management accounting Archives

Need Cash for Nonprofit?

Posted on June 8, 2022August 13, 2022 by TurnAround Executive Coaching

Do you lead a nonprofit that needs cash? 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. But another great help if you need cash for nonprofit!

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, but great help if you need cash for nonprofit!

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! Need cash for nonprofit? Look to government!

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. But if you need cash for nonprofit —-

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.

Need Cash for nonprofit?

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. Need cash for nonprofit? 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)
Certified Extended DISC Consultant

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.

Is work in July for Problems or Plans? Choose with the Rockefeller Habits

Posted on June 15, 2019July 10, 2022 by 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.

7 Key Financials!

Posted on April 12, 2019 by TurnAround Executive Coaching

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 13^th, 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/

Wasting Money to Count Money?

Posted on February 9, 2019 by TurnAround Executive Coaching

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.

990 Snooping Sundays – Getting Paid More

Posted on July 22, 2018August 6, 2018 by TurnAround Executive 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. 1045_4931523

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.

990 Snooping Sundays – Sleeping Assets

Posted on July 16, 2018August 6, 2018 by TurnAround Executive Coaching

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.

990 Snooping Sundays – 10% Surplus

Posted on July 1, 2018August 6, 2018 by TurnAround Executive Coaching

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 1019_4272975 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 2^nd quarter and a 20% growth in revenue in the 2^nd 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.

Are You Reading the Wrong Financials?

Posted on May 5, 2018June 23, 2018 by TurnAround Executive Coaching

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. Cash is King

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.

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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.

Getting Past Cash Problems When You Can’t Find 500 Donors to Give More

Posted on March 9, 2018June 23, 2018 by TurnAround Executive Coaching

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 😊

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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.

High Quality is a Recipe for Failure

Posted on October 11, 2016June 23, 2018 by TurnAround Executive Coaching

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.

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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.

Your Company is Richer Than You Think!

Posted on July 16, 2016June 23, 2018 by TurnAround Executive Coaching

We all look at our financials to determine how the company is performing. The problem with your financials is that they were invented in 1494 by Luca Pacioli (improving the Babylonian system of 5000 BC.

Would you not agree that an update is necessary?

The current financial system is oriented towards manufacturing. In 1995, service industry portion of high income economies was 66%. I can guarantee it’s grown since then.

Recording Labor as an Asset

There have been three economies in history – agricultural, industrial, and technological. Current financial accounting is dangerously biased towards an industrial economy that does not record the financial position of high income countries and their companies.

In high income countries, labor can now be divided into 3 parts.

Unskilled labor where technology destroys labor. Dyson has a vacuum that takes pictures of the room and climbs over obstacles. Why do you need the cleaning lady? Technology has even destroyed sex work since people with similar desires can connect with each other voluntarily. While unions and civil service slow the disappearance of this sector, it is marginal.
Skilled labor is the next to disappear. When did you go to the bank and find a teller? Did you check yourself out at Walmart or the grocery store? Self driving vehicles will replace all drivers.
The sweet spot in a technological economy is talent. You cannot replace the creative, heuristic, critical talent. In a perfect world, we would see an explosion of the arts and frontiers of science.

In the current world, you will face a dearth of talent to hire and a million resumes from skilled and unskilled labor every time you post a job.

What to do?

Expense all your skilled and unskilled labor as financial accounting requires.
Conservatively estimate the revenue that each talent based employee adds to the company and the estimated length of service. Add that to long term assets.
It will increase your assets and equity in most cases. If you are in trouble, it adds to your liabilities and shows that you are highly leveraged.

Next Steps

What do you do with assets? You increase their value and extend their useful life.

Invest heavily in talent to increase their value. Add professional development as an asset instead of an expense
Examine your labor pool and invest in Professional development to convert skilled labor into talent and assets
Look for technology that replaces skilled and unskilled labor

Conclusion

We cannot solve the life problems of labor that is not needed. This is where government policy and philosophy steps in to guarantee an economic floor.

For the current moment, you need to add value to labor to turn it into an asset. You will find that employees are so thrilled that most will stay longer than your conservative estimates of an asset allowed. You will win. They will win. Your stakeholders will win. The best kind of scenario.

Meanwhile, your balance sheet reveals a true picture of your expense and assets as an organization. Are you ready for the current economy? Your new balance sheet will tell.

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Sources

“Growth in the Service Sector.” (n.d.): n. pag. World Bank. Web. 16 July 2016.

Management, Valuation, and Risk for Human Capital and Human Assets: Building the Foundation for a Multi-Disciplinary, Multi-Level Theory . Palgrave Macmillan. Kindle Edition. Russ, Meir. N.p.: n.p., n.d. Web.

Your Company Assets Just Went Home for the Night

Posted on June 7, 2016June 23, 2018 by TurnAround Executive Coaching

Abstract

CEOs need to invest intentionally and annually in professional development for key staff in order to achieve the objectives of the Strategic Plan.

Adding a New Asset

Many nonprofits are service industry corporations with few fixed assets.* That means the success of your company is the result of your wise use of two items:

Assets (Cash and other Assets – Depreciation)
Temporary Assets (Labor Costs and Materials Cost)

Meir Russ argues that you need to take your key managerial training expense out of the Income Statement (Expensed at a year or less) and make a supplemental Balance Sheet with a new category of Managerial Assets. So the success of your company is now the result of your wise use of three items:

Assets (Cash and other Assets – Depreciation)
Temporary Assets (Labor Costs and Materials Cost)
Managerial Assets (Training and Professional Development Investment – Depreciation)

The rationale is that we invest in our key managers with the expectation that they will bring new skills to work everyday and that new productivity will last more than one year. This is not that novel an idea in other industries. Performers already look at life this way. They insure parts of their body with the expectation that its value will last more than one year. “As the Beatles sang “I wanna hold your hand”, their business managers were busy insuring their fingers for £200,000 – a colossal sum at the time…. More recently Bruce Springsteen’s voice was covered for $3 million.” (Hunter, 2003)

Let’s assume that your average key staff member has a job tenure of 5 years in your company. Create a supplemental Balance Sheet that records the professional development asset and depreciate the expense over that period of time instead of the normal pattern to expense it all in the year that it occurs.

The result is to showcase whether you leverage talent with training or are satisfied with the current state of affairs. If the new account has a balance of $0, I can predict the failure of your Strategic Plan.

Intentional Investment for Success

Your key players face the struggle to implement the Strategic Plan. If they don’t do it – what is your Plan B? The Strategic Plan, by definition, is not easy. Your key managers need to improve their skills to meet the challenge of tomorrow. Placing those expenses on the balance sheet gives attention to :

What is a reasonable investment yearly in managerial development?
Does that manager have an IDP (Individual Development Plan) and are they happy or resistant to work on it?
Are some key players in danger of skill aging and need to get one more chance and discussion about moving forward or transition in the next year? One problem of strategic planning is a key manager can be valuable in one strategic advance and not really interested in the continuing journey.

Like anything else I write about, these conversations are about as pleasant as a trip to the dentist. But the CEO is solely responsible for the wise use of labor, materials, and assets to accomplish the Strategic Plan. Leveraging the value of your managers is arguably the most strategic action that you can take. Publicly reporting it will make sure it happens and it’s also a better way of looking at leading the company than Financial Accounting allows.

Increase Tenure of Key Managers

All of us have a dream of who we can be. I have met very few employees who really feel that they are in the perfect place. I can tell you that if you tell a key employee that you are willing to invest $5,000 every year in their professional development, you are guaranteed to extend their time in your agency. Your reports will feel appreciated and understood.

You can’t keep progressing on the Strategic Plan when key talent quits repeatedly. They take too much institutional history and culture with them.

Tell your board that you can keep a key staff member Ms. Gold 7 years instead of 5 years for $35,000 ($5,000 per year). Mention that you can implement a key objective of the Strategic Plan with the help Ms. Gold. If I could get that bargain, I’d give the extra $35,000 myself!

Conclusion

You are richer than you thought. Those managerial Professional Development Costs are not going to be used in one year. They are going to stay for year 2, and year 3, and year 4 …….. They are one of your keys to complete the Strategic Plan. You simply must treat them that way.

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*Hospitals and museums are examples of capital intensive nonprofits. The rationale of the managerial reclassifying of expenses should still be valid.

Hunter, Teresa. “What Price an Arm or a Leg?” The Telegraph. Telegraph Media Group, 29 Jan. 2003. Web. 07 June 2016.

Russ, Meir. Management, Valuation, and Risk for Human Capital and Human Assets Russ (2014-10-15). Management, Valuation, and Risk for Human Capital and Human Assets: Building the Foundation for a Multi-Disciplinary, Multi-Level Theory . 1st ed. New York City: Palgrave MacMillan, 2014. Print.

people-leaving-work

Audits do not Provide Stupidity Protection

Posted on April 24, 2016June 23, 2018 by TurnAround Executive Coaching

Is it possible that your company needs stupidity protection more than a good audit? Audits (and the CPA function in general) are very good tools to prevent fraud and present a conservative picture of the organization. However, Management Accounting takes things one step further to protect against stupidity. Every company needs both protections.

My company has strong internal controls. It’s a challenge because we are spread out over several locations for both program and tuition collection. 12 managers charge expenses to the income statements for their departments. Over time, we have developed a careful manual of Financial Procedures, update it annually, use GAAP presentation, and work with the auditor to test for fraud.

It was a shock to see that none of this due diligence mattered when we made an investment greater than our resources. It has been two years to recover from that decision and the rescue is arriving from Management Accounting.

What is the difference between Management Accounting and Financial Accounting?

Financial accounting is standardized so that it is easier to compare several companies. Management Accounting slowly adds accounts to the Chart of Accounts and changes reports as your company changes. The results of Management Accounting give advice that is unique for your business at this moment. Because of that, we say that Management Accounting is future oriented, private advice for good decisions while Financial Accounting is historical, public fair presentation of the company. Both types of Accounting are required but Financial Accounting gets 90% of people’s attention.

Nonprofits need Management Accounting even more than For-Profits. For-profits have more access to cash and financing in the event of a stupid decision. They are more likely to own property that can be security for a bank loan. They may be able to issue stock or offer a bond issue. Nonprofits do not have these tools and it makes the need for financial advice about future decisions more acute.

What are examples of Management Accounting that nonprofits typically ignore? I’ll mention two of them.

Imputed costs – Assume that you receive a contract for student services for 100 students at $1,000 per student. Upon opening registration, you discover that 150 students want the service and you do not have additional funding. In financial accounting, you would debit income of $100,000, and debit expense for $80,000 for program and $20,000 for administration. Deliver an excellent program and you feel very successful under Financial Accounting.

Under Management Accounting, you have left the need for services and money of 50 students on the table. The imputed cost this decision is the administrative portion of $10,000 (50 students * .20 * 50,000). With this change, the Income Statement for the program reports a $10,000 deficit under Management Accounting instead of being balanced under Financial Accounting.

Management has a decision to make after reading the Management Accounting report –

ask for more contract funding,
ask for fee for service for additional students,
ask for charitable donations, or
leave matters as they are.

Very few of us would have given this situation a 2^nd glance under Financial Accounting.

Cash Flow Statement – In Financial Accounting, the Cash Flow Statement is still new and underused. One underused feature is to separate New Investment Projects from Continuing Operations Projects in the Chart of Accounts and New Fixed Assets for New Projects from New Fixed Assets for Continuing Program. Financial Accounting has no such interest in this separation.

Assume that 100 students are in your continuing program and you buy chairs, computers, and other fixed assets (charged to New Fixed Assets for Continuing Program) as they are destroyed each year. Over a period of 6 years you notice that you spend $50 per year per student. Management Accounting then advises that you add $5,000 to the next capital budget for continuing operations Fixed Assets. That information could not be determined easily without creating separate Fixed Asset Accounts for Continuing Program. You now have advice on what level of Fixed Asset investment is required each year to maintain program at the quality and size you are operating.

You may feel overwhelmed by the number of ways that Management Accounting can probe and rearrange your data. It’s also true that some reports from Management Accounting provide no new insight. The point is that every agency should be doing some Management Accounting to spotlight decisions that will make a difference.

Most of us depend on Sheer Dumb Luck as we go from year to year with our companies. The audit is a reasonable attempt at fair reporting. Management Accounting is one more tool to bring some science and insight to decisions. My advice is to lead with assistance from both approaches.

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Cash Needed

Posted on March 12, 2016July 24, 2022 by TurnAround Executive Coaching

Cash Needed? 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!

More Cash Tools!

How can you get your $75,000 for cash needed now?

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!

Contact me to see how coaching can lead to 4 payrolls in the bank! Click the graphic ->

Can you stop being the government’s bank?

Not 100%. But you will find with daily calls and emails, cash needed 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!

GDPR – Your email is collected by an automated system so that posts can be sent. You will be invited twice a year to a two hour Scaling Up workshop for CEOs and EDs.

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.

Scaling Up is a system created by Verne Harnish. It’s used by 3,000 companies around the world.

Does a Non Profit Really Need 6 Months of Cash?

Posted on February 14, 2016June 23, 2018 by TurnAround Executive Coaching

Most Non Profits have little idea about the working capital to keep in the bank at all times. Nonprofit articles often recommend cash equal to 6 months of expenses. Those writers have obviously not actually worked in a smaller nonprofit. Aside from a legacy, there is little chance of putting aside half of the year’s program budget for a rainy day fund.

Many nonprofits take one of two approaches. One approach is to receive a windfall legacy or grant and keep the entire amount in a savings account to be safe. This sadly reduces the investment in mission. Imagine operating a food bank that can open a new location and get reimbursed for food. It will cost $1,000.000 to renovate the space. The Board decides not to proceed because it has $3 million available and fears drawing down its cash.

The other common approach is to put your head down, keep operating and hope that the day never comes when the unavoidable demand for cash clashes with the available bank balance.

Fortunately, there are formulas that help.

Greg Crabtree* advocates for 2 months of operations plus 10% profit of cash in bank. For example, a $12,000,000 revenue company might have $2,000,000 plus $1,200,000 ($3,200,000) in ready cash and securities.

On a daily basis that same company may only need $10,955 in constantly available cash and the rest in a money market (or line of credit).

Get out the calculator! The formula is (2 * monthly amount needed to pay bills) / (Interest rate on line of credit/ 12). Got that? Now take the square root of that number.

Example: Your budget is $12 million** and your business is so regular that you need exactly 1/12 of that every month to pay bills. Line of credit is 5%

(2 * 1,000,000) / (.05 / 12) = 480,000,000. The square root is $21,909. The maximum to keep in the bank account is that amount and the average daily balance should only be $10,955. Save on line of credit costs or get more interest from the money market by holding only what the formula requires.

You can feed the hungry while making sure that your agency doesn’t end up needing bread.

*CRABTREE, GREG. SIMPLE NUMBERS, STRAIGHT TALK, BIG PROFITS!: 4 Keys to Unlock Your Business Potential. LIGHTNING SOURCE, 2014.

**My companies always have regular numbers to make clear examples. Don’t be surprised if you need to make some adjustments when you apply the formulas 🙂

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