Do you lead a nonprofit that needs money? Do you look with envy on some other executive directors who haul dollars into their vaults in sacks or bitcoins? Maybe you’re like me—an outsider director.
Outsider directors don’t know rich people who are trying to give away their estate. We didn’t graduate from a famous college. And the End of the Year solicitation hit a high point when my mother gave $50. Outsider directors are executive directors whose birth, education, or family connections did not give them the network that some other executive directors enjoy.
So how does an outsider director cope with the need for cash? There are two types of capital structure: capital sources that are based on results and capital sources that are based in time-consuming relationships. Since outsider directors don’t have well-built networks for relationships, start with result-based methods. Here are seven results-based ideas and three relationship-based ideas on how to build your capital structure.
Note: For sustainability, I recommend that you choose three out of this list of ten methods. One source leaves you too vulnerable, but each additional source requires time and energy to build.
Fee-for-service. Some nonprofits have core customers who can pay for the service. Hospitals and universities understand this method. Is it possible for you? A benefit of fee-for-service is that the surplus is completely unrestricted. Your only source of launch capital for new programs is an unrestricted surplus.
Fee-for-service also saves time because the cash is derived from the result. An outsider director needs to spend every minute carefully. Do you want customers for your daycare? Operate a quality daycare and advertise. No time-consuming evening meetings and fundraising events are needed. The challenge of fee-for-service is to find a needed service for which other companies are not competing.
Embed. This is a special instance of fee-for-service. Since government often wants us to make bricks without straw, they create social programs with a lot left undone. Just consider public schools that dismiss at 2:30 p.m. Who’s able to get out of work and over to a school at that hour?
My parents had home-delivered meals from a nonprofit agency. The government contract provided food and delivery. So what was missing? Dessert! Those meals omit dessert since we all know dessert is bad. Frankly, when I’m 80 years old, I still want dessert.
So, the nonprofit offered a cookie/nuts/seltzer choice for $1 with the food delivery on holidays.
Follow the rules of your contract but look for opportunities to embed your own enhanced services for which people will pay. Other examples are fee-based daycare for working parents after the contract after school program ends or adding optional fee-based trips on additional days at a contract senior center program. Again, check contract rules!
Membership fees. Most of us pay to join our local nonprofit consortium. I’m in one group that charges $1,100 a year and has 500 members. This is a great method to consider when you can offer more resources than people will use. The consortium has workshops continually, and I rarely attend, yet the support is there if I need it. People often won’t use your program every day, but they’ll pay the membership fee to have those resources available in case they run into a problem.
Government contracts. Most nonprofits that take in over $2 million in revenue will have significant government contracts. This is a great method if you work on a problem that is new to government. The government tends to be generous when it doesn’t know what to do. Half of the entire military budget of the U.S. goes to military contractors!
Government contracts are a good sustaining method as long as another source provides the cash for new projects and the implementation of your full mission. One challenge of obtaining cash from contracts is that a change in politics can bring with it a windfall or the reverse: a welcome increase in contracts or the unexpected termination of contracts.
Investment or endowment income. Harvard’s endowment is $53 billion. The investment interest alone pays for their entire operation! But their endowment is also 400 years old, so don’t hear this and retire early. If you’re planning for a long-term mission, the endowment can play a role.
This method is great for serendipity. It’s my experience that even outsider directors occasionally get gifts from unexpected sources. When that happens, create the endowment.
Cy-près. For this, consult an attorney! Let’s assume that an estate has to be settled and that the decedent was concerned about helping people who are homeless. You direct an agency that helps people who are homeless. At times, people die without leaving an heir. Perhaps an insurance policy is discovered long after the estate is settled and heirs are deceased. A judge often decides how to spend the money. If the court is aware of your agency, you could receive the estate.
Debt instruments. Debt is a source of cash. If you bought your house with a mortgage, you added debt cash to the down payment, and it all worked. Normally, nonprofits are closed out of debt markets. We often don’t have the assets to secure debt. That changed when the EIDL loan expansion increased to $2 million, and I was first in line to apply. Finally, an outsider director has a chance for real launch capital!
Debt cash can leverage your launch capital to start a new program. Board members can be a source of debt cash, but here, again, you should consult an attorney. It’s not a method for the faint-hearted, but outsider directors are usually not faint-hearted. Check out American Nonprofits, whose goal is to provide the nonprofit sector with financial resources, including low-interest loans to qualifying nonprofits.
Now we get to the difficult capital sources in order of importance for an outsider director. These sources are difficult because they depend on relationships. Since outsider directors lack networks, these process-based methods can create anxiety and guilt.
Donor-advised funds. This is a fast-growing method for wealthy people to make gifts. Simple networking can add you to their list. Visit the foundations in your community where these gifts are often made. Invite the director to your site. Foundation directors cannot make gifts themselves. But when a donor shows an interest in health clinics, the director already knows about your clinic and can recommend you as an agency to receive the gift.
Two benefits that the investment allows process time for building a few relationships with directors and the gifts are in the thousands instead of the tens and hundreds.
Volunteers. Like cash, volunteers are a resource with which you can do great things. Volunteers are a great capital source. If you have process time to select and supervise volunteers similar to the way you do regular staff, this is a great resource. The challenge is that most volunteers are not well-screened when they apply, and they’re not supervised properly when they work. Check if your insurance carrier offers you discounted screening services for volunteers. Volunteers, like staff, are a high-process commitment.
Charitable giving. According to The NonProfit Times, about 10% of nonprofit revenue is from charitable gifts, and it’s declining. I set aside 10% of my income for charity. Even at that level of giving, I took the standard deduction last year because Trump’s change in the tax law removed any tax-motivation for giving. This method is high process—fundraising calls, meetings, and stories take time—and many people give $10 and feel like they gave $100.
What to do? Find simple ways to build relationships. I follow the example of politicians: a lot of small events that take little time to set up and a quick call afterwards to ask for the gift.
If you’re struggling as an outsider director, you’re not alone. It is tough and isolating to face closed doors to networks that other executive directors open automatically. However, with grit, optimism, and a passion for mission, outsider directors can fill their vault. I hope these ten tools are an encouragement to keep fighting the good fight.
Dr. Ronald Dale Tompkins is Managing Partner and Principal Coach of TurnAround Social Sector Coaching. His passion for empowering outsider directors comes from leadership roles in five different agencies.
The thought leadership that Dr. Ron brings to clients for coaching includes:
Management Accountant associated with the Institute of Management Accountants
Certified Scaling Up Coach
Ph.D. in Higher Education Policy (Buffalo)
MBA in Finance (State University of New York)
Dr. Ron is gay, married, and has children and foster children in the USA and Southeast Asia. He has been a member of the Indo-Chinese Caucus and Cambodian Caucus of the United Methodist Church. He is a long-term resident of New York City.
Many nonprofits are being damaged by fundraising. The change is like being hit by a fast freight. Next year will not feel like last year. Nonprofit leaders often regard charitable gifts as the first and major provider of money. It’s critical! Cash pays staff and helps clients. Three forces are changing the giving landscape. Are you ready?
First, Tax reform in 2017 doubled the standard deduction. Only richer people and tithers (people who have a spiritual habit of giving) benefit financially from gift-making. Reports indicate that gifts from individuals declined by 1.1% in 2018. Charitable gifts from corporations increased. Gifts from those over 70 years old who made gifts from IRAs also increased.
Second, the number of corporations that received half of all profits in the USA declined. In 1975, 109 companies made 50% of all profits. In 2016, the number dropped to 30. There are very big gifts but not as much capacity for small and medium gifts.
Thirdly, Christian religious affiliation is declining rapidly in the USA. Christianity has been a major inspiration for giving. Pew Research shows a decline of 12% in the last decade! It’s hard to describe what changes this rapid rejection of religion will make in American society, but charitable gifts will be affected.
Are you watching your dependence on gifts and making appropriate changes?
I coach nonprofits who face turbulence. Contact me at firstname.lastname@example.org for a free consultation.
The free workshop is September 18 and 19th (details below) on Zoom. This is one workshop where you won’t be late because the subway was behind schedule!
The first recession proofing we talk about is loneliness of leaders when facing external problems. Since I lead a nonprofit as well as serve as a coach, I speak about these feelings because loneliness has been a companion several times as a CEO or ED.
Here is a quick video recap and details are below to register with Zoom
Recession Proofing Nonprofits
You are invited to a Zoom meeting on Recession Proofing
When: Sep 19, 2019 08:00 AM Eastern Time (US and Canada)