August 29, 2012

Planning for Growth on Sound Financial Footing

In the current economic climate, many nonprofits are facing a dilemma: increasing demand for their services at a time when financial support for growth is scarce. For those groups that decide to expand to meet the greater need, careful financial planning is essential.

But since normal expenses often increase faster than revenue during times of growth, charities must also have a plan for plugging the budget gaps and a good sense of how long it will take the revenue and expenses to balance out again.

One organization that decided to undertake growth is Legal Outreach, a New York City nonprofit that works to prepare students for college.

NFF worked with Legal Outreach to project its direct and indirect costs over several years, and Legal Outreach estimated how much of the growth it could cover each year through a combination of fundraising and drawing down its reserves.

Once the plan was in place, the organization knew the full range of costs associated with delivering more results, how long it would likely take to raise enough extra money, which organizational resources would be depleted, and what contingency plans could be built into the process.

We sat down with Legal Outreach’s executive director, James O’Neal, to discuss how the organization approached the process of planning for growth and the financial challenges that came with it. The following has been condensed from the original conversation.

NFF: Many nonprofits are struggling in this economy but also seeing an increase in need. What did you consider in deciding that now was the right time for Legal Outreach to grow?

Mr. O’Neal: Every year about 100 students apply for our four-year College Bound program, but because of financial concerns, we’ve only been able to take half of those. Not accepting applicants is one of the hardest decisions we have to make every year because these are always young people who have proven that they’re willing to make the sacrifices necessary to achieve their goals So, the agony of having to turn students away every year is something that led us to look seriously at growing.

An external factor was a push from our funders, who have seen that we’ve been very successful at helping students not only complete the College Bound program but graduate from high school and matriculate at some very competitive colleges. So those funders are looking at those results and asking us whether we can take on more students.

NFF: What kinds of financial concerns did Legal Outreach take into account in the planning process?

Mr. O’Neal: One thing we were not willing to do was to sacrifice the quality of what we were doing. We had to consider expanded staff to support additional students and the implication for how many additional students we could take on per year.

When you’re talking about growing programs, you also have to look at what growth means in terms of back-office functions like accounting and bookkeeping. What does it mean in terms of your fundraising capacity? What does it mean in terms of how often our facility is going to be open? We needed to get a sense of what our numbers would look like from year to year and then formulate a plan that we could first present to our board and staff and then to funders so that they know what they’re buying into.

NFF: What would you say to other organizations preparing to scale up?

Mr. O’Neal: Many of us in the nonprofit sector had this idea, particularly before the 2008 financial crisis, that you just go for it. We have been idealists and have been of the mind-set that if you just do more programming, particularly when the needs are great, the resources will follow.  What this process has shown me and what the financial crisis has taught me is that you really have to be systematic and methodical in how you go about planning for growth.

Numbers are always eye-opening. You’re not just saying, “Here’s what I think it’s going to take.” You’re actually seeing a model that tells you what you will actually need to get to where you want to go.

Emily Triggs is a program coordinator at Nonprofit Finance Fund and is a member of the consulting and lending teams in New York City.  She also manages NFF’s Pay For Success Learning Hub. Phil Rosenbloom is a senior associate at Nonprofit Finance Fund and is a member of the consulting team in New York City.  He also writes for NFF’s Social Currency blog.