Is Cash difficult for your nonprofit? Coaching helps! Here are 10 ways Executive Directors can still get cash to sustain and grow
management accounting Archives - TurnAround Executive Coaching
Many nonprofit leaders face an unending mountain of tasks with no clear path to a better life and leadership. I managed the chaos — by Mastering the Rockefeller Habits.
Capital One Bank has graciously agreed to host so its free for you. June 20 at 8:30am – 10:30am at 320 Park Avenue. Write me at tompkir1@gmail.com for a reservation.
Leaders get lost in a fog of numbers when they only need 7 Key Financials to make decisions.
I hope that you can join me at OpCon, June 13th, where I will be on a panel “What Nonprofits Need to Know About Nonprofit Accounting and Finance”. If you come with a CPA, bring aspirin as they recover from an encounter with a Management Accountant. If you’re a CEO, bring champagne to celebrate as you learn about 7 numbers that actually help you manage your agency.
In my book “Doing Bad at Doing Good”, I discover that the best nonprofits have an Operations Budget model that only requires 7 key financials. I’ll have copies of that available for attendees!
When you’re ready for a coaching investment, let’s talk! https://taconsulting.live/our-nonprofit-promise/
I stopped rolling pennies to take to the bank. I realized that I can only fill, tape, and address a roll of 50 cents every five minutes. My maximum profit is $6.00 per hour and it’s cheaper to use the machine at the grocery store!
Now the same process is happening at the school that I direct. 75% of the money that parents pay is with an app that we provide for their phone. The payment flows directly to the bank for the school and eliminates a physical deposit. The software automatically updates their account on student billing and also adds the revenue to the general ledger. Several tasks are reduced or eliminated.
Now the school is automating accounts payable for trusted vendors. And preparations are underway for triple entry bookkeeping with Blockchain to pay all vendors automatically. There will be no more audit sampling because every transaction will be proven with blockchain.
What does it mean for you as a leader? Accounting staff positions are changing steadily. Will anything be left? How should you arrange your projected Operations Budgets?
The Institute of Management Accountants just had the slide below in a presentation. It shows that nonprofits will still need an accountant who gives financial advice for management decisions. And your budget should include more money for the software that automates the transactions.
Are you leading a nonprofit and don’t feel prepared for the winds of change? Check with me because Cash and Execution Decisions are part of business coaching.
No gossip column on 990s can omit the juicy topic of what we’re all getting paid.
The 990 tracks highest paid compensation in two places – Part VII, Line 1d on the main form and also Schedule J (There are 16 additional schedules that can accompany the main form and sometimes this is where the bodies are buried.)
There are two ways to examine the data.
- What did the highest paid staff member receive?
- What percentage of the total compensation expense (Part I, Line 15) are the Highest Compensated Employees taking?
Let’s start with the highest compensated in $ even though the percentage of total compensation by percentage may not be unusual.
- Leadership of universities/medical facilities and private schools for the wealthy are routinely given higher salary in lieu of stock options. The theory is high leadership skill is required but leaders could also make more in the for-profit corporations with stock options as incentives. The eye popping salaries are a replacement for the stock and other incentives to be made at Apple, GE, and IBM.
- Higher pay can be concealed by Part VII Section A Column F – Other related organizations. While I have an upcoming look at nonprofit captive corporations, some midmarket nonprofits with financial sophistication use this column to add an extra $50,000 to the executive compensation. Wish I worked there 🙂
- Guidestar publishes an annual compensation report. For example, the CEO in Sacramento for a nonprofit should make approximately $54,000 if the total revenue is less than $500,000; $112,000 if the total revenue is less than $1 million. $130,000 if the total revenue is less than $5 million, and $175,000 at greater than $5 million revenue. These numbers strike many Boards as generous, but Guidestar is watching all of these clever add ons and reporting them. Why should you settle for less than fair? (Guidestar, 2017:208)
Let’s continue with the underpaid!
- Leadership compensation by percentage of total compensation is how much the Board thinks that the leadership is worth. An agency of $6+ million should expect that leadership compensation will absorb 3-5% of total compensation.
- Since ill-equipped leadership will never get the nonprofit to $6 million in revenue, small organizations may experience 6-12% of total compensation for leadership costs. Boards have to pay in advance of the larger size that good leadership can provide. It’s necessary pain of investment!
- If you are in a $500,000 revenue organization, be careful not to overvalue the ED job. Let’s use the Sacramento example and your compensation should be $54,000. Because the company is small, your job may also include clerical for 25% of the time and program meetings for 25%. Those two compensations for full-time work are $30,000 and $40,000.
So your total compensation would be
- 50% ED – $27,000 (54,000*.5)
- 25% Clerical – $7,500 (30,000*.25)
- 25% Program – $10,000 (40,000*.25)
- TOTAL $42,500
- I’ve also seen another nonprofit with $18 million in revenue and 1% in Highest Compensated Staff. While I applaud the benefits that staff receive in pension and health, it appears that they are risking a loss of leadership when managers go to a convention and chat about salaries. (People gossip at conventions! ). Poor Board leadership.
Let’s finally think about the overpaid
- I’m looking at a $7 million revenue organization with compensation requiring about 16% of the total compensation budget. That is leadership that has the board in their pocket!
- I’m also looking at a medical nonprofit that has been in the news for fraud charges. There is $2.5 million in compensation from related organizations – for 2 people.
Conclusion
Board of Directors should structure compensation to be generous to leadership and expect high results in return. Small agencies must suffer with tight budgets until total revenue approaches $6+ million. Boards should work with Executive Directors/CEO so that most of their time is spent in leadership. Mixing job descriptions will never produce great results in lives of clients. At the same time, there are ceilings to compensation for highest paid employees. With the 990, we can see where an agency is on the continuum.
The CEO/ED job is challenging. A business coach can help and contact me if you need support to go through this process.
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:
- 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.
I’m doing a 990 study. Each Sunday for 10 weeks, I will give out one insight for leaders. Most people ignore the 990 and its 16 additional schedules. Life is too short to do all that reading!
Sustainability
Let’s start with a critical number – Net Income or Surplus. To start a company, cash is the
key number. To buy a building or equipment, cash is key. Banks loan cash. Investors give cash. Customers pay in advance. But to keep a company going, there has to be a consistent profit or surplus which is the best source of cash. .
What Profit Do You Need?
What’s the required surplus for a business to stay in business indefinitely? Most businesses will soon be gone if there are year over year deficits, on life support with less than 5% surplus, and healthy over 10%. Why not profit of $1?
The income statement (Statement of Activities) does not include the cash that you need to keep investing in the business. Computers and cars need to be replaced. Technology is a huge investment. The surplus provides the cash to invest in new assets. Business owners will also want a profit on the money that they put into the business. Why would you put $500,000 into your business and not expect an annual return? That cash eventually has to come from profit.
Nonprofits/NGOs need 10% surplus to be sustainable for the some of the same reasons. But Nonprofits have a special additional burden. Nonprofits usually show more profit than cash because government pays so late. Let’s say that you make a profit of $100,000 this year. How much of that cash is in your bank on the last day of the year? Possibly $0 or less if government is involved! Nonprofits need a 10% surplus with the expectation that their cash account will stay above $0!
Depreciation
You may be lucky and have a lot of depreciation and bad debt allowance on your income statement. Why do we like depreciation? Because it’s not a cash item. Let’s assume that your revenue is $10 million. 10% profit will be $1 million. That’s a challenge! But let’s assume also that you bought a $5 million dollar electrical system that has a ten year life for depreciation but it will probably be working 20 years from now. Your income statement has a $500,000 charge for depreciation already so a 5% surplus ($500,000) and the depreciation ($500,000) is a fairly safe combination for the present.
Conclusion
Non profits in particular are usually happy if they have a $1 surplus. This is not a plan for the long term.
Today’s example is a nonprofit started in 1953. $45 million in revenue last year. Payroll of $1.4 million and 14 days of expenses in cash in the bank. Limited depreciation and an average of 1% profit over 4 years. If the CEO quit, would you enthusiastically apply for that job?
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. Until next Sunday, keep your eyes on surplus!
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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.
If you’re out of cash, you’re not the first leader to have the experience. In 2010, the New York Metropolitan Opera ran out of cash. They were surprised. They had a balance sheet which was filled with rich things. They had a budget of $291 million.
Here they were, humiliated and humbly asking singers to take a 10% pay cut.
There is no substitute for cash. Your employees can’t be paid in dog food, bedding, free haircuts, or whatever your business produces.
Most leaders who don’t have a financial background love the profit and loss statement. It’s an unfaithful lover. Make a date with your balance sheet.
In the left-hand corner of the balance sheet, the first thing you see is Current Assets. The arrangement is that these highly liquid items are the most important because you can pay bills with them.
- Line One is Cash followed by other lines in order of how quickly they can turn into cash. Cash is good.
- Line Two is Petty Cash. It’s small. It’s hard to make payroll with Petty Cash if you pay minimum wage or more 😊
- Line Three is Temporary Investments. These are great things but risky. I invested my parents’ life savings and it was $54,000 in 2008. I cashed out when it hit $26,000. I can’t even write this without saying a prayer of forgiveness to my parents in heaven. Are you big enough to watch this daily?
- Line Four is usually Accounts Receivable. Is that money from a deadbeat government contract that plans to pay 4 months late? They won’t speed up just because you’re desperate.
- Line Five is inventory. Is this stuff that’s going to sell next week?
The balance sheet holds a truth of your company on line 1. How much cash do you have?
How did the Metropolitan Opera survive? They have some world-famous murals by Chagall and they took out a special mortgage (Chattel mortgage) to get enough money to keep payroll going. Most of us don’t have the Chagalls and Rubens hanging around the factory so don’t get excited.
What about the income statement? The problem of the income statement is that you can’t tell the difference between real cash and other things like Accounts Receivable and Depreciation. Haven’t you had times where you are running a profit and counting the pennies to make payroll? The income statement is important but it’s a dangerous tool in the hands of a non-financial leader.
The Cash tools are part of the 4 key decisions because cash shortage will put you out of business faster than any other decision you make. Cash surplus gives you time to recover from a problem in any other area of business.
Dust off your balance sheet! Then plan to build your cash with TurnAround Business Coaching.
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’ve never been in a plane that ran out of fuel. Having fuel is such a critical part of travel but airlines plan carefully. I have never heard a pilot announce that we have to land in the wrong city because we need more jet fuel.
Non profits are having more and more trouble with fuel supplies. A lot of good trips to do good things are being cut short because the money ran out. Some groups have dreams of where they want to go but there is no way to fund the new idea.
Religious non profits are often a sub-group in special pain because they are in decline. It’s a lonely and failing feeling to be in charge but without cash. How can that be turned around?
One of the 4 Decisions Tools is Cash. When I mentioned to my friend that I help nonprofits find cash, he immediately asked if I lead boards in fund raising campaigns. He took me by surprise since the 4 Decisions doesn’t start there. But in the non profit world – of course – fund raising is the magic wand that gets pointed at leaders of nonprofits as the answer to everything!
Fund raising sounds wonderful, but it cannot be the only method for most organizations. Big gifts can take a long time to cultivate and it takes a lot of $10 gifts to get most nonprofits past their difficult cash moments.
Nonprofit leaders actually have 10 levers to improve their cash. The more powerful levers don’t normally include Fund raising.
Let me give an example. In my own nonprofit, I was surprised by changes in health insurance and so we re bid all of our insurance contracts. To my great surprise, a new broker got us the same policy from the same company and the total quote reduced our costs by $34,000.
What is easier for you? Asking 340 people to give $100 or reducing the insurance bill? Something I like about the 4 Decisions Tools is that you will feel more empowered as a leader as you use them. When you have a cash problem, you are not a victim who is waiting for a million dollar gift. You have multiple tools to solve the problem and your team chooses several levers and keeps that plane in the air.
Scaling Up is the textbook for the 4 Decisions Tools and one section is on Cash. And I also offer a workshop on the 4 Decisions if your team is ready to fly with a full load of fuel 😊
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 live in a mixed income neighborhood. I was delighted when a new restaurant opened with a lounge style, creative tapas, and space for mingling. The staff were well dressed and professional. There was a waiter for every 3 tables! No more Joe the Bartender nights. It was worth twice the price 🙂 What a shock when Volcano suddenly closed its doors. I’m still in mourning,
BUT Business success balances quality against cost.
We all want to hire a lot of Grade A staff. Let’s assume that you own a restaurant. In this example, you hire only specialty chefs – pastry chef, sous chef, saute chef, fish chef, glacier, etc. Add professional waiters with 5 years previous experience. Just to be perfect, add a maître d’ to die for.
Would you get the Zagat Award?
No. In my neighborhood your restaurant will be bankrupt after 3 months. You cannot afford a staff team where everyone is a superstar and there’s too many staff anyway. You need a mix of employees at different levels and just the minimum number of staff.
Success in business requires a few Grade A staff, a few Grade B staff who are teachable, and constant firing of Grade B staff who won’t learn and also quickly fire Grade C staff who actually hurt your business.
A great business uses a Salary Cap. The Salary Cap is simply the total amount of money that you can spend on payroll. You can split the Salary Cap any way that you want. If the Salary Cap is $1 million, you can hire 10 people at $100,000 each or 20 people at $50,000 each.
The Salary Cap is easy to find. Start with your total revenue and subtract Fixed Costs (lease, taxes, mortgage, depreciation, interest, and insurance.) Now subtract all supplies and inventory purchases. If you own the business, subtract your return on investment.
The remainder is your Salary Cap. You can hire as many people as you want as long as the total salary is under the Cap. See how it works in this example.
Example:
Revenue: $5 million
Minus Fixed Costs: $1 million
Minus Inventory and Supplies: $1.5 million
Salary Cap = $2.5 million
Won’t people pay more for quality? Why not hire all the chefs in the first example and simply raise the price of every meal by $10. Your revenue goes up and so does the Salary Cap.
It depends on your market. If your business is in a high poverty area, people may enjoy very competent waiters at the restaurant and great food, but they will still eat at McDonalds. Your recipe for success may be to hire some Grade B- people and hire one good trainer and one good supervisor who can fire people regularly. The combination will give you enough Grade A staff to be a success.
I’ve always hated cooking. It takes so long and not easy either. You have to experiment with the recipe. Of course, people who like to cook get better and better at it. You have the same challenge with your company. The only way to get good at it is to experiment to find the right mix of staff. No one likes to fire people or move them around. It’s hard to find new people and train them. What a headache! Just like using recipes 🙂
Have patience. Keep practicing until you have the perfect recipe. Bon Appetit.
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.