Profit Archives - Page 2 of 2 - TurnAround Executive Coaching

Introduction
Unlike banks, large nonprofits are failing. And they seem to do it in a sudden dramatic way. The Community Services Society investigated the collapse (November, 2014) of FEGS (Federated Employment and Guidance Service), a large non profit in New York City with revenues of $250 million. (1)

Their report reminds us that government doesn’t  pay in a timely way and doesn’t pay enough anyway.

The report fails to emphasize that nonprofits can choose a business model that understands government contracts and creates surpluses while accepting them.

 

Betrayed
Important points of the study that blame government and foundations:

  1. Companies above $10 million in revenue are more apt to fail because of unfunded audits and regulations and paying interest on lines of credit while waiting for contract money.
  2. Government contracts are often created without input from actual providers. Some results are comical and tragic.
  3. Underfunding of 80 cents on the dollar is the primary cause of nonprofit failure when funded largely by contracts
  4. Governments and donors resist paying for repairs, technology upgrades, and administration.
  5. A large nonprofit may endure up to 250 government audits per year
  6. Half of all NYC nonprofits are in the red with no reserves
  7. A typical DYCD provider has overhead costs of 18.84% while funded for 10%
  8. NY State Education Department allows 2.6% overhead
  9. Unfunded mandates abound include paying staff during abuse investigations that have a founded complaint ratio of 2.7%

 

Bemused
But it’s important to see what is missed in the report —

  1. The report does not consider fraud. FEGS has unexplained payments to executives which have attracted the federal district attorney. FEGS also (2) (3)
    1. created a captive forprofit,
    2. outsourced functions such as accounting to the forprofit,
    3. allowed a private director to be on the board of the forprofit,
    4. and watched as he sold his own company to the captive forprofit

This all could be explainable, but complex stories with murky motives attract district attorneys. Many larger nonprofits seem to have complex fiscal structures that they may not understand.

  1. The golden age where you only open your doors and provide the program is gone. Contracts are now like fishing licenses. You choose the line, stream, and lure and hope that you’re good enough and strong enough. Non profits are just like forprofits with different purposes. Nonprofits have to compete, plan, prepare for problems. The report includes the example of a city grant that won’t pay for capital repairs because the agency owns their own building. This is clearly a case where a captive forprofit that owned the building and leased it to the nonprofit would be the preferred strategy. Charter schools understand this but most nonprofits do not.
  2. There are 4 sources of funding (contracts, gifts, blended forprofit, and fee for service). Nonprofits are doomed to fail with a contract funded model. It is painfully difficult to master more than one source. Nonprofits without planned financing simply cannot overcome government.
  3. Nonprofits need to be strong in mission and strategic planning. The contract model lulls organizations into completing the requirements of the contract and nothing more.

 

Conclusion

A lot of nonprofit failure lies just ahead. Nonprofits can either be victims or choose to make their own destiny with good strategic plans, willingness to compete, and predictive accounting that understands and outwits their biggest deadbeat customer.

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Notes

  1. http://www.capitalnewyork.com/sites/default/files/Nonprofits%20in%20the%20Aftermath%20of%20FEGS%202016.pdf
  2. http://forward.com/news/322260/fegs-faces-federal-criminal-probe-over-fiscal-collapse/
  3. https://nonprofitquarterly.org/2015/10/02/social-enterprise-swallows-big-agency-whole-more-about-fegs/

I’m worried about Non Profits going out of business – some with a bang, but more with the comforts of hospice.

My agency has a grant that joins us to 6 other agencies plus two others in the neighborhood. In preparation for the meetings, I read the 990’s of all involved. Hold on to your seat.

  • The range of agencies’ revenue was $1 million – $54 million
  • 1/3 actually made a surplus last year, 2/3 had a loss
  • The two largest agencies had more debt than assets. While accounting can lowball the market asset value of a building, this report is still really bad. I wouldn’t work for this company! It turns out that we don’t have to  🙂  They just laid off 80 staff to try to turn things around. Too little, too late.
  • The 2nd largest agency in the study at $31 million has similar troubles except that they are cutting administration instead of program. They’re down to 9% for administration. Good luck with that strategy for 5 years.
  • Two other agencies (revenues of $5 and $7 million) have complicated balance sheets that show complex fiscal structures or — corruption. How can you have a revenue of $7 million, yet invest $9 million in a limited partnership with the founder and ex director still on the board? I was going to copy their fiscal complexity in our agency but, — oh, they are both still in deficit!! So much for financial deals that we mortals can’t understand.
  • 4 agencies have Receivables at the end of the year of 11%, 14%, 17%, and 18%. How can they stay alive with that much government money that hasn’t paid?
  • Of the three agencies that made money, one has the smallest budget and volunteers.

What is going on?

  • It’s a small sample. Maybe I accidentally found all the nonprofit problems?

My guess is that many agencies don’t spend time thinking about where they are going and how they will get there. Long term viability for nonprofits requires a good strategic plan, including a section on what the agency will not do. Too many strategic plans are magical thinking.

Historic, long-lived agencies have a special problem. They need to ruthlessly cut programs that no longer serve the mission well. It means cutting off some well loved staff who have added a lot of value in years past. Most of the agencies in this small study are not new nonprofits.

Also, someone with predictive accounting ability (management accounting) needs to make a financing plan to pay for what has been planned. Cash is gas for the strategic plan. Out of gas – out of plan.

Finally, make sure your fraud policies are in place. As soon as you say $1 million, you’ll attract new friends and they won’t all be donors J

I’d be interested in the experience at your nonprofit (anonymously if necessary).

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.

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