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?
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 email@example.com for a free consultation.
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
When: Sep 19, 2019 08:00 AM Eastern Time (US and Canada)
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.
Exactly 10 years ago as I write, I applied for a Vice President position at Edwin Gould. I just checked the cover letter and it was a masterpiece. Of course, one reason that I’m writing this is that I was rejected. No one could have known that Edwin Gould would be acquired by the former Leake and Watts in 2018.
How did an agency started in 1939 have trouble as a going concern with a revenue of about $30 million and fundraising costs of $118,047 at Ciprianis in 2008 when I applied? It’s like the Sears of Foster Care!
What Incidental Factors Don’t Matter in Going Concern Troubles?
Labor Efficiency Ratio – This is the biggest shock to me in the book. I preach labor efficiency with any company that I coach. It saved the nonprofit that I direct. It’s a simple ratio that X dollars of revenue must come into your company for every dollar paid to employees on the front lines. Nonprofits are often sloppy and overstaff programs and the results can drain cash. One of our programs had a labor efficiency ratio of 1.3 For every $1 paid to our program staff, we got $1.30 paid to us by the City. Suddenly, we couldn’t afford classroom supplies! Usually a LER of less than 1.5 is not possible to sustain. For profit business normally has a LER range of 3 -7. That means that for profit companies expect $3-$7 to arrive in sales for every $1 paid in compensation.
Amazingly, Edwin Gould had a LER of 1.77. For a social service agency that needs credentialled staff, I would assume this to be a well managed agency. The supervisors kept labor costs in check but it did not save the company.
Accounts Receivable – Many nonprofits bleed to death while waiting for government to pay. I could see how that would create a going concern issue. The going concern group of nonprofits in this study had about 17% of revenue still unpaid by the government. That is on the low side of normal in this study. Children’s Village has total revenue over $80 million with 24% Accounts Receivable. The highest A/R in the study was 39% of total revenue and that nonprofit continues to placidly sail along.
Assets / Equity – A normally leveraged for profit company should have some debt – generally under 40% of assets. That would give a ratio of 1.67. Most of the nonprofits in the study had an acceptable balance, including those in the Going Concern group. While most nonprofits don’t use assets or equity efficiently, they have so much trouble getting lines of credit and term loans that their fiscal structure remains intact. Edwin Gould and Sheltering Arms (a similar nonprofit) had negative equity. This can happen when an agency is in such dire distress that it records liabilities for the agency in excess of assets. Otherwise the Assets to Equity balance is not a good indicator of Going Concern issues.
# of Payrolls in Cash – Nonprofits are slowly losing their ability to have cash for paychecks. Some of the payrolls are over a month in arrears. I assumed that this would be a big signal of Going Concern. Amazingly, the Going Concern Group members had as much or more cash on hand as anybody else.
The Three Critical Factors of Going Concern
Management Leadership –
From the 990 alone, Board Leadership appears to have made a Succession error. There was 50% continuity on the Board of 12 persons from 2008 – 2016. However, three managers including Executive Director Audrey Featherstone lead the agency for about 10 years. Revenue increases and the agency survives a crisis in Foster Care in NYC in 2005.
There is a catastrophic loss of income in FY 2014 of $1.7 million as Featherstone leaves the agency. Two or more financial leaders turn over successively. With Featherstone gone, the Equity actually goes under water to negative $1 million in two years.
Kingsbridge is a similar agency in the Bronx with a going concern paragraph in their last published audit. In the case of Kingsbridge, a long term Executive Director appears to have misjudged the rapid changes in the non profit world.
The common thread in narratives of the Going Concern group is poor attention to selection or supervision of the Executive Director to make sure that the Director changes the agency nimbly to adapt to the funding available with a good strategy. Boards generally are too conservative on participating in and requiring reports on strategy. Both for profit and nonprofit agencies go out of business with plenty of assets.
Edwin Gould has $30 million going into the acquisition.
In 2005, Edwin Gould was ranked first in Foster Care Agencies in NYC (NYTimes 11/07/2007)
In 2011, Edwin Gould received $101 million grant from NYC for five years of children’s services
The right director could probably create a strategy to use those resources and network and keep an agency in operation.
Going Concern Group members generally have a persistent deficit over a period of years. Many of the Scaling Group members have occasional deficits which they quickly reverse with a change in strategy. There is simply no way to live with lines of credit, spontaneous financing, and deposits for future services over the longer period. All companies must have a positive net income.
One Source of Revenue
The Going Concern Group members only have government contracts as a source of revenue. The Scaling Up Group members have a 2nd major source of revenue – Charitable gifts (Individual, Foundations and Corporate Gifts), Donor advised funds, or Fee for Service. The unrestricted and surplus funds from these other sources are at least 10% of the net income.
Steven Rathgeb Smith (1993:133) outlines the fickle demands of regime funding. These are the contract funds from government which change as political priorities change and are willing to spend any amount of money to monitor the process. In addition, regime funding is the overwhelming majority of the Accounts Receivable that most agencies struggle to work around.
Edwin Gould, for example, received about $300,000 in fund raisers and contributions in FY 2016. The 1% of the net income that this provided was dwarfed by $550,000 of deficits in the regime funding programs. This is a perfect example of a large effective agency which would be in great operating condition today with $1 million annually in gifts and grants to provide the financing that fills in the gap created by inadequate contracts from government.
10 Nonprofits have just merged in New York City. It’s an industry with too many organizations who believe that regime funding is a Strategic Plan. If a nonprofit is weak in two or more of the critical factors, it’s time for an entire board meeting to occur on partnering, merging, or being acquired. Conversely, an agency with strong critical and incidental factors is in a place to extend it’s work for the public good through an acquisition.
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.
Did you work harder after you hired more people? The reason to hire more staff is because there is too much work. How can more people create more work instead of less work?
Companies go through ‘valleys of death.’ This is commonly described as any nonprofit between $1-6 million in revenue. This is the growth period where the need for more office support (administrative, legal, hr, accounting, etc) is high but the cash is really not there to pay everyone.
Valleys of Death – Employees
Another Valley of Death happens when the staff team grows and changes.
Companies usually start with the vision of one person. How many times have you seen a great visionary start a small homeless program? The new company is built around the passion and skill of the founder. Of course, the owner cannot prepare food, clean and recruit clients so helper people are hired, 2 social workers, a kitchen assistant, and a custodian. This model climbs to 10 employees. The new staff are owner-helpers. They don’t have much authority. The director/owner sets the rules for the shelter, orders the supplies and keeps the books. The helpers clean and help. It is critical that the director/owner trusts the helpers.
Over 10 staff and more is needed than loyalty to the director/owner. Good food and safe housing created a flood of applicants for the housing program. The director/owner helpers are replaced by staff who have the ability to make good decisions when the director/owner is not there.
The staff team over 25 people is the highest level of director/owner failure. It is possible for the owner to work too hard in the 10-20 staff member range and not hire capable people to exercise independent judgment. If the director/owner continues to add 30 helpers without independent good judgment
The director/owner will collapse from overwork OR
The agency will lose newer staff and cycle between shrinkage and growth with 25 staff
The director/owner must prepare for a constant change in role during growth. There is a steady shift from
Leader doing all of the work with help
Skillful staff taking over marketing, accounting, client engagement
Leader becoming a visionary and values thought leader with managers
Leader setting 3 year highly achievable goals with management team
There is a saying that at 10 staff the owner needs to hire someone identical to herself. At 100 staff, she needs to hire someone much different from her style to fill in missing skills.
The director feels too badly to transition staff who helped to start the company but don’t have a place on a larger team. One for-profit owner had two CEOs who could not grow as the company expanded to 5 sites around the world. He simply added them to his research staff at their same rate of pay – until he was no longer breaking even.
A nonprofit director lost many younger staff when three ‘original’ staff were mean and dismissive and no longer playing valuable roles. She couldn’t face the stress of honesty and transition.
A director liked to hire managers who were not threatening. They had less ability than the director. The agency could never break growth barriers because the team lacked skills and experience to take it to the next level.
There are personnel companies who can be hired to review job descriptions and actually transition unproductive managers when the owner/director or board does not feel capable of the task.
Leading a growing company is a difficult and constantly changing job. Your role requirements will not stay the same for 12 months. While sufficient cash is a challenge, the balance of effective people on the team at different stages is critical. The CEO job is challenging. A business coach can help and contact me if your team needs support to go through this process.
This weekly club meeting talks about stress that CEOs and Executive Directors feel when employees don’t do the right things at the right times and life gets difficult. Perfectly happy Directors and Presidents are not eligible for membership. This week, I’m thinking about why employees get the job description and don’t understand the job.
In a former job, I was also half of the HR department. I wrote job descriptions for every job. Since the job involved children, I carefully added that you have to be able to get down on the floor with kids and lift 70 pounds. The description is great – but has so many details in it that’s its impossible to know what the actual job is. While it’s critical to be able to carry a child in a fire, the day to day work for the appraisal is quite different. In 10 years, staff had to pick up a 70-pound child one time! How do you protect yourself without hopelessly confusing your new employee?
What is the job description? The job description outlines the legal limits of your authority. If you are the first grade teacher, you cannot pay bills. It’s not in the job description. You don’t have the authority. The job description describes the limits of the job but employees want to know what is the core of the job?
There are several systems online to identify simply what the job is about. The job scorecard is what the job is really about. It’s simple enough for employees to understand. It protects them because you write down how you measure success. Many employees try to be successful if they know what you want.
Some employees won’t give their best until they understand what you want. I like a 10 point job scorecard that has 4 sections. I can tell the staff very simply what the job is about and they are not surprised later in feedback and appraisals.
Knowledge, Skills, Abilities – 3 measures. For example, an accountant might have
Knowledge – BA Accounting and 40 hours of additional training per year
Skills – 3 years experience in inventory allocations (Knowledge plus practice)
Abilities – interprets our corporate financials to board (baked in knowledge)
Values – 3 measures of values (values have to already be established)
Value is mission-driven staff – measure is staying late to meet the reporting deadline
Value is delighted customers – measure is returning calls and emails in one day
Value is flawless execution – measure is 0 corrections required in the audit.
Visible Results – 2 measures for an Accountant
Reports to the managers by 5th of the month
Public audit without qualification
Key Responsibilities –
18-month rolling cost budget
Inventory entries with sales, costs of goods sold, raw materials, finished goods, and work in progress.
Isn’t that simple?
Keep the job descriptions because they keep jobs from changing without good reasons. They protect both manager and employee in moments of tension.
Use the job scorecard to do appraisals and help the employee understand how they add value to the company. Your employees will not understand you until they know what you want. Job scorecards help!
The CEO job is challenging. A business coach can help and contact me if your team needs support to go through this process.
This weekly club meeting talks about stress that CEOs and Executive Directors feel when employees don’t do the right things at the right times and life gets difficult. Perfectly happy Directors and Presidents are not eligible for membership. This week, I want to deal with the stress of the 18-36 month window.
ReHire When you first take the CEO job, you have to rehire all of the people who report directly to you. Perhaps you assumed that they are good sheep and will simply change to a new head sheep?
Someone who now reports to you isn’t confident and you make them nervous. Someone else wanted the job that you have. Someone else has been cutting corners (with time and attendance, expense account, etc) with the last boss and wonders how to test your tolerance. And so on. You thought it was a greener pasture, but all greener pastures have manure!
Meet with each direct report and help them show their best side to you. Recognize their talents, skills, values and passion. Meet together as a team and give staff an idea of your most important values. My own personal values include:
I don’t hire assistants. I hire people smarter than I am who own their part of the company – In your area, take responsibility and authority and bring me solutions as well as problems.
Be a continuous learner. I expect to offer more skills to my job one year from now. I expect you to offer more one year from now. I read one book a week. What is your goal?
I pay 75 percentile for your position. I think that great managers need to be compensated so they don’t worry about job and home. I pay for professional development. I offer flex time and remote work where possible. I respect your valuable contribution to this company.
I only want people in this company that you would enthusiastically rehire. Does anyone need more attention on your team? Does anyone need to transition? Those will be my questions.
Result The result of the rehiring – people feel respect for who they are and what they have accomplished and they have a clear idea on how to work with you. In most cases, this is a great start.
Research shows that effective CEOs will need a 50% change in leadership team in the 18-36 month range. The management mix requires a team that can be effective under your leadership. In some cases, the reporting managers also see this and create their own retirements and resignations. This is not a sign of poor leadership as long as the revolving door stops within 24 months. It’s what is needed to take the organization to the next level.
The review period is where you set up a job scorecard for each position with the help of the leadership team. The process is necessary but it will point out some managers who are not in the right seat or not a match for the next phase of the company.
Repair The discernment process is a time where you meet with some direct report about needed changes that may bring about transition. It’s also a time to see if you have followed the Rehire and Review process.
Failure to rehire can cause leadership challenges in the first 12 months.
Failure to retire people that you do not enthusiastically want will cause problems in year 2. According to the Rockefeller Habits Question 1, you need a leadership team that understands each other’s differences, priorities, and styles and a team that is able to engage in constructive debate. And you need team members who function flawlessly so that you are leading instead of repairing problems. Here are 3 Repair Steps.
It is never too late to say to a direct report ‘I apologize for the awkward start to our relationship and I’d like to hear more about your talents and interests as we continue to create the team.’ No one is perfect and you are opening the rehiring question and giving them respect and a chance to join your team.
It is never too late to state your values and apologize if anyone is surprised.
It is never too late to start a repair or termination that you delayed out of fear or misplaced sympathy. I hate to fire people – until they start making me do or fix their work, or until they start to create trouble on the team.
CEOs can let problems slide, but my Personnel Consultant always said, you can’t cure cancer with aspirin.
They’ve worked here for 15 years.
I respect that but the company is growing and changing and needs staff who empower that change. Can they change? I’ll help.
They probably can’t get a parallel job with their training.
That is a choice that they made when they decided not to keep learning. It’s tragic, but respect their choice.
They have a lot of friends on the staff team.
Very likely, but employees protect their own job first. There may be muttering but none of us are as popular at work as we hoped 😊
The CEO job is challenging. A business coach can help and contact me if you need support to go through this process. But with or without support, most Executive Directors inherit leadership teams with issues. The issues can be managed – and the Board was wise enough to hire you to do it.
Rehire, Review, Repair.
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