Budget Archives

Ways to Raise Funds

Posted on October 2, 2022October 2, 2022 by TurnAround Executive Coaching

I assume that you are a frustrated NonProfit leader who is slowly fighting your way forward and you need strength for the battle. I’m Dr. Ron Tompkins of TurnAround NonProfit Coaching. If you’re stressed, you’re not alone. There are over 1.5 million nonprofits in the USA and sometimes we’re in competition with each other, with forprofits, and with government. In the midst of the struggle to do good, it’s tempting to consider 5 sources of funding which may not match your agency needs:

Where are the grants? At the beginning, NonProfits usually need capacity grants and they are offered program grants or tiny grants. So you complete a lengthy application for a $500 grant from XMart and the grant is so small that winning the grant actually destroyed some of your time for program and strategy leadership. Someone applied for a 21^st Century grant for Afterschool. They won the award but only 2% is allowed for overhead. The grant assumes that you will do extra fundraising in addition to the grant. You may have raised your revenue and your deficit at the same time. Revenue is vanity, surplus is sanity, cash is Queen/King!

Grants are a necessary part of your capital structure as you grow. Set limits on the amount and types of grants for which you will apply. Study the grant carefully to match the grant to your strategic plan.

Where are the donors? Donors help you start an agency but most agencies can’t grow with donors. A $10 million agency may raise $1 million in donations. To do this, they have a department with Chief Development Officer and staff. They keep donors informed with pictures, regular stories of success, and donation campaigns. Let’s assume that you are an agency under $6 million in revenue. Are you ready to hire a professional and set up the department with costs for social media and mailings?

If you’re not ready for that, most leaders decide to do it themselves with some volunteer help from the Board. This often fails because small-gift donors require regular contact. One of the more difficult Ways to Raise Funds. Pew Charitable Trust also reports that the number of small donors is decreasing. You may look at a $20 gift as a tip, but many donors feel as though that $20 gift had three more zeroes behind it.

Willie Sutton understood that if you need money, you have to go where it is. He said that he robbed banks because ‘that’s where the money is.’ If you are a smaller NonProfit, your best fund raising is to make a list of people who can give $5,000 and work with the Board systematically to develop a few relationships that you have the capacity to maintain.

What about an unrelated business as a captive corporation and use the profits? Large NonProfits do this all the time. Think of your college and the food court. It’s highly profitable but 4 conditions have to be right. Does the business require a small up-front investment? You don’t have the upfront cash to also be a bus company. Are competitors unlikely? Are the profits high enough to cover unplanned problems? Do you have the management capacity?

All four conditions need to be present or you could lose money for your nonprofit instead of adding more. A senior daycare opened a Russian curios and arts shop. Competitors are unlikely but the travel to Russia frequently for inventory is a high cost and the inventory may not sell quickly due to world conditions. Suddenly they have a lease on the shop to pay and unsold inventory. The senior daycare will pay for the curio shop! Don’t create a business where the funding goes in reverse! Not Ways to Raise Funds when cash disappears 🙂

What about one of those new corporations? Let’s make a Certified B Corp, Public Benefit Corp, Conscious Capitalism, or L3C instead of a NonProfit. There are many experiments in the Social Sector to do good in the world. Most universities have some type of Social Sector program now.

Ben and Jerry’s is a famous example. Do good and give some of the profits away. How is this different from a captive corporation? The difference on the upside is that most of these corporate forms can attract investors. You get quick cash to get started. NonProfits aren’t owned by anyone so there is no way to ask Ron to invest $100,000. Ben and Jerry’s did well and grew and the profits attracted a takeover bid from Unilever. Unilever investors want dividends and high share prices. This was illustrated when Ben and Jerry’s took at stand on social sector issues in Israel. So these corporate forms have serious limitations and not enough examples of success.

What about just doing good? – Most NonProfits are not willing to set a risk appetite. ForProfits set risk rather easily. Let’s assume that Ron opens a bakery so he takes a mortgage on his home and spends $100,000 to get started. If he is successful, he will get $100,000 back in a year and another $200,000 in profit. His risk is that he might have to pay the $100,000 to keep his home if his business does poorly. His hopes and assumptions allow an aggressive risk appetite. He will also work day and night to make the bakery succeed. Everything is on the line. NonProfits have a much lower risk appetite. Boards typically don’t give bonuses for success. The traditional high-performing managers are not attracted to nonprofit leadership where they accept risk, sleepless nights, and anxiety but don’t share in success. If you have a high risk appetite and happy to split the profit on doing good and doing good for yourself, you might just pay property, sales, and income tax on profits and just do good.

We’ve looked at 5 Ways to Raise Funds that lure NonProfits. Could any of these be right for your agency? Definitely! Grants, donations, unrelated business, new business forms or high risk appetites may be a perfect match to get you going and growing. Coaching helps you match your business model to your capacity. You know your business but the coach asks questions so that you make right decisions. You do more good for more people. If this makes sense to you, call me to take a risk free step! Thank you for being with me today!

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Control Hidden Expenses

Posted on August 7, 2022August 7, 2022 by TurnAround Executive Coaching

Would you be interested if I can show you how to control hidden expenses in your nonprofit?

Boston Nonprofit had a surplus in a contract and decided to buy 100 Chromebooks for after school use at a cost of $50,000. Most public schools are using online homework assignments so After School programs need updated technology and more of it. The expense was not unreasonable but the After School homework time was about 60 minutes. Assume that the Chromebooks last two years and costs are hidden on the balance sheet with depreciation to account for breakage and use.

So would you agree that we should spent $50,000 and hid it on the balance sheet as an asset? That takes all the pressure off from management because leaders usually lead with data from the income statement. The balance sheet is more mysterious unless you’re in the accounting priesthood.

Over two years of use, each student is paying $250 per year or about $1.50 per school day for only one hour of use. If you were buying this computer for your kid, would you be ok with a computer that was used one hour a day? I’d work out a deal where she shares with her brother!

The balance sheet hides costs as assets. Makes you look richer. You’re not! You have $50,000 less cash than last week and you are getting very little use from what you bought!

A coach asked if leaders were comfortable with the cost for so little use. Boston nonprofit realized that the Chromebooks were a wonderful resource that was 95% available every day. They decided to think of the $50,000 as an investment that they had to recover since they only needed an hour a day. Control Hidden Expenses.

An Early Childhood program in the same building was willing to use 50 Chromebooks in the morning for 3 hours and pay $150 per year or $7,500.
A partner agency for job training was willing to rent 25 Chromebooks evenings for $1,000 per month or $12,000 per year.
A nearby Charter School was interested to use 50 Chromebooks from 12pm-3pm for $15,500.
A tutoring company used 50 units on weekends for $12,000.

The extra use drove up replacement and repair costs. The nonprofit expensed the entire set and sold the 50 remaining Chromebooks at the end of the year to a homeless shelter for $3,000.

Now, I’ve changed details to make an easier story, but what are the results?

Most people notice that the Chromebooks now cost the agency nothing because they got an additional $50,000 in rentals to match the expense. That’s not really the results that the coach saw. Can you see other results?

There will be added costs to record and monitor rental use – some software and a staff person to monitor storage and use

The cost that changed to an asset is the social impact. This one nonprofit used partnerships to take $50,000 spent on 100 students to 10x the value of social impact to change 1,000 lives

Technology ages so the nonprofit is always buying the current year model which is usually faster. This empowers 100 students in homework
Tutoring for college
Job preparation for the unemployed
Help with high school research
Computer access for impoverished young children
Communication for homeless.

Can you imagine the feeling of the Executive Director at the end of the year?

When I coach with agencies, I see 10x value from the assets all over the place.

Control Hidden Expenses. Let’s look at ignored costs for program directors. Often the flow of clients varies while the nonprofit is open. Boston nonprofit noticed that 25% of students leave the after school program an hour early. Their parents pick them up on the way home from work. They excused some unneeded staff early, but that had morale problems that led to quality and productivity loss. With their new understanding of costs. they weren’t ready to see staff stand idle.

Boston nonprofit started to discuss what to do with irregular student demand. They realized that Fridays were a day when many after school students were picked up early. They hired a staff member with a computer background who offered coding on Fridays when they weren’t needed for a classroom. Another staff member was needed half of the time for the later hours, so they assigned that staff member to plan trips and monthly themes. Those activities could be done at slack times instead of a rigid schedule. Other staff set up a tutoring schedule so some students with need had one to one attention.

When they compared notes with the day school, they realized that six months of the new approach had raised the report cards half a letter grade on average and reduced absenteeism in the day school by 5%.

Most of our nonprofits are able to do more than we even imagine. How many ignored costs can I find in your nonprofit? Would it be worth a challenge to see how many can be leveraged to change lives?

If this makes sense to you, click on the pic above to connect. I use the TurnAround Performance Platform with leadership teams. Meanwhile, thanks for the time together today.

7 Key Financials!

Posted on April 12, 2019 by TurnAround Executive Coaching

Leaders get lost in a fog of numbers when they only need 7 Key Financials to make decisions.

I hope that you can join me at OpCon, June 13^th, where I will be on a panel “What Nonprofits Need to Know About Nonprofit Accounting and Finance”. If you come with a CPA, bring aspirin as they recover from an encounter with a Management Accountant. If you’re a CEO, bring champagne to celebrate as you learn about 7 numbers that actually help you manage your agency.

In my book “Doing Bad at Doing Good”, I discover that the best nonprofits have an Operations Budget model that only requires 7 key financials. I’ll have copies of that available for attendees!

When you’re ready for a coaching investment, let’s talk! https://taconsulting.live/our-nonprofit-promise/

990 Snooping Sundays – Is Your Paycheck Safe?

Posted on July 29, 2018August 6, 2018 by TurnAround Executive Coaching

This is the 5^th 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?

They borrow from their restricted funds with the promise to repay
They borrow from prepaid tuition and fees or prepaid money on government contracts
They finance up to 75% of the collectible cash from government with a line of credit at a bank
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 2^nd quarter and a 20% growth in revenue in the 2^nd year. We’re here for you!

990 Snooping Sundays – Getting Paid More

Posted on July 22, 2018August 6, 2018 by TurnAround Executive Coaching

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

What did the highest paid staff member receive?
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.

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.
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 🙂
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!

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.
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!
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

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

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!
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.

990 Snooping Sundays – Sleeping Assets

Posted on July 16, 2018August 6, 2018 by TurnAround Executive Coaching

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.

990 Snooping Sundays – Technology!

Posted on July 8, 2018August 6, 2018 by TurnAround Executive Coaching

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?

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
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.
Infrastructure is larger than technology and involves decisions on how fast to add staff in Human resources, administration and accounting.
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 2^nd quarter and a 20% growth in revenue in the 2^nd year. Until next Sunday, keep your eyes on technology!

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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.

Are You Reading the Wrong Financials?

Posted on May 5, 2018June 23, 2018 by TurnAround Executive Coaching

If you’re out of cash, you’re not the first leader to have the experience. In 2010, the New York Metropolitan Opera ran out of cash. They were surprised. They had a balance sheet which was filled with rich things. They had a budget of $291 million.

Here they were, humiliated and humbly asking singers to take a 10% pay cut. Cash is King

There is no substitute for cash. Your employees can’t be paid in dog food, bedding, free haircuts, or whatever your business produces.

Most leaders who don’t have a financial background love the profit and loss statement. It’s an unfaithful lover. Make a date with your balance sheet.

In the left-hand corner of the balance sheet, the first thing you see is Current Assets. The arrangement is that these highly liquid items are the most important because you can pay bills with them.

Line One is Cash followed by other lines in order of how quickly they can turn into cash. Cash is good.
Line Two is Petty Cash. It’s small. It’s hard to make payroll with Petty Cash if you pay minimum wage or more 😊
Line Three is Temporary Investments. These are great things but risky. I invested my parents’ life savings and it was $54,000 in 2008. I cashed out when it hit $26,000. I can’t even write this without saying a prayer of forgiveness to my parents in heaven. Are you big enough to watch this daily?
Line Four is usually Accounts Receivable. Is that money from a deadbeat government contract that plans to pay 4 months late? They won’t speed up just because you’re desperate.
Line Five is inventory. Is this stuff that’s going to sell next week?

The balance sheet holds a truth of your company on line 1. How much cash do you have?

How did the Metropolitan Opera survive? They have some world-famous murals by Chagall and they took out a special mortgage (Chattel mortgage) to get enough money to keep payroll going. Most of us don’t have the Chagalls and Rubens hanging around the factory so don’t get excited.

What about the income statement? The problem of the income statement is that you can’t tell the difference between real cash and other things like Accounts Receivable and Depreciation. Haven’t you had times where you are running a profit and counting the pennies to make payroll? The income statement is important but it’s a dangerous tool in the hands of a non-financial leader.

The Cash tools are part of the 4 key decisions because cash shortage will put you out of business faster than any other decision you make. Cash surplus gives you time to recover from a problem in any other area of business.

Dust off your balance sheet! Then plan to build your cash with TurnAround Business Coaching.

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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.

High Quality is a Recipe for Failure

Posted on October 11, 2016June 23, 2018 by TurnAround Executive Coaching

I live in a mixed income neighborhood. I was delighted when a new restaurant opened with a lounge style, creative tapas, and space for mingling. The staff were well dressed and professional. There was a waiter for every 3 tables! No more Joe the Bartender nights. It was worth twice the price 🙂 What a shock when Volcano suddenly closed its doors. I’m still in mourning,

BUT Business success balances quality against cost.

We all want to hire a lot of Grade A staff. Let’s assume that you own a restaurant. In this example, you hire only specialty chefs – pastry chef, sous chef, saute chef, fish chef, glacier, etc. Add professional waiters with 5 years previous experience. Just to be perfect, add a maître d’ to die for.

Would you get the Zagat Award?

No. In my neighborhood your restaurant will be bankrupt after 3 months. You cannot afford a staff team where everyone is a superstar and there’s too many staff anyway. You need a mix of employees at different levels and just the minimum number of staff.

Success in business requires a few Grade A staff, a few Grade B staff who are teachable, and constant firing of Grade B staff who won’t learn and also quickly fire Grade C staff who actually hurt your business.

A great business uses a Salary Cap. The Salary Cap is simply the total amount of money that you can spend on payroll. You can split the Salary Cap any way that you want. If the Salary Cap is $1 million, you can hire 10 people at $100,000 each or 20 people at $50,000 each.

The Salary Cap is easy to find. Start with your total revenue and subtract Fixed Costs (lease, taxes, mortgage, depreciation, interest, and insurance.) Now subtract all supplies and inventory purchases. If you own the business, subtract your return on investment.

The remainder is your Salary Cap. You can hire as many people as you want as long as the total salary is under the Cap. See how it works in this example.

Example:

Revenue: $5 million

Minus Fixed Costs: $1 million

Minus Inventory and Supplies: $1.5 million

Salary Cap = $2.5 million

Won’t people pay more for quality? Why not hire all the chefs in the first example and simply raise the price of every meal by $10. Your revenue goes up and so does the Salary Cap.

It depends on your market. If your business is in a high poverty area, people may enjoy very competent waiters at the restaurant and great food, but they will still eat at McDonalds. Your recipe for success may be to hire some Grade B- people and hire one good trainer and one good supervisor who can fire people regularly. The combination will give you enough Grade A staff to be a success.

I’ve always hated cooking. It takes so long and not easy either. You have to experiment with the recipe. Of course, people who like to cook get better and better at it. You have the same challenge with your company. The only way to get good at it is to experiment to find the right mix of staff. No one likes to fire people or move them around. It’s hard to find new people and train them. What a headache! Just like using recipes 🙂

Have patience. Keep practicing until you have the perfect recipe. Bon Appetit.

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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.

Are You Throwing Away Cash on Labor?

Posted on March 21, 2016June 23, 2018 by TurnAround Executive Coaching

Summary:

Kindheartedness can kill your business in less than 15 years if you are paying for staff or salaries that you don’t need.

Compensation is your biggest cost

If your company is a nonprofit or service company, the biggest budget line is compensation. You only have one thing to offer the public – the actual service of your staff. For example, the cost of owning a barbershop is not the chair and the razor – it’s the barber.

You create savings or leverage for more results only on your biggest line item in the budget. That line is your biggest expense so that is where the profit or loss really happens. Your line item to watch is compensation. In the case of the barber, saving 30% on the cost of razors is very nice but doesn’t really change the bottom line. The cost of razors is a small cost compared to the cost of barbers.

A common way that labor can be changed is buying technology so that a manual task can be automated. We used to have a time clock and cards which were manually input into payroll with cards and work papers stored. We bought hand scanners which directly enter the online payroll program. We require direct deposit so there are no checks to distribute. We changed the pay date to twice a month instead of biweekly and went from 26 payrolls per year to 24 payrolls. The result is a reduction of 18 hours of labor per month.

Technology is only one way to leverage labor. Use your imagination!

Reasons Not to Change Labor Costs

It would seem logical to reduce positions, hours, or compensation when needed except that:

You’re a nice person and hate to cut hours even when staff have nothing to do
The staff member is 55 years old and you’re afraid she can’t get another job
You’re concerned about age or other discrimination
The staff member scares you and you’re worried that he will damage the company online after the termination
You have two sisters working in the same company so you will end up with two headaches while changing one job.

Since these are all real feelings, let’s look at each one –

Starting with two sisters – never hire related persons in the same department. Move one of them as soon as possible into a different department so that each can be supervised on their own merits. If the company is small, it can be very difficult without losing both of them.
The staff member scares you – I remember one staff member who scared other staff. When I fired him, I felt like a lion tamer facing an unusually hungry beast. He left the firing room to accuse other staff of hating him and sent notes to customers about my untrustworthy behavior. My only mistake – you need to escort the person off the property as soon as you finish telling them the news. Ignore the threats
Discrimination – you must follow labor law scrupulously. Consult your attorney. The money you spend on the attorney can be paid with the dollars you save from making the change. Document all your actions and employee responses.
Age – There are now more and more people working later in life in all companies. That is wonderful as long as they add value. You can protect the company and protect them with an immediate policy that they have to invest in their skills development every year to keep the position. In my first job, the company had a policy of requiring progress towards a Master’s Degree within 3 years of hiring or the 3rd year would be the terminal year. They wanted the freedom to change the work force as needed without damaging employees. What a graceful way to handle staff relations! I’ve always followed it.
The biggest problem in making change is your own feelings as a manager. It’s an awful feeling and responsibility to disrupt someone else’s life. And it’s part of the responsibility that comes with your compensation.

Conclusion

Our economy is changing rapidly. “The average lifespan of a company listed in the S&P 500 index of leading US companies has decreased by more than 50 years in the last century, from 67 years in the 1920s to just 15 years today, according to Professor Richard Foster from Yale University.” (BBC News). I can’t predict how your agency will manage external threats and opportunities. What I can say is that labor costs in a service organization are your major challenge. If you don’t manage those costs, your chance of survival is bleak. Good luck!

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Does Any Non Profit Believe in Making Money?

Posted on February 22, 2016June 23, 2018 by TurnAround Executive Coaching

I’m worried about Non Profits going out of business – some with a bang, but more with the comforts of hospice.

My agency has a grant that joins us to 6 other agencies plus two others in the neighborhood. In preparation for the meetings, I read the 990’s of all involved. Hold on to your seat.

The range of agencies’ revenue was $1 million – $54 million
1/3 actually made a surplus last year, 2/3 had a loss
The two largest agencies had more debt than assets. While accounting can lowball the market asset value of a building, this report is still really bad. I wouldn’t work for this company! It turns out that we don’t have to 🙂 They just laid off 80 staff to try to turn things around. Too little, too late.
The 2^nd largest agency in the study at $31 million has similar troubles except that they are cutting administration instead of program. They’re down to 9% for administration. Good luck with that strategy for 5 years.
Two other agencies (revenues of $5 and $7 million) have complicated balance sheets that show complex fiscal structures or — corruption. How can you have a revenue of $7 million, yet invest $9 million in a limited partnership with the founder and ex director still on the board? I was going to copy their fiscal complexity in our agency but, — oh, they are both still in deficit!! So much for financial deals that we mortals can’t understand.
4 agencies have Receivables at the end of the year of 11%, 14%, 17%, and 18%. How can they stay alive with that much government money that hasn’t paid?
Of the three agencies that made money, one has the smallest budget and volunteers.

What is going on?

It’s a small sample. Maybe I accidentally found all the nonprofit problems?

My guess is that many agencies don’t spend time thinking about where they are going and how they will get there. Long term viability for nonprofits requires a good strategic plan, including a section on what the agency will not do. Too many strategic plans are magical thinking.

Historic, long-lived agencies have a special problem. They need to ruthlessly cut programs that no longer serve the mission well. It means cutting off some well loved staff who have added a lot of value in years past. Most of the agencies in this small study are not new nonprofits.

Also, someone with predictive accounting ability (management accounting) needs to make a financing plan to pay for what has been planned. Cash is gas for the strategic plan. Out of gas – out of plan.

Finally, make sure your fraud policies are in place. As soon as you say $1 million, you’ll attract new friends and they won’t all be donors J

I’d be interested in the experience at your nonprofit (anonymously if necessary).

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Reduce Risk in Budgets for Better Sleep

Posted on February 18, 2016June 23, 2018 by TurnAround Executive Coaching

Budgets are planning documents. It’s always good to have a plan – but it’s even better to add risk protection in your plan. If your company has at least a modest surplus, it’s time for risk management.

How to Reduce Risk in Your Budget

Calculate your bad debt from last year. Bad debt is fees not paid for service, pledges that were not paid, government contracts that had a clawback, etc. It’s money that you expected to receive in your budget, but it never arrived.
Add an amount of bad debt as a new expense account in this year’s budget. It will be similar to last year’s total amount of bad debt. Charge the budget entry each month this year in your general ledger (debit expense and credit a new contra account in the Accounts Receivable). When the Smith family doesn’t pay that $200 bill, you can use the savings from the contra account (debit the contra account and credit income) and your operating budget doesn’t change at all. Mischief managed.
Sudden worker’s compensation insurance bills are very similar if your work force is growing. Add an expense account and a contra account to plan for a sudden bill.
Unexpected maintenance on leased equipment charges such as extra use of copiers, overtime minutes on cell phones, etc.
Unemployment claims if you use the direct reimbursement method offered to non profits in some states.

Only add these budget entries if they are large enough to be material. Adding $100 contra account for extra cell phone use is more effort than it’s worth.

These accounts take the unknowns for this year and give you one more tool to manage risk and sleep at night.

Side Note
Monitor the contra accounts yearly and reduce unreasonable balances. Since they are balance sheet items, they just continue to grow if the risks don’t actually occur. Some clever directors add vacation expenses in that trip to the Caribbean by charging the contra account and hoping the Board doesn’t notice.

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