Make sure that your fundraising plan fits your agency capacity
Make sure that your fundraising plan fits your agency capacity
Is Cash difficult for your nonprofit? Coaching helps! Here are 10 ways Executive Directors can still get cash to sustain and grow
Frustrated leaders can turnaround problems when the recession threatens income.
There are four long-term sources of financing for nonprofits – Fee for Service, Government Grants and Contracts, Donor Advised Funds, and Charitable Giving.
The 990 does not make this information available easily. On Page 1, they blend charitable donations with government contracts*, Schedule B is a report of all donors over $5,000 and frequently that report is simply submitted as ‘Restricted.’
It’s easy to miss the point on the 990 that the four funding sources are quite different from each other and virtually no agency in the study was skilled in attracting funds from all four sources.
Charitable Giving – Non profits began in the 1800’s with charitable gifts. Often, wealthy people formed a group and funded it with gifts for orphans, destitute, etc. The charity did not begin to match the needs at that time. As ethnic groups got larger, smaller nonprofits served particular groups from a language, religious, or cultural background. Slowly, many of the oldest nonprofits (universities, for example) built endowments that were powerful and independent sources of funds. Investment money flowed from charitable gifts.
Fee For Service – Hospital fees, tuition for universities, and other fees (excluding Medicare and Medicaid) make up almost half of nonprofit income. Since hospitals and higher education nonprofits have little in common with funding sources for other nonprofits, it’s fair to say that about 10% of nonprofit income is from fee for service.
Government Grants and Contracts – States, Localities, and Federal Government increased funding in the 1960’s. The first decades were slow increases with few regulations. With budget cutting in the 1980’s, governments started regime funding – close control of process, less volunteers, and more professionals. The administrative requirements of regime funding were not calculated in costing. The idea returned to the 1800s model that the social sector must be funded in part by charitable gifts.
Donor Advised Funds – The top 20% of the population is accumulating wealth and the top 1% even more so. This concentration is leading to Giving Clubs and Donor Advised Funds where gifts produce very specific purposes and outcomes. The benefit of these funds is that they empower agencies with clear agendas and the possibility of an independent voice. The benefit can also be a liability if agendas don’t uphold values such as equality and justice for all.
With that background, what does the study of 990s show?
Conclusion
Government is a major force in financing the social sector. In most cases, the contract triggers agency wide changes to comply. Boards of directors become financial watchdogs instead of protectors of the vision. Ironically, the nonprofits which are failing are those who are the most compliant with government demands!
Healthy nonprofits have to overcome the barrier of multiple funding streams in order to thrive. 10% of total revenue from charitable gifts and fee for service almost guarantees that you won’t run out of cash. And cash is cash!
*Government contracts are considered donations because there is no exchange with the public. I would argue that improvement of a person and the taxes later received do create the exchange 😊
What is the effect of a long-term CEO and management team on a nonprofit? What is the effect of a board with relatively little turnover? The 990 reports the name and position of each board member and senior manager annually. Let’s compare the lists over a 4 year period (2013-2016). Unfortunately, the truth is a wise and subtle mix of factors
Conclusion
An effective leader and an effective board chair drive success. Effective boards need term limits, additional volunteer committees, and board members committed to learning.
Effective management requires a leader with time to preach a vision, arrange a team for flawless execution, and work with the board for abundant cash to fuel growth. There is often a plan for succession in these nonprofits. One consultant said that successful nonprofits hire management from within. It reduces the shock of succession. Normal succession with an outsider has a management turnover of 50% within 18 months. This is necessary when the nonprofit is stressed.
Note to all: The CEO/ED job is challenging. A business coach can help and contact me if you need support to go through this process.
This is the 5th of 10 articles on Sundays that look at the 990s to understand what is happening to nonprofits in general and give you some data for your own nonprofit. Today, the focus is on the ability of companies to make payroll. Is your next paycheck safe?
I advocate for nonprofits to set a 10% surplus target. Greg Crabtree has the same advice for privately owned companies. We are both worried about the bills that accumulate while waiting for cash to settle them.
The largest nonprofit in the study so far, Children’s Village, has an Accounts Receivable of 27% of Revenue and only 3 days of its next payroll on hand in unrestricted cash. There are 1,319 people on staff!
In a study of 14 nonprofits of various sizes ($1 million – $85 million revenue), 7 nonprofits showed a decline in the ability to make payroll over 4 years. The worst performer was over 2 months in cash arrears on payroll.
What can nonprofits do?
Any company with less than two payrolls in the bank in cash is putting the wellbeing of families in jeopardy who depend on regular checks. Richard Reeves tells us that jobs that pay less than $120,000 face an increasingly expensive middle class lifestyle with more and more income insecurity.
Nonprofits have missions to do good – and that includes generous treatment of staff.
Calculate your own cash for payrolls from your 990:
If you have 4 payrolls in the bank, you have time to maneuver if bad days arrive. If you have less and less payrolls in the bank, you need to make a plan. Scaling Up business coaching creates a plan in 90 days, a quick win in the 2nd quarter and a 20% growth in revenue in the 2nd year. We’re here for you!
Are Your Assets Resting?
Why would you buy a truck or a bus for your company and fail to use it? Why would you hire a new accountant and fail to use her? We are supposed to buy fixed assets and employ people and get more money back than we spent. Nonprofits will focus on social impact as well as cash. That’s fine but some nonprofits find it easy to spend other people’s money for things of little value.
The 990 tells whether assets are being purchased or employed wisely.
Assets
Each industry has its own range of the dollars returned in profit divided by the Assets. For profit education companies average 5%. The beverage industry is 9%.
The nonprofits studied have a return of assets of about 3%. That means that each $100 of investment in assets returns about $3 in profit. That is a lot lower than the industry ranges mentioned above because the corporate tax rate has been 35%! It’s fair to say that nonprofits actually do divert resources to the social sector that are returned in some other metric.
Two concerns emerge:
Human Assets
In a post-industrial age, the real asset of any company is the compensation budget and the human resource that it represents. One way to measure effective hiring is to relate the total revenue to the dollars spent on compensation. If you hire a new staff member for $100,000, it’s clear that you have to raise at least $100,000 more in revenue to support the position. The labor efficiency ratio is usually between 2 and 7, depending on industry.
The formula used in the study is total revenue / total compensation.
Nonprofits are low, regardless of size.
A labor efficiency ratio under 1.4 is a danger signal. The income may be critically lacking for required infrastructure. There may be undue influence of board or management to drain resources. Accrediting and regulatory agencies should measure program quality carefully.
Conclusion
The only way for nonprofits to serve and succeed in mission is through wise use of assets. When the financial return on assets is too low, it will reduce cash and destabilize the nonprofit. Older nonprofits generally seem to need more business training to approach 5% or more return on assets.
Labor efficiency is a critical asset because almost all companies spend most of their budget on payroll. When a budget is set up with less than $1.40 coming back in cash for every $1.00 spent on payroll, there is not enough money left to pay rent, insurance, and program supplies.
Younger nonprofits appear to be more nimble. They are less burdened with nonproductive assets and save enough money (aside from payroll) to finance quality program supplies and infrastructure.
Success = monitoring return on assets and labor efficiency.
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.
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.
People tell me that they don’t plan because they have no money. They ask, ‘Why plan if I have no money?’ I normally respond, ‘How do you know that you need money until you plan?’
People don’t like the challenge of planning before finding money. Too many people think that they need money — to think about money.
So here are 10 ideas for Strategic Planning that can reduce or remove the need for cash.
You come along next and want to buy $5,000 of the same cheap clothing. If you could get the same terms as Walmart, the clothing company would only receive a profit of $5 dollars from your order. They will laugh you out of San Pedro Sula.
Once you pay $6,000 for the same clothing, you will need to raise sale prices back in Phnom Penh. It’s a desperate game that is hard to win.
And now, I return to my first point. You don’t need any money until you painfully create the Strategic Plan on how to invest and make more money. A plan that is good and usable is not easy to create. It’s going to take several months and need quarterly review after starting.
Some business ideas require less cash. And no business requires cash until you have a good Strategic Plan.
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.