990 Archives - TurnAround Social Sector Coaching

Exactly 10 years ago as I write, I applied for a Vice President position at Edwin Gould. I just checked the cover letter and it was a masterpiece. Of course, one reason that I’m writing this is that I was rejected. No one could have known that Edwin Gould would be acquired by the former Leake and Watts in 2018.

How did an agency started in 1939 have trouble as a going concern with a revenue of about $30 million and fundraising costs of $118,047 at Ciprianis in 2008 when I applied? It’s like the Sears of Foster Care!

alexa-mazzarello-223406-unsplash

What Incidental Factors Don’t Matter in Going Concern Troubles?

Labor Efficiency Ratio – This is the biggest shock to me in the book. I preach labor efficiency with any company that I coach. It saved the nonprofit that I direct. It’s a simple ratio that X dollars of revenue must come into your company for every dollar paid to employees on the front lines. Nonprofits are often sloppy and overstaff programs and the results can drain cash. One of our programs had a labor efficiency ratio of 1.3   For every $1 paid to our program staff, we got $1.30 paid to us by the City. Suddenly, we couldn’t afford classroom supplies! Usually a LER of less than 1.5 is not possible to sustain. For profit business normally has a LER range of 3 -7. That means that for profit companies expect $3-$7 to arrive in sales for every $1 paid in compensation.

Amazingly, Edwin Gould had a LER of 1.77. For a social service agency that needs credentialled staff, I would assume this to be a well managed agency. The supervisors kept labor costs in check but it did not save the company.

Accounts Receivable – Many nonprofits bleed to death while waiting for government to pay. I could see how that would create a going concern issue. The going concern group of nonprofits in this study had about 17% of revenue still unpaid by the government. That is on the low side of normal in this study. Children’s Village has total revenue over $80 million with 24% Accounts Receivable. The highest A/R in the study was 39% of total revenue and that nonprofit continues to placidly sail along.

Assets / Equity – A normally leveraged for profit company should have some debt – generally under 40% of assets. That would give a ratio of 1.67. Most of the nonprofits in the study had an acceptable balance, including those in the Going Concern group. While most nonprofits don’t use assets or equity efficiently, they have so much trouble getting lines of credit and term loans that their fiscal structure remains intact. Edwin Gould and Sheltering Arms (a similar nonprofit) had negative equity. This can happen when an agency is in such dire distress that it records liabilities for the agency in excess of assets. Otherwise the Assets to Equity balance is not a good indicator of Going Concern issues.

# of Payrolls in Cash – Nonprofits are slowly losing their ability to have cash for paychecks. Some of the payrolls are over a month in arrears. I assumed that this would be a big signal of Going Concern. Amazingly, the Going Concern Group members had as much or more cash on hand as anybody else.

 

The Three Critical Factors of Going Concern

  1. Management Leadership

From the 990 alone, Board Leadership appears to have made a Succession error. There was 50% continuity on the Board of 12 persons from 2008 – 2016. However, three managers including Executive Director Audrey Featherstone lead the agency for about 10 years. Revenue increases and the agency survives a crisis in Foster Care in NYC in 2005.

There is a catastrophic loss of income in FY 2014 of $1.7 million as Featherstone leaves the agency. Two or more financial leaders turn over successively. With Featherstone gone, the Equity actually goes under water to negative $1 million in two years.

Kingsbridge is a similar agency in the Bronx with a going concern paragraph in their last published audit. In the case of Kingsbridge, a long term Executive Director appears to have misjudged the rapid changes in the non profit world.

The common thread in narratives of the Going Concern group is poor attention to selection or supervision of the Executive Director to make sure that the Director changes the agency nimbly to adapt to the funding available with a good strategy. Boards generally are too conservative on participating in and requiring reports on strategy. Both for profit and nonprofit agencies go out of business with plenty of assets.

  • Edwin Gould has $30 million going into the acquisition.
  • In 2005, Edwin Gould was ranked first in Foster Care Agencies in NYC (NYTimes 11/07/2007)
  • In 2011, Edwin Gould received $101 million grant from NYC for five years of children’s services

The right director could probably create a strategy to use those resources and network and keep an agency in operation.

  1. Net Income

Going Concern Group members generally have a persistent deficit over a period of years. Many of the Scaling Group members have occasional deficits which they quickly reverse with a change in strategy. There is simply no way to live with lines of credit, spontaneous financing, and deposits for future services over the longer period. All companies must have a positive net income.

  1. One Source of Revenue

The Going Concern Group members only have government contracts as a source of revenue. The Scaling Up Group members have a 2nd major source of revenue – Charitable gifts (Individual, Foundations and Corporate Gifts), Donor advised funds, or Fee for Service. The unrestricted and surplus funds from these other sources are at least 10% of the net income.

Steven Rathgeb Smith (1993:133) outlines the fickle demands of regime funding. These are the contract funds from government which change as political priorities change and are willing to spend any amount of money to monitor the process. In addition, regime funding is the overwhelming majority of the Accounts Receivable that most agencies struggle to work around.

Edwin Gould, for example, received about $300,000 in fund raisers and contributions in FY 2016. The 1% of the net income that this provided was dwarfed by $550,000 of deficits in the regime funding programs. This is a perfect example of a large effective agency which would be in great operating condition today with $1 million annually in gifts and grants to provide the financing that fills in the gap created by inadequate contracts from government.

Conclusion

10 Nonprofits have just merged in New York City. It’s an industry with too many organizations who believe that regime funding is a Strategic Plan. If a nonprofit is weak in two or more of the critical factors, it’s time for an entire board meeting to occur on partnering, merging, or being acquired. Conversely, an agency with strong critical and incidental factors is in a place to extend it’s work for the public good through an acquisition.

There are four long-term sources of financing for nonprofits – Fee for Service, Government Grants and Contracts, Donor Advised Funds, and Charitable Giving.

The 990 does not make this information available easily. On Page 1, they blend charitable donations with government contracts*, Schedule B is a report of all donors over $5,000 and frequently that report is simply submitted as ‘Restricted.’  1019_5901001

It’s easy to miss the point on the 990 that the four funding sources are quite different from each other and virtually no agency in the study was skilled in attracting funds from all four sources.

Charitable Giving – Non profits began in the 1800’s with charitable gifts. Often, wealthy people formed a group and funded it with gifts for orphans, destitute, etc. The charity did not begin to match the needs at that time. As ethnic groups got larger, smaller nonprofits served particular groups from a language, religious, or cultural background. Slowly, many of the oldest nonprofits (universities, for example) built endowments that were powerful and independent sources of funds. Investment money flowed from charitable gifts.

Fee For Service – Hospital fees, tuition for universities, and other fees (excluding Medicare and Medicaid) make up almost half of nonprofit income. Since hospitals and higher education nonprofits have little in common with funding sources for other nonprofits, it’s fair to say that about 10% of nonprofit income is from fee for service.

Government Grants and Contracts – States, Localities, and Federal Government increased funding in the 1960’s. The first decades were slow increases with few regulations. With budget cutting in the 1980’s, governments started regime funding – close control of process, less volunteers, and more professionals. The administrative requirements of regime funding were not calculated in costing. The idea returned to the 1800s model that the social sector must be funded in part by charitable gifts.

Donor Advised Funds – The top 20% of the population is accumulating wealth and the top 1% even more so. This concentration is leading to Giving Clubs and Donor Advised Funds where gifts produce very specific purposes and outcomes. The benefit of these funds is that they empower agencies with clear agendas and the possibility of an independent voice. The benefit can also be a liability if agendas don’t uphold values such as equality and justice for all.

With that background, what does the study of 990s show?

  • Healthy nonprofits augment government contracts with either charitable gifts or fee for service of at least 10% of total revenue. This additional financing can be used to pay for strategic investments and funds payroll when government is slow to pay.
  • Nonprofits that started in the 1980-2000 years of growth in government funding often pay little attention to other sources of money. They tend to have smaller boards who may not have an individual mandate to contribute. With regime requirements increasing, the government funded nonprofits are close to merger, acquisition, or bankruptcy.
  • Revenue is vanity. One nonprofit with revenue of $70 million and growing quickly is 1.5 payrolls behind. While they may use a line of credit to offset the immediate need, the growth and size do not give them protection for the long term. The funding mix is far more important than the size of revenue.
  • Charitable gifts generally have a practical collection limit of $5 million in the nonprofits studied. Growth above $50 million in revenue requires a revenue stream from Fee for Service to keep government contracts revenue under 90% of total revenue.
  • Two new nonprofits report charitable gifts of $11 and $14 million. These represent Donor Advised giving. Both nonprofits are growing above 20% per year and already have a major voice in education reform and biological diversity.

Conclusion

Government is a major force in financing the social sector. In most cases, the contract triggers agency wide changes to comply. Boards of directors become financial watchdogs instead of protectors of the vision. Ironically, the nonprofits which are failing are those who are the most compliant with government demands!

Healthy nonprofits have to overcome the barrier of multiple funding streams in order to thrive. 10% of total revenue from charitable gifts and fee for service almost guarantees that you won’t run out of cash. And cash is cash!

 

 

*Government contracts are considered donations because there is no exchange with the public. I would argue that improvement of a person and the taxes later received do create the exchange 😊

What is the effect of a long-term CEO and management team on a nonprofit? What is the effect of a board with relatively little turnover? The 990 reports the name and position of each board member and senior manager annually. Let’s compare the lists over a 4 year period (2013-2016). Unfortunately, the truth is a wise and subtle mix of factors

  1. Effect of Long-Term CEO – The vision of an effective CEO is one of the magic quantities needed to produce success.
      1. One CEO in the study is in the 8th year of service. The nonprofit has more than doubled in revenue during that time to almost $30 million. Positive news articles have been written and many local school districts have signed contracts. These effective managers are rare outside of medicine and higher education (and not common anywhere – just ask Penney’s and S
      2. ears!). He has been able to articulate strategy, keep the leadership moving together, and has grown in his own skills to manage a much larger company.
      3. Unfortunately, another nonprofit with news reports about corruption also has a long-serving management team with board and management retention at 100% over 4 years. One way not to get caught is if you never leave!
      4. Another nonprofit lost its way and the recent audit has a ‘going concern’ paragraph. I had only heard about them! This is a first. The founder stayed for 30 years and did not grow in capacity to match the growth and challenge of the $9 million agency.1019_4231589

     

  2. Effect of a Long-Term Board – The growth companies in the study had board retention rates in the 80% range.
    1. A nonprofit incubated by people from Harvard has a board retention rate of 94% over 4 years. The annual revenue growth rate for this nonprofit is 127% annually.
    2. Nonprofits in existence over 25 years have more trouble keeping board members. They have a retention rate of about 50%. Many are teetering with ill-planned financing.
    3. New successful nonprofits benefit from a startup with a skilled CEO and Board chair. One promising startup in stress has a board retention rate of about 10%. The Board Chair was inexperienced and could not drive the board to support the agency in networks.

Conclusion

An effective leader and an effective board chair drive success. Effective boards need term limits, additional volunteer committees, and board members committed to learning.

Effective management requires a leader with time to preach a vision, arrange a team for flawless execution, and work with the board for abundant cash to fuel growth. There is often a plan for succession in these nonprofits. One consultant said that successful nonprofits hire management from within. It reduces the shock of succession. Normal succession with an outsider has a management turnover of 50% within 18 months. This is necessary when the nonprofit is stressed.

Note to all: The CEO/ED job is challenging. A business coach can help and contact me if you need support to go through this process.

All 990s report on Board Members and Managers. When you join a board, the risk is to avoid one that is stuck or failing. The 990 information is a springboard to other sources and patterns emerge of the best boards – and the worst!  1019_4272320

What is the worst number of directors for a healthy nonprofit?

Less than 11. The nonprofits in the study that had less than 11 board members reported on the 990 had reports of corruption in news articles or were really a family business in the garb of a nonprofit. If you want to disguise another business purpose in a nonprofit form, a small board is essential to keep secrets.

Otherwise, a small board is ineffective. Small boards are erratic on accountability. One poorly qualified member of a small board has an outsized voice. The line between a governing board and a working board starts to blur. A large board  should have enough wisdom to sort out erratic opinion and be globally focused.

What are worst board members for charitable guidelines?

Members who Give Time Instead of Money!

  • Charitable gifts are important because contract money usually has a specific purpose that doesn’t fully reflect the nonprofit mission. Gifts also impress foundations and government of community support for the agency. 50% of the Board of Directors should be willing to host a fund raiser each year. 100% of directors needs to make an annual gift that is one of their top three charitable priorities for the year. No exceptions. Directors who don’t contribute should be offered a volunteer position.
  • 20% of the Board of Directors should appear on 990 Schedule B as giving $5,000 or more to the organization. It’s a signal that someone on the Board really cares about this!

The indicators mentioned above for the Board charitable effort is a sign of the importance of your mission and the passion of the Board.

What is the worst Board Balance for Regulatory?

100% regulatory members

Every board has a universal need for 2 board accountants. The Board needs a CPA for the Audit Committee and at least one Management Accountant to analyze financial reports. Most of this business should take place in the Finance Committee. The 990 Part VII lists each Board Member. Always use the 990 as a beginning point for searching social media and online. Too many accountants on the Board will blur the line between management and board and meetings will be spent poking and probing the regulatory reports.

What is the worst Board relationship to the community?

No Centrality

The 990 Part VII lists each Board Member and Senior Manager. In New York City, the nonprofit world, similar to all other industries,  attracts the best connected members and managers. If you search each name on Google and LinkedIn, successful New York City nonprofits often draw Executive Directors and board members from Ivy League graduates. There are exceptions, but you will work twice as hard to get the job for which you have the same credentials as the Harvard alum.

Perform a search of 20 nonprofits in your community in the size that you plan to be in your Strategic Plan. Make a chart of companies, colleges, and community activities to see what patterns emerge. Make sure that half of your new Board Members are connected to the central nonprofit community.

What is the worst Board for Directing the Agency?

The Board is charged with setting the basic direction of the agency and creating measures to measure the effectiveness of the Executive Director and staff. The 990 Part III asks about agency accomplishments. Schedule O gives opportunity for more reporting.

Most boards fail this last and most important question. The largest nonprofit in the study has three paragraphs on the 990 as to what it provides to children. There is no indicator that they accomplished anything. Part III gets little attention because too many agency missions are controlled by the demands of the funder. Boards of Directors simply give up and vote to fund the agency and hope for the best.

Conclusion

The 990 has information that is more than a report on financials. It’s possible to see the makeup of a board. One can discover the presence of major board member gifts. Most importantly, it has space for whether the board thinks about mission and results. It’s a great tool to use at the next time that someone asks you to join their board – avoid the worst!

Start your TurnAround today with a coach who can 10X your progress!  Click my name Ron Tompkins f\or the next step!

 

This is the 5th of 10 articles on Sundays that look at the 990s to understand what is happening to nonprofits in general and give you some data for your own nonprofit. Today, the focus is on the ability of companies to make payroll. Is your next paycheck safe?

I advocate for nonprofits to set a 10% surplus target. Greg Crabtree has the same advice for privately owned companies.  We are both worried about the bills that accumulate while waiting for cash to settle them.

  • For companies that make a product, the operating cycle begins when inventory has to be purchased or built. Bills have to be paid. A sale occurs, but cash still may not appear until merchandise is shipped and the cash is transferred. The entire period has to be financed.
  • For nonprofits, late payments by government can create a cash lag of months or years. Meanwhile, payroll has to be paid.

The largest nonprofit in the study so far, Children’s Village, has an Accounts Receivable of 27% of Revenue and only 3 days of its next payroll on hand in unrestricted cash. There are 1,319 people on staff!

In a study of 14 nonprofits of various sizes ($1 million – $85 million revenue), 7 nonprofits showed a decline in the ability to make payroll over 4 years. The worst performer was over 2 months in cash arrears on payroll.232_2895318

What can nonprofits do?

  1. They borrow from their restricted funds with the promise to repay
  2. They borrow from prepaid tuition and fees or prepaid money on government contracts
  3. They finance up to 75% of the collectible cash from government with a line of credit at a bank
  4. They blend methods and simply tell staff that payroll will be late.

Any company with less than two payrolls in the bank in cash is putting the wellbeing of families in jeopardy who depend on regular checks. Richard Reeves tells us that jobs that pay less than $120,000 face an increasingly expensive middle class lifestyle with more and more income insecurity.

Nonprofits have missions to do good – and that includes generous treatment of staff.

Calculate your own cash for payrolls from your 990:

  • Copy the number from Page 1, line 15 and divide by 26 to find the Cash for One Payroll.
  • Copy the numbers from Page 11, lines 1 and 2, to discover total Cash on Hand at End of Year.
    • Subtract from the Cash on Hand, restricted assets on page 11, lines 28 and 29 to find Unrestricted Cash.
  • Divide Unrestricted Cash by Cash for One Payroll.

If you have 4 payrolls in the bank, you have time to maneuver if bad days arrive. If you have less and less payrolls in the bank, you need to make a plan. Scaling Up business coaching creates a plan in 90 days, a quick win in the 2nd quarter and a 20% growth in revenue in the 2nd year.  We’re here for you!

 

 

No gossip column on 990s can omit the juicy topic of what we’re all getting paid.

The 990 tracks highest paid compensation in two places – Part VII, Line 1d on the main form and also Schedule J (There are 16 additional schedules that can accompany the main form and sometimes this is where the bodies are buried.)

There are two ways to examine the data.1045_4931523

  1. What did the highest paid staff member receive?
  2. What percentage of the total compensation expense (Part I, Line 15) are the Highest Compensated Employees taking?

 

 

Let’s start with the highest compensated in $ even though the percentage of total compensation by percentage may not be unusual.

  1. Leadership of universities/medical facilities and private schools for the wealthy are routinely given higher salary in lieu of stock options. The theory is high leadership skill is required but leaders could also make more in the for-profit corporations with stock options as incentives. The eye popping salaries are a replacement for the stock and other incentives to be made at Apple, GE, and IBM.
  2. Higher pay can be concealed by Part VII Section A Column F – Other related organizations. While I have an upcoming look at nonprofit captive corporations, some midmarket nonprofits with financial sophistication use this column to add an extra $50,000 to the executive compensation. Wish I worked there 🙂
  3. Guidestar publishes an annual compensation report. For example, the CEO in Sacramento for a nonprofit should make approximately $54,000 if the total revenue is less than $500,000; $112,000 if the total revenue is less than $1 million. $130,000 if the total revenue is less than $5 million, and $175,000 at greater than $5 million revenue. These numbers strike many Boards as generous, but Guidestar is watching all of these clever add ons and reporting them. Why should you settle for less than fair? (Guidestar, 2017:208)

Let’s continue with the underpaid!

  1. Leadership compensation by percentage of total compensation is how much the Board thinks that the leadership is worth. An agency of $6+ million should expect that leadership compensation will absorb 3-5% of total compensation.
  2. Since ill-equipped leadership will never get the nonprofit to $6 million in revenue, small organizations may experience 6-12% of total compensation for leadership costs. Boards have to pay in advance of the larger size that good leadership can provide. It’s necessary pain of investment!
  3. If you are in a $500,000 revenue organization, be careful not to overvalue the ED job. Let’s use the Sacramento example and your compensation should be $54,000. Because the company is small, your job may also include clerical for 25% of the time and program meetings for 25%. Those two compensations for full-time work are $30,000 and $40,000.

So your total compensation would be

  • 50% ED – $27,000 (54,000*.5)
  • 25% Clerical – $7,500 (30,000*.25)
  • 25% Program – $10,000 (40,000*.25)
  • TOTAL $42,500
  1. I’ve also seen another nonprofit with $18 million in revenue and 1% in Highest Compensated Staff. While I applaud the benefits that staff receive in pension and health, it appears that they are risking a loss of leadership when managers go to a convention and chat about salaries. (People gossip at conventions! ). Poor Board leadership.

 

Let’s finally think about the overpaid

  1. I’m looking at a $7 million revenue organization with compensation requiring about 16% of the total compensation budget. That is leadership that has the board in their pocket!
  2. I’m also looking at a medical nonprofit that has been in the news for fraud charges. There is $2.5 million in compensation from related organizations – for 2 people.

 

Conclusion

Board of Directors should structure compensation to be generous to leadership and expect high results in return. Small agencies must suffer with tight budgets until total revenue approaches $6+ million. Boards should work with Executive Directors/CEO so that most of their time is spent in leadership. Mixing job descriptions will never produce great results in lives of clients. At the same time, there are ceilings to compensation for highest paid employees. With the 990, we can see where an agency is on the continuum.

The CEO/ED job is challenging. A business coach can help and contact me if you need support to go through this process.

Are Your Assets Resting?

Why would you buy a truck or a bus for your company and fail to use it?  Why would you hire a new accountant and fail to use her? We are supposed to buy fixed assets and employ people and get more money back than we spent. Nonprofits will focus on social impact as well as cash. That’s fine but some nonprofits find it easy to spend other people’s money for things of little value.

The 990 tells whether assets are being purchased or employed wisely.neonbrand-258972-unsplash

Assets

Each industry has its own range of the dollars returned in profit divided by the Assets. For profit education companies average 5%. The beverage industry is 9%.

The nonprofits studied have a return of assets of about 3%. That means that each $100 of investment in assets returns about $3 in profit. That is a lot lower than the industry ranges mentioned above because the corporate tax rate has been 35%! It’s fair to say that nonprofits actually do divert resources to the social sector that are returned in some other metric.

Two concerns emerge:

  • Nonprofits that are less than 10 years old have a return on assets in the 20% range. Since they are probably carrying fixed assets with little accumulated depreciation – why are they so much more effective in acquiring assets that actually return the cost of investment? Are newer nonprofits born in a more competitive time in the nonprofit industry and will be stronger structurally?
  • The historic nonprofits over 25 years old show returns as low as 3%. If they own heavily depreciated buildings or other long term assets, their return of 3% may be inflated. It could be closer to 0%.

Human Assets

In a post-industrial age, the real asset of any company is the compensation budget and the human resource that it represents. One way to measure effective hiring is to relate the total revenue to the dollars spent on compensation. If you hire a new staff member for $100,000, it’s clear that you have to raise at least $100,000 more in revenue to support the position. The labor efficiency ratio is usually between 2 and 7, depending on industry.

The formula used in the study is total revenue / total compensation.

Nonprofits are low, regardless of size.

  • Some of the lowest include nonprofits in existence for 25+ years that have limited federal funds. For example, one reported an average of 1.26 over four years. This means that only 26 cents were left after payroll for rent, materials, food, office, etc. An overemphasis on payroll indicates poor program quality.
  • The lowest reported (1.22) was family operated which probably means that they drain the nonprofit of cash by paying three sisters in management very well. Since it’s a special needs daycare, I pity the recipients of the services.
  • Regulated nonprofits (child care) will have lower labor efficiency ratios because of required staffing and credentials. Companies such as McDonald’s have few staff requirements other than the practical matter of getting hot food to customers quickly.
  • New nonprofits (under 10 years) tend to produce more money per staff member hired and spend more money on program (labor efficiency ratio of 1.7 – 2). This doesn’t mean that they pay staff poorly – they have enough money to do everything
  • Nonprofits with growth rates of 20%+ per year have labor efficiency ratios of 1.5 – 2. This seems reasonable. They are saving money for program and rent. They have budget balance.

A labor efficiency ratio under 1.4 is a danger signal. The income may be critically lacking for required infrastructure. There may be undue influence of board or management to drain resources. Accrediting and regulatory agencies should measure program quality carefully.

Conclusion

The only way for nonprofits to serve and succeed in mission is through wise use of assets.  When the financial return on assets is too low, it will reduce cash and destabilize the nonprofit. Older nonprofits generally seem to need more business training to approach 5% or more return on assets.

Labor efficiency is a critical asset because almost all companies spend most of their budget on payroll. When a budget is set up with less than $1.40 coming back in cash for every $1.00 spent on payroll, there is not enough money left to pay rent, insurance, and program supplies.

Younger nonprofits appear to be more nimble. They are less burdened with nonproductive assets and save enough money (aside from payroll) to finance quality program supplies and infrastructure.

Success = monitoring return on assets and labor efficiency.

 

I’m doing a 990 study. Each Sunday for 10 weeks, I will give out one insight for leaders. Most people ignore the 990 and its 16 additional schedules. Life is too short to do all that reading!

1266_4928590

There are three critical areas for every company that plans for stability and growth – a) leadership, b) marketing, and c) infrastructure. It’s not possible to draw conclusions about leadership development and marketing from 990 reports.

Technology
There is an entry on technology expense on page 10 of the 990. This number is from the income statement so we can treat it as a signal of the priority that a company places on infrastructure. It’s only an indicator because infrastructure is more than technology.

I’m assuming that most of the technology expense is cloud based software as a subscription. Nonprofit subscriptions can be expensive. Blackbaud is a common software environment and its most inclusive packages range at least to $50,000 per year.

What did I find?

Old line NPs (more than 25 years old) only devoted .33% of their total revenue to technology. Their other financial indicators are fragile and they are not set up for a great future.  The  largest agency was an exception with $85 million revenue. Children’s Village reported 1.29% over 4 years.

New agencies (less than 10 years old) 1.07% of total revenue per year over 4 years.

Incubated agencies from think tanks 1.07% of total revenue per year over 4 years.

Single donor funded agencies average 1.07% of total revenue per year over 4 years.

Growth companies averaging 20% overall growth in revenue for 4 years on average also each used 1.07% as their benchmark for technology expense.

What do these numbers mean if you want to learn something for your company?

  1. Your investment will be greater than 1.07% for growth because these numbers do not include any hardware or software that was capitalized and depreciated. 2% of total revenue cash costs per year is probably a safer technology target for growth. For example – on a $10 million budget, devote $200,000 cash per year to technology
  2. Increasing Labor costs make technology investments critical. One company that I coach added a tuition collection program from Blackbaud which integrates directly into the general ledger. Suddenly, there are no labor costs for mailing, creating and printing invoices monthly.
  3. Infrastructure is larger than technology and involves decisions on how fast to add staff in Human resources, administration and accounting.
  4. These numbers are drawn from companies in the $3-$100 million revenue. If you are a startup under $3 million in revenue, you need to plan for a Valley of Death time where costs for infrastructure are difficult to manage.

The message is simple – companies that are thriving make investments in infrastructure. Set your own goals for infrastructure and sustainability.

Scaling Up business coaching creates a plan in 90 days, a quick win in the 2nd quarter and a 20% growth in revenue in the 2nd year.  Until next Sunday, keep your eyes on technology!

If you want One Minute TurnArounds by email, please sign up!

GDPR – Your email is collected by an automated system so that the One Minute Manager posts can be sent. You will be invited twice a year to a two hour Scaling Up workshop for CEOs and EDs. Annually, you will be offered an Ebook and asked whether the resources of TurnAround Business Coaching are helpful.

A maximum of 10 companies per year develop a relationship for Business Coaching to turn around their company or scale up past a growth barrier.

I’m doing a 990 study. Each Sunday for 10 weeks, I will give out one insight for leaders. Most people ignore the 990 and its 16 additional schedules. Life is too short to do all that reading!

Sustainability
Let’s start with a critical number – Net Income or Surplus. To start a company, cash is the1019_4272975 key number. To buy a building or equipment, cash is key. Banks loan cash. Investors give cash. Customers pay in advance. But to keep a company going, there has to be a consistent profit or surplus which is the best source of cash. .

What Profit Do You Need?
What’s the required surplus for a business to stay in business indefinitely? Most businesses will soon be gone if there are year over year deficits, on life support with less than 5% surplus, and healthy over 10%. Why not profit of $1?
The income statement (Statement of Activities) does not include the cash that you need to keep investing in the business. Computers and cars need to be replaced. Technology is a huge investment. The surplus provides the cash to invest in new assets. Business owners will also want a profit on the money that they put into the business. Why would you put $500,000 into your business and not expect an annual return? That cash eventually has to come from profit.

Nonprofits/NGOs need 10% surplus to be sustainable for the some of the same reasons. But Nonprofits have a special additional burden.  Nonprofits usually show more profit than cash because government pays so late. Let’s say that you make a profit of $100,000 this year. How much of that cash is in your bank on the last day of the year? Possibly $0 or less if government is involved!  Nonprofits need a 10% surplus with the expectation that their cash account will stay above $0!

Depreciation
You may be lucky and have a lot of depreciation and bad debt allowance on your income statement. Why do we like depreciation? Because it’s not a cash item.   Let’s assume that your revenue is $10 million. 10% profit will be $1 million. That’s a challenge! But let’s assume also that you bought a $5 million dollar electrical system that has a ten year life for depreciation but it will probably be working 20 years from now. Your income statement has a $500,000 charge for depreciation already so a 5% surplus ($500,000) and the depreciation ($500,000) is a fairly safe combination for the present.

Conclusion
Non profits in particular are usually happy if they have a $1 surplus. This is not a plan for the long term.

Today’s example is a nonprofit started in 1953. $45 million in revenue last year. Payroll of $1.4 million and 14 days of expenses in cash in the bank. Limited depreciation and an average of 1% profit over 4 years.   If the CEO quit, would you enthusiastically apply for that job?

Scaling Up business coaching creates a plan in 90 days, a quick win in the 2nd quarter and a 20% growth in revenue in the 2nd year.  Until next Sunday, keep your eyes on surplus!

If you want One Minute TurnArounds by email, please sign up!

GDPR – Your email is collected by an automated system so that the One Minute Manager posts can be sent. You will be invited twice a year to a two hour Scaling Up workshop for CEOs and EDs. Annually, you will be offered an Ebook and asked whether the resources of TurnAround Business Coaching are helpful.

A maximum of 10 companies per year develop a relationship for Business Coaching to turn around their company or scale up past a growth barrier.