Unlike banks, large nonprofits are failing. And they seem to do it in a sudden dramatic way. The Community Services Society investigated the collapse (November, 2014) of FEGS (Federated Employment and Guidance Service), a large non profit in New York City with revenues of $250 million. (1)
Their report reminds us that government doesn’t pay in a timely way and doesn’t pay enough anyway.
The report fails to emphasize that nonprofits can choose a business model that understands government contracts and creates surpluses while accepting them.
Important points of the study that blame government and foundations:
- Companies above $10 million in revenue are more apt to fail because of unfunded audits and regulations and paying interest on lines of credit while waiting for contract money.
- Government contracts are often created without input from actual providers. Some results are comical and tragic.
- Underfunding of 80 cents on the dollar is the primary cause of nonprofit failure when funded largely by contracts
- Governments and donors resist paying for repairs, technology upgrades, and administration.
- A large nonprofit may endure up to 250 government audits per year
- Half of all NYC nonprofits are in the red with no reserves
- A typical DYCD provider has overhead costs of 18.84% while funded for 10%
- NY State Education Department allows 2.6% overhead
- Unfunded mandates abound include paying staff during abuse investigations that have a founded complaint ratio of 2.7%
But it’s important to see what is missed in the report —
- The report does not consider fraud. FEGS has unexplained payments to executives which have attracted the federal district attorney. FEGS also (2) (3)
- created a captive forprofit,
- outsourced functions such as accounting to the forprofit,
- allowed a private director to be on the board of the forprofit,
- and watched as he sold his own company to the captive forprofit
This all could be explainable, but complex stories with murky motives attract district attorneys. Many larger nonprofits seem to have complex fiscal structures that they may not understand.
- The golden age where you only open your doors and provide the program is gone. Contracts are now like fishing licenses. You choose the line, stream, and lure and hope that you’re good enough and strong enough. Non profits are just like forprofits with different purposes. Nonprofits have to compete, plan, prepare for problems. The report includes the example of a city grant that won’t pay for capital repairs because the agency owns their own building. This is clearly a case where a captive forprofit that owned the building and leased it to the nonprofit would be the preferred strategy. Charter schools understand this but most nonprofits do not.
- There are 4 sources of funding (contracts, gifts, blended forprofit, and fee for service). Nonprofits are doomed to fail with a contract funded model. It is painfully difficult to master more than one source. Nonprofits without planned financing simply cannot overcome government.
- Nonprofits need to be strong in mission and strategic planning. The contract model lulls organizations into completing the requirements of the contract and nothing more.
A lot of nonprofit failure lies just ahead. Nonprofits can either be victims or choose to make their own destiny with good strategic plans, willingness to compete, and predictive accounting that understands and outwits their biggest deadbeat customer.
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