Is Cash difficult for your nonprofit? Coaching helps! Here are 10 ways Executive Directors can still get cash to sustain and grow
Is Cash difficult for your nonprofit? Coaching helps! Here are 10 ways Executive Directors can still get cash to sustain and grow
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!
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
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.
The right director could probably create a strategy to use those resources and network and keep an agency in operation.
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.
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.’
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?
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.
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.
What can nonprofits do?
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:
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.
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:
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.
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!
If you want One Minute TurnArounds by email, please sign up!
GDPR – Your email is collected by an automated system so that the One Minute Manager posts can be sent. You will be invited twice a year to a two hour Scaling Up workshop for CEOs and EDs. Annually, you will be offered an Ebook and asked whether the resources of TurnAround Business Coaching are helpful.
A maximum of 10 companies per year develop a relationship for Business Coaching to turn around their company or scale up past a growth barrier.
I’m 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.
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.
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?
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.
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.
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:
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.
What do acquisitions provide?
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.
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.
Cash needed? Without cash, you don’t have time to fund raise, to borrow, or to think. There are 18 ways to find quick nonprofit cash.