Balancing the Mission Checkbook

The New York Times published an article this week about the Gilmanton New Hampshire Year-Round Library Association and their efforts to raise money for operating costs. Led by dedicated and committed volunteers, a facility has been built by moving and refurbishing an 18th century barn, but no funds are in hand to open the doors. The article reports that they are “looking for someone who will provide at least $1 million for a private endowment” to support the ongoing operating costs. Wouldn’t every nonprofit like to “find” someone who will donate $1 million! This is a case for Mythbusters - Nonprofit Finance Edition.

There are no magic donors. In the article, one of the volunteers hopes that “Maybe someone out there has had a dear loved one that’s passed away, or a child or parent they’ve given everything possible to, and this would be a special new gift.” I don’t mean to pick on the volunteers for their effort. And I certainly love the picture of the barn/library, having grown up in New England with a lot of time spent in a picturesque, cozy library. I hear that kind of wishful thinking elsewhere, though, and am concerned that the myth of the elusive, secret donor is dangerous. Hoping and waiting for One Big Gift that solves everything might just be an excuse not to do the hard work of fundraising. Now, as always, fundraising involves identifying those who care about the cause, building relationships, making the case, and demonstrating responsibility - step by step.  I recommend this recent blog post from PhilanTopic that smartly translates the core principles of donor cultivation and planning into useful advice for today.

If you’re like me, you’re reading a lot of reports, surveys, and advice right now looking for useful data and direction. To help you cull through this material, Nonprofit Assistance Fund has launched a new blog, Nonprofit Harvest.  Our goal is not to post every available resource, but to consistently provide useful content that will help nonprofits.  I encourage you to read the blog, share resources you have found helpful, and offer your own suggestions for how nonprofits can navigate this challenging economy.

Earlier this year, I proposed Accountability Lesson Number 1: Questions Must Be Asked to encourage directors of nonprofits to overcome their hesitancy to ask questions. In particular, when financial or governance issues are unclear or incomplete, they should continue to pose questions until they get answers. In some ways, asking questions is one of a board member’s primary jobs. What comes next, though, after the questions are answered?

Next lesson: Action must be taken. One of the most interesting dynamics in nonprofits is the relationship and shared authority of executive directors/CEOs and their board of directors. We could debate infinitely the question of who is really in charge. In day to day life, most nonprofits find a way to make it work if they have assembled and hired the right people, agree on roles, and know how to share and use information. There are times, though, when the board needs to assert its real and legitimate authority to make a big decision - to take action in the face of urgent needs for the nonprofit and its mission. In Lesson Number 1, I said that asking questions is one of the board member’s most important roles. I will state here that I think the primary role for board members, especially board chairs, is to know when they need to take action, and then to do it. I think this is an urgent issue right now because I have often seen the sometime dire consequences of reluctant, slow decisions. Too often, board members who have been expected to be good supporters and cheerleaders can’t seem to change gears and be the leaders they need to be. If the board’s practice has been to ask for more information and then defer decisions to the next meeting, and then the next, then real problems can grow while the options shrink.

The need to step up and take action is always applicable, but it seems to be more urgent right now. If income sources are less reliable, or costs are harder to identify and match with impact, then boards simply must ask questions and then follow up with real decisions - and real governance.

What do you think about these Accountability Lessons?  Do you have an example where asking tough questions and then taking action led to positive change? Or do you have lessons learned that may be helpful to others?  I invite you to share your experiences in the comments section.

I’m pretty sure that every nonprofit would love to have enough money that some of the funds can be invested for the future. In the past month, though, nonprofits may have seen their investment portfolios buffeted by the markets. If that wasn’t enough of a concern, this week we read about losses for some local nonprofits from investments related to the Petters Company fraud case. News reports this week in both MinnPost and the Star Tribune describe the negative impact on organizations that may lose millions from investments that were made to provide short-term loans to companies for inventory purchases. As Scott Russell said in the MinnPost article, these cases are “a wake-up call for other nonprofits to review their investment policies and portfolios.”  As an outside observer, it’s easy to say that these investments seem like an unlikely fit for a nonprofit organization, but we don’t know what standards or criteria those boards were using to evaluate and select investments. This is a good time, though, to review some fundamental guidelines for investments by nonprofits.

• Time Horizon – Funds that may be needed within a few months must be invested in highly liquid, safe investments. This is the most common type of investment fund for most nonprofits, composed of operating funds and reserves. In order to be assured that the funds will be available as needed, the investment choice must be readily available. The recent financial news has even raised red flags about some short-term investments – see my earlier post It’s 10 AM, do you know where your cash is?.

• Risk Tolerance – One of the fundamentals of investing is the balance of risk versus return. Investments with a higher return almost always also come with higher risk. The key question for nonprofit leaders and boards is to understand how much risk is involved and to decide if they can accept the risk. As an example, if the funds to be invested represent the balance of a large program grant that will be spent over the next year, then the organization can’t afford to risk the loss of any of the funds. A permanent endowment fund, on the other hand, is usually invested in a diverse portfolio that includes more risk in return for a higher long-term return.

• Responsibility – The nonprofit’s board of directors is responsible for overseeing this balance of risk and return for the health of the organization and any legal requirements. In order to fulfill this responsibility the board must act as prudent and loyal stewards of the organization’s assets. The board may decide to employ professional staff or outside advisers to manage the investments if the amount if large enough.  At minimum, the board needs to adopt and follow an investment policy. I highly recommend a booklet from BoardSource, Minding the Money: An Investment Guide for Nonprofit Board Members.

In this economic environment, every nonprofit needs to take a look at their investments and understand any risks that may have been taken for granted. It’s better to spend some time now and avoid surprises later.

I’ve been looking for something positive to write about following last week’s downer message about the economy. The best I can offer today is the suggestion that you consider approaching the current uncertain environment as if your nonprofit were in a turnaround mode. Turnarounds make great case stories after the fact - when the organization is revitalized and builds a new reputation for connections with the community, strong leadership, and financial health.  Who wouldn’t want all that? So why wait until things are bad?

Brandeis University Press has just published The Art of the Turnaround: Creating and Maintaining Healthy Arts Organizations by Michael Kaiser, president of the John F. Kennedy Center for the Performing Arts in Washington DC. While the book’s title and cases are from the arts, the advice and lessons are relevant to nonprofits in social services, community development, or any other field.

A short excerpt from the book is available from The Chronicle of Philanthropy. Kaiser offers ten basic rules for every turnaround:

1. Someone must lead
2. The leader must have a plan
3. You cannot save your way to health
4. Focus on today and tomorrow, not yesterday
5. Extend your programming planning calendar
6. Marketing is more than brochures and advertisements
7. There must be only one spokesperson, and the message must be positive
8. Fundraising must focus on the larger donor, but don’t aim too high
9. The board must allow itself to be restructured
10. The organization must have the discipline to follow each of these rules

Read this excerpt and find out which turnaround steps can help your organization through this difficult and uncertain period. We’ll call it preemptive turnaround.   

My first blog entry this year, What about the economy?, posted on January 10, 2008, began with this comment:

“Reading the headlines reflecting concerns and jitters about the direction of the economy is causing leaders of nonprofits to ask how it will affect their organizations. For some people, a state of worry has set in.”

We can now say with certainty that all nonprofit leaders share a deep concern about the rest of this year and the prospects for the next couple of years. In that same blog post I encouraged organizations to understand their income mix and focus on what they could learn about the trends affecting their dominant income sources. Different income sources typically have different triggers and cycles. Foundation grantmaking, for example, changes at a slower pace than individual contributions because foundations calculate their endowment “payout” based on average balances over two years or more, while individuals make giving choices partially based on how confident they feel right now.

A lot has been written, and will be written, about the impact of the economy on nonprofits. Some hopeful news comes from the Philanthropy Journal’s article Past sheds light on recession giving, which notes that overall giving doesn’t drop as much as you might fear. Other stories, however, add to the worry, such as A gloomy giving outlook about corporate giving. I sympathize with the reporters who are writing these stories, though, because the real answer to questions about how the current economic environment is affecting nonprofits is “We don’t know yet.” Every week brings more questions and we all hope that the direction for the future will start to be clearer after the election.

On top of everything else, now is the time for all nonprofits to pay attention to developments that will impact the state budget next year. The forecast doesn’t look good according to the Minnesota Budget Bites blog. State funding dominates for human services, education, and many health care organizations, and it is important for many other nonprofits. This is the time and place to prepare for policy discussions, and you need to be a part of them. It’s easy to stay up to date through the blog and other information and meetings sponsored by the Minnesota Council of Nonprofits.

Because of this uncertainty, and the fact that all the indicators look weak, what had been concern has risen to the point of anxiety.  Emily Saunoi-Sandgren, who blogs at the Humphrey Institute’s new pubTalk blog, wrote Much ado about the economy last week looking for signs that these challenges might lead to some bigger ideas and discussions. Yes, it is time for some big discussions (such as the conversation around public policy and the state budget). Unfortunately, the reality for many nonprofits is that they need to be very cautious and careful.

I’m being blunt here, and it makes me feel like a depressing economics professor, but I have a lot of conversations with nonprofits that don’t have a lot of reserves and so their options are limited. So what’s a nonprofit to do?  Here are some fundamental steps you can take:

• Dig in to analyze what income is reliable and what is not.
• Understand the costs of delivering programs and services.
• Keep close track of increases in demand for services and how much of that increase is driven by the same economic factors.
• Scrutinize any plans for expansion carefully until you are confident that the funding is available to fully support the expansion.
• Double check every assumption.

At Nonprofits Assistance Fund we frequently talk with managers of nonprofit organization that are facing cash flow shortfalls. It’s really common that the of timing income and expenses gets out of sync.  Income is received according to grant, contract, and contribution cycles, which are often irregular. Meanwhile, payroll and rent payments have to be paid very regularly.  While this is an everyday topic for our staff, cash flow problems cause concern and worry at the nonprofits that are feeling the pinch.

To all those nonprofits, current news reports can help you understand that cash flow is important for every nonprofit, business, and even government.  Large businesses are scrambling to obtain short-term cash from borrowing through what’s known as commercial paper.  Over the weekend, the state governments of both Massachusetts and California notified that US Treasury Department that they might need short-term cash flow assistance. These are big numbers, too. Next time your nonprofit needs some help in tiding over a cash flow dip, take heart. You’re in good company, and this is a day to day reality for any organization.

If you are interested in assessing your organization’s cash position, you can download our Cash Flow Template to make your own cash flow projection.