nonprofits?

My understanding of the awards became clearer this year as I read all the articles and expanded information on the web site. The addition of a special category of recognition for partnerships between nonprofits and businesses - with benefits for both – helps to answer the question of why a business magazine sponsors this recognition. The piece I’ve been missing, though, for the last three years is the critical role of metrics for Fast Company and its business readers. All of the awardees are able to provide concrete, quantitative measures of impact for their work.  I’ve been making the case for a while that nonprofits need to take responsibility for defining their own measures of success – or else someone else with define them for us. These social capitalists have done that. Whether or not you think that these are the right 43 organizations to be recognized or not, I admire the clarity of the information about their mission, activities, and their impact. The 43 organizations are all great nonprofits, but I am disappointed that the same names appear on this list year after year. I think that about 75% of this year’s awardees have been recognized previously, and 10 or more have been on the list all four years. Get your metrics figured out and watch out for the call for nominations next year!

A second point of clarity for me is the distinction between what Fast Company calls “social capitalists” and the questions I hear about starting a social venture - nonprofits starting an earned income venture. Social capitalists may or may not generate much (or any) earned income from sales of goods or services. Bill Drayton at Ashoka that social entrepreneurship is about innovation and impact, not income. Read more about innovation to solve community problems in an article by Gregory Dees at Duke University.

An article in the November 23, 2006 issue of the Chronicle of Philanthropy called “The Vanishing Donor” really struck a nerve with me. The article addresses the high donor dropout rate experienced by many organizations – donors will make one or two gifts and then disappear from the list.

But the biggest reason by far for the loss of donors is that many of them are just as angry as Ms. Medicus about the number of mailings they receive and other aggressive fund-raising tactics, experts say.

Even so, most charities that rely heavily on direct-mail and telephone appeals have been slow to change how they interact with new donors, says Penelope Burk, a Chicago fund-raising consultant and author of Donor-Centered Fundraising: How to Hold On to Your Donors and Raise Much More Money.

"It is difficult to transition out of the old system to a new one that is better for the times," but the need for change is long overdue, says Ms. Burk, who has conducted in-depth research on 250 donors to determine what they want from charities and why they stop giving. Charities, she says, "are now in a state where the entire country is over-solicited and donors have hunkered down, looking for ways to get out from under these negative aspects of fund raising."

Donors tell Ms. Burk and other researchers that they are asked for money too often, provided with only token acknowledgments of their gifts, and offered little meaningful information about how their money was used. Donors also complain that they are not given sufficient choices about how a charity communicates with them. (November 23, 2006 Chronicle of Philanthropy).

Join a live discussion with researcher Penelope Burk on December 4^th for more on this topic.

The research findings and recommendations were music to my ears:

• Ask donors what method of communication they prefer and how frequently they want to hear from you.
• Put effort into learning what your donors want from you. Do they want information about an issue, information about activities, or simply a thank you letter?
• Reduce the frequency of solicitations.
• Finally, thank your donors personally and sincerely.

I’m going to keep my stack and report back after the holiday. I’m also going to contact the organizations that we do support and invite them to have a different kind of relationship with us – a relationship that fits our preferences and needs. Next year I’ll take that into consideration when it’s time to write the checks.

The current news relates to criminal charges filed against the museum’s CFO stemming for the financial troubles at the museum that surfaced in 2005. While the charges are against a former executive, the museum’s board was clearly not doing their job. When reading financial reports, one of the first questions a board member should ask is, “does this information make sense based on what I already know?” In the Milwaukee Museum’s case, several major expansion initiatives into retail stores, IMAX, and new exhibits were not meeting budget, but the museum’s financial reports were apparently indicating that cash flow and finances were fine. Does that make sense?

In every case, someone needs to ask the question – and

that someone should be the board members.

The lesson that needs to be learned over and over is that each board member is responsible, not just the treasurer or the board members who appear to be “experts”. Sometimes it’s an unlikely member who can say that the emperor has no clothes. The only way that can happen, though, is for every member of the board to have a grounding in reading the financial reports and understanding the underlying financial structure of the organization. Even a sophisticated financial professional needs some training to understand how government reimbursement contracts and restricted grants work. Board members without a financial background certainly need to learn the basics such as how to identify red flags and ask questions.  

This takes us back to the Milwaukee Museum – where the financial information doesn’t make common sense; an obvious red flag. When funding is going down and expenses are going up, cash has to come from somewhere. In the museum’s case it was from the endowment, other nonprofits rack up debt, delay payables, or fail to pay payroll taxes. In every case, someone needs to ask the question – and that someone should be the board members.

Good boards maintain a balance between supporting the organization’s management and governing the organization that is described well in the article Why Boards Don't Govern by Jan Masaoka. Taking responsibility for finances is one of the cornerstones of governance.

October was conference month for me. I attended four annual conferences of statewide or national organizations. I started with the joint conference of the Minnesota Council of Nonprofits and MN Council on Foundations followed by the MN Association of Community Health Centers, Independent Sector and ended with Opportunity Finance Network. One conference each week in a single month – why does everyone have to meet in October?  I attended five plenary sessions, three keynotes, two awards dinners, and (I think) eleven topic sessions. I also presented three of the sessions at two different conferences.

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.
  

Though I do not subscribe to the theme that nonprofits universally need to “act more like business”, in one area I do think that the business world has a lot to teach – the sources and uses of capital. Use the word “capital” in a discussion about nonprofit finances and the majority of the participants will assume that the topic is buildings and a “capital campaign”.  Business leaders know that they need capital for a range of distinct and important purposes including short-term working capital, permanent working capital, and long-term asset creation.

I’m not alone in thinking that it’s time for a serious discussion about nonprofits and capital. At the Independent Sector’s annual conference held last week in Minneapolis, I attended the session “From Financial Capital to Social Capital” to hear some of the emerging strategies and practices. Edward Skloot from Surdna Foundation led an interesting panel with Clara Miller (Nonprofit Finance Fund), Bob Ottenhoff (Guidestar), and Tom Triplett (Fieldstone Alliance). I am a huge fan of Nonprofit Finance Fund and Clara Miller’s well-written articles on finance. I recommend the NFF web site for these articles. One challenge of the capital discussion is that it’s complex and confusing to those who prefer to stick to the basic annual budget as the primary financial tool. I loved a remark by Guidestar’s Bob Ottenhoff that "if you're serious about your mission, you have to be serious about your financial model."

There are three sources of capital for business: profit, debt and equity. Nonprofit businesses are not too different in their need for a variety of types of capital, but we have not developed a sophisticated understanding and analysis of capital use in nonprofits. What are the sources of capital for nonprofits? The actual sources are the same as business, but with different terms and relationships: profits (operating surplus), debt (loans and PRIs), and equity (grants and gifts). These sources of capital are where nonprofits and businesses diverge – businesses can offer a financial return on investment to their capital sources while nonprofits cannot.

When the floor was opened to the audience at the Independent Sector conference session, we agreed that the nonprofit sector needs is a new level of understanding of the eventual community results of investing capital in organizations and some better metrics to communicate the results. Edward Skloot challenged the group to take up the task in earnest. When do we start?

I spend quite a lot of time reading financial reports from nonprofit organizations and talking to leaders of nonprofits about their financial situation. Delving into the financial reports of an individual nonprofit is like getting to know one verse of a song from a musical. Each verse is important and lovely to hear, but it’s even better if you can see the whole show - when you hear it in the context of the characters and story. 

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.

At the beginning of the annual budget season, which for many nonprofits is in the fall, listen carefully and you will hear the wails of anxiety about what grants, contributions and contracts to include in the budget for next year. A frequently heard wail is: “Why can’t we be one of those nonprofits with grants that they can count on every year, and deep-pocket individual donors who always write big checks, and … if only we could be one of them, we’d be financially stable.”  

I’ve heard this over and over. The truth is that this is a myth – and too many nonprofit directors and board members believe it. It’s an unusual nonprofit that has completely reliable and recurring sources of income year after year. Income, both contributed and earned, has to be continually researched, requested, proved, and unearthed by small, mid-sized, and large organizations. What makes a nonprofit financially stable is having the kinds of systems, plans, and people in place to do all of this consistently enough to get results they can count on. This means that we have to change our definition of the mythical financial stability.

The myth is that a nonprofit can find foundations and donors once and turn them into a never-ending stream. The truth is that nonprofits have to create a solid infrastructure for prospecting, requesting, completing, and maintaining grant and donor relationships. This is one of those bad news/good news realities.  The bad news is that there isn’t an easy one-time fix for income budgets. The good news is that every nonprofit has the ability to create and build systems to bring in income consistently – if only they keep working at it.

For consistently interesting ideas and research about the financial reality of leading a nonprofit, read the Nonprofit Quarterly. Their most recent e-newsletter included a preview of an article profiling six income models for financial stability - Financial Independence: Six Approaches.

What do I mean by the “mission checkbook”? It’s that balancing point that every nonprofit organization needs to find. The point where the focus stays on the mission and community while also assuring that the right resources are available and used as effectively as possible. In my role as the executive director of a nonprofit organization that works to build the “business” side of other nonprofit organizations, I find myself at an interesting juxtaposition of nonprofits, philanthropy, and business. This affords me a pretty broad perspective of the way that nonprofits work – from starting up to growing their programs to struggling and facing very hard decisions.

There are plenty of opinions and experts about how nonprofit organizations “should” do their work and keep the books balanced. I agree with some, disagree with several, and get confused by others. There are a few things I am sure of. First, balancing the mission and money of a nonprofit is hard. It’s also an essential responsibility of executive directors and board members who want to be sure that the community will be served not just this week but also in the future. Secondly, leading a nonprofit is not just like running a for-profit business. While there are some common elements, I see marked differences every day. I came to this work after more than twenty years in community banking where I worked with businesses, entrepreneurs, and the bank’s board of directors. I understood marketing, financial analysis, and management. In my six years leading a nonprofit and working with hundreds of others I’ve learned about the additional complexity and dynamic that comes from balancing community needs and funder requirements, volunteers and paid staff, board members and executive directors, and demands for public accountability, transparency, and measurable results.   

My hope for this blog is to expand on the conversations I have with executive directors, staff and board members of nonprofits, with foundation program officers, and with bankers and other businesspeople. Beyond the technical answers to many questions – how to create a budget, read a financial report or build an operating reserve – there are larger issues that impact all of us in the nonprofit world and our larger communities. I’ll be posting about these broader issues from my own viewpoint and with links and summaries of news and research. I’ll also share some of the day to day conversations and lessons we learn together about looking for that balance. You’ll also hear some of my opinions, so be prepared. Please share your own opinions, ideas, thoughts, resources, and questions to the mix.