Nonprofit Finance FundUsing Finance to Improve InstitutionalSustainabilityPresented byGar Kelley,Vice PresidentAEO Annual ...
Goals for This SessionEquip you to incorporate your organization’sbusiness dynamics and financial condition inplanning and...
Nonprofit Finance Fund:Where Money Meets MissionServed thousands of nonprofits and funders since1980CAPITAL ACCESS Alone ...
The NFF Triangle                                       Mission and Program                                        What you...
The NFF TriangleEstablishing and maintaining a balance amongthe three components is essential to long-termhealth and viabi...
Agenda   Some Perspective    Nonprofits in Recession    Considerations for Sustainability   Capitalization Tools and Str...
How Did This Recession Compare?Steeper and deeper than the past 3 recessionsSource: Board of Governors of the Federal Rese...
More Nonprofits Experience DeficitsDuring and After Recession         Percentage of Nonprofits Reporting Deficits         ...
NFF 2009, 2010, & 2011 SurveysNationwide survey of nonprofit managers To assess the real-time financial challenges To su...
What Are the Trends Among TheseLifeline Organizations?“Lifeline” organizations that provide critical services topeople in ...
Summary of National Survey FindingsNonprofits face ongoing increases in service demand, whilethe financial situation for m...
Agenda   Some Perspective    Nonprofits in Recession    Considerations for Sustainability   Capitalization Tools and Str...
Focus, Focus, FocusRevisit your mission and define your priorities:         Which activities are core to your mission?  ...
Questions to Consider AroundSustainabilityWhat businesses are you in?What do you sell in each business?Who buys ―it‖?What ...
Need vs. DemandWho decides if there is a need for your programming?How do we know if there is demand for yourprogramming?...
Agenda   Some Perspective    Nonprofits in Recession    Considerations for Sustainability   Capitalization Tools and Str...
Determining Your Risk Tolerance:Focus on the Balance Sheet                                Statement of                    ...
Assess Risk:Understanding Current PositionAssess your exposure and risk        Understand your income statement          ...
Assess Risk:Know your Income StatementRevenue Dynamics Where does the organization‟s money come from? Is it reasonably d...
Generate Surpluses to Cover the   Full Cost of Business        Total Cost of All Business Activity        ($ in thousands)...
Assess Risk:Know your Balance SheetFirst things first: Know where you stand Assets                      Cash – How much? H...
EXAMINE NET ASSET COMPOSITION      Temporarily                 Unrestricted             Earned            Permanently     ...
Measuring Liquidity                                                                  Total CashMonths ofCash =            ...
Assess Risk:Months of Cash- Rule of ThumbWhat is the right amount of liquidity? In good andbad economic environments? Mont...
Types of Board-Designated Reserves:Tools for Supporting OrganizationsRainy Day (Emergency) Reserve For the unexpected and...
Agenda   Some Perspective    Nonprofits in Recession    Considerations for Sustainability   Capitalization Tools and Str...
A Planning Continuum                           Financial & Organizational AssessmentExplore strategicpartnerships,collabor...
Cash Flow Management BestPracticesEstimate how much cash to keep on hand and, ifappropriate, how much short-term debt and/...
Address Risk:    Cash Flow Management                                         Month 1                   Month 2           ...
Building Your Cash Flow Projections:Tips and TechniquesBe disciplined and conservative, but not tooconservative – an unrea...
Quantifying the Challenge:Debt and Access To CapitalLines of Credit Can help address periodic or recurring CASH FLOW  iss...
Quantifying the Challenge:Debt and Access To CapitalConversations with your banker must be ongoing, deep,and fully transpa...
Using Program Profitability Analysisto Assess RiskAssessing underlying program economics informsstrategic decisions about:...
Program Profitability Analysis:A Visual Tool                           High $ contribution                  High $ contrib...
NFF’s Program Profitability ModelNFF’s Program profitability model helps frame manykey decisions in a way that nonprofit m...
PPM MethodologyStep 1: Use most recent annual financial information Using current budget or latest projection for current...
PPM MethodologyStep 2, continued:Note that PPM is both art and scienceEg., A foundation may give program restricted fundin...
Tips for Using the PPM as aManagement ToolThis is not a one-time analysis, it is meant to get betterover time as staff and...
Program Economics:MethodologyStep 3: Calculate contribution margins             Program 1                                 ...
Sample Program Profitability Model                                              Programs                                  ...
Scenario TestingBy building a financial model using alternate casescenarios, you can project a range of outcomes to inform...
Planning Your Response:Scenario TestingDetermine the triggers that lead to Plan B, Plan C, etc. For example: if X% of rev...
How Will Scenarios Impact YourOrganization’s Long Term Health?How do the scenarios impact the organization’s abilityto wit...
Concluding Thoughts―Programs‖ are not necessarily synonymous with―Lines of Business‖     Determine lines of business by a...
Agenda   Some Perspective    Nonprofits in Recession    Considerations for Sustainability   Capitalization Tools and Str...
Communicate Early and OftenEngage staff in conversations about options. Valuablesource of creative ideas and solutionsBrin...
Knowing-Doing Gap: Where are You?Information Gap: Do you develop transparent, accurateand timely financial planning and ma...
Minimizing the Information Gap:Developing a Financial ToolkitDo your financial planning and management toolsprovide the in...
Concluding ThoughtsGood financial decision-making requires timely,accurate and transparent financial informationUse financ...
Appendix: 2011 National Survey2011 State of the Nonprofit Sector Survey Results March 2011 For more information, please vi...
Thank You!To Stay Connected…  Learn More                                nonprofitfinancefund.org  Twitter                 ...
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NonProfit Finance Fund: Making Finance Work For You.

  1. 1. Nonprofit Finance FundUsing Finance to Improve InstitutionalSustainabilityPresented byGar Kelley,Vice PresidentAEO Annual National Microenterprise ConferenceWashington, DCMay 3, 2011nonprofitfinancefund.org ©2011 Nonprofit Finance Fund ®
  2. 2. Goals for This SessionEquip you to incorporate your organization’sbusiness dynamics and financial condition inplanning and decision making for programmaticsuccessProvide you with financial tools & strategies tomanage in a changed and changing environmentnonprofitfinancefund.org ©2011 Nonprofit Finance Fund® 1
  3. 3. Nonprofit Finance Fund:Where Money Meets MissionServed thousands of nonprofits and funders since1980CAPITAL ACCESS Alone and through strategic partnerships: Debt, PRI management, New Market Tax Credits, “Philanthropic Equity,” Catalyst Funds $280 million in loans; $100 million in New Market Tax Credit deals; over $1 billion in capital leveraged ―[NFF is]… arguably the most influentialCONSULTING voice in the ongoing effort to Over 1,000 consulting engagements and workshops reshape thinking in past 5 years and practice about nonprofit Financial advisors and educators capitalization.‖ Collaboration/Merger specialists –The Nonprofit TimesAll sub-sectors served: $300,000 to $50 millionnonprofitfinancefund.org ©2011 Nonprofit Finance Fund® 2
  4. 4. The NFF Triangle Mission and Program What you do, and how you do it. Capacity Capital The people, space, and What resources andprocesses that allow you assets you to have to to do what you do. work with.nonprofitfinancefund.org ©2011 Nonprofit Finance Fund® 3
  5. 5. The NFF TriangleEstablishing and maintaining a balance amongthe three components is essential to long-termhealth and viability. Mission and Program Mission and Program Mission and Program Mission and Program Mission and Program Mission and Program Mission and Program Capacity Capacity Capacity Capacity Capacity Capacity Capital Capacity Capital Capital Capital Capital Capital Capital Capital Capital Capitalnonprofitfinancefund.org ©2011 Nonprofit Finance Fund® 4
  6. 6. Agenda Some Perspective  Nonprofits in Recession  Considerations for Sustainability Capitalization Tools and Strategies  Assessing your Nonprofit‟s Current Financial Situation  Planning a Strategic Response That Encourages Stabilization and Sustainability Concluding Thoughts  Communicating your Financial Story and Resource Needs  Overcoming the Knowing-Doing Gapnonprofitfinancefund.org ©2011 Nonprofit Finance Fund ® 5
  7. 7. How Did This Recession Compare?Steeper and deeper than the past 3 recessionsSource: Board of Governors of the Federal Reserve System, 2009 research.stlouisfed.orgNote: Shaded areas indicate US recessions.Index: 2002 = 100nonprofitfinancefund.org ©2011 Nonprofit Finance Fund® 6
  8. 8. More Nonprofits Experience DeficitsDuring and After Recession Percentage of Nonprofits Reporting Deficits (Post-Depreciation) 50% 44% 45% 41% 40% 40% 38% 38% 35% 33% 31% 30% 25% 20% 15% 10% 5% 0% FY1999 FY2000 FY2001 FY2002 FY2003 FY2004 FY2005 Recession Recovery Lagnonprofitfinancefund.org ©2011 Nonprofit Finance Fund® 7
  9. 9. NFF 2009, 2010, & 2011 SurveysNationwide survey of nonprofit managers To assess the real-time financial challenges To surface the most critical areas of need  both for the immediate and longer-term  durability and effectiveness of the sectorOver 1,900 nonprofit leaders responded in 2011Results suggest US nonprofit sector continues to experience: Downward pressure on both government and philanthropic funding Cash and liquidity constraints for an indefinite period  60% of respondents had 90 days or less of cash available Financial Vulnerability  44% of 2011 survey respondents ended 2010 with a surplus, versus 35% in 2009 and 40% in 2008.  Only 25% of 2011 survey respondents added reserve funds in 2010.nonprofitfinancefund.org ©2011 Nonprofit Finance Fund® 8
  10. 10. What Are the Trends Among TheseLifeline Organizations?“Lifeline” organizations that provide critical services topeople in need are finding it hard to meet the demands intheir communities: 87% saw an increase in demand for services in 2010, compared with 68% of non-lifeline organizations. 60% of lifeline organizations increased the number of clients served in 2010, yet only 43% were able to full meet the demand for services. Just 37% of lifeline organizations expect be able to fully meet demand in 2011.nonprofitfinancefund.org ©2011 Nonprofit Finance Fund® 9
  11. 11. Summary of National Survey FindingsNonprofits face ongoing increases in service demand, whilethe financial situation for many continues to be difficult.Nonprofits are responding to this „new normal‟ with creativityand resilience, even finding ways to increase services in theface of funding uncertainty.While some nonprofits are adapting to changed circumstancesin healthy ways, such as strategic collaborations and carefulexpense management, others are entering into situations thatthreaten their survival, such as substantial layoffs or deficits.Now more than ever, nonprofits need open dialogue withinternal and external stakeholders, and support for the overallorganization and core programs.nonprofitfinancefund.org ©2011 Nonprofit Finance Fund® 10
  12. 12. Agenda Some Perspective  Nonprofits in Recession  Considerations for Sustainability Capitalization Tools and Strategies  Assessing your Nonprofit‟s Current Financial Situation  Planning a Strategic Response That Encourages Stabilization and Sustainability Concluding Thoughts  Communicating your Financial Story and Resource Needs  Overcoming the Knowing-Doing Gapnonprofitfinancefund.org ©2011 Nonprofit Finance Fund ® 11
  13. 13. Focus, Focus, FocusRevisit 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 is non-negotiable in your budget?Once you define what is core to your mission thendefine programs as:  What we MUST do  What we SHOULD do  What we WANT to doMake Mission-Driven Decisions:The goal is to ensure you stay afloat to serve the community.This may mean partnering with other complimentaryorganizations or making tough business decisionsnonprofitfinancefund.org ©2011 Nonprofit Finance Fund® 12
  14. 14. Questions to Consider AroundSustainabilityWhat businesses are you in?What do you sell in each business?Who buys ―it‖?What does ―it‖ cost? How do you price ―it‖?Is there a ―Model of Sustainability‖ for our organization?How does our Model of Sustainability change if ourcircumstances and/or environment change?How do our enterprise/balance sheet needs impact andinfluence our Model of Sustainability?nonprofitfinancefund.org ©2011 Nonprofit Finance Fund® 13
  15. 15. Need vs. DemandWho decides if there is a need for your programming?How do we know if there is demand for yourprogramming? Who are your local competitors and how does that affect demand? Why are you best suited to offer your programming in your market?Demand = combination of reliable sources willingto pay full-cost price annually Demand Sustainability Neednonprofitfinancefund.org ©2011 Nonprofit Finance Fund® 14
  16. 16. Agenda Some Perspective  Nonprofits in Recession  Considerations for Sustainability Capitalization Tools and Strategies  Assessing your Nonprofit‟s Current Financial Situation  Planning a Strategic Response That Encourages Stabilization and Sustainability Concluding Thoughts  Communicating your Financial Story and Resource Needs  Overcoming the Knowing-Doing Gapnonprofitfinancefund.org ©2011 Nonprofit Finance Fund ® 15
  17. 17. Determining Your Risk Tolerance:Focus on the Balance Sheet Statement of Financial Position Assets Liabilities Statement of Cash Cash Statement Flows of Activities Net Revenue minus Assets Expense = Surplus / Surplus / Deficit Deficitnonprofitfinancefund.org ©2011 Nonprofit Finance Fund® 16
  18. 18. Assess Risk:Understanding Current PositionAssess your exposure and risk  Understand your income statement – How might your revenue and expense components be affected? – How will operating performance impact the organization?  Understand the strength of your balance sheet – Are you operating now from a position of strength or weakness? – Can you afford a deficit and, if so, how large and for how long? – What is your risk tolerance?The urgency and type of action leadership should takedepends on your organization’s current financialposition.nonprofitfinancefund.org ©2011 Nonprofit Finance Fund® 17
  19. 19. Assess Risk:Know your Income StatementRevenue Dynamics Where does the organization‟s money come from? Is it reasonably diversified or at risk? Do revenue streams appear reliable / consistent?Cost Dynamics What does the organization spend on operating activities? Are expenses adjusted in line with revenue changes? Note: Statement of Activities will not present expenditures on capital items or debt principal repayments.Profitability and Savings Does the organization cover its costs? Are surpluses sufficient to meet balance sheet obligations? Is the agency saving? If so, is it enough?*Conversation with leadership will offer greater clarity than financials alone.nonprofitfinancefund.org ©2011 Nonprofit Finance Fund® 18
  20. 20. Generate Surpluses to Cover the Full Cost of Business Total Cost of All Business Activity ($ in thousands)2,8002,4002,000 Reserve, one month expenses1,600 Depreciation expense1,200 Purchases of property & equipment (P&E) 800 Estimated debt principal payment 400 Expenses (before depreciation) 0 Revenue (including non-operating) 2010B nonprofitfinancefund.org ©2011 Nonprofit Finance Fund® 19
  21. 21. Assess Risk:Know your Balance SheetFirst things first: Know where you stand Assets Cash – How much? How “liquid?” Balance Sheet Receivables – Are they slow to collect? Are any at risk for collection? Liabilities Fixed Assets – How do you address Assets maintenance issues? Net Assets Liabilities Line of Credit – How do you manage cash flow? Are you using debt appropriately? Net Assets Unrestricted Net Assets – Do you own more & than you owe? Reserves Temporarily Restricted Net Assets – Do they fully support your core programs? Reserves – Do you have them? Are they suitable to your needs? Agreement on use?nonprofitfinancefund.org ©2011 Nonprofit Finance Fund® 20
  22. 22. EXAMINE NET ASSET COMPOSITION Temporarily Unrestricted Earned Permanently Restricted Contributions Revenue Restricted Contributions Contributions Temporarily Permanently Restricted Restricted Net Assets Net Assets Net Assets Investment Released Income Ice: Receivables Water Bottle: Board Designated ReserveWater: Unrestricted Cash Rocks: PP & E Operating and Non-operating Expensesnonprofitfinancefund.org ©2011 Nonprofit Finance Fund® 21
  23. 23. Measuring Liquidity Total CashMonths ofCash = (Total Expenses / 12) Unrestricted Net Assets –Months of (PPE – PPE Debt)LiquidNet Assets = (Total Expenses / 12)Working Current Assets – CurrentCapital = Liabilitiesnonprofitfinancefund.org ©2011 Nonprofit Finance Fund® 22
  24. 24. Assess Risk:Months of Cash- Rule of ThumbWhat is the right amount of liquidity? In good andbad economic environments? Months of Expenses Covered by Cash Operating Situation 0 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 risk – Able to withstand increasingly acute shocks such as large facility repairs, funding cuts and possibly recessions.nonprofitfinancefund.org ©2011 Nonprofit Finance Fund® 23
  25. 25. Types of Board-Designated Reserves:Tools for Supporting OrganizationsRainy Day (Emergency) Reserve For the unexpected and unbudgeted (i.e. to replace lost income)Cash Reserve for Operations Internal line of credit to bridge funding delays NOT to replace lost income or cover ordinary expensesFacility Reserve Building maintenance, systems replacements, etc.Investment Reserve A “self-governed” endowment with board authority to use the principal for other purposes if necessarynonprofitfinancefund.org ©2011 Nonprofit Finance Fund® 24
  26. 26. Agenda Some Perspective  Nonprofits in Recession  Considerations for Sustainability Capitalization Tools and Strategies  Assessing your Nonprofit‟s Current Financial Situation  Planning a Strategic Response That Encourages Stabilization and Sustainability Concluding Thoughts  Communicating your Financial Story and Resource Needs  Overcoming the Knowing-Doing Gapnonprofitfinancefund.org ©2011 Nonprofit Finance Fund ® 25
  27. 27. A Planning Continuum Financial & Organizational AssessmentExplore strategicpartnerships,collaborations,mergers Scenario Cash Flow Testing Planning Debt Consulting and Access to Capital Program Profitability Analysisnonprofitfinancefund.org ©2011 Nonprofit Finance Fund® 26
  28. 28. Cash Flow Management BestPracticesEstimate how much cash to keep on hand and, ifappropriate, how much short-term debt and/orreserves you will need to access during low cashmonthsDistinguish between ―cash flow‖ issues (timing ofreceipts) and ―cash‖ issues (shortage of cashoverall)Cash flow planning is an iterative process, requiringconstant monitoring and adjustmentnonprofitfinancefund.org ©2011 Nonprofit Finance Fund® 27
  29. 29. Address Risk: Cash Flow Management Month 1 Month 2 Month 3 Month 4 Month 5 Month 6 Proj. Actual Proj. Actual Proj. Actual Proj. Actual Proj. Actual Proj. ActualBeginning Total Cash 0 0 - - - - - - - - - -Unrestricted Operating Cash onHand [Beginning of month] 0 0 - - - - - - - - - -Operating CashUnrestricted Operating Cash ReceiptsEarned Income 0 0 0 0 0 0 0 0 0 0 0 0Unrest. Contributions 1 0 0 0 0 0 0 0 0 0 0 0 0Restricted Cash Releases - - - - - - - - - - - -Total Op. Cash Receipts - - - - - - - - - - - -Operating Cash SpentPersonnel 0 0 0 0 0 0 0 0 0 0 0 0Professional Fees 0 0 0 0 0 0 0 0 0 0 0 0Occupancy 0 0 0 0 0 0 0 0 0 0 0 0Interest on debt 0 0 0 0 0 0 0 0 0 0 0 0Other 1 0 0 0 0 0 0 0 0 0 0 0 0Total Op. Cash Spent - - - - - - - - - - - -Net Cash from Operations - - - - - - - - - - - -Non-Operating CashNon-Operating Cash InDraw on LOC/ Long Term Debt Receipt 0 0 0 0 0 0 0 0 0 0 0 0Capital Campaign Contributions 0 0 0 0 0 0 0 0 0 0 0 0Other Non-Op. Cash In 0 0 0 0 0 0 0 0 0 0 0 0Non-Operating Cash OutPrincipal Payment on LOC 0 0 0 0 0 0 0 0 0 0 0 0Principal Payment on LTD 0 0 0 0 0 0 0 0 0 0 0 0Other Non-Op. Cash Out 0 0 0 0 0 0 0 0 0 0 0 0Net Non-Op. Cash - - - - - - - - - - - -Temporarily Restricted CashTemp. Rest. Cash In 0 0 0 0 0 0 0 0 0 0 0 0Temp. Rest. Cash Released 0 0 0 0 0 0 0 0 0 0 0 0Net Temp. Restricted Cash - - - - - - - - - - - -Ending Cash - - - - - - - - - - - -Monthly Operating Cash FlowProjection vs Monthly Actual: 0 - 0 - 0 - 0 - 0 - 0 - nonprofitfinancefund.org ©2011 Nonprofit Finance Fund® 28
  30. 30. Building Your Cash Flow Projections:Tips and TechniquesBe disciplined and conservative, but not tooconservative – an unrealistic cash flow projection isuselessRevisions to your projections will be necessary. Eachmonth, check for anomalies and subject them to furtherreviewLook for trends in the end of the month cash balances: How do projections stack up against actual cash balances? Which months end with positive/negative cash levels? What are the patterns?nonprofitfinancefund.org ©2011 Nonprofit Finance Fund® 29
  31. 31. Quantifying the Challenge:Debt and Access To CapitalLines of Credit Can help address periodic or recurring CASH FLOW issues Provide a bridge for timing gaps between fund expenditure and receipt of offsetting revenueBy securing a line of credit, particularly when youneed it least, you build your banking relationship andcredit historynonprofitfinancefund.org ©2011 Nonprofit Finance Fund® 30
  32. 32. Quantifying the Challenge:Debt and Access To CapitalConversations with your banker must be ongoing, deep,and fully transparent. Be prepared to share: Short- and long- term plans for the organization A management team that has the ability to lead through changing economic and funding environment Evidence of reporting and processes in place to measure progress against budget and ability to course correct Funding commitments / contracts for next 12 months (at minimum) Multiple scenarios for potential reductions or loss in funding Track record of support from community and funders Engaged board of directorsnonprofitfinancefund.org ©2011 Nonprofit Finance Fund® 31
  33. 33. Using Program Profitability Analysisto Assess RiskAssessing underlying program economics informsstrategic decisions about: Whether and how to cut costs Where to focus fundraising efforts Whether to sustain, grow or cut/change programs How to respond to operating changes How to allocate resources among competing prioritiesNonprofits often make decisions to maintain deficitprograms critical to their missionThe key is to understand the size of, and identify thesource for the subsidy needed to cover, these deficitsnonprofitfinancefund.org ©2011 Nonprofit Finance Fund® 32
  34. 34. Program Profitability Analysis:A Visual Tool High $ contribution High $ contribution Low mission alignment High mission alignment +$  Assess threat of „drift‟  What can we cultivate and  Opportunity to align with preserve? core programs?  Are there opportunities for Contribution  Non-financial costs? growth? Money Margin Low $ contribution Low $ contribution Low mission alignment High mission alignment  Relevance to the  Potential to cut costs? -$ organization?  Can the revenue model  Legacy? One-off? change?  Opportunities for strategic  Does subsidy exist elsewhere realignment? in the organization? Low Impact High Impact Missionnonprofitfinancefund.org ©2011 Nonprofit Finance Fund® 33
  35. 35. NFF’s Program Profitability ModelNFF’s Program profitability model helps frame manykey decisions in a way that nonprofit managers caneasily understand and act onIt removes complex cost allocations:  Total cost allocations are often critical for funder reports and pricing analyses  However, they are not always best suited for devising financial strategy and making operating decisionsnonprofitfinancefund.org ©2011 Nonprofit Finance Fund® 34
  36. 36. PPM MethodologyStep 1: Use most recent annual financial information Using current budget or latest projection for current fiscal year is critical to improving decision making Focus on operating revenue available for the fiscal year. Capital revenue and expenses are not considered in the model (e.g., the cost of a new building)Step 2: Identify items that are directly tied to programs If the program goes away, does the revenue (or expense) go away? Eg., After School Teacher may leave if after school program goes away, but Director of Programs would likely stay (at the same salary) The PPM thus reveals a specific program-based “bottom- line” surplus or deficitAll supporting expenses (management, occupancy,fundraising, admin., etc.) are examined separately.nonprofitfinancefund.org ©2011 Nonprofit Finance Fund® 35
  37. 37. PPM MethodologyStep 2, continued:Note that PPM is both art and scienceEg., A foundation may give program restricted funding, but ifthe nonprofit ended the program, the foundation may fundanother program of the organization because they hold thenonprofit in high regard and trust management‟s decisions.Given the funder‟s flexibility in this case, the grant would beconsidered “capacity,” rather than “program”Given cases such as these, a good PPM would draw on theknowledge of the CFO, CEO, and other key managersnonprofitfinancefund.org ©2011 Nonprofit Finance Fund® 36
  38. 38. Tips for Using the PPM as aManagement ToolThis is not a one-time analysis, it is meant to get betterover time as staff and board use it Real power of the model comes over time, when it is fully integrated into planning. Stakeholders will have strong foundation to make financial decisionsThis analysis is for internal use onlynonprofitfinancefund.org ©2011 Nonprofit Finance Fund® 37
  39. 39. Program Economics:MethodologyStep 3: Calculate contribution margins Program 1 Program 2 Program 3 Revenue: $500,000 Revenue: $400,000 Revenue: $100,000 (-) Dir Exp: $200,000 (-) Dir Exp: $1,200,000 (-) Dir Exp: $600,000 Contribution Margin: Contribution Margin: Contribution Margin: $300,000 ($800,000) ($500,000)Program TotalsDirect Revenue: $1,000,000(-) Direct Expense: $2,000,000= Total Direct Contribution Margin: ($1,000,000)nonprofitfinancefund.org ©2011 Nonprofit Finance Fund® 38
  40. 40. Sample Program Profitability Model Programs Capacity After Youth Senior Program Special Program Capacity School Program Literacy Services Subtotal Fundraising Events Mgmt Admin. Subtotal TotalRevenue (A) Earned Government contracts $457 $110 $800 $1,367 $0 $1,367 Ticket Sales $0 $0 $0 Client Fees $156 $100 $256 $0 $256 Subtotal $613 $110 $0 $900 $1,623 $0 $0 $0 $0 $0 $1,623 (B) Contributed Foundations & Corporations $113 $120 $233 $10 $10 $243 Government $27 $27 $80 $80 $107 Individuals $85 $85 $704 $242 $946 $1,031 Trustees $12 $12 $152 $185 $337 $349 Subtotal $237 $0 $120 $0 $357 $946 $427 $0 $0 $1,373 $1,730 Total Revenue $850 $110 $120 $900 $1,980 $946 $427 $0 $0 $1,373 $3,353Expenses Salary & Benefits ($441) ($80) ($525) ($1,046) ($188) ($85) ($475) ($748) ($1,794) Consultants & Contractors ($239) ($100) ($172) ($511) ($20) ($175) ($195) ($706) Professional Fees $0 ($48) ($85) ($13) ($146) ($146) Occupancy ($112) ($259) ($371) ($62) ($46) ($108) ($479) Office & Supplies ($3) ($12) ($5) ($20) $0 ($20) Program ($85) ($8) ($10) ($103) $0 ($103) Interest $0 ($20) ($20) ($20) Miscellaneous ($15) ($29) ($44) ($44) ($15) ($102) ($161) ($205) Total Expenses ($894) ($100) ($100) ($1,000) ($2,094) ($300) ($337) ($85) ($656) ($1,378) ($3,472) Surplus/Deficit ($45) $10 $20 ($100) ($115) $646 $90 ($85) ($656) ($5) ($120) nonprofitfinancefund.org ©2011 Nonprofit Finance Fund® 39
  41. 41. Scenario TestingBy building a financial model using alternate casescenarios, you can project a range of outcomes to informdecisions  Scenario testing provides a means to explicitly and transparently communicate in financial terms the viability of plans for the futureDetermine how and under what circumstances you willmid-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.  Ensure new revenue opportunities are “net” positive nonprofitfinancefund.org ©2011 Nonprofit Finance Fund® 40
  42. 42. Planning Your Response:Scenario TestingDetermine 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 expensesPlan for a worst-case scenario Easier to add back later than to be forced to take drastic action without a thoughtful planPlan for the impacts of scenarios on programming What is the impact on specific program metrics (i.e., clients served, number of housing units produced or managed, schools and youth served, etc.)Can be as complex or as simple as needed: What would we do differently if budgeted revenue dropped 10%? 20%? 30%? What is the likelihood of receipt for each revenue source within each program? What adjustments will we make within these programs and to our supporting capacity?nonprofitfinancefund.org ©2011 Nonprofit Finance Fund® 41
  43. 43. How Will Scenarios Impact YourOrganization’s Long Term Health?How do the scenarios impact the organization’s abilityto withstand risk?  How will earned revenue or philanthropic dollars raised change? Will overhead/capacity costs change?  Which scenarios produce deficits? Surpluses?  Will deficits deplete cash and liquidity or result in larger debt obligations?  Will surpluses be converted to cash savings or invested in fixed infrastructure?nonprofitfinancefund.org ©2011 Nonprofit Finance Fund® 42
  44. 44. Concluding Thoughts―Programs‖ are not necessarily synonymous with―Lines of Business‖  Determine lines of business by assessing what it is you are selling in terms of services, who the buyers of those services are, and how much those services are costing you and your buyers  Once you establish clearly defined lines of business, you will gain visibility into the sustainability of program and enterprise level plansUse scenario planning to adjust strategy and respond topotential shifts in your internal or externalenvironment; revenue and expense contingencies can:  Help mitigate the effects of a dire situation  Completely neutralize the effects of a negative occurrence  Identify opportunities to improve the organization‟s bottom line going forwardnonprofitfinancefund.org ©2011 Nonprofit Finance Fund® 43
  45. 45. Agenda Some Perspective  Nonprofits in Recession  Considerations for Sustainability Capitalization Tools and Strategies  Assessing your Nonprofit‟s Current Financial Situation  Planning a Strategic Response That Encourages Stabilization and Sustainability Concluding Thoughts  Communicating your Financial Story and Resource Needs  Overcoming the Knowing-Doing Gapnonprofitfinancefund.org ©2011 Nonprofit Finance Fund ® 44
  46. 46. Communicate Early and OftenEngage staff in conversations about options. Valuablesource of creative ideas and solutionsBring alternatives to the Board for decision making.Remember: Board has a fiduciary duty to safeguard theorganization‟s assetsStay in front of donors—don’t pull back. Be candidabout the continued impact of the economic climate onyour programs and organizationnonprofitfinancefund.org ©2011 Nonprofit Finance Fund® 45
  47. 47. Knowing-Doing Gap: Where are You?Information Gap: Do you develop transparent, accurateand timely financial planning and management reports thatgive you the information you need?Interpretation Gap: Do management and board collectivelyhave the ability to understand, interpret and discuss theimplications of financial information?Decision-making Gap: Do you have a culture of making andfollowing through on tough decisions?nonprofitfinancefund.org ©2011 Nonprofit Finance Fund® 46
  48. 48. Minimizing the Information Gap:Developing a Financial ToolkitDo your financial planning and management toolsprovide the information you need? Year-to-date actuals vs. budget Balance sheet Monthly cash flow Revenue and expense by programWho is involved in preparing the reports?How frequently?Who receives them?When and how does the Board get involved?Tools are only as good as the assumptions behind them.Be prepared to work with and adapt to imperfectinformationnonprofitfinancefund.org ©2011 Nonprofit Finance Fund® 47
  49. 49. Concluding ThoughtsGood financial decision-making requires timely,accurate and transparent financial informationUse financial planning tools to guide decision makingbut bear in mind that tools are not a substitute formaking difficult decisions  Beware of the knowing-doing gapA healthy capital structure is critical to long termprogrammatic vibrancy and financial viability  Seek funding opportunities that cover full costs and meet full enterprise needs  Manage costs in the context of revenue and capital realities  Establish reserves that enable the organization to manage risknonprofitfinancefund.org ©2011 Nonprofit Finance Fund® 48
  50. 50. Appendix: 2011 National Survey2011 State of the Nonprofit Sector Survey Results March 2011 For more information, please visit nonprofitfinancefund.org For full survey results, please visit http://nonprofitfinancefund.org/2011Survey Data is based on a nationwide Zoomerang survey of nonprofit leaders conducted by Nonprofit Finance Fund, January-February 2011. Generously supported by Bank of America Charitable Foundation nonprofitfinancefund.org ©2011 Nonprofit Finance Fund® 49
  51. 51. Thank You!To Stay Connected… Learn More nonprofitfinancefund.org Twitter twitter.com/nff_news Facebook facebook.com/nonprofitfinancefund Our Blog philanthropy.com/blogs/money-and-mission Sign Up nonprofitfinancefund.org/sign-up RSS nonprofitfinancefund.org/news/feed Get in 212-457-4710 Touch! Garvester.Kelley@nffusa.orgnonprofitfinancefund.org ©2011 Nonprofit Finance Fund® 50

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