You are days away from an unusual Nonprofit resource. Mingle with Forprofit companies and learn growth secrets. You know how to offer your service with excellence. the ScalinUp Summit in Atlanta May 21-23 will make your work sustainable (and you’ll sleep better!)
Verne Harnish collects thought leaders twice a year to help businesses and nonprofits who want to grow. Scaling Up philosophy is that to 10X your business, you have to 10X your people. And to 10X your people, you have to 10X yourself. Summits are two days of nonstop quality ideas – like getting a drink from a high-pressure hose. One company brings along a secretary just to take 25 pages of notes to review afterward.
Scaling Up Summits and Coaching are an
investment of time and money with the promise that your nonprofit will get
tools to grow.
There is also a cheap approach
to the firehose if you’re not sure. Buy the books now that Summit speakers have
written and you’ll be convinced of the value.
Reading is a Cheap Way to Drink at the Firehose
I have started to read a book a
week to get ready.
Last week, I read a book from
one of the Summit speakers who will be in Atlanta in May. Mariya Yao wrote
‘Applied Artificial Intelligence – A Handbook for Business Leaders.’ It’s an
easy read and gets leaders up to speed on using Artificial Intelligence in your
nonprofit. (Spoiler Alert – you are already using weak artificial intelligence,
so you have started!)
I’ve been scared of Artificial
Intelligence because it sounds expensive. It sounds like new software ($$$) and
new staff to understand the software ($$$) with me to raise the money ($$$$)
Mariya begins with the cheapest
of ideas -what do you want to know? Artificial intelligence starts with the
intelligence of leaders! Who knew? I actually brought managers together last
Thursday to ask that question. What a great session as people gave different
ideas as to why the school is so successful. I made a tool to guide our
discussion. Email me if you want to try something with your team and I’ll send
Join Me in Atlanta, Invest in Future
Join me in Atlanta after you
read a book and see what you’ll will get. Invite board members too. We’ll have
a late night session Tuesday night to meet and review the day. Text me before
you register because there is a nonprofit rate.
A new survey of 2,100 people has found that only 19% of Americans really trust nonprofits and religious groups. The best news that we can take from this report is that they don’t distrust us as much as they distrust other companies and government.
We live in an age of Fake News. We have Wikileaks, Trump, and the Russians pushing out Fake News and accusing mainstream media and others of Fake News. Our nation has caught the Fake News Flu and is now vaccinated against most institutions.
Rusty Shelton, author of Authority Marketing says that people trust people more than institutions. We tend to buy from stores where we know someone. We live in an atmosphere of high suspicion.
There is more need than ever for Strategic Planning. There are 1.5 million nonprofits in the USA. Many are engaged in critical and worthwhile services. With planning, Fake News Flu is just another challenge that can be overcome. If I can help, email me at Ronald.Tompkins@TAConsulting.live to get a conversation started.
PS. Here’s the link to the entire report. https://www.give.org/docs/default-source/donor-trust-library/give-org-donor-trust-report.pdf
Are you turning around a difficult situation? It’s lonely. That’s why we all gather twice a year who are gathered in this business to hear stories of success and to share our struggles.
It’s not an easy event because so many thought leaders are onstage with great ideas. Tom Peters was a speaker in May. You will end up tired and with a new sense of partners in the determination to lead your company to success!
The Fall ScaleUp Summit in Denver (16-17 October, 2018) is nearing capacity, with 800+ business leaders and 12 bestselling business authors gathering together to focus on high-growth strategies. Register now to reserve your space — preferred seating available for teams of three or more.
Twice a year, I gather with nonprofit leaders who want to dream of greater mission. Can you invest two days on possibilities instead of problems? Check past summits with Verne Harnish online to see the great value! Text me to register.
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?
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.
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
Effect of Long-Term CEO – The vision of an effective CEO is one of the magic quantities needed to produce success.
One CEO in the study is in the 8th year of service. The nonprofit has more than doubled in revenue during that time to almost $30 million. Positive news articles have been written and many local school districts have signed contracts. These effective managers are rare outside of medicine and higher education (and not common anywhere – just ask Penney’s and S
ears!). He has been able to articulate strategy, keep the leadership moving together, and has grown in his own skills to manage a much larger company.
Unfortunately, another nonprofit with news reports about corruption also has a long-serving management team with board and management retention at 100% over 4 years. One way not to get caught is if you never leave!
Another nonprofit lost its way and the recent audit has a ‘going concern’ paragraph. I had only heard about them! This is a first. The founder stayed for 30 years and did not grow in capacity to match the growth and challenge of the $9 million agency.
Effect of a Long-Term Board – The growth companies in the study had board retention rates in the 80% range.
A nonprofit incubated by people from Harvard has a board retention rate of 94% over 4 years. The annual revenue growth rate for this nonprofit is 127% annually.
Nonprofits in existence over 25 years have more trouble keeping board members. They have a retention rate of about 50%. Many are teetering with ill-planned financing.
New successful nonprofits benefit from a startup with a skilled CEO and Board chair. One promising startup in stress has a board retention rate of about 10%. The Board Chair was inexperienced and could not drive the board to support the agency in networks.
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.
All 990s report on Board Members and Managers. When you join a board, the risk is to avoid one that is stuck or failing. The 990 information is a springboard to other sources and patterns emerge of the best boards – and the worst!
What is the worst number of directors for a healthy nonprofit?
Less than 11. The nonprofits in the study that had less than 11 board members reported on the 990 had reports of corruption in news articles or were really a family business in the garb of a nonprofit. If you want to disguise another business purpose in a nonprofit form, a small board is essential to keep secrets.
Otherwise, a small board is ineffective. Small boards are erratic on accountability. One poorly qualified member of a small board has an outsized voice. The line between a governing board and a working board starts to blur. A large board should have enough wisdom to sort out erratic opinion and be globally focused.
What are worst board members for charitable guidelines?
Members who Give Time Instead of Money!
Charitable gifts are important because contract money usually has a specific purpose that doesn’t fully reflect the nonprofit mission. Gifts also impress foundations and government of community support for the agency. 50% of the Board of Directors should be willing to host a fund raiser each year. 100% of directors needs to make an annual gift that is one of their top three charitable priorities for the year. No exceptions. Directors who don’t contribute should be offered a volunteer position.
20% of the Board of Directors should appear on 990 Schedule B as giving $5,000 or more to the organization. It’s a signal that someone on the Board really cares about this!
The indicators mentioned above for the Board charitable effort is a sign of the importance of your mission and the passion of the Board.
What is the worst Board Balance for Regulatory?
100% regulatory members
Every board has a universal need for 2 board accountants. The Board needs a CPA for the Audit Committee and at least one Management Accountant to analyze financial reports. Most of this business should take place in the Finance Committee. The 990 Part VII lists each Board Member. Always use the 990 as a beginning point for searching social media and online. Too many accountants on the Board will blur the line between management and board and meetings will be spent poking and probing the regulatory reports.
What is the worst Board relationship to the community?
The 990 Part VII lists each Board Member and Senior Manager. In New York City, the nonprofit world, similar to all other industries, attracts the best connected members and managers. If you search each name on Google and LinkedIn, successful New York City nonprofits often draw Executive Directors and board members from Ivy League graduates. There are exceptions, but you will work twice as hard to get the job for which you have the same credentials as the Harvard alum.
Perform a search of 20 nonprofits in your community in the size that you plan to be in your Strategic Plan. Make a chart of companies, colleges, and community activities to see what patterns emerge. Make sure that half of your new Board Members are connected to the central nonprofit community.
What is the worst Board for Directing the Agency?
The Board is charged with setting the basic direction of the agency and creating measures to measure the effectiveness of the Executive Director and staff. The 990 Part III asks about agency accomplishments. Schedule O gives opportunity for more reporting.
Most boards fail this last and most important question. The largest nonprofit in the study has three paragraphs on the 990 as to what it provides to children. There is no indicator that they accomplished anything. Part III gets little attention because too many agency missions are controlled by the demands of the funder. Boards of Directors simply give up and vote to fund the agency and hope for the best.
The 990 has information that is more than a report on financials. It’s possible to see the makeup of a board. One can discover the presence of major board member gifts. Most importantly, it has space for whether the board thinks about mission and results. It’s a great tool to use at the next time that someone asks you to join their board – avoid the worst!
Start your TurnAround today with a coach who can 10X your progress! Click my name Ron Tompkins f\or the next step!
No gossip column on 990s can omit the juicy topic of what we’re all getting paid.
The 990 tracks highest paid compensation in two places – Part VII, Line 1d on the main form and also Schedule J (There are 16 additional schedules that can accompany the main form and sometimes this is where the bodies are buried.)
There are two ways to examine the data.
What did the highest paid staff member receive?
What percentage of the total compensation expense (Part I, Line 15) are the Highest Compensated Employees taking?
Let’s start with the highest compensated in $ even though the percentage of total compensation by percentage may not be unusual.
Leadership of universities/medical facilities and private schools for the wealthy are routinely given higher salary in lieu of stock options. The theory is high leadership skill is required but leaders could also make more in the for-profit corporations with stock options as incentives. The eye popping salaries are a replacement for the stock and other incentives to be made at Apple, GE, and IBM.
Higher pay can be concealed by Part VII Section A Column F – Other related organizations. While I have an upcoming look at nonprofit captive corporations, some midmarket nonprofits with financial sophistication use this column to add an extra $50,000 to the executive compensation. Wish I worked there 🙂
Guidestar publishes an annual compensation report. For example, the CEO in Sacramento for a nonprofit should make approximately $54,000 if the total revenue is less than $500,000; $112,000 if the total revenue is less than $1 million. $130,000 if the total revenue is less than $5 million, and $175,000 at greater than $5 million revenue. These numbers strike many Boards as generous, but Guidestar is watching all of these clever add ons and reporting them. Why should you settle for less than fair? (Guidestar, 2017:208)
Let’s continue with the underpaid!
Leadership compensation by percentage of total compensation is how much the Board thinks that the leadership is worth. An agency of $6+ million should expect that leadership compensation will absorb 3-5% of total compensation.
Since ill-equipped leadership will never get the nonprofit to $6 million in revenue, small organizations may experience 6-12% of total compensation for leadership costs. Boards have to pay in advance of the larger size that good leadership can provide. It’s necessary pain of investment!
If you are in a $500,000 revenue organization, be careful not to overvalue the ED job. Let’s use the Sacramento example and your compensation should be $54,000. Because the company is small, your job may also include clerical for 25% of the time and program meetings for 25%. Those two compensations for full-time work are $30,000 and $40,000.
So your total compensation would be
50% ED – $27,000 (54,000*.5)
25% Clerical – $7,500 (30,000*.25)
25% Program – $10,000 (40,000*.25)
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.
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.