Cash Flow Archives - Page 3 of 3 - TurnAround Executive Coaching

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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;.

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 🙂

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.

 

A new book called ‘The Challenger Customer’ points out that government and business are both much larger than in 1990. The result of this huge increase in scale is more stakeholders who review your contract or grant. The judgment of one person is replaced by the varying perspectives of a committee. Committees don’t agree internally so everyone gets more cautious with the contracts.

Each stakeholder adds an extra rule – just so that their unpleasant teammate can’t report them to the boss.  A grant that took one person 3 days to process in 1990 is reviewed now by 5 people on average, based on data in the book. And the new massive rule writing threatens to inflate the cost of ink.

I direct a non profit with 7 contracts. Let’s look at typical changes this year  —

September – new rule that you can’t file a renewal until it expires although expirations freeze contracts. Government returns 42 page application. I respond and complain.
October – Government says “my boss says the renewal is fine, send it back.”  (a week later) “Oh. I’m returning part because the person who signed before is no longer eligible.”
November – new insurance certificate is required November 1 but the insurance company won’t issue for the next policy year until it begins on the 15th. Contracts paused.
December – insurance declarations certificate is no longer acceptable.  New form required. Payments Paused.
January – new language required on the Additional insured in new insurance form and is more characters than the Insurance Company computer allows. Government response =”Not my Problem”. Director starts screaming at broker and insurance company until they shrink the type and provide a magnifying glass for government to read the text.
January again – new insurance policy is accepted, all is fine, but no money. Government replies – “we did not mean that you get the money, we have to send to Comptroller now”

I seriously wondered if there was a political vendetta against us. But no, the local Jewish Community Center has been receiving $15,000 per year. The new rule is that amounts over $5,000 require an audit. The cost of the audit? $15,000

So, apart from more whine, wine and vacation – what can we do?

If you are small or midsized, you need a Strategic Plan for growth, or a partner non profit to outsource administration, or a planned possible closure.

Growth – A study sponsored by Goldman Sachs indicated that non profits in 2005 needed to have an Operations Budget in the $8-$10 million range for long term sustainability. Growth is uncomfortable but you need the scale to afford the labor costs to handle all of the stakeholders.

Outsource – If you are small and specialized – consider an affiliation with a larger general agency who allows you program autonomy as long as you cooperate on financial and legal.

Wind Down – A community group here has stopped applying for government money and realize that they are vulnerable to closure if volunteer vision does not continue. That’s not a bad thing. If we do good in non profit work and then close – it does not ruin all the good that has been already done.

The good news is that your feeling of smothering is not paranoia or inability to handle the top job. You are being smothered!  (in addition to any other problems you have).  More good news is that you have choices. But –  the bad news  – you need to respond before the rest of us finish you off so we can have your contracts and grow 🙂

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.

A crippling snowstorm has closed my nonprofit today.  I can rest easy. It’s difficult to be a nonprofit fraud victim when you’re closed. But that strategy is impractical for the longer term  🙂

Nonprofits attract fraud like ants to honey. Why?

  1. It happens because you have money. If your total revenue is $100, you are relatively safe from fraud. There is not much theft from lemonade stands. When you receive a grant for $10 million, people notice. Board recruiting suddenly becomes easy. You attract Freddie, whose sister Betty — owns a building perfect for renting as a school. You need a new building. Freddie uses the board position to push the lease to Betty at a high price. The nonprofit gets the school, Betty gets rich, Freddie gets a finder’s fee. It’s corrupt, and often impossible to prove.
  2. Fraud happens because nonprofits don’t pay that well. The typical profile is a female who has worked in your nonprofit for 3 years, has considerable responsibility, and doesn’t make that much (Non Profit Quarterly 12/21/2007)
  3. Fraud happens because nonprofits build a corporate atmosphere of trust. Can you imagine your local bank being as friendly as you are?
  4. Finally, Fraud happens because nonprofits are famously weak on punishment. Sam, the front desk guy that everyone loves, stole $10,000 by tampering with checks received (NPQ, Ibid). It seems a shame to add a criminal charge to such a nice guy.

As much as we trust audits, they rarely reveal fraud. True forensic audits are very expensive. Even the government prosecution of Sheldon Silver (Majority Leader NYS Assembly 1/2016), almost did not succeed with the jury.  The majority of fraud is discovered by accident.

So, how can you stand in the door and keep (some) corrupt money from flowing this week?

  1. Realize that all of us will commit fraud under the right circumstances. If my child needs a medical treatment and I see a way to steal from you, I will do it and worry about the consequences later. You will too. And you have no idea what personal crises are going on in your company personnel.
  2. Once you have announced to your managers that we will all steal under the right circumstances, implement protective policies to reduce and eliminate. As Ronald Reagan said so famously ‘Trust, but verify’
  3. Set a high ethical tone. People watch you turning in lunch receipts that are not believable, attempting every known device to get more expense money. Sheldon Silver chose longer routes in business plane flights to get more points on his personal account. Certainly his office staff and direct reports knew that a flight to Albany does not go through Washington  🙂

You don’t have the time and money to catch fraud this week, but you probably can prevent it.

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.

Whenever there is a deficit, we look at the budget for places to cut – less paper, less copies, less postage. The sad result is that you can’t mail anything for the next two months but the agency still fails. What can leaders do?

Non Profit Costs Are Labor Costs – Non profits all share a common feature – Most of their costs are labor costs. Non Profit budgets are made up of various human services. Those are provided by people that we pay. Non Profits are not selling postage stamps. You can cut the postage budget 100% and it still won’t solve a cash problem. 70% or more of a typical non profit budget is labor costs.

You won’t like this next part, but try one or more cost cuttings from this list.

  • Replace Low Quality Staff – Find staff who have been at the agency for a long time and have become mean and inflexible. They also tend to make better wages and benefits. Everyone is scared of them because they seem irreplaceable. Replace them. You will help staff morale and cut costs.

In one situation, the staff member was traded to four different managers because she was mean, was paid more than others, and played favorites. She informed one supervisor that she couldn’t be fired. The director felt like a lion tamer trying to get the job done. The result – the staff member left, income statement improved,  and the program never felt the loss.

  • Review Job Descriptions – Over time, job descriptions don’t change but regulations change, clients change, and technology changes. Carefully review jobs to see if you need to make significant changes and cut labor costs.

When you look around, everyone is busy. Ask each person for a list of their activities. Your goal is to find people who are being paid at a high level for a simple job that can be done at a lower cost.

A program director should not start stuffing envelopes after they have extra hours when their program funding and clients are cut. The task is needed, but not at that labor pay rate. Perhaps that director can add on another program to direct and save the cost of a 2nd position.

For example, our agency built an Excel report weekly for the bank deposit. Changing the accounting system removed that step which saved 4 hours of labor per week and audit costs at the end of the year.  Sadly, this was not apparent – and the accountant started to stuff and address invoice envelopes to fill the time.

 

  • Capture Lost Minutes – Are you paying for 4 minutes for a staff who arrives 2 minutes late every day and also leaves two minutes early? If you buy a time clock with biometrics, and pay only for the actual time for 60 staff who cut those corners, – its $1,000 a month that you can cut from labor costs.

 

  • Leverage Technology – Finally, are you using technology to reduce labor costs? Banks are using ATMs instead of tellers. Grocery stores are converting to self checkout. Non profits have two areas where technology helps.

Use technology on agency activities not related to your direct program services. Start bill paying online with controls, start payroll and tax reporting, human resource documents, etc. The annual cost of the change is cheaper than the annual cost of a staff member to perform these jobs.

Also, look for ways to assist appropriate direct program services with technology. In one program, each staff member was given an ipad. The observations were made and stored directly so that no clerk was involved to maintain paper files. The new system also allowed easy review of previous reports. One staff position was cut from the budget.

 

Conclusion:

The reason we don’t cut costs is that it’s easier to take $100 out of the postage budget than to release someone from the staff. Leading an agency has difficult moments.  We got into these positions to help the group of people within our mission with special services that will change their lives. When the budget to do that program is in danger, it’s the top and difficult priority of leadership to protect them.

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.

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