Systems Archives

I stopped rolling pennies to take to the bank. I realized that I can only fill, tape, and address a roll of 50 cents every five minutes. My maximum profit is $6.00 per hour and it’s cheaper to use the machine at the grocery store!

Now the same process is happening at the school that I direct. 75% of the money that parents pay is with an app that we provide for their phone. The payment flows directly to the bank for the school and eliminates a physical deposit. The software automatically updates their account on student billing and also adds the revenue to the general ledger. Several tasks are reduced or eliminated.

Now the school is automating accounts payable for trusted vendors. And preparations are underway for triple entry bookkeeping with Blockchain to pay all vendors automatically. There will be no more audit sampling because every transaction will be proven with blockchain.

What does it mean for you as a leader? Accounting staff positions are changing steadily. Will anything be left? How should you arrange your projected Operations Budgets?

The Institute of Management Accountants just had the slide below in a presentation. It shows that nonprofits will still need an accountant who gives financial advice for management decisions. And your budget should include more money for the software that automates the transactions.

Are you leading a nonprofit and don’t feel prepared for the winds of change? Check with me because Cash and Execution Decisions are part of business coaching.

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!

There are three critical areas for every company that plans for stability and growth – a) leadership, b) marketing, and c) infrastructure. It’s not possible to draw conclusions about leadership development and marketing from 990 reports.

Technology
There is an entry on technology expense on page 10 of the 990. This number is from the income statement so we can treat it as a signal of the priority that a company places on infrastructure. It’s only an indicator because infrastructure is more than technology.

I’m assuming that most of the technology expense is cloud based software as a subscription. Nonprofit subscriptions can be expensive. Blackbaud is a common software environment and its most inclusive packages range at least to $50,000 per year.

What did I find?

Old line NPs (more than 25 years old) only devoted .33% of their total revenue to technology. Their other financial indicators are fragile and they are not set up for a great future. The largest agency was an exception with $85 million revenue. Children’s Village reported 1.29% over 4 years.

New agencies (less than 10 years old) 1.07% of total revenue per year over 4 years.

Incubated agencies from think tanks 1.07% of total revenue per year over 4 years.

Single donor funded agencies average 1.07% of total revenue per year over 4 years.

Growth companies averaging 20% overall growth in revenue for 4 years on average also each used 1.07% as their benchmark for technology expense.

What do these numbers mean if you want to learn something for your company?

Your investment will be greater than 1.07% for growth because these numbers do not include any hardware or software that was capitalized and depreciated. 2% of total revenue cash costs per year is probably a safer technology target for growth. For example – on a $10 million budget, devote $200,000 cash per year to technology
Increasing Labor costs make technology investments critical. One company that I coach added a tuition collection program from Blackbaud which integrates directly into the general ledger. Suddenly, there are no labor costs for mailing, creating and printing invoices monthly.
Infrastructure is larger than technology and involves decisions on how fast to add staff in Human resources, administration and accounting.
These numbers are drawn from companies in the $3-$100 million revenue. If you are a startup under $3 million in revenue, you need to plan for a Valley of Death time where costs for infrastructure are difficult to manage.

The message is simple – companies that are thriving make investments in infrastructure. Set your own goals for infrastructure and sustainability.

Scaling Up business coaching creates a plan in 90 days, a quick win in the 2^nd quarter and a 20% growth in revenue in the 2^nd year. Until next Sunday, keep your eyes on technology!

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Most strategic plans assume a static future where the basic costs and use of labor remain the same. That is a critically false assumption.

Machine learning started in the 1990s. Anthony Goldbloom states that machines were trained to look at credit applications and determine a score. Since then the trend line was arithmetic but recently has climbed more steeply. Now we actually have cars on the road which are one step from being self driving.

The rapid dislocation of labor from human to machine is one major factor in the unusual American election. It’s a global challenge on how to make all humans necessary. At this point, the economy does not need grocery checkers, cab drivers, subway drivers, live telephone reception, farm workers, and a host of other tasks which have been human based for time immemorial.

Will your Strategic Plan survive the onslaught? Only those that account for machine learning and avoid that competition will be here in 15 years.

Machine learning requires tasks which are high volume and have limited causal factors.

High Volume – Machine learning thrives in high volume. For example, one study had volume reports on police in Philadelphia and teachers. The goal was to hire police officers who are productive and not violent and to promote only worthy teachers (Chalfin et al. 2016). Since the variability is significant between exceptional performing teachers and future failures, the machine learning was able to discern patterns which would predict correctly in both scenarios – better, more productive police and teachers.
Limited Causation – checking out groceries involves a group of products with bar codes, passing the scanner, settling the price and payment. Presumable bagging will be computerized too. The causation for the checkout system is simple – a consumer wants to process items one at a time and pay for the results and take them from the store.

Machine learning is not effective in novel situations, or with creativity, or with relationships

Novel – Novel situations occur where original reasoning trumps learning. For example, some of the best American scholarship looks at problems from the perspective of 2 disciplines. Sociobiology looks at sociological problems and traces evolutionary causes. It’s a terrible discipline for machine learning at this stage. There is not a high volume of reports from which to learn.
Creative – Machine learning will never produce the creativity of Mozart, bell hooks, or Monet. Creativity is a unique human fountain that never runs dry, While machine learning can produce copies of the Mona Lisa, it cannot jump ahead and create a new Mona Lisa. It’s work will always be derivative.
Relational – So much of business success depends on 8 socio emotional skills
1. Goal persistence
2. Awareness of others
3. Awareness of Self
4. Optimistic Thinking
5. Decision Making
6. Relationship skills
7. Self Management
8. Personal Responsibility

Those skills work together to build teams, invent new solutions to business problems, and consider unique value propositions based on available resources.

So how does your Strategic Plan match up?

Test your vision based on the strengths and weakness of machine learning.

Are you planning to manufacture a product without investing in robotics? It’s likely that robotics locally with lower transportation costs will be cheaper than cheap human labor in other locations.
Is there new infrastructure planned in an area that you exploited? NYC plans to go green in 14 years. Any business that moves quickly can compete with old energy guzzlers that don’t see the problem coming.
Did you create a unique value proposition that uses relationship skills for success? Edith Penrose says that effective teams become the real competitive edge of a company.

The coming and current dislocation will be a time for some Strategic Plans to gain the advantage and many others will collapse. It may be an opportunity for a start up to move shrewdly where a larger company could not change.

Is your Strategic Plan going to be terminated?

References:

Bloom, Anthony. “Machine+learning+ted+talk”. TED Talks, n.d. Web. 14 Aug. 2016.

Chalfin, Aaron, Oren Danieli, Andrew Hillis, Zubin Jelveh, Michael Luca, Jens Ludwig, and Sendhil Mullainathan. “Productivity and Selection of Human Capital with Machine Learning†.” American Economic Review 106.5 (2016): 124-27. Web. <https://econ.tau.ac.il/sites/economy.tau.ac.il/files/media_server/Economics/PDF/seminars2015/AER%20picking%20people%20ML%2020151228_final%20complete.pdf>.

Nickerson, Amanda B., and Callen Fishman. “Convergent and Divergent Validity of the Devereux Student Strengths Assessment.” School Psychology Quarterly 24.1 (2009): 48-59. Web.

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Summary

Fraud is a persistent cancer in the non profit world. Local news in New York City reported another fraud of $1 million as the director redirected funds for his mortgage. Just as with other cancers, prevention is cheaper and easier than cure.

This cancer is much larger than officially reported.

Many nonprofit boards are reluctant to press charges. Board are filled with volunteers who are reluctant to give the examination time needed to find a result that they don’t want to discover.
Agencies don’t look good to the public when they report a fraud. It affects their brand and threatens future charitable and contract funding. It’s cheaper to ignore it.
Frauds are often perpetrated by employees who appear to be the most loyal and honest. While their overtime work conceals the fraud, they appear to the world as super diligent. It’s never popular to send Aunt Susie or Uncle Bill off in handcuffs.
Fraud is usually discovered by accident. Most of us are working in organizations where money is flowing in and out. Even auditors are unlikely to discover frauds below a certain percentage of the revenue of the corporation.

Cure – Expensive and rare

Intentional discovery is almost impossible. Forensic accounting is often more expensive than the potential fraud. It is the Board’s act of last resort.

Prevention – Cheap and Effective

It’s amazing that nonprofits don’t use much prevention. Thousands can be saved. Some of the ideas that follow require no money to implement.

There should be a Personnel Policy about fraud. Clearly warn people about things that the organization will not tolerate
In a staff team of 25 or more, create an anonymous survey once a year to ask about fraud. It communicates that you are serious. Include questions such as:
- Do you know of any staff member who has taken company property for personal use?
- Do you know of any illegal acts in the company?
- Have you seen a supervisor ignore complaints about illegal actions?
Require any person who pays bills, opens mail, or receives money (paid, volunteer, or part time) to take a 2 week vacation of consecutive days once a year. Watch for anomalies during that time.
Examine executive perks and how they appear to staff throughout the organization. A strong ethical public tone at the top strongly influences people throughout the organization. If you get a free car as director, the janitor may feel justified in pilfering toilet paper.
Create a simple treasurer’s report that warns of potential non profit fraud to watch. There are six ratios in the financials that predict possible non profit fraud. These include overstating expense, bringing future expense into the current year, and overstating depreciation. While these ratios don’t prove fraud, their presence in the Treasurer’s report means that the agency is serious about fraud detection.
Compensating Controls – Most organizations can afford compensating controls in lieu of extra staff for division of duties. Let us assume that one person handles petty cash. A simple log with date, purpose, receipt and amount of funds can be required and given to the Treasurer quarterly. It is considered a secondary control but much better than none.
Preventive Controls – these are primary controls which are more effective. Some are quite inexpensive. For example, buy rubber stamps for every person who opens mail or is involved with deposits. The rubber stamp is marked ‘For Deposit Only, My Happy NonProfit, Farmers Bank # 1235-56789’. Anyone stamps everything as soon as it is first seen. This simple control prevents double endorsement of checks to someone’s personal bank account.
Leadership – controls are of no use if leadership does not enforce them. I know that fraud correction can ruin friendships, invite retribution, or focus on a beloved staff member. Fraud prevention needs a leader who is more committed to the nonprofit mission than these other considerations. It’s not easy.
Board Leadership – As nonprofits grow, politicians and others may see the organization as a convenient place to enrich themselves. One non profit outsourced their accounting to a public company created by a former board member. They also invested surplus funds heavily in the new company. Management drained the outsourcing company of assets and closed – effectively taking the non profit’s treasury. Strong board policies to prevent board access to assets and existence of potential conflicts of interest must be written and maintained.

Conclusion:

I first became interested in nonprofit fraud when I heard stories and realized that it’s nearly universal. It’s often a staff member who appears loyal and hardworking, secretly paying personal bills. Most of this fraud is undetected.

Detective controls are expensive, preventive controls are effective and cheap. The faster you start, the more money you will have to help the homeless, feed the hungry, or cure disease. Start today.

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A Story of Two NonProfits –

When I started my first nonprofit, I bought a computer before I paid myself. That should have been a sign of trouble ahead. The truth is that I’m in love with systems. It was no trouble at all to set up systems for the nonprofit. I had enough credibility to get a board of directors from respected colleagues. I got bank accounts started, hired staff, started fund raising, and began flying between Madison, Chicago, Knoxville, Buffalo, and New York.

The devil was in the details of the strategic plan. The mission was too broad and the staff were more academicians than strategists. We had great meetings twice a year with the Board and theory flowed like wine. We did not notice any weakness. If we had been a for profit company, we would have noticed immediately how few people wanted our services. As a nonprofit, we were drunk on grand theories of broad vision, dreams of how the world should be, and my administrative competence.

Another nonprofit was set up at the same time. That director understood the strategy and created an aggressive, manageable vision. She did not like systems and ignored legal and financial details as much as possible. The early days had time when paychecks did not arrive and the IRS impounded the account twice for nonpayment of taxes. There was very little in writing, but oral history and a staff team of 2 people made communication easy. There was no computer. What was happening was that she was getting activities started and results for clients.

Which agency survived? The agency with the defined vision and strategic plan (not mine). Thirty years later, it thrives as a $3 million program to support refugees and has 100 staff members.

Systems sink small nonprofits, sustain large nonprofits and suffocate dying nonprofits

Small – If your nonprofit is under $500,000 in revenue and in a human service area of low risk, you can possibly ignore some systems while you get your vision and strategic plan working. Your licenses may not have all the right dates but regulatory agencies often don’t worry about small agencies. If you work in high-risk human services (ex. children or medicine,) you have the worst of worlds with a need to be good at everything.

Large – In a larger nonprofit, the strategic plan is in place but needs the cooperation of many people. It’s no longer a fluid set of tasks that two or three people hand off easily and interchangeably. After $500,000 in revenue, your nonprofit is ready for an increasing round of systems to sustain the vision. When you hire more people, there will be more unemployment claims. The cost of the audit escalates with higher revenue and more time is needed to provide paperwork for the audit. At $5 million in revenue, my company struggles to keep up with the regulatory requirements. Size increases regulation and I have no time for the internal tasks that I used to enjoy.

Dying – Many agencies that are declining have an odd combination of insufficient vision but strong systems and strong systemic need. Let’s use religious congregations as an example. Thom Rainer states that ‘between 8,000 and 10,000 churches will likely close this year’. (2013:Huff Post, The Blog). The Archdiocese of Chicago speaks of closing 100 churches this year. Clearly, there are many religious groups in the middle of retrenchment in the USA.

In the middle of their trials, most of these groups have expensive fixed assets – buildings with towers, special windows, complex organs, and years of neglected maintenance. These remaining assets of the nonprofit and denominational regulations require finance committees, Trustee meetings, and other systems.

Most small nonprofits just don’t have these systemic needs because they have not had the chance to accumulate the assets!

The systemic needs of over asseted J churches overwhelm their strategic planning energy. There is rarely the energy in a small group to discover and refine a Strategic Plan at the same time that a Systemic Plan is being operated. Declining groups are usually loathe to give up a fixed asset. They don’t want to be known as the group that sold the church as long as there is any life left. That is precisely when they should be divesting to shift the remaining energy resources into Strategic Planning.

Conclusion:

Operating any corporation is a mix of skill and blessing. Very few companies in the United States of any size have existed for 100+ years. It’s not easy

One of the issues that plague organizations is the balance and need for both Strategic and Systemic Planning – and divesting as well as investing in systems.

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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.

McSwain, Steve. “Why Nobody Wants to Go to Church Anymore.” The Huffington Post. TheHuffingtonPost.com, 14 Oct. 2013. Web. 17 Apr. 2016.

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