Risk Management Archives - TurnAround Social Sector Coaching

NonProfits rarely see the need to find a business partner. At best, they find a favorite auditor, attorney or supply vendor and essentially develop no-bid contracts with their favorites. Stuart Mendel and Jeffrey Brudney found that nonprofit and business partnerships were only 10% of partnerships.

Partnerships mean that both partners get something that they want from the relationship. Nonprofit CEOs are nervous about relationships that might make a business – more profitable. Actually, every time that you pay your auditor, I assume that they get richer! So there is nothing illegal or unethical about partnership with business.

What are bad partnerships with Business?

Brand Risk – The biggest risk is Brand risk. If you choose to partner with businesses that don’t match your values, mission, or values of your clients, you can seriously damage your brand. Partnerships with business should hire a coach to help you review partner proposals with your leadership team, board, and stakeholders before you proceed. For example, the company in New York that has done audits for Mr. Trump also pushes aggressively in the nonprofit space locally. Would it affect your nonprofit brand if you chose the same auditor? What questions would you raise before you made the decision? Your coach can help.

Kentucky Fried Chicken partnered to give money for breast cancer cure. They printed a month of pink buckets for chicken. Media quickly seized on the links between calories, obesity and breast cancer. There was nothing unethical with the business relationship but the nonprofit failed to consider key implications of their brand. Proceed slowly and use a coach!

Process Risk – A second risk is process risk. The processes and corporate cultures of all companies are far different. When any two groups develop a partnership, there needs to be a written charter that the coach helps you to carefully spell out details

Both Brand Risk and Process Risk can be managed. Leaders lean into the danger, use a coach, and do risk management! You can partner with business.

What’s a good reason to partner with Business? Mendel and Brudner list four reasons and I add two more!

  1. Your nonprofit needs money – Pampers diapers and UNICEF were partners for a long time and UNICEF got funding for its mission. Pampers added to its brand strength by being interested in children. Find a business owner who really likes your mission.
  2. Your nonprofit helps a Business that helps your clients – A family doctor has a practice locally that easily accepts cash and his prices are low. Any nonprofit that helps low income families would be helping their clients by referring them to the doctor if there are not other good choices.
  3. Your nonprofit needs more expertise – A local construction company is willing to partner with your nonprofit with internships. You have a training program for people released from prison but no expertise in introducing your best graduates to the job market. The construction company gets a supply of semi skilled workers that come there with your recommendation.
  4. Both you and the Business want market share – You realize that a local bakery attracts young parents whose children would be eligible for your school. You already have 200 parents who don’t go to that bakery. If both companies give discounts to each other’s customers for a month, then both groups of parents are now potentially interested in both companies.
  5. Sumo Number Four – Bernie Brenner suggests that you find a partner who is 10x bigger than you and partner with them. For example, a real estate developer suddenly gets bad press about rodent infestation. They need a brand partner who will help them clean their brand. They donate money to your nonprofit and rebrand as the safe rental for families. This partnership is the most risky for the nonprofit but potentially the most effective.
  6. More Respect Than Government – Government partnerships are often take it or leave it contracts. They add conditions without reflecting on the costs of compliance. They assume that they are the head in the partnership and your nonprofit is the hands and feet. Business partners can be different, You can search until you find the right business to partner but you can’t easily choose another government to partner if you don’t like the first one!

Conclusion: Partnerships are critical in the growth of nonprofits and often welcomed by business. You will be treated as a co-equal partner by the right Business. Remember:

  • This is not a plan for next week – it’s in your three-year plan.
  • Use a coach and develop carefully.
  • Avoid brand and process risk
  • Involve your leadership and board in the decision
  • Enjoy the expansion of your good work!

Many nonprofits are being damaged by fundraising. The change is like being hit by a fast freight. Next year will not feel like last year. Nonprofit leaders often regard charitable gifts as the first and major provider of money. It’s critical! Cash pays staff and helps clients. Three forces are changing the giving landscape. Are you ready?

NonProfit leader about to be hit?

First, Tax reform in 2017 doubled the standard deduction. Only richer people and tithers (people who have a spiritual habit of giving) benefit financially from gift-making. Reports indicate that gifts from individuals declined by 1.1% in 2018. Charitable gifts from corporations increased. Gifts from those over 70 years old who made gifts from IRAs also increased.

Second, the number of corporations that received half of all profits in the USA declined. In 1975, 109 companies made 50% of all profits. In 2016, the number dropped to 30. There are very big gifts but not as much capacity for small and medium gifts.

Thirdly, Christian religious affiliation is declining rapidly in the USA. Christianity has been a major inspiration for giving. Pew Research shows a decline of 12% in the last decade! It’s hard to describe what changes this rapid rejection of religion will make in American society, but charitable gifts will be affected.

Are you watching your dependence on gifts and making appropriate changes?

I coach nonprofits who face turbulence. Contact me at tompkir1@gmail.com for a free consultation.

Sources: Richard Eisenberg (Forbes, June 18 2019), Pew Research (October 2019), and Richard Wolff (Democracy at Work)

The free workshop is September 18 and 19th (details below) on Zoom. This is one workshop where you won’t be late because the subway was behind schedule!

The first recession proofing we talk about is loneliness of leaders when facing external problems. Since I lead a nonprofit as well as serve as a coach, I speak about these feelings because loneliness has been a companion several times as a CEO or ED.

Here is a quick video recap and details are below to register with Zoom

Recession Proofing Nonprofits

You are invited to a Zoom meeting on Recession Proofing NonProfits

When: Sep 19, 2019 08:00 AM Eastern Time (US and Canada)

Click Here to Register in advance for this meeting:

 After registering, you will receive a confirmation email containing information about joining the meeting.

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Growing Business in Cambodia
You are invited to a Zoom meeting on Growing Business in Cambodia.

When: Sep 18, 2019 08:00 AM Phnom Penh time.

Click here to register in advance for this meeting:

 After registering, you will receive a confirmation email containing information about joining the meeting.

Is your nonprofit about to lose money while you take a few well deserved days off? Can you afford to be home at Christmas?

In 2013, 19,000 children were told to take care of themselves every day of the government shutdown. Headstart had to close until government restarted..

I coach nonprofits to build a secondary source of funding. We live in a time of divided government where one party wants to shrink taxes and government provided services. Many fine organizations do not have the cash reserves to lose $100,000 in a shutdown and never get it back.

If you are in trouble, write to me and I’ll give you some ideas to survive through the President’s funding cutoff.

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Photo by Miguel Constantin Montes on Pexels.com

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.’  1019_5901001

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?

  • Healthy nonprofits augment government contracts with either charitable gifts or fee for service of at least 10% of total revenue. This additional financing can be used to pay for strategic investments and funds payroll when government is slow to pay.
  • Nonprofits that started in the 1980-2000 years of growth in government funding often pay little attention to other sources of money. They tend to have smaller boards who may not have an individual mandate to contribute. With regime requirements increasing, the government funded nonprofits are close to merger, acquisition, or bankruptcy.
  • Revenue is vanity. One nonprofit with revenue of $70 million and growing quickly is 1.5 payrolls behind. While they may use a line of credit to offset the immediate need, the growth and size do not give them protection for the long term. The funding mix is far more important than the size of revenue.
  • Charitable gifts generally have a practical collection limit of $5 million in the nonprofits studied. Growth above $50 million in revenue requires a revenue stream from Fee for Service to keep government contracts revenue under 90% of total revenue.
  • Two new nonprofits report charitable gifts of $11 and $14 million. These represent Donor Advised giving. Both nonprofits are growing above 20% per year and already have a major voice in education reform and biological diversity.

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 😊

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.

  • For companies that make a product, the operating cycle begins when inventory has to be purchased or built. Bills have to be paid. A sale occurs, but cash still may not appear until merchandise is shipped and the cash is transferred. The entire period has to be financed.
  • For nonprofits, late payments by government can create a cash lag of months or years. Meanwhile, payroll has to be paid.

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.232_2895318

What can nonprofits do?

  1. They borrow from their restricted funds with the promise to repay
  2. They borrow from prepaid tuition and fees or prepaid money on government contracts
  3. They finance up to 75% of the collectible cash from government with a line of credit at a bank
  4. They blend methods and simply tell staff that payroll will be late.

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:

  • Copy the number from Page 1, line 15 and divide by 26 to find the Cash for One Payroll.
  • Copy the numbers from Page 11, lines 1 and 2, to discover total Cash on Hand at End of Year.
    • Subtract from the Cash on Hand, restricted assets on page 11, lines 28 and 29 to find Unrestricted Cash.
  • Divide Unrestricted Cash by Cash for One Payroll.

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.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.

 

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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