Contract Funding Archives - TurnAround Social Sector Coaching

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

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

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

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

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

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

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

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

 

The Three Critical Factors of Going Concern

  1. Management Leadership

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

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

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

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

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

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

  1. Net Income

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

  1. One Source of Revenue

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

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

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

Conclusion

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

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

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

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

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

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

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

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

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

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

Conclusion

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

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

 

 

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

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!

 

 

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.

 

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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I’m always envious of the for profit companies. I know they have their bad days (Tesla after it’s car crash) but their business plan is so simple. Make Money. Two elegant words that everyone understands.

The non profit world is messy business. We are mission driven. That one phrase leads to our great challenge – arrogance. If you are really good at understanding your mission, then criticism from stakeholders runs off your back like water off a duck. We actually like criticism because it shows us how the peasants really don’t understand. Criticism becomes a compliment.

Who criticizes?

 

Government

Government contracts often struggle against the unique mission of a particular non profit. Government does not want to cut individual deals with 1.5 million nonprofits in the USA. They simply specify what they want to do and we rush to respond to the RFP.

  1. Government contracts are often written to prevent failure rather than strive for success. Youth diversion contracts are written to count kids in seats, not to measure more peace and confidence for an angry teen from a broken home. Mission driven non profits often are organized for more specific results.
  2. Government contracts are politically driven. That means that the next President, Governor or Mayor can ruin the excellence that you built. Contracts get cancelled. New contracts veer off in new directions. I honestly understand the many non profits who have given up on excellence in mission and simply supply whatever minimums are required.

 

Families and Clients

Families often don’t understand what they need or why we offer specific resources. Example: While you may be the specialist in lactation therapy for babies, that does not mean that parents will simply rush to fill your appointments. They don’t connect their need with your resources.

  1. People live for their fears and your mission may not connect. Do you know how many parents ask about gluten in food programs?  Only 1% of the nation is allergic to gluten. From parent comments, you would think it’s the silent killer of America.
  2. People have trouble measuring the quality of service industries so they look for symbols of quality that have nothing to do with your mission. You provide quality daycare and parents look. They look to see if you bought Little Colorado train tables. And are the tables low formaldehyde? The symbol has little to do with the quality of your service.

 

Self Criticism

The most painful critic should be the management and board. Sometimes the mission has not been carefully considered and you have critics because you deserve critics. Is your agency really providing (1) measurable results (2) at a reasonable cost (3) for a worthy group of stakeholders? That key question (Carver) needs to be reviewed regularly.

I was recently at a gala for another agency. The evening was filled with spectacular comments about getting basic rights for prisoners across the globe. The speakers were inspiring.  The reasonable cost and how to raise it was never mentioned. The speakers were traveling constantly and regaled us with stories of trips. Perhaps they should change the mission to bringing prisoner care packages on their trips.

 

How to Stay the Best and Survive

Let’s assume that you have done the self criticism and your mission is clearer and better than ever. What are some steps to protect it without irritating all your stakeholders?

  1. Reduce the areas where you are unique to the bare minimum. This is no time for grand gestures that add little value to the end results. If your need to add your special elements to a government contract at your own expense, most contractors have no trouble with that.
    1. Any unneeded extra uniqueness has to be paid from your free cash. Ouch.
    2. All parts of a program need staff orientation and professional development. The simpler program requires less effort in training and will be easier to achieve highest quality results.
  2. Tie your mission to stakeholder fears. The Challenger Sale is a six step process for sales. Two of the six steps are Rational Drowning and Emotional Impact (Dixon). Both steps show the customer more about the problem before talking about the sale. Example: Why do I have to pay $2,000 for Test Prep? I’m ready to accept that price after someone teaches me why kids are struggling with the Common Core.  Once I understand that most children will spend their career saying “You want fries with that burger?”, I’m ready to listen to why I need your non profit service.

 

Conclusion

NonProfits are mission driven which gives us great privilege to look at society and direct resources to areas of strongest need. We have to accomplish that mission with humility and realize that we need the good will of the stakeholders. They are trying to make the best decisions too. We have to be smart as to how to apply our mission to contracts and we have to understand client fears before we announce that we are the magic cure.

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Works Cited

Carver, John. Boards That Make a Difference: A New Design for Leadership in Nonprofit and Public Organizations. San Francisco: Jossey-Bass, 1990; 3rd edition, 2006. Print

Dixon, Matthew, and Brent Adamson. The Challenger Sale: Taking Control of the Customer Conversation. New York: Portfolio/Penguin, 2011. Print.

Synopsis: If you have noticed that fewer government RFPs are arriving for your mission, it’s a possible sign that political priorities have changed and your great agency no longer has a private key to the statehouse. This article proposes 4 ways a nonprofit can respond to cuts in contract funding.

Background

Higher Education is a jilted lover.

At the end of WW II, the President feared that the USA would return to peacetime with riots (this had previously occurred after WWI). The economy could not absorb all of the returning soldiers into the work force. The GI Bill was an elaborate ruse to divert soldiers out of the work force temporarily until the peacetime economy resumed.

You know the rest. Soldiers went to college, the Marshall plan created demand for USA goods, and the national standard of living advanced steadily in the 1950’s and 60’s.

By the 1980’s, Higher Education was cast aside while Crime and Medicaid projects flirted with government. The City University of New York lost its free tuition and the rest of the NYS system was no longer cheap. While almost all states have cut funding since 2008, Alabama, Arizona, Louisiana, Pennsylvania, and South Carolina have the sad distinction of removing 35% or more funding for higher education (Center on Budget and Policy Priorities, (2015:Mitchell and Leachman).

 

What can you do if you are in education, AIDS, or some other downsized priority?

I suggest that you choose one of four alternatives:

  1. Reduce your mission to a niche that can be funded
  2. Acquire a similar agency
  3. Look for a hero and negotiate your surrender
  4. Start a forprofit partner

 

Reduce Your Mission

In good years, we all tend to broaden our mission. Our best stakeholders demand it with considerable pressure. We gracefully yield, impressed by our own capacity. The trick is to understand the core where we are determined to be the best and  return to our true love when our government suitor is found with a new friend.

In my agency, our core is academics for kids who don’t have English as a home language. We have supplemental programs as well and many additional students from English speaking homes participate because they like our quality.

NYC does not always have our constituency at heart. The last administration proposed stopping all after school programs throughout the city for fiscal reasons. The current administration thinks more about diversion to avoid youth violence than college prep.

We accept some of those contracts but we also understand our core for those times when the love affair with government falters. We work hard to keep our tuition based programs filled and expanding to guard against the day when funding cuts occur

 

Acquire a strategic company

Notice that I say acquire rather than merge. Mergers often fail as two living organisms try to live as one.

  1. Weak finances of many nonprofits make bad mergers. Owen et al. state that “…. many organizations have grown quite weak in the present economy and are today in an extremely vulnerable position. ….. it would be difficult to carry out effective mergers with organizations that had grown financially desperate as demonstrated by an inability to meet ongoing monthly expenses or the loss of significant revenue sources.” (Owen, 2011:46)
  2. Unusual leadership is needed for mergers– While there are examples of successful mergers, the success depends on skills of boards and executives. I submit that these skills are the exception more than the rule.
  3. Less conflict in acquisitions– The power of the acquisition is simply for one organization to surrender its resources in the expectation that the combined company will have more efficiencies and two networks for its continued mission. There will be staff reductions, but the acquired organization may easily have some talent that will get preference in merit based selections. The spirit of the acquisition under the lead executive will be understood. People accept in advance in an acquisition that difficult decisions will be made to protect what we do for the people we serve.

What do acquisitions provide?

  1. Key contracts– The acquired agency may have a key contract or lease that is hard to obtain.
  2. New networks– assuming that the acquired agency has done quality work and managers will not leave precipitously, you can quickly expand your own network
  3. New talent– if some positions are now duplicates, you may find that some of the better talent should be chosen from the acquired organization. This is a strategic chance to strengthen your bench
  4. Efficiencies of scale– while service organizations do not profit from scale as much as manufacturing, acquisitions with a total revenue of less than $10 million will likely benefit.

 

Look for a Hero

There are too many nonprofits even without the cutbacks and fickle behavior by government. Kobara (2015) states that new nonprofits started at a rate 50 times faster than small businesses in the last decade. He points out that there are no investment banks, specialists, and attorneys that assist non profits as they begin operations.  Since the funding is not provided by the persons served, the market forces that cause forprofit companies to succeed or fail don’t affect nonprofits as quickly.

If you have less than $5 million in revenue and contract revenue is at risk, consider surrender rather than acquisition. Verne Harnish calls the revenue of corporations between $1 million and $5 million the ‘Valley of Death’. Your agency has not attained the efficiencies of scale. While you still may have the talent to lead a combined organization, you probably don’t have the experience.

There is no dishonor in strategic planning to keep the mission alive in a different corporate form.

 

Create a ForProfit Partner

For Profits are helpful vehicles for attracting social investors and business plans that could throw off tax or ownership benefits.

  1. Investors Easier than Donors– For long term fixed assets such as buildings, friendly investors such as board members and friends may be more willing to invest in stock than to donate. The building can be purchased with their capital down payment, financed by rent from the nonprofit, and sold if the rental stream fails. The nonprofit gets use of a property that is normally not available.
  2. Higher Rents– For government contracts that discourage ownership, a leasing structure from the forprofit partner may permit more contract funded repairs and lease money that essentially pays the mortgage.
  3. Exploiting Assets– If the nonprofit has unused assets, the forprofit corporation can rent them from the nonprofit and exploit them for unrelated purposes.
  4. Managing Risk – if the programs have significant risk, the nonprofit can accept the risk since it has few fixed assets. The forprofit keeps the fixed assets at arm’s length and cannot be touched in the event of a lawsuit.

Conclusion

If your agency is largely funded by contracts, changes are inevitable. The needs of communities change and politics change. Even friendly legislators retire or move on. Many of us assume a relationship with government that is not reciprocal. Why wait until your nonprofit is one of the many unlucky ones that fail? Choose your backup strategy now and rejoice that you could survive singleness!

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.

 

References

Harnish, Verne. Scaling Up: How a Few Companies Make It… and Why the Rest Don’t. N.p.: n.p., n.d. Print.

Kobara, John. “Facilitating Mergers and Acquisitions for Nonprofits” Huffington Post.  9/09/2015

Owen, Greg, et al. “What Do We Know about Nonprofit Mergers?” Wilder Research (2011): 1-49. Wilder Research. Web. 12 Apr. 2016.

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.

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.