How to Run Out Of Cash

(Note: This post comes directly from my new book Smart Stewardship for Nonprofits: Making the Right Decision in Good Times and Bad, to be released in February 2012 by John Wiley and Sons. You can pre-order at Amazon by clicking on the link above.)

Almost all nonprofits have too little cash on hand at any given time. Sometimes this is the result of funder policies not letting the nonprofit keep what they earn (or tut-tutting when a nonprofit has 2 dimes to rub together), sometimes a result of poor long-term management on the part of the nonprofit, sometimes caused by a short term crisis, or a combination of the above. And, if you don’t have any cash cushion, as CEO, you lose a lot of sleep.

I know a CEO who has been in her position for 20 years and who has fretted about making payroll twice a month for every one of those 20 years. When I asked her a few years back about why she hasn’t built up any reserves, she looked like I had hit her: “We can’t do that. People are in need. It’s immoral for us to carry any money from one fiscal year to the next.” So, her organization is intentionally cash poor.

While I understand her sentiment and admire her empathy for the people her organization serves, this is not Smart Stewardship. The quality the space where the organization provides services is appalling, her staff turnover is high, there’s no website (thus impacting her fundraising efforts) and the next longest serving employee has only been there three years. And, any delay in payments from key funders, or reductions in donations, and the doors close.

Not every nonprofit falls into the trap of being cash poor, but if you feel your organization is chronically cash short, you cannot, let me repeat cannot grow. Growth sucks up cash like a giant vacuum cleaner. And you need cash.

Here’s the key takeaway for this issue. CASH = OXYGEN. Cash buys you time to think, is insurance against funding cutbacks, let’s you sleep at night assured you can make rent at the beginning of the month. Cash lets you manage rather than just survive.

And growth? Growth is funded by cash. Remember my mantra earlier in the book: Money enables mission, but profits enable growth. Without profits (and profits that are retained, not immediately spent), you can’t grow.

Let’s do the numbers using a not all that unusual example. A funder, who loves your services and has been a strong supporter, calls you and says,
“We have a one year grant opportunity for you. We want you to expand ServiceX for the next year and measure the impact.”

You are intrigued and excited: More mission! And, ServiceX is your core competence and serves your highest priority demographic. More high priority, high quality mission! The funder continues.
“You need to shoot me a financial projection, but we know you and trust your management. Also, send me a number of units of service based on a one year, $1million grant. We’ll go from there.”

You are nearly speechless. $1million? ONE MILLION DOLLARS? And full reimbursement? There’s no risk! Then, you think, where’s the catch?

The funder continues, “No worries about match. We want to get this project going, so we’ll reimburse your costs fully. We’ll reimburse you each month within 45 days of your billing us. Get back to me by the end of work tomorrow and we can make this month’s contracting and approval cycle. Have a nice day.”

Now there’s an understatement, you think...a nice day....this is the best. day. ever. You shoot out of your chair to go share the news that your mission growth just went off the charts.

How does all this sound to you? Awesome? Unlikely? Yes on both counts of course. But while you have visions of mission growth dancing in your head, let’s look at this amazing, high priority, no risk mission opportunity in a bit more depth.

Let’s assume you start the service at the beginning of the next month, which we’ll call June 1. Let’s also assume you can just start doing more mission from a standing start--no upfront expenses like more space, licensing, training, etc. You and I both know we always have those expenses, but for now, just keep them in the back of your mind to add in later.

So, June 1 you start doing a LOT more mission. On June 30, if you’re like most nonprofits, you bill the funder, and the 45 day reimbursement clock starts. If the funder actually gets you the reimbursement in 45 days, that means you get paid on August 15, or 75 days after you started the expanded mission.

During those 75 days, what has your organization done? LOTS of great, high priority mission. You’ve helped LOTS of people.
And spent LOTS of cash. LOTS. How much? Let’s do the math.
Take $1,000,000. Divide it by 365 to get a cash cost per day. The result is a daily cost of $2,739.73. Then, multiply the daily cost by the 75 days you have to wait for reimbursement. $2,739.73 times 75 equals $205,479.45.

That’s a lowball calculation of the amount of money that goes out before you get paid. Ouch. And that’s real cash going out the door, money that can’t be used to pay rent or insurance or other staff payroll. Remember that the $205,000 does NOT include the startup costs we pushed aside earlier. So in nearly all cases the number would be higher, perhaps much higher than $205,000.

Moral? To afford this no risk, high priority mission opportunity you need more than 20% of the grant total in hand, in cash, before you start. This money is called working capital, and it’s the money you need between the time you make a product or provide a service and get paid. The more you grow, the more working capital you need, even if it’s not in big, one time $1,000,000 increments. The longer the funder takes to pay you, the more working capital you need. The higher your startup costs are, the more working capital you need.

Where does this working capital come from? From prior years earnings. If you haven’t put funds aside, you can’t take advantage of opportunities as they arise. And, by the way, no bank is going to lend you funds to cover this grant’s working capital. Loans are paid back by profits, and this grant, while fully reimbursing your costs, does not include a profit. And, you can’t sell stock in your nonprofit--that’s only for for-profit firms. So, you need to be making a profit to grow.

Remember, money enables mission, but profit enables more mission. And here we are with a perfect example. Your nonprofit’s prior profits allow you to take the $1,000,000. If you haven’t made the profit and set it aside, all you’re doing is running out of cash.

This is why so many nonprofits who have a budget goal of breaking even and, like my CEO friend, feel that making a profit is wrong, are always out of cash as they grow, even if that growth is minimal. They make the mistake of thinking that if there income and expense report shows a break even that they should have enough cash to pay the bills. Fatal error. Accrual and cash are different, and a break even P&L does not mean that your cash in and cash out match for the fiscal year.

Again, my point here is that growth, any growth, sucks up cash. Your organization already has working capital invested in your operations now. Even if you grow organically, you’ll need more. Conversely, if programs end, it frees up working capital for you.

Here we go again...to what end?

The entire issue of congress/state legislatures looking and overseeing nonprofit management salaries drives me a bit nuts.

Here is just the latest example from today's New York Times.

I'm mildly torn: some nonprofit CEO salaries do seem high to me in my tax bracket, but so do pretty much all for-profit CEO salaries. I frankly don't believe any business person is worth multiple millions a year. If I were a shareholder of a corporation that pays that much to top management, I'd be rightly upset.

So, should donors be upset about "high" management salaries for hospitals, universities or national charities? Well, they can be, and they can withhold their donations. That's free enterprise. States and the feds can as well, but for congress (with it's free health care for life, I might add) to decide what's "high", or for a state legislature to limit CEO compensation (for for-profits as well, to be fair, at least in New Jersey) bothers me greatly.

Large nonprofits are, well, large, complex organizations, with thousands of employees and huge assets at risk. The people who run them should be paid according to market scale, with the understanding that the market is somewhat ameliorated by the mission satisfaction of what the organization is doing.

The tragedy of all this discussion is that these legislators are only looking at how to cut cost in a high profile way to get a little PR shelter. Most legislatures have been politically cowardly about balancing their budgets (i.e.raising taxes) for decades and their prior acts are now biting them on the butt. They prefer to distract us all by saying "Look at her! She's paid too much! She works for a charity! Take out your angst on her, not us!"

What about the fact that for hundreds of thousands of staff at smaller nonprofits, salaries (even at the top of the organization) have never been close to even adequate, since the same state and federal officials who now pine over .01% of nonprofit salaries have never considered paying a reasonable rate for the very, very needed services these nonprofits provide so that their employees could live reasonably?

In a society that delegates so many of its toughest problems to the nonprofit sector, shouldn't some consideration be made for the people that work there?

File or lose your (c)3

An excellent headsup in the New York Times on the risk that 400,000 nonprofits in the US have of losing their tax-exempt status if they don't file their 990 forms by May 15.

http://www.nytimes.com/2010/04/23/us/23exempt.html

The bottom line is this: If you are a smaller nonprofit and have not filed your 990, or 990N in the past three years, on May 15 your tax-exempt status will vaporize.

Check this out and file NOW.

Coming Out of The Recession Stronger

The March edition of the Mission-Based Management Newsletter is online....this month's topic is "Coming Out of The Recession Stronger". Check it out!

Should nonprofits be taxed?

We now stand in unprecedented territory. All 50 state governments are in a deficit situation with 2011 and 2012 looking worse (since the federal stimulus funds that many states have used to plug budget holes will run out).

This, of course trickles down to counties and municipalities, nearly all of which have their own budget woes.

Which leads us to our question of the day: Should real property owned by nonprofits be taxed at the same rates as that owned by for-profits? Before you scream bloody murder, think about it for a moment. Take a city like Boston, with many, many hospitals, universities and church facilities (and hundreds of other nonprofits) living side by side with other owners who pay property tax. Some estimates of the percentage of Boston land owned by nonprofits are as high as 20%...meaning that the cost of police, fire, roads, trash, etc for all city properties have to be picked up by only 4 out of 5 owners. Fair?

On the other hand, there is no doubt that nonprofits contribute to the public good in many ways. Does that compensate enough?

And, government is often a key (sometimes mojority) funder of nonprofits--and it certainly doesn't overpay. Does that underpayment for services compensate for the property tax lost?

Obviously, I come down on the side of keeping nonprofit property tax-exempt. But the voices FOR taxation are growing louder. In Camden, New Jersey, a move to tax nonprofits on a per-employee basis just died, but the fact that it was even introduced shows the desperation of some governments to fill their budget gaps.

Here's a few readings on the subject.

http://www.i2i.org/main/article.php?article_id=463
http://www.nonprofitmaine.org/all_about_nonprofits.asp#why_exempt


Keep yourself informed about this growing (and concerning) trend.

What to do now, Part III

Last time, in What To Do Now Part II, we looked at strategic questions to financial (or other) crisis, and in this post, we'll look at some strategic responses. In Part IV, we'll deal with tactics.

To refresh our discussion--you have to start with strategy in any crisis. Stop, breath, think. Then, and only then, do. And in doing, start with the big issues, the big questions. I know you want to get down in the weeds and fix stuff....but strategy first. Here are some actions to begin with:

1. Review your mission and organizational values. What do these core guiding documents have to tell you about your path from here? Going back to mission, reminding everyone of what the point is, that's the place to start.

2. Review your strategic plan. What does it say about priorities, SWOT, etc.? Use the tools you've already developed. It will help you avoid knee-jerk responses.

3. Review your marketing plan. Who are your priority service recipients, your most important funders, your key donors? Again, this tool should tell you.

4. Talk to peer organizations. Are there group responses to your cuts that are appropriate or useful at this point? And, what are other groups doing to cope?

5. Talk to your state trade association or association of nonprofits if you have one. Again, what are other organizations trying to weather this storm.

6. Big question once those are answered: Given what you know, and what you predict, is there a need for long-term, strategic restructuring? This might mean casting off services (hopefully to another organization), or partnerships, or sub-contracting certain functions (payroll, HR) out, or even partial or full merger. Now is the time to start thinking about this, or to revisit it if you've considered it before. A crisis motivates boards and staff to do things that have been put on hold in the past.

Remember, mission, mission, mission. The point of any actions to take has to be to do as much high quality mission for as many people for as long as you can.

In Part IV, we'll talk tactics, and then in Part V look at a leadership checklist.

Hang in there.

What to do now, Part II

This is Part II of a series on what to do now. We'll get to that in a minute, but I have to mention the irony of my current big project, the one that kept me from posting for two weeks.

I'm working on a third edition of Mission-Based Management, which was my first book in 1993 and had a second edition in late 2000. My preface (and lots of the contents) talk about being a nonprofit in a booming economy with no federal deficits in sight, etc., etc., hahahaha, sob.

Of course there are a lot more changes than just that, particularly in technology, marketing and best practices (think SOX). But the big change is economic.

As an aside, I'm nearly done with the full rewrite, then I have to read it all again word for word, edit one last time and then I ship it to Wiley, and you get to see it in nine months to a year, after THEY edit it, I see it again, they set it, I see it again, and then they actually print the thing. As you can imagine, after all this back and forth, I'm so sick of my own words I never actually look at any of my books after they come out for at least a year.

But, most importantly, the writing and review has shocked/ saddened/appalled/terrified me as I see how far down we've come since 2000.

So let's get to it, and talk more about what you can do in the economic downturn. In Part I, I showed you signs of trouble that could be lurking in your nonprofit. In this post, we'll talk about initial strategic actions that should be taken, and then in Part III we'll look at some more strategic responses before we get to tactics.

Strategy first, though. Yeah, yeah, yeah, you say. Strategy, Schmategy. I want to DO something, not just ponder.

I understand. As managers, and particularly as CEO's we are action oriented. We want to fix what's broken, get our hands on the problem and wring its neck, not sit back and think. But just as our management level jobs usually don't let us provide direct services, (and some of us miss doing just that), our responsibility in a financial crisis is to think first, then act.

Hence the strategic thought process outlined here.

STARTING QUESTIONS:
1. How bad is our projected (or immediate) shortfall And, how bad it is really? The italics are there to underscore a key problem--people tend to believe what they hear and rumor abounds when things get tough. You hear from a peer CEO that the state is cutting everyone 25% and before you check it out with the state (and find it's "only "15%", you go to your board and staff in a panic.

Don't. Think like a journalist--it's not true until you have confirmation from two sources.

2. Is this shortfall short term or long term, systemic or incidental. Many arts charities in New York got a lot of their funds from Lehman Brothers, both the firm and the partners. The firm is gone and most partners are unemployed. That's a systemic long term hit. Was your charity golf tournament sponsored by the now defunct Circuit City? That's a long term problem. A large donor moved to warmer climes and you can't find her? More a short term, solveable problem.

Having said this, do not, repeat do not fall into the trap of believing that our current economic mess is short term. It's not. This recession (let's hope we don't get to depression) will last years, not months. SO you've got to think long term for most things.

3. Is your organization's viability at risk? Most organizations can cut back (if painfully) 10%, 15%, perhaps even 20%, and still provide some services. But at some point, and only you know where that is, it becomes impossible to for you to provide even minimum services and pay the bills. You lose too many staff, or cut too many services and you go into a domino decline. So, ask this question now. If the answer is truly yes, then the motivation to act now is even higher for everyone. Paul Light has said that at least 100,000 nonprofits in the US could fail this year and next--don't let yours be road-kill.

4. Are services at risk? This is a subset of #3. Will a 10% cutback cause you to eliminate any services completely? If so, you need to look at your strategic and marketing plans and see what they say about priority markets and established high priority mission.

5. Are there legal and contractual responsibilities in play? In some cases, eliminating service X means that you are no longer meeting the requirements of the contract for service Y or Z. Some contracts and grants link capabilities, accreditions, etc. Some disabilities groups have CARF accreditation, an expensive and time consuming process (and one that I fully support, by the way).But in a downturn, it's easy for someone to say--"Let's cut CARF!" and save some bucks. Except that having and maintaining CARF is a requirement of many government funds. Check the contracts you currently have now. Refresh your memory about what's in those contracts, leases, and other obligations.

Think these things through carefully and with your key staff and board. In Part III, we'll look at some strategic responses, then we'll move in Part IV to tactics.

What to do now? Part 1

On my last post, I promised I would start a series on What To Do Now?, based on the chapter in my book Nonprofit Stewardship entitled "Stewardship in Good Times and Bad".

Times are tough, or worse, for many nonprofits. I just finished the current issue of the Chronicle of Philanthropy and was depressed all over again. Then I read through the economic news on Google News and felt worse. As I've said before here, we're in for a loooonnnngggg haul. My longstanding view is that, at best, things will only get worse through 2009 and that we may see a leveling in 2010, with a beginning of a recovery late that year or early 2011. At best, could be worse.

So, if you aren't already cutting, strategizing and re-thinking, you need to be. The economy is NOT a short term problem.

Today, we'll start with organizational signs of trouble for nonprofits. Next post, we'll look at strategic things you can do.

Signs of trouble are things that I see in my consulting role that are indicators of less than optimal performance or warning signs of impending crises for any nonprofit. We start here because you want to make sure that your basics are in shape for the downturn for your nonprofit.

Look for these issues and fix any you can now:

No (or insufficient) financial reporting. Sounds dumb--of COURSE you're going to report, right. You'd be amazed. Anyway, keep the financial reports coming, and definitely develop a six month cash flow projection and update it every week. Every WEEK, not every month. More about this when we get to tactics.

Excessive staff turnover. This is less of a problem in a steep recession/depression, but look at organizations like FedEx. Everyone took a pay cut rather than lay people off. Hmmm.

Excessive board turnover. You need to keep your board on board now. So, keep them informed, use them as resources. Don't scare them off by lack of information or involvement.

No new programs or methods of provision. Keep trying new stuff. Really. I know your dollars are tight, but keep innovating in program provision, fund raising etc. You may not be able to do BIG innovations, but you can still do lots of small ones. These keep staff energized and show the community you are moving forward.

No regular and repeated Asking. You gotta ask. Keep your staff, board, funders and the people you served involved. Ask them what they want, ask them for ideas on how to weather the storm (notice I did NOT say "cut back"), ask what's critical to them about your organization. Ask, ask, ask. It's cheap and essential.

No Staff continuing education. Ooooh, easy to cut right? Non-essential, right? Wrong. When you cut staff training you cut the quality of service, reduce staff morale, hurt services. I know you can't send everyone off to a conference, and perhaps not anyone can go out of the area to a meeting this year or next. But there are still book clubs, local training, online options, etc. Get creative, and DON'T stop pouring new ideas into your people's brains.

Out-of-date internal policies. I know, I know you're in a crisis. But life (and good management) goes on. Make sure you regularly update your HR, financial and QA policies. These are essential and help prevent distractions and problems down the line. You're keeping your insurance, yes? Keep your policies up-to-date, too.

No Strategic Plan. Again, I know you're in a crisis. But the most important time to have a strategy is now, not when thing. More on this in the next post when we talk about strategies.

Little or no sharing of information internally. Regular readers know I'm a zealot about this. Use all your staff's minds, not just some of them. Same with your board and volunteers. To do that you HAVE to share information, like budgets, plans, contingencies. You need people's ideas more than ever. You need them to have a sense of contribution to the problem. No matter how smart you are, you don't have all the ideas or all the solutions. As John Chambers, CEO of CISCO says: "No one of us is as smart as all of us". I could not agree more. We'll come back to this in our tactics post.

Inadequate marketing materials/website. Focus focus focus in your materials and website. Too big an issue to cover here, but suffice it to say that this is a great time to look over your marketing materials and website and to make sure they focus on your current priorities, and that they reflect the current economic times.

Poor use of technology. See the last two issues above? They beg for better use of technology, as does more asking and more sharing of financial situations. USE your tech to help you through this. Whether with staff wikis to hone ideas, or special online editions of your newsletter to keep people informed, push your tech. Ask your young staff how to best do this--they know!

And, don't panic. Ever.

Nervous? Fine.

Scared? Me, too.

Panic? Not a useful leadership response.

You need to go home and scream into a pillow? Good. Do that. At home. Not at your nonprofit.

As my Dad (an engineer and attorney) used to say, "Don't angst, work the problem." I agree. The people we serve need us to FOCUS on still getting the most high quality mission out the door as possible.


Think about these, and next post we'll look at some strategic responses you can start with.

Another blow....

Another day, another blow to the nonprofit community from the financial world. First, Lehman Brothers, et. al get their greed comeuppance and the result is that many New York nonprofits have their donations cut in half or worse. Then the banks: same thing for the nonprofit community---less support immediately and over the next two or three years.

The stock market tanks: Foundations lose 40-50% of their endowments and can't make as many grants. Some grants are canceled in mid-stride. Cynical side note: anyone suggesting that in such dire times the foundations should explore merging? Or is this only a good idea for poor nonprofits? Hmmm.

Friday, it was Madoff. While we only know the very, very, very slimmest part of the story, and more is coming out by the hour, many nonprofits are suffering, some to the point of closing.

In hard times the poorest suffer first, most, and longest. It seems that is playing out with nonprofits now. And it's our fault. We (and by we, I mean all of us: funders, donors, media, government) have kept nonprofits poor, fussed at nonprofits when they have cash reserves, hassled them when they had "too much" administrative cost. Now, when the community needs the nonprofit world the most (1 in 10 americans is now on food stamps), they have insufficient resources to ride out the cutbacks, and will fail in large numbers.

Paul Light noted a month or so ago that 100,000 US nonprofits could fail in the current recession/depression. What would that number be today?

And, I wonder what the news will bring tomorrow?

Difficult times now and in the future.

No eureka about the title of this post, I assume. Everyone (at least everyone who is paying attention) knows that we are screwed economically, and for a long time to come.

The past few weeks, I've fielded a dozen questions from audiences about how long the current recession/depression will last: "How far down the tunnel is the light?" "How long until fundraising turns around?" etc.

Here's my answer, with the understanding that I'm not an economist, just a mission-based business guy who tries to pay attention to the signals out there.

1. Don't believe anyone who is telling you the market is "bottoming". These people are NOT out in the country with the rest of us. They are in New York or the DC Beltway, and are playing "market model" games rather than looking around. I heard one say two days ago that: "Historically, recessions last 13 months, and we've been in this one 13 months, so things will turn around soon." What drivel. Also, many of the talking heads have a "horse in the race" ....for personal or political reasons, they need to be optimistic.

2. We're a long, long way from the bottom of the economy. Some small factoids from recent news: 40% of mortgages in the US are "under water" that is, the house is worth less than the debt on it. Has never happened--since the 1930's. 10% (yes, that's one in ten) Americans are either on or applying for food stamps. Never happened before ---there were no food stamps in the 30's.

3. Ask yourself--even if you haven't lost any income in your family---have you put off buying ANYTHING you would have a year ago? A toaster, a lawnmower, a night out on the town, a weekend getaway. Yeah, me too. Everyone is doing that, and that level of fear and inertia takes a LONG time to turn around. At the business level, no one is hiring if they can put it off (except health care and public schools), expansions are on hold....same symptom, just bigger bucks.

4. All the money the feds have pumped into the system hasn't loosened credit, or encouraged hiring. There are tons of profitable businesses who can't get loans, and thus are stalled, not hiring, not making donations to their regular charities.

I went through my list of observations on this a couple of days ago in Florida, and someone asked, "aren't you optimistic about anything in the economy? What about the price of gas?" My answer was no, $1.30 gas, while nice in the short term (and, understand, I'm REALLY happy about gas prices for people who are on the economic edge) is really an indicator that the recession is global--and will thus take even LONGER to turn around.

So, no. I don't see any light right now at all. Even Obama's infrastructure plans (which I fully support) will take 18 months to really have an effect. A good friend told me last night that he was at a board meeting of his firm in NYC this past week and that the economists presenting to them all agreed that the earliest the economy "might show some life" is the second half.....of 2010. And then the presenters added "but really, that's a guess. No one can really see a bottom to this yet."

OK, so it's bad and getting worse. What should you do at your nonprofit? There's a lot of things you can do now, and you need to start very, very soon.

First, get your board and staff together and review your mission....and its meaning. What does your mission tell you about your priorities, your focus, who you need to help the most. It all starts with mission, so start there.

Second, look at your income array. What percentage comes from large donors, or small, from foundations or government? Talk now (yes, get on the phone) with funders to keep on their radar and get a sense of what they know. Don't be offended if they don't tell you much, and remember that they are just as nervous as you are. Most people (most foundations, most governments) don't have a clue right now of how all this will shake out. But by calling, and being sympathetic to their plight, you stay on their minds in a good way.

After these calls give do some math. Look at your income array and play percentage games. Your result might look like this. The percentages are what you expect might be cut

• State funds:
• Program a: 20% within 60 days
• Program b: 50% within 90 days
• Program c: No change---entitlement funds

• Foundation 1: No renewal for the third year
• Foundation 2: 0% cut over the next 6 months, then who knows?
• Donations: Already down 10%, expect another 10% over the next 6 months
• Membership: Down 20% for the past three months, seems stable now.

This is just a sample to get you the idea. What you REALLy need to do is a best case, middle case, worst case scenario. And, here's the key BE CONSERVATIVE.
Then you can run both a budget and a cash flow for each scenario, and see where you are.

Speaking of cash flows, as people who come to my trainings know, CASH=OXYGEN. You need to run bi-weekly cash flow projections out six months, and update them every week or so. You HAVE to be on top of your cash position and projection in tough times.

NOW you have the information you need to start talking about cutting back, if your finances show that need, and for most of us, they do.

Remember, some cutting is symbolic, some not so much. No matter what your budget shows, cutting some small things (or, not spending what is perceived as unnessessary) is key. Thus, holiday parties right now should be tabled, or severely reduced. Some subscriptions or memberships might be cut, raises might be put on hold, etc. If you haven't already, start now with some reductions. It will help later on, both financially and politically.

Before I show you some resources, one more note: nonprofits spend about 85% of their funds on their staff. Thus significant cutbacks are always going to be about people. Always. This is very, very hard stuff. If your nonprofit is like 98% of the 501(c)(3)'s in the US and Canada, you are NOT overstaffed, and the people you employ are nearly always great people, people with families to feed, homes to pay for etc. This sucks. It will tear your heart out. Been there, done that, HATED it.

But remember this: Your job as a manager is about the organization's mission. You have to make tough choices to preserve as much well-provided mission as possible. So, start soon, and know I'm thinking about you.

Resources: My newsletter in September (doesn't that seem like a quaint, idyllic time already?) was on Budgeting in a Recession.

My Decision Tree to help you make good, mission-based decisions, is free here.

In Nonprofit Stewardship, there is an entire chapter on leading in Tough Financial Times.

Here's an excellent piece from About.com. Thanks to Joanne Fritz.

Finally, remember this is a marathon, not a sprint. Start now, keep at this, and keep focused on the people your mission serves as your ultimate inspiration.

And, keep checking back here for more ideas as we move forward. If you have great resources you want to post, let me know and I'll share them.

The cost of higher educution and nonprofits

One of the concerns I have about nonprofits recruiting and retaining the best and brightest is the cost of higher education which, as a percentage of average family income, is an enormous barrier. Not only does it stress out current nonprofit staff who have kids and are trying to figure out how to pay for college, but for someone coming out of undergraduate or grad school with a $20k, $30k, even $90k debt, the ability to work in a low-paying nonprofit is severely limited.

The recent federal bill to "fix" this problem is a start, but a poor one. Basically, a 22-year-old has to go to work for a nonprofit, work ten years, and then she sees some minimal help. Ten years? Ten YEARS? Ten years for a 22 year old is half their life so far, at least the part they can recall. Not much of an incentive, particularly for the average 22 or 23 year old who is still figuring out their place in the world, where they want to live and work, and what their real passion is.

We've always used financial incentives to push people toward desired outcomes. Whether its the ability to deduct interest costs on your mortgage to encourage home ownership, had rapid depreciation allowances to encourage businesses to build, or drill for oil. Let's put together a real program that helps both students and parents.

More and more families are taking out loans, rates for loans are rising: student loans now cost 6.8% and parent loans 8.2%. Rates went up last year to help cut the deficit. And, private lenders have stepped back from lending given the mortgage crisis....

Here's my suggestion:

A student with a federal debt (in his/her own name or that of his or her family) goes to work for a nonprofit. During the year, the debtor pays only interest on the loan. After one year, if he or she does the job, 5% is cut off the principle. This continues moving forward for as long as the individual works for a (any) nonprofit. The second year, the forgiveness is 10%, where it stays for each of years 3-5 and then it moves up again to 15% per year until the loan is retired with one last 10% forgiveness in year 9.

Thus, the student receives immediate help (interest only) and a reduction in one year, not 10.
Will congress change the law? Unlikely.

So, what can communities do? Set up the same program locally with some variation. I'd love to see community foundations put money aside for debt reduction for employees at nonprofits, corporations and service organizations like Rotary and Lions set up scholarships for graduated students who work for nonprofits. Local governments could offer property tax relief to nonprofit workers buy homes in the community they work for, and state governments could target the areas where the most workers are needed and offer incentives as well.

We want well educated employees. We know we can't pay our employees salaries that are competitive with the for-profit sector, and we know that our mission-satisfaction makes up for that to a point. But mission-satisfaction can't help here: we have to come up with a better way if we want the best people.

Cash = Oxygen

The title of this post is very, very familiar to pretty much anyone who has heard me speak on my book titles, Mission-Based Management, Financial Empowerment or Nonprofit Stewardship. Cash is really, really important.

So much so that the July issue of the Mission-Based Management Newsletter is on the subject of Better Cash Planning. Here's an excerpt from the Management Tip....

"Many nonprofit board and staff describe themselves as "non-financial" managers. In other words, they come to the issue of managing their organization's finances second, after coming first to the mission. For staff, they may be trained as social workers, teachers, nurses, or environmental engineers. They worked for their organization and a mission they loved, and then got promoted and were forced to deal with budgets. First they learned about income and expense sheets, the core of a budget. Then, as they moved up the food chain, they had to deal with balance sheets, and the mysteries of accrual accounting. They learned how to read their auditor's reports and understand financial ratios. All well and good.

But in a surprising number of cases, no one ever emphasized the importance of cash. And cash, (people who have heard me speak know what's coming:) cash = oxygen. Without it your organization dies, and very, very quickly. While income and expense statements are important, and balance sheets offer crucial information, without cash, all else is for naught."

Check it out.

Save some unemployment tax money!

This came across my screen recently and looks like something you should check out if your nonprofit has employees, and you want to save some money. Does that sound like you?

The organization is called the 501(c) Agencies Trust, and it works to reduce the expense of unemployment insurance for nonprofits. A nonprofit itself, the Trust is governed by a board of trustees representing large nonprofits from throughout the nation.

From the website:

"Unemployment Program for Nonprofit Organizations

Nonprofits have saved millions of dollars over the years by participating in the 501(c) Agencies Trust. Last year alone, members saved nearly $30 million, money that was available for valuable service programs instead of paying unemployment costs.

A 1972 federal law gives nonprofit employers the option of reimbursing the state for actual unemployment claims rather then participating in the State Unemployment Insurance (SUI) program.

The 501(c) Agencies Trust has been helping nonprofits exercise this option with a secure, cost-effective alternative since 1982."

I'd give this a look!

Give your Treasurer a break

It happened again. An email from a nonprofit board treasurer asking how she could graciously get out of her job...."I've been on three nonprofit boards in the past 15 years, and because I'm a CPA everyone ASSUMES that I want to be treasurer. I understand their assumption, but I'm sick of it. Been there; done that...three times! Is this a problem on every nonprofit board?"

Sadly yes, and for many its worse than that. Sometime you're like the Pope-you have the job for life. Why? Because it takes a few years to really figure out what the organization's finances are all about, and the board counts on the treasurer to be the trusted interpreter. So, once you invest the time, they want you to stay.

They could give you help. And this is what I told my email correspondent...click the link to see the full answer. As you'll see, it doesn't help her much, but it can help your organization. I also told her to simply give a year's notice....and find a deputy treasurer ASAP.

Bank on that....

I was thinking about banking today, and how far we've come in nonprofits in relation to our banks. I well remember when I was board president of a large ($12,000,000 annually at the time) human services nonprofit here in Springfield 20 years ago, and we went to the our bank for a $75,000 line of credit (which is almost nothing in terms of cash flow) and the three old line banks in town shared the "risk" for that loan because we were, well, nonprofit....I discovered that the banks did all of their nonprofit loaning in a pool to reduce risk....incredible to think of today.

Progress aside, there are things to remember when selecting a bank, or even your every five year review of the best bank for your organization. Here's my list:

1. You are the customer. If you are borrowing, the bank is selling you money. Banks want your deposits--that's the money they use to make loans with. So never walk into a bank and say "We're a poor wonderful charity, can we please open account in your nice bank?" Instead, say, we're a $750,000 a year (or whatever) small nonprofit business and we're looking for a bank that's a good fit for our deposit, transaction, and loan needs."

2. Never borrow unless you are making money. This is because debt is paid back from profits, not losses, nor from "breaking even" on your income and expense statement. Don't believe me? Ask you accountant. If you have a financial need for a program that is or is going to make money, debt is good. If not, stay away....the one exception to this is a line of credit for short term cash flow issues.

3. Ask lots of questions about services and fees. Often there are fees that are not hidden, just never discussed. Check fees, online transaction fees, etc. TIP: NEVER pay for online transaction fees, bill paying, inter-account transfers....there is far too much competition in this area.

What will the bank want to know? A lot. They'll ask about your audit, your area of service, your governance, if you have conflict of interest statements, how you budget, etc. You want to impress them with your management skills, and not wear your cause on your sleeve.

Your relationship with your banker is crucial. Choose wisely, review regularly and meet with your banker twice a year. It's worth the time.

Below the radar....

I was reminded yet again this week in Denver about the difficulty nonprofits have in hiring and retaining good employees in today's economy. Two key contributors:

1. Health care costs. While rates/contracts/grants for nonprofits go up at or below the rate of inflation, health care premiums do not--they go up way, way faster. And, the result is that nonprofits are passing the increased health insurance costs on to employees, who already are underpaid.

2. Educational debt. Today's college and grad school students bear an unprecedented amount of educational debt. I have students at Kellogg who tell me that they want to work for a nonprofit (and often did before grad school) but how do they pay off a $60,000 educational loan on a $40,000 a year salary?

Idea: Federal legislation that forgives one year of debt for each year worked in a 501(c)(3) with an annual budget under $20,000,000.

If we can't hire and retain good staff....we'll give crappy service. Not a good thing.

The IRS is comin'

Excellent article in the October 12 issue of the Chronicle of Philanthropy on the IRS's increasing efforts to audit and watch nonprofit activity. They are particularly concerned with excessive exec pay and inappropriate loans to ED's and board members. The Director of the tax-exempt office, Lois Lerner has added nearly 12% more staff in the past year, mostly to the audit division. And, it appears that size does not matter: the IRS is going to audit large and small organizations.

The point? Make sure you are clean, clean, clean...and ready to cooperate.

An organization on whose board I served until September got an audit inquiry letter from the IRS last winter. I was audit committee chair at the time, so was closely in the loop. After one conversation, and shipping a few documents, the IRS said no problem, have a nice day. Why? Because we were completely clean, transparent, and totally cooperative. The "anomaly" they saw was easily explained, but at the same time there was nothing else to make them concerned.

Don't think that, because you are a small organization, or because your organization is new, or because you do good works (who doesn't?) that you can ignore the IRS rules and regs. You can't, and you put your mission in peril if you do. Remember, we have a special tax status because we are special organizations. We have to act like it and merit the community's trust in us.

I recently listened to an exec rant about how the IRS should spend its time on auditing big business, not charities, and how she was going to "stick it to them" if they darkened her door. She talked about calling her Congresswoman, and writing letters to the editor. I suggested that she might just put all that energy into making sure her audit committee had its records in order.
She bristled, and I told her she sounded like the driver on the highway who, when pulled over by the trooper for speeding, didn't argue that they were going too fast, but that others were going even faster. The law is the law, and the IRS's job is to enforce it.

And our job is to meet both the letter and the intent of the law. If we start feeling our good works give us a hall pass...let me change my metaphor....a get out of jail free card, we're both wrong and wrong-headed.

The charitable sector, and every one of us in it, needs to be above reproach, not looking for an angle. And if we screw up and the IRS notices, it's our fault, not theirs.