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)
If you lead a nonprofit, you already succeed at a harder job than your friend Susan who directs a forprofit company (ABC Motors) of similar size! You may notice that you have unique pressures that Susan does not face at ABC Motors. She seems to have more cash and less regulation while you try to have real impact with less cash and more regulation. Many nonprofit leaders experience unique frustration, disillusionment and loneliness in their work.
Here are ten
ways in which your nonprofit is different and harder to direct than ABC Motors.
Nonprofits serve the 5% of the
market that forprofits have abandoned
The USA has
a $21 trillion market economy. It is very efficient for most of the nation. Unfortunately,
a market economy fails for about 5% of the total activity in areas where no one
can figure out how to make money. Housing the homeless, feeding the hungry, and
other good services are failures of a market economy. The market answer to
needed but unprofitable activity is to give the problem to Nonprofit Leaders! Nonprofits
make up a unique 5% of the American economy (about 1 trillion dollars) where
everyone else has already failed..
More dependent on government
contracts so revenue does not flow to surplus
sources of revenue for nonprofits are government, fee for service, gifts and
grants. Government contracts are the largest source of nonprofit growth. Most
nonprofit leaders struggle with stipulations of government contracts. These
often promote equal access over equal results and do not fully express the
mission of the nonprofit. Government money is virtually required for growth in
any nonprofit over $5 million revenue. There is also no reward (surplus) for
excellence or efficiency in a contract.
commonly use product pricing or fee for service and build in a robust profit
target or turnover. Surplus profits from sales can be used without any
restriction. Forprofit contracts with government may have rewards for
performance. Forprofits may have more capacity for government grants that
require strategic and technological innovation. These grants are generous
compared to performance grants that nonprofits typically accept. Many nonprofit
contracts are where government feels confident of performance expected and
wants a highly regulated bargain.
Limited access to debt financing for
forprofit corporations have fixed assets of Property, Plant, and Equipment (PPE).
These can be mortgaged or serve as security for a loan for growth. Small
forprofits are often required to use personal funds or assets as security for
loans. They are willing to do this because they own the company and would never
leave the company while still responsible for its debt. Larger forprofits can
issue bonds which allow them access to cash while retaining ownership.
expensive to issue and 75% of all nonprofits are less than a $1 million in
revenue and far too small to afford the cost of the bond issue. Nonprofit
corporations can’t write off the interest paid on bonds as a tax deduction and
reduce the cost of the issue (in contrast to forprofits).
Limited access to equity markets for
and programs require energy – usually cash is required. Forprofit corporations
can sell shares based on their past history and future plans. Startups look for
angel investors with the same idea of potential future profits to be shared.
Nonprofits cannot distribute the surplus from financially successful activities
so they do not attract investors.
Revenue ceilings typically much less
easy access to equity and debt markets, very few nonprofits have grown past $50
million in revenue. Since 1980, less than 50 nonprofits in the USA have increased
beyond that level of activity. In addition, retained earnings (another source
of growth) tend to grow slowly for nonprofits because government contracts
often are performed at a deficit.
Agency problem in that clients who
receive services often are not the funders
forprofit companies are paid by those people who receive the goods or services.
Nonprofit financing from charity and government involves double stakeholders –
the funding source and the client who receives the services. The workload is
double for the nonprofit leader. They must educate the funder on what services
are meaningful and also hear the client need and respond appropriately.
Hard to have 20 year focus based
simply on social impact
business has a 20 year focus on the Big Hairy Audacious Goal (BHAG). This makes
sense because the owner is accumulating wealth along the way. The path to
wealth for many people has been to develop a business, work with passion and
long hours and reap a generous reward.
leadership is inspired by mission. The few nonprofits that continue on a long
term strategy to succeed pay a leadership team generously. In a study of 990s
for nonprofit factors for failure and success, agencies which paid 4 or more
leaders $100,000 or above tended to retain leadership and stay on course. Many
nonprofit boards undervalue the competence of a long-term leadership team.
Boards of directors are present from
Directors are one more management task. Beverly Behan writes that the real
management of the Board is with the CEO and less should be expected of the
Board Chair. Nonprofit leaders will know this challenge immediately because
board formation happens before or in the first days of nonprofit existence. Many
nonprofit leaders are foiled completely or weighed down by operating boards who
enjoy the nonprofit as a hobby and diversion from their forprofit jobs.
are usually started by an owner or by partners. New forms of financing are
usually required for growth after revenue tops $100 million. Shares are offered
and a board is formed well after the foundation values, and strategic plan are
Nonprofit leaders are paid less to
lead agencies of similar size to forprofits
Who are the
best paid nonprofit leaders? Usually, presidents of universities and leaders of
medical enterprises are paid salaries of which the rest of us can only dream. Those
salaries are priced high in place of stock options which cannot be offered to a
college president for excellent performance.
At the more
normal level of nonprofit leadership, we are never going to be reimbursed fully
for the knowledge, wisdom, and networks that we possess. When there is a
turnover in the nonprofit C suite, there are less applicants who are highly
qualified by experience and connected in networks as the replacement. The lower
compensation does change the pool of available leadership.
Nonprofit fund raising behavior is
constrained by community values
Let’s assume that our nonprofit needs $10 million dollars for a life saving vaccination program. In this example, we have two choices, Choice one – we can hire a fund raiser who will charge $20 million in fees and produce the $10 million that we need in 3 months and save 1,000 lives from premature death. Choice two – we can have some private receptions and raise $2.2 million per year for five years at a cost of $1 million total (a total net income of $10 million). Which will your board choose?
nonprofits and most media would opt for the ‘reasonable’ fund raising costs of
10% and react in horror to fund raising costs of 66%. A forprofit perspective
would immediately allow the higher costs because the total raised is the same
and the 1,000 lives are saved. Some nonprofit ‘best practices’ are unique to
disadvantages, one might ask why anyone wants to lead a nonprofit! There are
unique opportunities available through the nonprofit structure.
Nonprofits support justice, compassion, & the creative spirit of humanity.
companies are discovering the need for values oriented behavior but values find
their truest home in the nonprofit world. If nonprofits did not exist, would
government, religion, business or military fill the need? Nonprofits add to the
social good when other forces fail.
Service agencies require little capital to begin
salons and flea markets, nonprofits don’t require much cash to start. While
many articles detail the fragility of nonprofits, they are like a rosebush.
Many of the flowers will die quickly but a few will thrive.
Nonprofits are more likely to get gifts and foundation grants
make one-time contributions to a forprofit toy drive or other visible act of
compassion, but nonprofits understand the human need to give as well as receive.
They are a natural home for gifts and grants.
Difficulty of leadership is not a
way to measure value
article is to help nonprofit leaders understand that they are stronger than
they may imagine. It is a very noble cause to lead a nonprofit even though
nonprofit leaders need to be smarter and better than their forprofit peers.
come from social service or teaching and now you want to make a real impact
with your leadership and legacy? It is very possible to do and many nonprofits
are changing lives in every community.
The best way to appreciate and strengthen your leadership is a commitment to lifetime learning. Scaling Up and the Four Decisions are one planning system that equips you to spend less time in the nonprofit problems and more time on the nonprofit results. Choose some planning system and build your skills continuously so that you feel less stress and more satisfaction for all you are giving to the human community.
And contact me Ronald.Tompkins@TAConsulting.live for a partner in planning.
Are you turning around a difficult situation? It’s lonely. That’s why we all gather twice a year who are gathered in this business to hear stories of success and to share our struggles.
It’s not an easy event because so many thought leaders are onstage with great ideas. Tom Peters was a speaker in May. You will end up tired and with a new sense of partners in the determination to lead your company to success!
The Fall ScaleUp Summit in Denver (16-17 October, 2018) is nearing capacity, with 800+ business leaders and 12 bestselling business authors gathering together to focus on high-growth strategies. Register now to reserve your space — preferred seating available for teams of three or more.
Twice a year, I gather with nonprofit leaders who want to dream of greater mission. Can you invest two days on possibilities instead of problems? Check past summits with Verne Harnish online to see the great value! Text me to register.
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
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.
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.
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.
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.
Did you work harder after you hired more people? The reason to hire more staff is because there is too much work. How can more people create more work instead of less work?
Companies go through ‘valleys of death.’ This is commonly described as any nonprofit between $1-6 million in revenue. This is the growth period where the need for more office support (administrative, legal, hr, accounting, etc) is high but the cash is really not there to pay everyone.
Valleys of Death – Employees
Another Valley of Death happens when the staff team grows and changes.
Companies usually start with the vision of one person. How many times have you seen a great visionary start a small homeless program? The new company is built around the passion and skill of the founder. Of course, the owner cannot prepare food, clean and recruit clients so helper people are hired, 2 social workers, a kitchen assistant, and a custodian. This model climbs to 10 employees. The new staff are owner-helpers. They don’t have much authority. The director/owner sets the rules for the shelter, orders the supplies and keeps the books. The helpers clean and help. It is critical that the director/owner trusts the helpers.
Over 10 staff and more is needed than loyalty to the director/owner. Good food and safe housing created a flood of applicants for the housing program. The director/owner helpers are replaced by staff who have the ability to make good decisions when the director/owner is not there.
The staff team over 25 people is the highest level of director/owner failure. It is possible for the owner to work too hard in the 10-20 staff member range and not hire capable people to exercise independent judgment. If the director/owner continues to add 30 helpers without independent good judgment
The director/owner will collapse from overwork OR
The agency will lose newer staff and cycle between shrinkage and growth with 25 staff
The director/owner must prepare for a constant change in role during growth. There is a steady shift from
Leader doing all of the work with help
Skillful staff taking over marketing, accounting, client engagement
Leader becoming a visionary and values thought leader with managers
Leader setting 3 year highly achievable goals with management team
There is a saying that at 10 staff the owner needs to hire someone identical to herself. At 100 staff, she needs to hire someone much different from her style to fill in missing skills.
The director feels too badly to transition staff who helped to start the company but don’t have a place on a larger team. One for-profit owner had two CEOs who could not grow as the company expanded to 5 sites around the world. He simply added them to his research staff at their same rate of pay – until he was no longer breaking even.
A nonprofit director lost many younger staff when three ‘original’ staff were mean and dismissive and no longer playing valuable roles. She couldn’t face the stress of honesty and transition.
A director liked to hire managers who were not threatening. They had less ability than the director. The agency could never break growth barriers because the team lacked skills and experience to take it to the next level.
There are personnel companies who can be hired to review job descriptions and actually transition unproductive managers when the owner/director or board does not feel capable of the task.
Leading a growing company is a difficult and constantly changing job. Your role requirements will not stay the same for 12 months. While sufficient cash is a challenge, the balance of effective people on the team at different stages is critical. The CEO job is challenging. A business coach can help and contact me if your team needs support to go through this process.
This weekly club meeting talks about stress that CEOs and Executive Directors feel when employees don’t do the right things at the right times and life gets difficult. Perfectly happy Directors and Presidents are not eligible for membership. This week, I want to deal with the stress of the 18-36 month window.
ReHire When you first take the CEO job, you have to rehire all of the people who report directly to you. Perhaps you assumed that they are good sheep and will simply change to a new head sheep?
Someone who now reports to you isn’t confident and you make them nervous. Someone else wanted the job that you have. Someone else has been cutting corners (with time and attendance, expense account, etc) with the last boss and wonders how to test your tolerance. And so on. You thought it was a greener pasture, but all greener pastures have manure!
Meet with each direct report and help them show their best side to you. Recognize their talents, skills, values and passion. Meet together as a team and give staff an idea of your most important values. My own personal values include:
I don’t hire assistants. I hire people smarter than I am who own their part of the company – In your area, take responsibility and authority and bring me solutions as well as problems.
Be a continuous learner. I expect to offer more skills to my job one year from now. I expect you to offer more one year from now. I read one book a week. What is your goal?
I pay 75 percentile for your position. I think that great managers need to be compensated so they don’t worry about job and home. I pay for professional development. I offer flex time and remote work where possible. I respect your valuable contribution to this company.
I only want people in this company that you would enthusiastically rehire. Does anyone need more attention on your team? Does anyone need to transition? Those will be my questions.
Result The result of the rehiring – people feel respect for who they are and what they have accomplished and they have a clear idea on how to work with you. In most cases, this is a great start.
Research shows that effective CEOs will need a 50% change in leadership team in the 18-36 month range. The management mix requires a team that can be effective under your leadership. In some cases, the reporting managers also see this and create their own retirements and resignations. This is not a sign of poor leadership as long as the revolving door stops within 24 months. It’s what is needed to take the organization to the next level.
The review period is where you set up a job scorecard for each position with the help of the leadership team. The process is necessary but it will point out some managers who are not in the right seat or not a match for the next phase of the company.
Repair The discernment process is a time where you meet with some direct report about needed changes that may bring about transition. It’s also a time to see if you have followed the Rehire and Review process.
Failure to rehire can cause leadership challenges in the first 12 months.
Failure to retire people that you do not enthusiastically want will cause problems in year 2. According to the Rockefeller Habits Question 1, you need a leadership team that understands each other’s differences, priorities, and styles and a team that is able to engage in constructive debate. And you need team members who function flawlessly so that you are leading instead of repairing problems. Here are 3 Repair Steps.
It is never too late to say to a direct report ‘I apologize for the awkward start to our relationship and I’d like to hear more about your talents and interests as we continue to create the team.’ No one is perfect and you are opening the rehiring question and giving them respect and a chance to join your team.
It is never too late to state your values and apologize if anyone is surprised.
It is never too late to start a repair or termination that you delayed out of fear or misplaced sympathy. I hate to fire people – until they start making me do or fix their work, or until they start to create trouble on the team.
CEOs can let problems slide, but my Personnel Consultant always said, you can’t cure cancer with aspirin.
They’ve worked here for 15 years.
I respect that but the company is growing and changing and needs staff who empower that change. Can they change? I’ll help.
They probably can’t get a parallel job with their training.
That is a choice that they made when they decided not to keep learning. It’s tragic, but respect their choice.
They have a lot of friends on the staff team.
Very likely, but employees protect their own job first. There may be muttering but none of us are as popular at work as we hoped 😊
The CEO job is challenging. A business coach can help and contact me if you need support to go through this process. But with or without support, most Executive Directors inherit leadership teams with issues. The issues can be managed – and the Board was wise enough to hire you to do it.
Rehire, Review, Repair.
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Leaders universally face stress and discouragement. Many feel guilt when plans do not work as expected. The video is an introduction to causes of those feelings that cannot be shared. There are ways to manage these jobs.
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