There are many fundraising methods but only coaching talks about the tables where the nonprofit donations and cash are handed out
There are many fundraising methods but only coaching talks about the tables where the nonprofit donations and cash are handed out
NonProfit contracts from government have tiny amounts of cash for leadership. They are the Head, and the NonProfit is the Hands and Feet.
Is Cash difficult for your nonprofit? Coaching helps! Here are 10 ways Executive Directors can still get cash to sustain and grow
Giving Tuesday may provide gifts for your nonprofit, but most of us need more than one Giving Tuesday! Financing your nonprofit programs through charitable giving is a cliff hanger because gifts come and go quickly. You probably have discovered that.
I just analyzed the 990’s of a large, wonderful nonprofit in New York City.
BUT I WAS SHOCKED
Their gifts dropped from $120 million to $70 million in one year. I couldn’t believe it. I have a friend that knows them and she said that gifts from hedge funds really have been their major source of funding. In bad years, the hedge fund gifts go away.
For Giving Tuesday, I’m giving two hours of coaching in December to five nonprofit leadership teams. APPLY HERE I’ll review your 990’s, answer questions, and share a couple of tools as appropriate. Good advice never disappears or loses value!
I’m getting more requests than I can honor but its free to apply.
And I truly hope your finances get a major boost on Giving Tuesday also!
Kind Regards
Ronald Dale Tompkins
Certified NonProfit Teams Coach
APPLY HERE. It takes one minute 😊
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 😊
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!
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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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 😊
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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.
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.
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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.
President Obama said in a recent interview on Face the Nation that the most critical quality for a good President is to form an effective team because the job is simply too big without great support (7/24/2016). His comment is actually the Key Performance Indicator for anybody who is leading a company.
Your job is to choose wisely, lead the team, and solve team disputes!
It’s critical to know if you have chosen staff wisely. Most companies now spend more on service and administration than manufacturing. The balance sheets of older days focus on hard assets but most of your company is likely to be service and administrative. You need a balance sheet that measures whether your staff are building your company or wrecking it.
The literature on determining the asset value of employees is still emerging. While various models each have their benefits, it’s easy just to set up parameters and starting thinking in this new way.
I will present 12 elements of an Employee Asset Based approach. I follow that with three examples of a new staff hire, a valued older staff member, and a problem staff.
Elements of Employee Asset Based Value
How would this look in the real life examples of Jim, Elisa, and Beth?
Jim – The New Hire
Assume that you pay market rate for Jim who is capable of fulfilling the position description for teacher. That is all expensed as payroll. Assume pay of $40,000 per year. Debit that amount to payroll expense (just as normal)
Review the list of 9 Elements –
Jim has a Masters in Bilingual education and the DOE would pay $52,000 for this. Credit $24,000 to Equity Professional Added Capital and Debit $24,000 to Professional Assets. Since you expect the teacher to stay for 2 years before the DOE discovers the difference, credit a depreciation account for Professional Assets for $1,000 a month (2 year schedule) and debit expense for Professional Expense.
Add nothing because there is no history to indicate
Add $6,000 because he will take CLASS Professional Development and depreciate over two years – his expected tenure
No addition because there is no knowledge of history and culture
Add nothing because he has no network
Change nothing because he is not yet part of a team. You need his truthfulness, compassion to others, and willingness to live for company results more than his own. If he steals, lies, cheats clients – these will all reflect badly. If he has a reputation for peace and justice, then it adds value.
Change nothing because you do not know about accepting accountability
Add $9,000 in expected future profit because you believe that the presence of a Dual Language UPK teacher will add two seats to the three year old program and 2 retention effect students in After School programs. Add this in the same manner as # 1 and Depreciate over 5 years to account for the final residual effect.
Add nothing because this will be established by Jim’s performance
No, subtract nothing as the compensation is correctly established.
Change nothing because you don’t know. This score is the sum total of all the desired attributes fitting into a package that adds value
Change nothing because there is no history to indicate
Summary for Jim:
You hired him at $40,000. He adds $39,000 of value to the balance sheet. That amount will be depreciated over the remaining expected time of employment. The balance sheet should be adjusted in the yearly appraisal with Jim. He should see his value to the company and propose how to increase it. He correctly may feel that his compensation should be adjusted in Year Two.
On the surface, you have made a smart opening choice. The continuing months are critical as they will add or destroy value.
Elisa – Hired 10 Years Ago at Age 40
Assume that you pay less than the market rate of $50,000 for Elisa who is capable of fulfilling the position description for Human Resources. Assume pay of $40,000 per year. Debit that amount to payroll expense (just as normal). The $30,000 remaining is added to Professional Assets and Professional Added Capital and depreciated over 3 years)
Review the list of 9 Elements –
None, so no added asset
Elisa is totally committed to the mission of the company and stays late and takes work home. She is a model for younger employees. Add $60,000 and depreciate over 3 years.
You will propose a certificate course online for $5,000 because it will give her more skills and increase her expected date of departure by one year. Add to Professional Assets and depreciate over 3 years.
Significant knowledge of history and culture. It will take 3 months of compensation to replace. Add $10,000 to Professional Assets and Professional Added Capital and Expense over 3 years.
None, so no added asset. It is carried with Historical knowledge
Elisa has age and experience and a kindly manner. She works in the background with you to keep the team together and let you know quietly about unresolved issues. It’s worth $30,000.
Elisa rarely makes an error. She knows that her value to you is in being correct. Her determination not to disappoint relaxes you to focus on the leadership job. It raises your effectiveness by $60,000 over 3 years.
Not a consideration since she has little effect in Marketing or Program
Add nothing
No, subtract nothing as the compensation is correctly established.
She is highly valued and the overall fit with the team is worth $45,000 over three years
Change nothing
Summary for Elisa:
You hired her at $40,000. She adds $240,000 of value to the balance sheet. That amount will be depreciated over the remaining expected time of employment. The balance sheet should be adjusted in the yearly appraisal with Elisa. She should see his value to the company and propose how to increase it. She correctly may feel that her compensation should be adjusted in Year Two. She may have other proposals because she understands the appraisal and company very well.
You have made a smart choice in Elisa and retained her. Your leadership skills will be tested to retain her but it’s worth the struggle.
Beth – Hired 20 Years Ago
Assume that you pay less than the market rate of $40,000 for Beth who is barely capable of fulfilling the position description for Secretary. Assume pay of $28,000 per year for 10 years. Debit that amount to payroll expense (just as normal). The $120,000 remaining is added to Professional Assets and Professional Added Capital.
Review the list of 9 Elements –
None, so no added asset
Beth is unfocused. She isn’t determined to accomplish the job because it’s all hazy in her mind. Showing up is her idea of determination. Unless she has a critical errand for her family. Debit $10,000 per year to Professional Added Capital and Credit Professional Assets. Unfortunately, you assume she will work until retirement in 10 years so the total debit and credit is $100,000
Ha. The last thing that she learned was where a new restaurant opened for lunch
$1,000 ($12,000 over 10 years). Beth knows how the boiler works when there is a problem
None, so no added asset.
Beth has disappointed many employees over her career. They see that she gets paid for doing very little. She actually accounts for $100,000 ($10,000 per year) in reduced effort by others because they see that hard effort does not pay.
Beth always has a reason that a phone call was lost or mail that wasn’t sent. She costs about $120,000 over 10 years.
Not a consideration since she has little effect in Marketing or Program
Add nothing
No
No, She destroys about $5,000 of value annually ($50,000)
See above
Summary for Beth:
You hired her at $28,000. The sum total of credits and debits to the Balance Sheet is a negative $238,000. Debit to Professional Added Capital and Credit to Professional Asset. That amount will be depreciated over the remaining 10 years of expected time of employment.
You have a choice to make and your leadership skills will be tested to fire her and replace. Beth has one skill and that is to keep this position. She knows a Board member or she scares people or she is older and can’t get another job or she has an alcoholic husband and pays the bills. You can only remember that you’re not her father, mother or banker. You have a responsibility to the company and the people who receive its benefits.
Conclusion
Notice in these three examples (drawn from real life examples) that the real value is added by longer term employees who are effective (+$240,000). The biggest effect is not firing those who are destroying your company (-$238,000). New employees typically add the least (+$39.000)
In this example, you can increase the asset value by $279,000 or $41,000. The non performing staff member will kill your business.
What will you do this week to add Professional Capital to your company?
Notes
Russ, Meir. Management, Valuation, and Risk for Human Capital and Human Assets: Building the Foundation for a Multi-disciplinary, Multi-level Theory. N.p.: n.p., n.d. Print
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.