Cash Flow Archives - Page 2 of 3 - TurnAround Social Sector Coaching

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!

 

 

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!

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Program spending is up and investment cash is down, according to the Business Wire.  This has not prevented leaders from planning growth —-  without cash.

74% say that lack of cash is not a problem! Unbelievable.  Cash is the essential food of your company. Your strategy is worthless and your staff are underpaid if you run out of cash.

A key area of coaching is about growing and protecting cash.

 

https://www.businesswire.com/news/home/20180611005689/en/Nonprofits-plan-expand-lack-financial-strength-fuel

 

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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.

Nonprofits under $6 million in revenue are sometimes labeled as in the ‘Valley of Death.’

That’s a term from the for-profit sector (Greg Crabtree et al.) and it refers to the need to scale up administration fast even when you can’t afford the cost of hr, legal, and marketing. Infrastructure cash problems often disappear at the $6 million and above range.

It turns out that nonprofits have a unique worry – the indifference of funders who see no need to match services with reimbursements in a timely way.

The Open Road Alliance graphic shows that nonprofit leaders only cause 27% of their own problems. 46% of the crises in the nonprofit world are from funders. Keep scaling up to get your cash reserve!

 

Roadblock Analysis Report

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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.

I’ve never been in a plane that ran out of fuel. Having fuel is such a critical part of travel but airlines plan carefully. I have never heard a pilot announce that we have to land in the wrong city because we need more jet fuel.1118_4634681 (1)

Non profits are having more and more trouble with fuel supplies. A lot of good trips to do good things are being cut short because the money ran out. Some groups have dreams of where they want to go but there is no way to fund the new idea.

Religious non profits are often a sub-group in special pain because they are in decline. It’s a lonely and failing feeling to be in charge but without cash.  How can that be turned around?

One of the 4 Decisions Tools is Cash. When I mentioned to my friend that I help nonprofits find cash, he immediately asked if I lead boards in fund raising campaigns. He took me by surprise since the 4 Decisions doesn’t start there. But in the non profit world – of course – fund raising is the magic wand that gets pointed at leaders of nonprofits as the answer to everything!

Fund raising sounds wonderful, but it cannot be the only method for most organizations. Big gifts can take a long time to cultivate and it takes a lot of $10 gifts to get most nonprofits past their difficult cash moments.

Nonprofit leaders actually have 10 levers to improve their cash. The more powerful levers don’t normally include Fund raising.

Let me give an example. In my own nonprofit, I was surprised by changes in health insurance and so we re bid all of our insurance contracts. To my great surprise, a new broker got us the same policy from the same company and the total quote reduced our costs by $34,000.

What is easier for you? Asking 340 people to give $100 or reducing the insurance bill? Something I like about the 4 Decisions Tools is that you will feel more empowered as a leader as you use them. When you have a cash problem, you are not a victim who is waiting for a million dollar gift. You have multiple tools to solve the problem and your team chooses several levers and keeps that plane in the air.

Scaling Up is the textbook for the 4 Decisions Tools and one section is on Cash. And I also offer a workshop on the 4 Decisions if your team is ready to fly with a full load of fuel 😊

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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.

People tell me that they don’t plan because they have no money. They ask, ‘Why plan if I have no money?’  I normally respond, ‘How do you know that you need money until you plan?’

People don’t like the challenge of planning before finding money. Too many people think that they need money — to think about money.

So here are 10 ideas for Strategic Planning that can reduce or remove the need for cash.

  1. Avoid capital intensive Strategic Plans – Forget your plan to start a new low cost airline from New York to Phnom Penh. You can’t even afford one engine! You also can’t start a luxury clothing store there either. Clothing has to be purchased in quantity in different sizes. Inventory of expensive brands is a large investment and requires cash.
  2. Avoid long term payoff Strategic Plans – You want to find the cure to cancer? You don’t have the time to wait 5 years for drug trials. Do you want to start a new daycare in New York City? It will take a year to update or build and license before it opens. You need to use cash to pay salaries and construction during all that time.
  3. Avoid low cost goods for resale. It’s very hard to buy low cost clothes from Honduras for resale. Walmart got there first and has the power of a volume purchase. They offer to buy $1 million of cheap clothes with only a 1% profit for the manufacturer. It sounds like a bad deal but it actually returns $10,000 in profit to the clothing company.

You come along next and want to buy $5,000 of the same cheap clothing. If you could get the same terms as Walmart, the clothing company would only receive a profit of $5 dollars from your order. They will laugh you out of San Pedro Sula.

Once you pay $6,000 for the same clothing, you will need to raise sale prices back in Phnom Penh. It’s a desperate game that is hard to win.

  1. Build a service based Strategic Plan. Why doesn’t Walmart take over nail salons? Nail salon expenses are mostly labor. Nail polish does not cost much nor does advertising. The playing field is more equal. It’s hard for Walmart to make more money than you in labor intensive business.
  2. Build a materials + labor based Strategic Plan – Since you can’t compete directly with the purchasing power of large companies, add a unique service to the product that you sell. For example, buy cheap clothes in Hionduras and add an identification tag printed with a name and address. The price is no longer comparable to the shirt by itself because you have added a service.
  3. Avoid a Strategic Plan that has a long cash conversion cycle – Dell Computers was an early company that charged customers as soon as the computer order was made. They had the cash before they made the computer! Contrast that to a specialty clothing store that has a large inventory that sells slowly. The store may be quite profitable but requires cash to buy the clothing and then wait a lengthy period of time for the sale.
  4. Avoid a Strategic Plan that requires high fixed costs – Renting a storefront in a mall or on a busy street will require cash even in the slow season. It’s better to sell ice cream from a cart than from a store. There is no rent and the cart can be taken to a warmer climate in winter months or stored. Street fairs are popular because there are no rental costs on the days that you choose not to be open.
  5. Avoid a Strategic Plan in regulated industries – Industries that involve government inspections and licenses take cash and time to learn. The companies that are already in the market have more opportunity. For example, in New York City, there is a great need for the service business of child care. It’s also a business that the City watches closely with inspections, licenses, and regulations. Each of those add to the cost of a service and require cash.
  6. Consider a Strategic Plan that generates loyalty – Let’s assume that you sell ice cream from a cart. You are always on the same corner and you memorize the name of every child who buys a cone. Children love that attention from adults and loyalty will become part of your business model. No cash required for loyalty
  7. Consider a Strategic Plan that assumes one time sales – Tourists often pay outrageous sums of money for trinkets to remember a trip. In Florida, you can pour sand into a bottle and sell Florida sand at the airport. Customers will never return to buy more but they really don’t care if you charge $10 for sand. Cash from a few sales pays for a lot of inventory.

And now, I return to my first point. You don’t need any money until you painfully create the Strategic Plan on how to invest and make more money. A plan that is good and usable is not easy to create. It’s going to take several months and need quarterly review after starting.

Some business ideas require less cash. And no business requires cash until you have a good Strategic Plan.

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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.

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How can you secure government grants and avoid prison in the midst of a corrupt state or other regulatory environment? New York nonprofits and many others are famously susceptible to fraud. The NY literature (NPQ:02/2014) is filled with names of politicians such as Shirley Huntley, Efrain Gonzalez, jr. Sheldon Silver, Hiram Monserrate, Pedro Espada, fr., and others who were convicted of misdeeds with nonprofits or controlled non profits while pursuing criminal activities. The Nonprofit that decides to base its financing around contracts needs to approach funding mechanisms with political capacity.

5 Thoughts on Corruption, Connections, and Compulsory Crime

  1. Let us accept right from the start that connections matter. A Danish study of ‘clean nonprofits’ found that political connections led to more cash for agencies and better bottom lines on the income statement. (Amore and Bennedsen, 2013:1)
  2. Corruption is the willing agreement of organizational leaders to participate in a corrupt plan that benefits two parties. For example, William Rapfogel in New York overpaid insurance premiums for Metropolitan Council on Jewish Poverty. An insurance executive kicked back the excess payment with cash provided to both parties. He stole $3 million with this strategy.
  3. Tolerated semi public corruption breeds a corrupt culture which is hard to avoid. NYS Assembly Sheldon Silver intimidated some in the legislature and ruined the career of Michael Bragman and others who tried to make a change. Vito Lopez founded a senior center that was investigated for misdeeds while he continued to steer member items to the agency. It can be hard to exist in the same industry if a government official has a favorite project for funds.
  4. Tolerated corruption leads to extortion (Compulsory Crime) where unwilling participants from non profits have to participate in the corrupt practice in order to stay in business. IBM, GE, and many others have been caught in bribery schemes because they wanted to be in business in a certain jurisdiction. Non profits can face the same pressure if a majority of their funding originates in government.
  5. Corruption can be in the form of
    1. A simple cash kickback from the contract money
    2. a required donation to a non profit in which the politician has an interest or receives funds
    3. a donation may be made to your nonprofit by someone else who needs access to the politician and a compliant non profit to wash the money.

 

How To Avoid – A Beginning List

It’s good to develop your political capacity before you sail into deep waters of public money. If simply caught by any of this, your two defenses are stupidity or secret need. Neither are sufficient to keep you from being fired or in jail.

Since this is an article still not fully written, I welcome any suggestions to add or improve it.

Petty Extortion –

  • People generally don’t want to go jail for stealing $10,000. They may make a hint about your $50,000 grant offer, but it’s not worth entanglement if you have a defense. You can try one of these push backs:
    • Mention that you are getting a more severe A133 audit – in other words, just give us the cash, because the audit will catch any disappearing funds.
    • Stop the conversation before any illegal proposal is out in the open and save face for both parties with a legal offer. Maybe Senator X can get legitimate free publicity from the grant. Its not illegal. It’s expected.
    • Refuse the grant. This is not always possible since presumably you are meeting important needs with the money that you want to secure
    • Involve more community partners. Centrality is a concept from academe where several departments cross list a course to protect it during a budget cut. The Academic Dean decides to cut Communications 157 and suddenly discovers that it’s cross listed with Psychology and Sociology departments and will still be offered 100 years from now.

In this example ……..

Community partners can be legitimate subcontractors for a small amount and you promise to be their subcontractor in a similar circumstance. For example, the grant is for a school and you involve a food bank to subcontract the snack and the YMCA for a 3 week soccer class. Now the senator has three agencies involved and the sunlight becomes a disinfectant.

 

  • Larger Corruption
    • Hire a lobbyist. If you need a clinic and the only path is through corrupt electeds, you need a strategy. Making your own rolodex isn’t sufficient. A lobbyist who works at the level of the funding (city, state, county, federal, regional) can draw a safe map from you to funds.
    • Develop a cause in your nonprofit. If you are a vocal Cause (Al Sharpton, Bernie Sanders. Martin Luther King, and Eva Moskowitz are examples) you develop public support that may open the door for you even if it does not bring structural justice and reform the funding process. People like to fund projects with publicity value.
    • Examine your board of directors. Use LinkedIn, Facebook, and Google to understand any connections that they have that would be a conflict of interest. Make sure that no one is acting as a quiet agent in ways that are not transparent. Hire a private investigator if necessary. Then use the Board as a spokesperson. Even if you are not a firebrand, the entire board giving a press conference is unusual enough to get some publicity.

In Buffalo, my close friend and non profit leader was attracting money and doing things. During the build up, he got an unusual offer of money from the mayor. His comment was that he had to be wise because the funding would come with snares that would compromise his work.

If you are ready to grow, make sure you have the political capacity to do good and avoid jail

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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.

 

 

Notes

Amore, Mario, and Morten Bennedsen. “The Value of Local Political Connections in a Low-corruption Environment.” Journal of Financial Economics (2013): 19-20. Web.

Cohen, Rick. “New York’s Nonprofit Culture—“Corrupt at the Core?”.” Nonprofit Quarterly (2014): n. pag. Web. <https://nonprofitquarterly.org/2014/02/07/new-york-s-nonprofit-culture-corrupt-at-the-core/?gclid=Cj0KEQjw_9-9BRCqpZeZhLeOg68BEiQAOviWAhGhn_Fto85pvtpHuErLkoGiu-SOyuefS303Cui6bCgaAuEZ8P8HAQ&gt;.

Somebody who reads this article needs cash today.

Without cash, you don’t have time to fund raise, to borrow, or to think. You can’t increase your services because you have no cash to advertise. You may even be profitable – but slow payers are strangling your cash.

You have one more source of cash – collecting cash that people owe to you.

 

Are You in the Banking Business by Accident?

Most of us allow government and clients to get our services and pay later. The bank calls that a no interest loan. Here’s an example.  Let’s say that your budget is $1 million and you offer job training where most of the expense is paid by the government. Clients pay for daycare for their kids while they take the training.

  • Assume that 90% of your cash is received after you provide and bill for your job training services and daycare. Assume that it takes another 2 months to actually get the money. Your financial report every month shows about $225,000 as the accounts receivable. Use this formula.  90% of your budget of $1,000,000 is paid late and you carry $225,000 (3 months) constantly in bills that people have not paid. You need that cash now for payroll and rent!
  • The formula is (90%*$1,000,000)/ (225,000)  = 4.
  • You are accidentally in the banking business! 90% of your customers slipped a no interest loan into the services you provided. That number 4 should be much higher or negative.
  • Divide the number of days in a year (365) by 4 and the answer shows that you wait 91 days on average to get paid. This can put you out of business! If you can reduce to 60 days to get paid, you have just added $75,000 to your bank balance!

 

How can you get your $75,000?

  • Discount for immediate payment. If you are paying 7% on a line of credit while you wait for your money, it makes more sense to offer a 5% discount for full payment. Cash will start coming in this week. We needed cash and offered a 5% discount for the tuition paid in full. To my amazement, one person came in and paid $19,000 immediately. We would have paid 7% on our line of credit.
  • Require a deposit. It raises your number 4 and reduces the amount of missing money. A deposit means you are collecting money before service is provided. Landlords always charge rent for the month ahead, the security deposit and the last month’s rent. They reverse the cash and are borrowing 90 days of cash from their tenants at no interest!
  • Require payment today for services today. You are no longer in the banking business. A simple model.
  • Develop a relationship with all the government agency secretaries. Learn the names of their kids and what they hope to do on vacation. They have power. One secretary took our claim and quietly moved it to the top of a big pile. Relationships make a difference!

 

Can you stop being the government’s bank?

Not 100%. But you will find with daily calls and emails, money will arrive much sooner than patiently waiting. And all of these ideas are simple enough to start today. Why are you waiting? Get your cash!

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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.

Most Non Profits have little idea about the working capital to keep in the bank at all times. Nonprofit articles often recommend cash equal to 6 months of expenses. Those writers have obviously not actually worked in a smaller nonprofit. Aside from a legacy, there is little chance of putting aside half of the year’s program budget for a rainy day fund.

Many nonprofits take one of two approaches. One approach is to receive a windfall legacy or grant and keep the entire amount in a savings account to be safe. This sadly reduces the investment in mission. Imagine operating a food bank that can open a new location and get reimbursed for food. It will cost $1,000.000 to renovate the space. The Board decides not to proceed because it has $3 million available and fears drawing down its cash.

The other common approach is to put your head down, keep operating and hope that the day never comes when the unavoidable demand for cash clashes with the available bank balance.

Fortunately, there are formulas that help.

Greg Crabtree* advocates for 2 months of operations plus 10% profit of cash in bank. For example, a $12,000,000 revenue company might have $2,000,000 plus $1,200,000 ($3,200,000) in ready cash and securities.

On a daily basis that same company may only need $10,955 in constantly available cash and the rest in a money market (or line of credit).

Get out the calculator! The formula is  (2 * monthly amount needed to pay bills) / (Interest rate on line of credit/ 12).  Got that?  Now take the square root of that number.

Example: Your budget is $12 million** and your business is so regular that you need exactly 1/12 of that every month to pay bills. Line of credit is 5%

(2 * 1,000,000) / (.05 / 12) = 480,000,000.  The square root is $21,909.  The maximum to keep in the bank account is that amount and the average daily balance should only be $10,955. Save on line of credit costs or get more interest from the money market by holding only what the formula requires.

You can feed the hungry while making sure that your agency doesn’t end up needing bread.

*CRABTREE, GREG. SIMPLE NUMBERS, STRAIGHT TALK, BIG PROFITS!: 4 Keys to Unlock Your Business Potential. LIGHTNING SOURCE, 2014.

**My companies always have regular numbers to make clear examples. Don’t be surprised if you need to make some adjustments when you apply the formulas 🙂

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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.