Making Charity Finances Easy to Understand

Thursday, November 8, at 1 p.m., U.S. Eastern time.

Clara Miller, founder and chief executive of the Nonprofit Finance Fund, in New York. Ms. Miller developed the Nonprofit Business Analysis

A transcript of the chat follows.

Peter Panepento (Moderator):
    Welcome to today's live chat with Clara Miller, the founder of the Nonprofit Finance Fund. Ms. Miller has agreed to join us today to talk about how nonprofits can make sound financial decisions. We've already had a number of great questions come in and we're looking forward to what should be a lively discussion. Please feel welcome to submit your own questions throughout the chat to get Ms. Miller's expert response. Ok. Let's get started ...

Question from Ethel Campbell/People Reaching Out:
    How do I as as executive director do I compete with other organizations where as I can really rely on getting that grant,over the years my program has been proven to be most successful over the years, we just need help to continue this is our 15th year

Clara Miller:
    Reliable revenue--from any source--is a challenge for nonprofits and for-profits alike. Foundations are sometimes a source of reliable funding, but this is something you should discuss with your program officer. More reliable is individual donations, but you will need to invest in capacity in the development department to make sure this is a reliable source of revenue year upon year. A discussion with your program officer about the possibility of getting support to develop the capacity you need to reduce reliance on their funders may help you get the investment you need to build this capacity.

Question from Erlinda, small non-profit:
    Is it possible to obtain grants from the US for a non-profit operating in another country?

Clara Miller:
    Yes, but be aware there is an additional layer of regulation involved. The Foundation Center can give you great information on this,.

Question from Peter Panepento:
    This question came in from a nonprofit official who asked to remain anonymous:

Last year we had a corporation change CEOs and halt all sponsorships, leaving us high and dry in 2007; two banks that provided only one-time donations, and another foundation that has given three years in a row and decided to forego a donation this year. It's so difficult to project revenue and therefore program support with these kinds of issues. We're tiny and money is a big issue. Any advice?

Clara Miller:
    I wish I could say that donors will become less fickle...but I can"t. The best way to mitigate the risk the one or more sources of revenue will disappear is to have a balance sheet with a little "rainy day" capital--a reserve--to give you some room to reposition, restructure and find more and more reliable donors when events like those you describe take place.

Your board should be a source of support and "door opening" in situations like these as well...

Finally, budget by projecting reliable revenue, plan expenses conservatively based on revenue benchmarks, and time expenditures that go beyond reliable revenue based on meeting "one time" goals. That way, your cost structure doesn't get ahead of reliable revenue.

Question from Robert Engel, Rensselaer County Historical Society:
    I inherited an organization that had recently come up significantly short on a capital campaign. The facility is first-rate but the available reserves are gone. The board and I are steeped in short-term crisis solving, but what we really need is long-term development planning. I know enough about development to realize that we need outside professional help. How do I find that? (How do I afford that?)

Clara Miller:
    The perennial chicken-and-egg question! Pull together your key stakeholders (board and beyond) Lay out what you consider the basics of a going forward plan, including, possibly, closing down for a defined period to put together a thoughtful financial plan and raise funds to create core development capacity. Try not to reflexively expand program (which won't cover all costs) and create a plan designed to first cover the fixed costs of operations of the building and preservation of the collection and second program around it. I realize it's difficult and heartbrreaking, but the second won't be possible if the first isn't taken care of.

Question from Richard Starley, small nonprofit:
    My small nonprofit grew from $1M to $3M in less than 4 years but our cash has been very strained. Most of the growth is in services,with most of that in fee-for-service. The cash shortage has created underpayments on taxes, pension and other essential expenses. How common is cash shortages in such rapid growth? And, what can a small nonprofit do quickly to re-establish balance to its cash flow, especially when its board will not/cannot raise unrestricted funds?

Clara Miller:
    That is indeed a breathtaking pace, and you're describing one of the most difficult and, actually, heartbreaking aspects of nonprofit management.

You need to take emergency action, and it may include downsizing, furloughs, and other difficult decisions. Make sure your board members understand they are personally financially liable for non-payment of taxes, and may be for non-funding of pension.

This is cash shortage resulting from lack of profitability, not a "cash flow" problem. Your programs are clearly in demand, but you are losing a buck on every programmatic widget (i.e., every person you serve) and you won't ever make it up in volume. The difference is that you will stay in the business, because that's what your mission tells you to do. Stop growing your program in absence of other sources of funding to cover the full costs of operations, it is unsustainable and will eventually destroy your program and you will not be able to serve anybody.

Seek help from a major funder, savvy board member or local technical assistance provider who will be able to work with you on a sound financial plan.

Question from Edwin, small nonprofit:
    What is the prevailing trend regarding excluding "sin" stocks--e.g., tobacco, gaming industry, etc. from an organization's endowment/reserves portfolio? Is this trend increasing, or are organizations becoming more focused on the total return, without regard to the social, ethical, and public relations inplications?

Clara Miller:
    Many foundations are looking at "total social return," including social screens like the ones you cite. The Social Investment Forum is a good source of information on this.

Question from Lee Hinson-Hasty, PC(USA):
    When is it more appropriate to utilize educational programming versus consultation for organization when financial questions are raised?

Clara Miller:
    I'm guessing you mean that one problem is that both board and staff could use better financial understanding, generally, and therefore, it's hard to get your arms around just where the organization is financially...

Both are important, but in my opinion the first order of business is to understand your specific organization financially. How do you get revenue? How do you spend it? What revenue is reliable, and what portion...10 percent? more? Which costs are fixed? Do you have cash on the balance sheet? Facilities? Is your revenue rising or falling? Demand for services? Cost coverage from contracts? Sometimes an accountant can be helpful in answering these questions, but some CPAs focus too much on audits which can be confusing even to seasoned executives and alarming to folks from the for-profit world. NFF's tool, the Nonprofit Business Analysis, is designed to help organizations get a handle on this set of questions (we'll be happy to discuss or give more information if you e-mailing us at nff@nffusa.org, or go to our website, nonprofitfinancefund.org).

Question from Cole Johnson, Headwaters:
    Can a non-profit roll a permanently restricted fund it administers to another non-profit??

Clara Miller:
    It depends on the original terms of the restricted donation. Consult a nonprofit-savvy lawyer.

Question from Joseph S. Cavarretta,Executive Director, People Animals Love:
    I would like to be as efficient as possible in my work applying for grants from Corporations and Foundations:

Are there ratios available of the success rates of first/second/third-time grant applications to foundations that have never considered your organization? -- even when the missions closely align?

I have reapplied to some foundations that had turned us down in the past, and received the same response--even though the missions align and other criteria seem to be in sync.

I have also applied to new foundations and corporations with the same results--again even with very closely aligned missions.

Clara Miller:
    Approaching a foundation for a grant is most likely to be successful if you get encouraging signs from the foundation first: a meeting, an invitation to submit a "concept paper," an opportunity to attend a briefing for prospective grantees. Most foundations limit contributions to organizations in specific areas of interest, such as health or education (for example) Simply submitting a proposal "to whom it may concern," is unlikely to succeed, and submitting multiple times is no more likely. If you have corresponded with a specific program officer, calling for a debrief after a turndown will help you assess your chances and find out why you failed.

Peter Panepento (Moderator):
    We're hitting the midway point in today's chat. We've had a number of interesting questions so far and Clara is busy answering another wave of inquiries. But we still have time for more queries, if you have something you'd like to ask our expert.

Question from Sean Stannard-Stockton, Tactical Philanthropy Blog:
    Thanks so much for participating in this discussion Clara. I was wondering if you could talk a little about why the concept of granting "growth capital" is still something that people need convincing to accept. NFF has been around for quite a while. Do you think we're near a tipping point where foundations and other funders will begin to accept your pitch for growth capital?

Clara Miller:
    Sean, that's a great question and I think it goes back to the culture of the sector--we all fling ourselves at a mission, unaware (and heedless) of the commercial consequences or opportunity, then realize that understanding how enterprises work is very often part of succeeding at mission. Thus, we all need to play catchup. Every one of us sees mission as so critical that we overexploit the "enterprise," and it happens most to organizations that are succeeding wildly at mission, grow without knowing how risky and expensive that growth is (for for-profits and nonprofits alike). We have no equivalent of "risk" or "growth" capital in our sector, so we're trying to help nonprofits and funders understand and get comfortable with the need for it. I'd love to say we're near a tipping point (might just whisper it)...and we have begun to have more foundations join the conversation. While we have a somewhat limited view, Edna McConnell Clark has been a well-known leader, and Ford and now we see interest from a traditional leading "bricks and mortar" funder, Kresge; and a whole group of interested parties, including Gates; Kellogg; Doris Duke Charitable Fund, MacArthur, Mellon, Rockefeller, and others I'm sure I've forgotten or am not aware of! At any rate, the best part is that these foundations are understanding that they can act in concert, leverage the power of individual donors and get growing, excellent nonprofits all the way up the steep hill of growth in a sustainable way..

Question from Peter Panepento:
    We've seen many cases where nonprofits engage in a significant plan to expand their services or their physical operations beyond the scope of their original mission. In some of these cases, they expand far beyond their capacity for raising money to sustain these ventures -- or they do not have the manpower to properly carry out their work. What factors should nonprofit leaders look at before they attempt an expansion?

Clara Miller:
    Wonderful question: It's difficult for most nonprofit managers and boards to remember that expanding program always (with a tiny number of exceptions) expands the red ink, so a key part of a program expansion plan, especially a new facility (where fixed costs of operations are expanded, operations require more specialization and growth accelerates) SHOULD INCLUDE FLEXIBLE GROWTH CAPITAL TO EXPAND BUILT CAPACITY IN DEVELOPMENT!!! This will make the growth in program sustainable. It's important to remember that in our sector, growth and self-sufficiency (via earned program revenue) proceed on opposite paths.

Question from Lauren Brownstein, PITCH: Fundraising and Philanthropy Consulting:
    I have many clients who hire me because they cannot afford a full-time development staff person, or they do not wish to make that investment. I believe that, in the long-term, it's best to have an in-house development professional and to hire consultants for special projects, training, etc. - that in-house person is best suited to develop the sustainable, annual, unrestricted gifts that are the lifeblood of non-profits. How can I present this to my non-profit clients in a compelling, convincing way (is there a way to make the "math" on this more compelling)?

Clara Miller:
    You're right (or at least we violently agree!!) and I think the best way is to help organizations go from strategic plan to business projections of both income and expense driven, usually, by numbers of FTEs. I often try to turn their attention to a major scaled institution that they know well...I sometimes pick on Harvard, but they're in good company...and remind them that even when they're charging $40,000 per student in tuition, it costs them $240,000 to provide that education. That's why they have 400 FTEs in their development department!!! NPOs don't grow themselves into profitability by expanding program--they do so by growing the power and reliability of their sources of "subsidy," usually fundraising.

Question from Cindy Brown, MLP:
    What is the best way to motivate our board to want to get involved with the finances - It seems most enjoy the recognition but dont want to get their hands dirty - so to speak.

Clara Miller:
    It's actually one of the three things that are in their job description: 1) hire and fire the executive leader of the organization, if any; 2) make sure the mission is adequately resourced and 3) make sure the resources are deployed in concert with the mission. Arguably they cant do 2 or 3 very well without understanding and being comforatble with the finances. Executive leadership's job is to help them understand same and feel comfortable that they are well-managed.

It might be handy to remind them that they are personally financially liable for certain aspects of the financial operations (i.e., payment of payroll taxes).

Question from Sarah, medium non profit:
    How do non profits typically measure out salaries in terms of programs, fundraising, managment in general. Currently i'm breaking down employee time by % they spend on each category. Is this appropriate?

Clara Miller:
    I realize that my answer may not be helpful to you but I'm one of those people who thinks that those categories provide no useful information to you in managing your organization, to the IRS which asks for them on the tax form, or to the public. There is no real standard that ties this allocation to mission effectiveness, organizational efficiency or success across sizes and missions in the sector, any more than there is in the for-profit sector. Many nonprofits make sure the imputed "overhead" persentage is no more than, say, 15 or 20 percent, simply by forcing the numbers. There is widespread imprecision both in definitions of categories and in allocation methods.

That said, allocating by head count is a time-honored methodology, would pass muster among accountants and others, and would certainly meet the appropriateness standard!

Question from Donna, Small Non-profit:
    Is there a standard for how much operating reserve a non-profit should strive to have on-hand? Also, do you have any recommendations for how to achieve a reserve in an environment that encourages funds to be spent on programs?

Clara Miller:
    Given that you might want the reserve for cash flow purposes and as a cushion against financial risk, I would look at the amount to deal with based on those dimensions. In other words, what is the depth and timing of your receivables cycle now, then what might the effect on size be (ie., sensitivity) if it were pushed out three months? Six? Second, handicap the reliability of your major funding sources, and compare them to fixed costs of operations. If a large one is highly unreliable, and you have relatively high fixed costs, the cushion would be larger. This gives you something of a blueprint for starting to mitigate financial risk via reserves, and to have good discussions with major funders about how those financial hedges actually protect the people/mission/community you serve.

We (at NFF) are trying to have that conversation with funders as well, and the problem is the "current services trap" (described by Liz Keating) where we sacrifice the long term reliability of services that will get the job done to meet the urgent demand today. The people you serve need to protected (via cash reserve) from losing your services.

Question from Val, Executive Director of a small nonprofit:
    What is your advice regarding using the new Unified Chart Accounts designed by the California Asscoaition of Nonprofits to set up a small nonprofit's chart of accounts? Our nonprofit has a running debate on setting up income categories. Any thoughts?

Clara Miller:
    I am not familiar with the UCA of the California Association of NPOs (but think they do great work). My thoughts are KEEP IT SIMPLE (or at least roll it up into comparable, relatively large natural classification categories) Make sure it will allow you to track profitability (income and expense, together) of major programs or lines of business. And try to make yourself comparable to peers (you learn alot this way). Finally, avoid arbitrary categories that lend themselves to imprecision, such as "other" or "overhead" etc. They will not enlighten.

Peter Panepento (Moderator):
    We've been online for an hour, but we have a few more questions in the queue. We'll try to get as many of them answered as possible before we close the chat. Thanks to everyone who has taken the time to join us.

Question from Julie McConnell, NH Community Loan Fund:
    Clara, you have done extensive work in this area - how do you suggest nonprofit executives work with their Boards of Directors to more fully understand the balance between nonprofit financial structure and financial accountability, while maintaining a focus on organizational mission through the process?

Clara Miller:
    The best way to do this is to be able to express financial risk in terms of program/mission risk, and financial flexibility as programmatic gain/ability to improve quality or reliability. For example, if we have only one month of cash, and the state doesn't pay on time, we might have to interrupt abuse intervention services, or overload staff, leading to risk to children in our Manchester program. Accountability, to me, is different: it's the combination of meeting legal reporting requirements and having an appropriate level of transparency to stakeholders

Question from Mary Pedersen, faith-based nonprofit:
    Thank you for taking my question. Are there any financial issues or challenges you consider unique to faith-based nonprofits?

Clara Miller:
    Finanical challenges--our experiences is that the great strength is also the great weakness. Deeply mission driven, faith-based are likely to take on more and more, at risk to program quality and reliability. Reliance on volunteers can be a blessing, but in some settings can undermine professionalism and reliability. On the other hand, a large volunteer base can also be a large source of individual contributions, access to services and a variety of other advantages. Houses of worship tend to have little financial management capacity (and so-so financial records) When they take on government programs, for example, there is often a big gap between the aspiration and the built management capacity in a highly regulated and complex environment.

Question from Michelle, American Red Cross:
    We are in the 1st stages of stucturing a Planned Giving Program. At first, we thought it would be best to target financial and estate planners. But how can we effectively train or target these professionals to advocate for our cause? Or should we target our 'older' more steady donor base?

Clara Miller:
    This is not my area, but I know that there are people who are deeply expert on this subject (and exactly the question you have posed). I would buy some of their time to help you think about these very good questions.

Question from Sabrina, graduate student:
    I'm volunteering at a nonprofit that doesn't have much general operating support. How do you make a case to funders about this kind of funding (vs. program support)?

Clara Miller:
    Tie the ask for general operating support to programs to the extent possible...what does it buy the funder? If possible, structure and price proposals so it is simply part of the ask, that is, it pays for the informal, yet valuable work you do in the community, including collaborations, informal advice and service, and the like. And try to simply ask funders to fund the important work you are already doing--and make the case for the value of that--rather than manufacturaing new/different programs or pricing too narrowly.

Peter Panepento (Moderator):
    Well, that's a wrap. Thanks again to Clara Miller for taking the time to join us today and share her expertise. And thanks to everyone who carved time out of their schedules to participate in the chat.