Surplus Archives - TurnAround Social Sector Coaching

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.’  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!

 

 

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 the1019_4272975 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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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.

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.1118_4634681 (1)

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 😊

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.

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.

  1. Avoid capital intensive Strategic Plans – Forget your plan to start a new low cost airline from New York to Phnom Penh. You can’t even afford one engine! You also can’t start a luxury clothing store there either. Clothing has to be purchased in quantity in different sizes. Inventory of expensive brands is a large investment and requires cash.
  2. Avoid long term payoff Strategic Plans – You want to find the cure to cancer? You don’t have the time to wait 5 years for drug trials. Do you want to start a new daycare in New York City? It will take a year to update or build and license before it opens. You need to use cash to pay salaries and construction during all that time.
  3. Avoid low cost goods for resale. It’s very hard to buy low cost clothes from Honduras for resale. Walmart got there first and has the power of a volume purchase. They offer to buy $1 million of cheap clothes with only a 1% profit for the manufacturer. It sounds like a bad deal but it actually returns $10,000 in profit to the clothing company.

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.

  1. Build a service based Strategic Plan. Why doesn’t Walmart take over nail salons? Nail salon expenses are mostly labor. Nail polish does not cost much nor does advertising. The playing field is more equal. It’s hard for Walmart to make more money than you in labor intensive business.
  2. Build a materials + labor based Strategic Plan – Since you can’t compete directly with the purchasing power of large companies, add a unique service to the product that you sell. For example, buy cheap clothes in Hionduras and add an identification tag printed with a name and address. The price is no longer comparable to the shirt by itself because you have added a service.
  3. Avoid a Strategic Plan that has a long cash conversion cycle – Dell Computers was an early company that charged customers as soon as the computer order was made. They had the cash before they made the computer! Contrast that to a specialty clothing store that has a large inventory that sells slowly. The store may be quite profitable but requires cash to buy the clothing and then wait a lengthy period of time for the sale.
  4. Avoid a Strategic Plan that requires high fixed costs – Renting a storefront in a mall or on a busy street will require cash even in the slow season. It’s better to sell ice cream from a cart than from a store. There is no rent and the cart can be taken to a warmer climate in winter months or stored. Street fairs are popular because there are no rental costs on the days that you choose not to be open.
  5. Avoid a Strategic Plan in regulated industries – Industries that involve government inspections and licenses take cash and time to learn. The companies that are already in the market have more opportunity. For example, in New York City, there is a great need for the service business of child care. It’s also a business that the City watches closely with inspections, licenses, and regulations. Each of those add to the cost of a service and require cash.
  6. Consider a Strategic Plan that generates loyalty – Let’s assume that you sell ice cream from a cart. You are always on the same corner and you memorize the name of every child who buys a cone. Children love that attention from adults and loyalty will become part of your business model. No cash required for loyalty
  7. Consider a Strategic Plan that assumes one time sales – Tourists often pay outrageous sums of money for trinkets to remember a trip. In Florida, you can pour sand into a bottle and sell Florida sand at the airport. Customers will never return to buy more but they really don’t care if you charge $10 for sand. Cash from a few sales pays for a lot of inventory.

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.

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.

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

  1. Value of Job Ability -Training and certification which leverage effectiveness
  2. Determined DNA – to complete company mission
  3. Continuing Education
  4. Historical Knowledge of Company and Culture
  5. Network
  6. Ability to contribute to team with justice and peace (honesty, harmony)
  7. Willingness to accept accountability
  8. Impact on Profit of Company and Retention of Students
  9. Impact on Critical Number
  10. Is the compensation too high for this position?
  11. Would you enthusiastically rehire this staff member?
  12. Check for liabilities. Does the new staff member destroy value because of poor performance on one of these scales?

 

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 –

  1. Value of Job Ability -Training and certification which leverage effectiveness
    1. Training and certification which leverage effectiveness

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.

  1. Determined DNA

Add nothing because there is no history to indicate

  1. Continuing Education

Add $6,000 because he will take CLASS Professional Development and depreciate over  two years – his expected tenure

  1. Historical Knowledge of Company and Culture

No addition because there is no knowledge of history and culture

  1. Network

Add nothing because he has no network

  1. Ability to contribute to team with justice and peace (honesty, harmony)

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.

  1. Willingness to accept accountability

Change nothing because you do not know about accepting accountability

  1. Impact on Profit of Company and Retention of Students

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.

  1. Impact on Critical Number

Add nothing because this will be established by Jim’s performance

  1. Is the compensation too high for this position?

No, subtract nothing as the compensation is correctly established.

  1. Would you enthusiastically rehire this staff member?

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

  1. Check for liabilities. Does the new staff member destroy value because of poor performance on one of these scales?

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 –

  1. Value of Job Ability -Training and certification which leverage effectiveness

None, so no added asset

  1. Determined DNA

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.

  1. Continuing Education

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.

  1. Historical Knowledge of Company and Culture

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.

  1. Network

None, so no added asset. It is carried with Historical knowledge

  1. Ability to contribute to team with justice and peace (honesty, harmony)

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.

  1. Willingness to accept accountability

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.

  1. Impact on Profit of Company and Retention of Students

Not a consideration since she has little effect in Marketing or Program

  1. Impact on Critical Number

Add nothing

  1. Is the compensation too high for this position?

No, subtract nothing as the compensation is correctly established.

  1. Would you enthusiastically rehire this staff member?

She is highly valued and the overall fit with the team is worth $45,000 over three years

  1. Check for liabilities. Does the new staff member destroy value because of poor performance on one of these scales?

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 –

  1. Value of Job Ability -Training and certification which leverage effectiveness

None, so no added asset

  1. Determined DNA

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

  1. Continuing Education

Ha. The last thing that she learned was where a new restaurant opened for lunch

  1. Historical Knowledge of Company and Culture

$1,000 ($12,000 over 10 years). Beth knows how the boiler works when there is a problem

  1. Network

None, so no added asset.

  1. Ability to contribute to team with justice and peace (honesty, harmony)

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.

  1. Willingness to accept accountability

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.

  1. Impact on Profit of Company and Retention of Students

Not a consideration since she has little effect in Marketing or Program

  1. Impact on Critical Number

Add nothing

  1. Is the compensation too high for this position?

No

  1. Would you enthusiastically rehire this staff member?

No, She destroys about $5,000 of value annually ($50,000)

  1. Check for liabilities. Does the new staff member destroy value because of poor performance on one of these scales?

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.

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

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

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

 

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

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

 

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

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

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

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

 

Conclusion

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

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Notes

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

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

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

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

What is going on?

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

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

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

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

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

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

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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.