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Tools for Tough Times by Dione Alexander, NFF
 

Tools for Tough Times by Dione Alexander, NFF

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Nonprofit Services Center hosted Dione Alexander of NFF and a local panel of experts to explore how the financial health of nonprofits is changing, what is needed and what to look for in the evolving ...

Nonprofit Services Center hosted Dione Alexander of NFF and a local panel of experts to explore how the financial health of nonprofits is changing, what is needed and what to look for in the evolving process of financial stability and sustainability.

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  • Established in 1980, $12 mm budget. We work with all sectors—75% low to moderate income, 35% in areas of extreme poverty We make loans of up to $2 million for a range of purposes. Avg loan is close to $400K –range from $12K to $2mm (increasingly for working capital -40% vs. 40% facilities) Our lending experience has informed our advisory services business and how we look at nonprofits. Together with others we have flowed over $1 billion into the sector. We serve both sides of the desk: Our audience includes funders--changing funding and financing practices through advocacy. Working to “drain the swamps.” We help funders do PRIs, we “retail” loan capital, we do “delegated underwriting”. More and more, we’re also teaching. Through our new Capital Partners program, we are seeking to attract “investors” (i.e. funders who think about their grant as an investor might in terms of building the enterprise and providing the necessary growth capital, rather than buying the program or service) Provide affordable capital and financial services to nonprofits. We look at organizations from a business perspective, as enterprises, not just as programs. What is the capital structure that organizations need to support the enterprise that cradles their programs.
  • Rinse and repeat
  • PROVIDER: Be conscious of adjusting the slide to reflect tense and current situation
  • Add survey slide prior to this
  • Better presentation, more readable…fewer, and with bars
  • MANDATORY SLIDE SUGGESTED NOTES: Here is a framework that will be helpful for today. This is the NFF triangle. We advocate that nonprofits must establish and maintain a balance among these three critical components in order to ensure long-term health and viability. Think of the triangle as your organization’s ecosystem. It has three main components. Mission and Programs . You are all very familiar with mission and program—this is what organizations spend most of their time and energy on and it’s what they do best. Capacity . Capacity is the supporting infrastructure. It includes your staff, systems, etc. This is another area that most nonprofits are focused on and there are lots of consultants to help you align capacity with programs. Capital . Capital is the most overlooked leg of the triangle. Think of this as the underpinning business which is related to but separate from mission. What kinds of resources and assets do we need to carry out our mission and build our capacity? How will we finance these resources and assets? With regard to capital, we know that nonprofits have A, L and NA. Where do you find this information? How many of you think about how to manage your balance sheets? It takes a lot of time and energy but is really important. This is where NFF likes to focus its energies because all decisions you make will affect the capital piece, whether anticipated or not. The big lesson here is that a change in any one of the 3 components causes a change in the others because they are interdependent components of a system. For example, if you add a program, you will need new staff and space to support it (capacity) and enough cash on hand to support it in the growth stage before its starts generating its own profits (capital). Still, we don’t hear a lot about how a programmatic or mission-related decision will impact our financial structure, how it will demand more of our assets and require a change in liabilities and net assets. The challenge is to anticipate changes so they don’t catch you unaware. As we proceed, we will return to the triangle and we encourage you to continue asking how you can make decisions that maintain a healthy, balance triangle. Need to constantly ask ourselves what is our capital structure and what would we like it to be? We need to be deliberate about planning and managing capital structure (not just let it happen to us) If we don’t the triangle will get out of balance AUDIENCE QUESTION: Does anyone have a story they would like to share about trying to keep triangle in balance??
  • Rinse and repeat
  • MANDATORY SLIDE --please use this slide OR the next one as a transition to the balance sheet SUGGESTED NOTES: As I mentioned before, there are 4 financial statements but today we are going to focus on the balance sheet and income statement. The financial statements are all connected. AUDIENCE QUESTION: Which statements do most managers turn to first and why? Balance Sheet . We spend a lot of time with BS because it is a “snapshot in time,” revealing what financial decisions you have made, the circumstances that have surrounded you, and how much risk you can now tolerate. It reveals the true financial situation of the nonprofit at a point in time. Remember that on the Balance Sheet, Assets are balanced by the combination of Liabilities plus Net Assets. While for profit businesses have something called Owners’ Equity, nonprofits aren’t “owned” by anyone, hence they have net assets. Importance of planning and managing the BS as much as possible. Where are we now and where would we LIKE to be next year, in 5 years…? What choices can we make to get there? Statement of Cash Flow . We’re not going to talk much about this one. It shows the s ource and uses of cash: how much came in, how much you spent, and what’s left. Ending cash balance flows into the balance sheet. Statement of Activities. This is also known as the income statement or the “P&L.” This statement tells you how well you managed your finances in a given year. It shows y our revenue less your expenses over the course of a fiscal period (i.e. month, quarter, year). Nonprofits report expenses by functional classification in a separate statement toward the end of the audit – the two primary categories are program services and supporting activities (mgmt, fundraising & membership dev). First, we are going to talk about the Statement of Activities. OPTIONAL NOTES Federal Form 990 and the Statement of Financial Accounting Standards No.117 require nonprofits to report expenses by what is known as their functional classification. The two primary functional classifications are program services and supporting activities. Supporting activities are typically comprised of management and general activities, fundraising, and membership development. The lack of standard allocation practices makes functional accounting a somewhat unreliable measure of nonprofit efficiency and effectiveness. If a health research organization spent 80% of its money infrastructure and overhead but found a cure for cancer, would anyone think twice?!
  • Make sure arrow stops after one movement
  • We’re going to dive a little deeper into all of these issues we’ve just surfaced and put them into the context of today’s economy and what questions you should be asking yourselves. First, the assessment: Balance sheet is your starting point. Your ability to manage risk –but also to pursue new opportunity. From a financial standpoint, the answer is on your balance sheet –how strong is it currently and how can you make choices now so that it will remain strong on the other end of this. Some questions you could be asking yourselves
  • Quick animation to see calculations…so we can go through quickly Working capital to current ratio Notes to mention when discussing LNA to include temp restricted NA that will be released this year
  • Will you/can you afford a deficit and if so, how large? (Do you have reserves you can tap ?)
  • Rinse and repeat
  • SUGGESTED NOTES: This is another way of looking at financial statements: We have the statement of activities, statement of position, and Budget This is almost a time line: stmt of activities captures the past, the stmt of position the present and budget, the future. PLAN FOR THE FUTURE. It is important to plan for the future to help you determine whether or not you will have enough money to cover your expenses given your program priorities. Where this money will come from? Next slide – focus on budgeting Budget = P&L
  • At least monthly or quarterly Prioritization depends on level of crisis At the very least, your ED, Board and whomever puts together the finances –should all be on the same page NFF Recommendation : Plan and monitor cash needs by analyzing the timing and reliability of revenue and expenses on a monthly basis Assume cash will arrive late and bills must be paid sooner than expected; plan accordingly Ensure that cash flow projections are performed on a regular basis (monthly, weekly)
  • Program profitability tool and use a case study and give people the organization and this is what is showing us. Scenario testing – what would you do ?// Decision making is an option for this organization? PP case -> w two scenarios Maybe we can create categories of questions
  • This is a different way of looking at program profitability. Many of you may be looking at the full cost of each program , whereby you allocate costs across each program. That method is good and very appropriate so that you can have a well-informed conversation with funders . The concept I would like to introduce is a tool that can be used internally : looking at each program, its direct expenses and its direct revenue . So if you were to take the program away, what expenses would go? What revenue would go? (e.g. a program manager that manages more than one program would not be counted or allocated. Would be captured separately.) Removes complex cost allocations that are critical to funder reports and other analysis of TOTAL costs Helps link mission and money to create a full conversation: Finance is NOT the only deciding factor, and deficits are not necessarily bad. Which activities are core to your mission ? Are they positive financial contributors? What are some ‘ non-negotiables ’ in your budget? This is a way to see which programs generate surplus and deficits. This is a way to see where to focus fundraising , earned revenue and cost cutting efforts . On a program by program basis. This is to be done with program managers . Provides a clear picture that people without financial expertise can understand and act on (very helpful with boards) It is for internal use only !! In the PPM work, the focus is first understanding what decisions the client is trying to make and then framing the PPM information around that.
  • As the interest in nonprofit mergers grows, so do the myths surrounding them. In the nonprofit sector, mergers carry the stigma of for-profit experiences. Considering some of the legendary train wrecks that for-profit mergers have turned out to be, this is understandable. On that basis alone many people reject them. Yet when myths dominate thinking in place of clear-eyed analysis, decision-making gets skewed. This is a good time to examine some of the more persistent ideas about mergers in the nonprofit sector. There will be massive job cuts The second most pervasive myth about nonprofit mergers is that they lead to massive job losses. This one is largely a carryover from mergers in the for-profit sector and the simplistic media coverage they usually get. Investors generally like mergers but they dislike the dip in stock prices they can bring. CEO’s need to produce a quick offset to the additional cost of the merger, and the fastest way to do that is to lay off staff. The real heart of a merger is pretty unglamorous stuff, but the local television news reporter gets a ready-made, instantly understandable story, and that becomes the lead. Interestingly, it may be the announcement itself that they’re counting on to achieve the effect. One study tracked layoff announcements from the Wall Street Journal and calculated that if all of the announced job cuts had actually happened, the unemployment rate would have been 50%. In the nonprofit sector there is nothing comparable to investor pressure so there is no inherent pressure to cut jobs. There may be incidental job losses, but any major level of job loss that occurs during a nonprofit merger was probably going to happen anyway. In fact, a merger may actually reduce some of those losses if it promotes more efficient service delivery models. Shhhh. Don’t tell anyone For-profit mergers are done in secrecy because they have to be. Large amounts of money are often made or lost on swings in stock prices, and there are laws and regulations governing what merger planners can say. Premature disclosures can sink a deal, and unauthorized outsiders (and insiders) are always willing to try to cash in on a tip. Nonprofit mergers may well have to start out in secrecy for vaguely similar reasons. No nonprofit wants potentially damaging rumors to scare off donors or unnecessarily alarm government funders. And the wrong kind of disclosure can create staff anxiety. But if the best nonprofit mergers are decided from the top down, they must be implemented from the bottom up. Owning the company in a for-profit context confers now-hear-this authority, but in the nonprofit sector authority is diffuse and employee buy-in and good will are essential for implementation. Nonprofits can often manage the message effectively to external stakeholders such as donors and even the media. Without the lost-jobs theme, nonprofit mergers take on less urgency for most media outlets. Even today, when the mainstream media picks up on stories about nonprofit mergers, the treatment tends to paint nonprofits as a monolithic industry, with specific mergers used as illustrations of broad trends rather than as the story itself. Fast Profits/ Lower Costs The most persistent myth about nonprofit mergers is that they will save administrative costs. Maybe. Or maybe not. Many well-meaning outsiders looking in on the nonprofit sector conclude that there are ‘too many nonprofits’ and that there should be a lot of mergers in order to save money. Mostly this myth taps into everyone’s shared distaste for spending more money on administrative costs than is absolutely necessary. There is no constituency for wasteful overhead spending, so it’s a risk-free proposition. But let’s look at the economic realities of nonprofits and their mergers. The vast majority of nonprofit public charities have revenues barely into six figures, and the majority rarely clear even two million dollars per year. Many pressures keep administrative spending low already, so trimming even a small slice of that amount is a nearly heroic accomplishment. Those entertaining a merger with the primary idea of achieving major administrative savings will almost certainly be disappointed. More important, any merger whose chief goal is to achieve, say, $20,000 in administrative savings is quickly going to seem like cruel and unusual punishment to those trying to make it happen. At some point they’ll likely stop, look around, and ask each other ‘we’re doing all this just to save $20,000?’ Better to have a lofty strategic goal and be realistic about administrative savings. More likely is that any savings will show up as more bang for the same buck. Only when one of the entities is much larger than the other and has far more established and efficient administrative systems will there be likely to be significant administrative savings. We’ll lose our identity Of all the merger myths in this sector, this is one of the least well understood. For practical purposes, ‘identity’ means ‘brand’, and managing brands is one thing that the nonprofit sector is just beginning to master. In the days when the prevailing nonprofit model was one-corporation-one-site-one-brand, this may have been a legitimate fear. But many nonprofits are learning that it is possible and sometimes even desirable to have multiple brands under the same roof. The decision to merge corporate structures is not the same thing as the decision to merge brands. Only failing organizations merge Ironically, this tends to be a self-fulfilling myth. If they do not clearly understand the implications of their financial condition, many struggling nonprofits tend to hold on longer than they should. By the time they are finally ready to consider the idea it may be too late to salvage the programs. The result is that the first wave of mergers in a given area does tend to involve stronger organizations taking over weaker ones, so that becomes the prevailing imagery. But combining an organization with a lot of problems with another, healthier organization just produces a larger organization with a lot of problems to solve. The most constructive use of mergers is not to rescue organizations in trouble – which might be able to be done in other ways – but to strengthen community capacity by building nonprofit organizational strength. The increase in mergers is a product of the economic downturn Although it is logical to associate the increase in merger activity with the economic downturn, the fact is that many nonprofit resources are currently locked in outdated corporate structures and aging program models. While the downturn is making mergers seem like a logical choice, it is only a catalyzing agent for trends that were already under way. In the end, mergers are simply another leadership tool. Reflexive loyalty to unneeded corporate structures or to program models in need of innovation is not a virtue. Time to lighten the baggage of mythology.
  • Marketing TLC on printing
  • What am I supposed to next?
  • Program profitability tool and use a case study and give people the organization and this is what is showing us. Scenario testing – what would you ydo ?// Decision making is an option for this organization? PP case -> w two scenarios Maybe we can create categories of questions
  • Keep you staff informed. They should know the financial situation of the organization –and be engaged in discussions around how the agency might save on costs or generate new sources of revenue. When staff are involved, they develop a shared sense of responsibility for the organization’s well-being and plan. They also may have some of the best ideas, as they are closest to the programs. And, staff will better buy-in to tough decisions if they understand the context from whence they come. Your Board is fiscally responsible for the organization and needs to be informed. Ultimately, they must buy-into and advocate your agency’s strategy. While every funder is different, many will appreciate honesty and information. Talk to your major donors about how the economic climate is affecting you and your strategy to respond –explain the choices you are making and the reasons behind them. If you receive restricted grants, this can be an opportunity to renegotiate so dollars are aligned with your changed strategy. Continue to let them know that their support results in your organization's ability to meet your [focus of] programmatic mission. Funders want to see that organizations are making plans to adjust their budgets and operations to the current economic crisis and the longer anticipated recession. Funders will be looking for more consolidations, mergers and collaborations as a strategy for efficiency and survival. You may want to focus your efforts on the retention of existing donors . Make sure you are attending to your most important relationships rather than spreading yourselves too thin.   Those that have invested in you in the past are most likely to continue to support you with the right stewardship. Expect your fundraising  to take longer to achieve its goal. 
  • MANDATORY CONTENT PAGE TO BE USED FOR MAILED POST-MEETING REPORT Welcome. Thank clients for participating in the meeting. Provide timeframe and what to expect. “We have allocated up to 3 hours for this meeting.” Remind clients about the confidentiality of our work. Acknowledge who has paid for the NBA Facilitate introductions, including each person’s role within the organization and tenure. In a few moments, we will have a deeper conversation about what’s been happening in the organization and why we are here today. First we’d like to introduce NFF and the NBA

Tools for Tough Times by Dione Alexander, NFF Tools for Tough Times by Dione Alexander, NFF Presentation Transcript

  • Nonprofit Finance Fund Presented by Dione Alexander, V.P. Midwest Region Nonprofit Finance Fund Nonprofit Services Center St. Louis, MO August 2009 The 2009 Nonprofit Economic Climate: Managing Through a Downturn
  • Nonprofit Finance Fund: Where Money Meets Mission
    • Dedicated to keeping nonprofits in balance and in business.
    • Serving thousands of nonprofit and funder clients since 1980
      • $185 million in loans; over $1 billion in capital leveraged for nonprofits
      • 500+ Nonprofit Business Analyses; 200+ nonprofit finance workshops
      • Formed hundreds of strategic partnerships to advance nonprofit sector
    • Nationwide network of experts in nonprofit finance
      • Lending
      • Financial advisory services and workshops
      • Assistance in preparing for managed change
      • Financial advocacy across the nonprofit sector
    “ [NFF is]… arguably the most influential voice in the ongoing effort to reshape thinking and practice about nonprofit capitalization.” – The Nonprofit Times
  • Agenda
    • Some perspective
      • Lessons from history
      • Heard on the street: Experiences from the field
    • Assessing Risk: Preparing for a sustained economic crisis
      • Where money meets mission: the importance of capital structure
      • Evaluating exposure to risk and risk tolerance
    • Addressing Risk: A financial framework with tools and strategies for planning and managing in tough times
      • Defining what’s core
      • Quantifying your options
      • Developing your response
      • Strategic collaboration and realignment
      • Communicating with stakeholders
      • Rinse and repeat
    nonprofitfinancefund.org ©2009 Nonprofit Finance Fund
  • What Happens To Nonprofits In A Recession? Recession
  • Nonprofits’ Expenses Outpace Revenue During A Recession
    • Rate of growth in expenses generally exceeded the growth in revenue from 2001-2003.
  • Why Is This Recession Different?
    • Severity and length remains in question, but it is only part of the story
    • This period is plagued by a combination of events we haven’t seen in any of the market events over the past 20 years:
      • Credit markets have seized up
      • Employment falling in many sectors
      • Housing construction and real estate markets are in decline
    • What does this mean to the sector?
      • Immediate downward pressure on both government and philanthropic funding
      • Limited and/or more expensive access to credit
      • Nonprofits are likely to emerge from the downturn later than the broad economy
  • NFF 2009 Survey
    • Nonprofit Finance Fund recently conducted a survey of nonprofits nationwide to assess the real-time financial challenges they face. The survey focused on surfacing the most critical areas of need, both for the immediate and longer-term durability and effectiveness of the sector.
    • Nearly one thousand nonprofit leaders responded to our survey. Survey respondents stretched from coast-to-coast, from large organizations to small, and came from all sub-sectors.
    • What did we learn from their collective reply?
    • America’s nonprofit sector is financially vulnerable.
  • What Are Organizations’ Revenue Expectations for 2009? Organizations are bracing for funding cuts from all types of donors
  • Are Organizations Expecting Surplus or Deficit? And on What Scale? 2009 shows a rise in the number of organizations expecting deficit, and significantly fewer organizations anticipating a surplus
  • Summary of Key Findings
    • Only 12% of all respondents expect to operate above break-even this year.
    • Just 16% anticipate being able to cover their operating expenses in both 2009 and 2010.
    • 31% don’t have enough operating cash in hand to cover more that one month of expenses, and another 31% have less than three months’ worth.
    • In 2009:
        • 43% anticipate a decrease in funding from government
        • 62% anticipate a decrease in funding from foundations
        • 49% anticipate a decrease in funding from individuals
        • 33% anticipate a decrease in earned revenue
    • 52% of respondents expect the recession to have a long-term (2+ years) or permanent negative financial effect on their organizations.
    • 93% of lifeline organizations that provide essential services anticipate an increase in demand in 2009.
  • Your Organization’s Response
    • Now that we are in the second calendar year of the recession, what challenges or opportunities is your nonprofit experiencing?
    • Please share one or two of your coping strategies or plans of action.
  • From the Field… Deepening our programs, not expanding them Working with our funders to realign existing grants Rethinking growth plans Refocus our mission to concentrate our resources on what’s ‘core’ Staff layoffs and furloughs Keeping plans active but holding off on execution Created multiple scenario budgets, including action triggers Sell assets such as property or securities Greater reliance on in-kind donations and volunteers Developing new collaborations & alliances Bundling programs to create funding efficiencies Taking on less risk
  • Plans & Actions to Weather the Recession Nonprofits are taking or considering notable actions to keep their doors open in these difficult times
  • Where are the opportunities?
    • Reconfirm your organization's alignment with core mission
    • Examine the evolutionary possibilities
    • Encourage and embrace creative thinking
    • Consider bold, internal changes
    • Changes made during crisis can lead to emergence as more disciplined and, in turn, stronger enterprises
    • Implementing and institutionalizing good financial management practices can position our organizations for a stronger tomorrow
    “ You never want a serious crisis to go to waste.” -Rahm Emmanuel
  • The NFF Triangle Mission and Program What you do, and how you do it. Capacity The people, space, and processes that allow you to do what you do . Capital What resources and assets you to have to work with.
  • Agenda
    • Some perspective
      • Lessons from history
      • Heard on the street: Experiences from the field
    • Assessing Risk: Preparing for a sustained economic crisis
      • Where money meets mission: the importance of capital structure
      • Evaluating exposure to risk and risk tolerance
    • Addressing Risk: A financial framework with tools and strategies for planning and managing in tough times
      • Defining what’s core
      • Quantifying your options
      • Developing your response
      • Strategic collaboration and realignment
      • Communicating with stakeholders
      • Rinse and repeat
    nonprofitfinancefund.org ©2009 Nonprofit Finance Fund
  • The Three Statements are Connected Revenue minus Expenses = Surplus / Deficit Statement of Cash Flows Assets Cash Liabilities Net Assets Surplus / Deficit Statement of Activities Statement of Financial Position
  • The Two Bottom Lines
    • Income Statement: Surplus/Deficit
      • Income Statement reflects the annual results of a organization’s operations
      • Balance Sheet: Net Assets
      • Balance Sheet provides a picture of overall financial health
    • Income
    • Statement
    • Revenue
    • Expense
    • Surplus/
    • Deficit
    Balance Sheet Assets Liabilities Net Assets A surplus builds net assets; A deficit depletes net assets
  • Assess Risk: Quality of Financial Information
    • What financial planning and management tools do you currently use to assess your situation?
    • Common reports
      • Year-to-date actuals vs. budget
      • Balance sheet
      • Monthly cash flow
      • Revenue and expense by program
    • Are they giving you the information you need?
  • Assess Risk: Impact on Financial Performance
    • How do you answer these questions?
    • How might the reliability of your organization’s revenue streams be affected in an economic downturn?
    • Will costs have to be cut, and if so, which costs?
    • Will the recession lead to increased demand for services and, if so, how will you respond?
    • How will your organization deal with these potentially competing effects?
    • How might changes in revenue streams and cost reduction strategies affect operating results?
    • How will changes in your operating performance affect your organization’s balance sheet?
  • Assess Risk: Know your Balance Sheet
    • First things first: Know where you stand
      • Cash – How much? How “liquid”?
      • Receivables – Are they slow to collect? Are any at risk for collection?
      • Line of Credit – How do you manage cash flow? Are you using debt appropriately?
      • Fixed Assets – How will you address maintenance issues?
      • Temporarily Restricted Net Assets – Do they fully support your core programs?
      • Reserves – Do you have them? Suitable to your needs? Agreement on use?
  • Understand your balance sheet
    • Know where your organization stands. Your condition will inform the urgency and types of action leadership should take
      • Is your organization operating now from a position of strength or weakness?
      • Can you afford a deficit and if so, how large?
      • What is your risk tolerance?
    • If your balance sheet has…
      • No cash or receivables
      • A fully drawn line of credit
      • Little or no reserves available to management
      • Significant wear-and-tear of fixed assets
    • … There are no dollars immediately available to draw on in challenging times.
      • Borrowing to replace lost income is rarely appropriate.
  • Right amount for YOUR organization in this environment? Months of Liquidity: Rule of Thumb Months of Expenses Covered by Liquidity Operating Situation 0-3 Crisis – Scrambling for cash, delaying payment to vendors, overdrawing checking account. Less than 3 months Cash is tight – Relying on line of credit, delaying payment to vendors. 3-6 months Room to breathe – Can do some long-term thinking. Little room for “rainy days.” 6+ months Handles more risk – Able to withstand increasingly acute shocks such as large facility repairs, funding cuts and possibly recessions.
  • Measuring Liquidity Months of Cash = Total Cash (Total Expenses / 12) Months of Liquid = Net Assets Unrestricted Net Assets – (PPE – PPE Debt) (Total Expenses / 12) Working Capital = Current Assets – Current Liabilities
  • How do we begin to assess the health of our financial situation? Understand Operating PERFORMANCE Determine STRENGTH of Our Balance Sheet Acknowledge Our Ability to Handle RISK Plan Our Response
  • Agenda
    • Some perspective
      • Lessons from history
      • Heard on the street: Experiences from the field
    • Assessing Risk: Preparing for a sustained economic crisis
      • Where money meets mission: the importance of capital structure
      • Evaluating exposure to risk and risk tolerance
    • Addressing Risk: A financial framework with tools and strategies for planning and managing in tough times
      • Defining what’s core
      • Quantifying your options
      • Developing your response
      • Strategic collaboration and mergers
      • Communicating with stakeholders
      • Rinse and repeat
    nonprofitfinancefund.org ©2009 Nonprofit Finance Fund
  • Address Risk: Planning for the future
    • Where you’ve been Where you are now Where you’re going
    Statement of Activities Balance Sheet Budget Revenue Expenses Earned Contributed Personnel Professional Occupancy Support Interest Surplus/Deficit Budget Actual Variance Revenue Expenses Surplus/Deficit Assets Liabilities Net Assets
  • Leadership Requires Making Decisions
    • Good financial decision-making requires timely, accurate and transparent financial information
      • Be prepared to work with and adapt to imperfect information
    • Tools are only as good as the assumptions behind them
    • Tools are not a substitute for making difficult decisions
      • Beware the knowing-doing gap
    • Being honest first with ourselves allows you to begin the exercise of discovering options
    • External communication and buy-in are essential but not before you’ve done your internal due-diligence
    • Rinse & Repeat
  • Focus, Focus, Focus
    • Revisit your mission and define your priorities:
      • Which activities are core to your mission?
      • Are they positive financial contributors or do they need subsidy from other programs?
      • What are the non-negotiables in your budget?
    • Once you define what is core to your mission then define programs as:
      • What we MUST do
      • What we SHOULD do
      • What we WANT to do
  • Can You Answer The Tough Questions? Organizational Viability What are your mission priorities? What will current and prospective funders support? How important are deficit-producing programs to your mission? How will you respond if sources of earned and contributed revenue are not collectively reliable?
  • Quantifying the Challenge & Planning the Response: NFF Framework Program Profitability Analysis Cash Flow Projections Scenario Testing Strategic Alliances & Mergers Debt Consulting and Access to Capital Financial & Organizational Assessment
  • Quantifying The Challenge: Cash Flow Projections
    • Recessions impose severe constraints on cash flow and cash availability
    • Ensure more visibility into the future by developing a physical landscape of the timing and reliability of cash in and cash out
      • Distinguish between “cash flow” issues (timing of receipts) and “cash” issues (shortage of cash overall)
      • Prepare cash flow projections on a monthly basis (if not weekly in times of crisis) and continually update based on actuals vs. projection
    • Cash flow projections enable management to estimate how much cash it should keep on hand and, if appropriate, how much short-term debt it may need to access for the extra tough months.
      • Uses:
      • To instill cash management discipline
      • As part of your standard reporting package to the Board/Finance Committee
      • To support your conversations with funders, bankers and other stakeholders
      • To inform and guide achievement of mission and program objectives
  • What Are Some Ways Nonprofits Can Manage Cash Flow?
    • Accelerate receivables
    • Delay payables
    • Access an internal/ external line of credit
    • Draw on reserves
    • Access restricted cash (BEWARE!)
    • Which of these are viable strategies for the long term health of an organization?
  • Quantifying the Challenge: Debt And Access To Capital
    • A line of credit can help address periodic or recurring CASH FLOW issues, allowing your organization to bridge timing gaps between the expenditure of funds and receipt of offsetting revenue. In so doing, you preserve existing cash, whether it be for a rainy-day or future opportunity.
    • By securing a line of credit, particularly when times are good, you build your banking relationship and credit history.
    • Conversations with your banker must be ongoing, deep, and fully transparent . Be prepared to talk beyond the numbers:
      • Short- and long- term plans for the organization
      • Multiple scenarios for potential reductions or loss in funding
      • Funding commitments / contracts for next 12 months (at minimum)
      • Evidence of reporting and processes in place to measure progress against budget and ability to course correct
      • Management team with the ability to lead through changing economic and funding environment
  • Quantifying the Challenge: Program Profitability Analysis
    • Program economics analyses are designed to help answer the following questions:
      • Which programs subsidize other activities and overhead?
      • Which programs require subsidy from other fundraising or program activity?
      • How might we do business differently so that our programs and capacity are fully and collectively supported?
      • Program economics analyses are used to:
      • Inform strategic decision making around sustaining, growing or cutting/changing programs
      • Evaluate any trade-offs between bottom-line and mission contributions
      • Enable well-informed responses to operating changes
      • Allocate resources among competing priorities
    • Assessing the underlying economics of programs can inform decisions about whether and how to cut costs—and where to focus fundraising efforts based on an analysis of each program’s contribution to the bottom line AND to mission.
    • Nonprofit organizations often make decisions to maintain deficit programs critical to their mission. The key is to understand the size of, and identify the source for the subsidy needed to cover, these deficits.
    Using Program Profitability Analysis to Assess Risk
  • Using Program Profitability Analysis to Assess Risk, continued
    • The analysis involves preparing a spreadsheet that uses a budget or a completed year’s income statement.
      • Assigns all direct revenue and expense to each program - Identify items that are directly tied to programs.
      • If a program goes away, what revenue and expenses go away?
      • Program “bottom-line” shows the impact on the overall bottom-line if the program went away.
      • All supporting expenses (management, occupancy, fundraising, administrative, etc.) are examined separately.
    • This analysis is part art, part science; it is for internal use only ; and requires the judgment of the Executive Director.
  • Program Profitability Analysis: A Visual Tool + $ - $
    • High $ contribution, high mission alignment
    • What can we cultivate and preserve?
    • Are there opportunities for growth?
    • High $ contribution, low mission alignment
    • Assess threat of ‘drift’
    • Opportunity to align with core programs?
    • Non-financial costs?
    Mission
    • Low $ contribution, low mission alignment
    • Relevance to the organization?
    • Legacy? One-off?
    • Opportunities for strategic realignment?
    Low Impact
    • Low $ contribution, high mission alignment
    • Potential to cut costs?
    • Can the revenue model change?
    • Does subsidy exist elsewhere in the organization?
    High Impact Money Contribution Margin
  • Planning Your Response: Scenario Testing
      • Scenario testing provides a means to explicitly and transparently communicate in financial terms the viability of plans for the future
      • Determine how and under what circumstances you will mid-course correct
        • Consider which expenses you can reduce, eliminate or postpone
        • Evaluate how cuts will impact delivery of mission and economic viability
        • Consider ways to increase revenue, if once reliable sources seem questionable. CAUTION: Avoid over-diversification (i.e., new business lines) that can increase risk
        • Ensure new revenue opportunities are “net” positive
      • Identify the triggers that lead to Plan B, Plan C, etc.
        • For example: if X% of revenue doesn’t arrive by Y, we will cut Z% of expenses)
        • They will be different for every organization
  • Planning Your Response: Scenario Testing
    • Don’t wait until the wolf is at the door. Knowing how and when you will react can prevent emotion-based decision making
    • Scenario planning can be as complex or as simple as you need it to be:
      • What would we do differently if budgeted revenue dropped 10%? 20%? 30%?
      • What do we think the likelihood is of receiving funds from each revenue source within each program?
    • Plan for a worst case scenario. It’s always easier to take drastic action when you consider it before your MUST take it
  • How Will Each Scenario Impact Your Organization’s Long Term Health?
    • What will be the implications of your scenarios on your organization’s ability to withstand risk?
      • Which scenarios produce deficits? Surpluses?
      • Will deficits deplete cash or result in larger debt obligations?
      • Will you need to delay payments to vendors?
      • Will surpluses be converted to cash savings or invested in fixed infrastructure?
      • If revenue grows, will receivables grow?
    • While a strong balance sheet doesn’t guarantee strong programs, strong programs require the support of strong balance sheets
  • Nonprofit Mergers and Alliances: A Word Association Test…
    • When you hear the word merger , do you think of…
    • Lost Jobs?
    • Downsizing?
    • Decisions made in secret?
    • Fast profits/ lower costs?
    • Lost identity?
    • Failed organization?
    MYTHS
  • Merger or Alliance: What is the Difference? Focus on operations Open-ended time frame Six to nine months Multiple Boards of Directors One Board of Directors Market sees many acting as one Market sees one No corporate change Multiple corporate interests Act as one Merger Alliance Focus on strategy Corporate change
  • Mergers and Alliances: Examples of a C.O.R.E. Continuum of Collaboration R esponsibility C orporate O perations E conomics Shared admission/ logistics Co-location with services Housing Shared/ common back-office software Low Integration High Complexity Buying groups Co-location Co-ops High Integration Low Complexity Alliances Mergers BBBS of North Texas Utah Opera / Symphony CityKicks America Scores Centro Latino
  • When To Consider a Merger
    • Organizations should merge when they don’t feel that they must
    • This may sound glib, but…
      • … once organizations feel the pressure to merge, they’ve probably already lost a lot of their value, not to mention their ability to run as a going concern
    • How to proceed:
      • Talk and communicate: Boards/ Management
      • Find shared values and common mission goals
      • Involve advocates & funders
      • Seek examples & involve those who have been successful
  • Quantifying the Challenge & Planning the Response: NFF Framework Program Profitability Analysis Cash Flow Projections Scenario Testing Strategic Alliances & Mergers Debt Consulting and Access to Capital Financial & Organizational Assessment
  • Communicate Early and Often
    • Engage your staff in conversations about options
      • Staff may have some of the most creative ideas and solutions
    • Bring your alternatives to the Board for decision making
      • Remember your Board has a fiduciary duty to safeguard the organization’s assets
    • Stay in front of donors—don’t pull back. Tell your story regularly
      • Be candid about the impact of the economic climate on your programs and organization
      • Communicate your strategy and plan to adjust
      • Focus on positive messaging. Emphasize your commitment to mission and the urgency of your needs
  • Opportunities, revisited
    • Reconfirm your organization's alignment with core mission
    • Examine the evolutionary possibilities
    • Encourage and embrace creative thinking
    • Consider bold, internal changes
    • Changes made during crisis can lead to emergence as more disciplined and, in turn, stronger enterprises
    • Implementing and institutionalizing good financial management practices can position our organizations for a stronger tomorrow
  • Nonprofit Finance Fund To learn more about NFF, visit us at nonprofitfinancefund.org Dione Alexander Vice President, Midwest Region (313) 965-9145 [email_address] nonprofitfinancefund.org ©2009 Nonprofit Finance Fund