Posts Tagged ‘nonprofit financial management’

Podcast: Are you ready to consider impact investing?

impactinvestorcoverAs Millennials move into new leadership roles, they are demanding the opportunity to align every facet of their lives with making a positive difference in the world. A new capitalism, what Ben Thornley and his coauthors call Collaborative Capitalism, is focused on more than just financial returns to make an impact on the world’s issues.

One tool of Collaborative Capitalism is called impact investing. This new form of investing focuses on delivering positive social and environmental outcomes alongside competitive financial returns.

In the new book, Impact Investing: Lessons in Leadership and Strategy for Collaborative Capitalism, the authors examined 12 outstanding impact investment funds that met or exceeded expectations in a two-year study.

They uncover the practices that make these funds successful and outline the strategies that all investors, from corporate executives to change agents to philanthropists, can apply to their own organizations to achieve high performance in both social and financial outcomes.

We had a chance to discuss the exciting implications for nonprofits in a recent conversation with coauthor, Ben Thornley. Feel free to click on any of his answers to the topics we present below in the podcast excerpts:

1) Ben Thornley–Premise and NP benefits

2) Ben Thornley–Indicators for nonprofits

3) Ben Thornley–New trends

4) Ben Thornley–Nonprofits first steps

Increasingly, financial institutions and corporations around the world are using Collaborative Capitalism as a tool to generate clear, positive social outcomes in addition to profits. This book will help nonprofits learn how capital can be used to drive social and environmental change as well as how to attract potential investors.

Financial tools are increasingly being used to support community vehicles, including nonprofits, cooperatives and social enterprises. The Impact Investor gives a comprehensive overview of the approaches successful impact investors have used to increase their probability of success.

See also:

The NON Nonprofit: For-Profit Thinking for Nonprofit Success

Cash Flow Strategies: Innovation in Nonprofit Financial Management

The Nonprofit Business Plan: The Leader’s Guide to Creating a Successful Business Mode

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Nonprofit planning: Mindset over matter

Last week I enjoyed a keynote address delivered by The Sustainability Mindset coauthor Steve Zimmerman in Baton Rouge, Louisiana. With smarts and wit, Steve enlightened a room of nonprofit executives about the advantages of looking at financial and programmatic sustainability in the same conversation. According to Steve, most nonprofits look at these critical elements in isolation of one another, which deprives them of accurate sustainability evaluation and productive planning.

What is the mindset?

You might be asking what mindset means. The Sustainability Mindset is about financial sustainability: meeting the needs of the present without compromising the future. It’s also about programmatic sustainability: the ability to develop, grow and retire programs in sync with your constituencies. Because this is easier described than done, Steve Zimmerman and his coauthor Jeanne Bell provide experienced-based guidance and a specific framework to follow using their supremely helpful visuals and templates.

Introduction to the matrix map

The primary visual that facilitates the authors’ process is the matrix map. The matrix map allows organizations to view both their impact and profitability at the same time. Often, during a strategic planning meeting, organizations will look at the success of their programs in one conversation and then their budget in another. The map gives them a combined look so they can make better decisions. For example, if one program shows high impact but low income, the organization can turn to other sources of income that can cover the expenses.

How it works

This map can provoke strategic discussions on how to strengthen the model. For example, the organization can look at the upper left quadrant (see below) to decide if the Youth Services and Adult Education & Family Literacy are worth the expense for a high mission impact. If they are covered by other
bubbles and if they provide a necessary service that no one else provides in the community, they may be worth the expense.

Organizations can create these maps during strategic planning, annual budgeting and operational planning meetings, loss of funding, new opportunities, or changes in external environments.

Depending on the purpose, the map can either be a quick look or a more detailed vision of the organization’s status. Again, depending on the purpose, various people should be involved. For example, funders and constituents could be surveyed for a closer look at mission impact in a more detailed version. Otherwise, the senior leadership, staff and board can be involved in the input and can learn more about the organization through this process.

Ultimately, the map provides what is for many leaders the first time they’ve seen their nonprofit programs mapped according to their financial and programmatic viability in one single action.

What are the stages?

In the book, the authors cover these stages of the matrix map process: 1) introductory meeting, 2) articulating intended impact, 3) defining programs, 4) assessing mission impact, 5) determining profitability, 6) plotting your map, 7) analyzing your map, and making strategic decisions.

When looking at these stages, my editor and I were compelled to ask Steve and Jeanne about where most leaders experience challenges when applying the matrix map process and what is the most critical step within the process:

CausePlanet: At what point do nonprofits experience challenges when trying to apply the matrix map to their organizations and how do they overcome them?

Zimmerman: Senior management teams are often not used to having open, candid discussions about the contribution a program makes to the organization’s intended impact relative to other programs or about how the program is differentiated from other offerings in the community. As a result, assessing mission impact can be a challenge in the matrix map process. These conversations can be frightening, as participants often fear hurting a co-worker’s feelings or being vulnerable in front of a group. However, the leadership’s efforts in creating a safe environment where candid feedback and discussion is encouraged, appreciated and respected will ensure the success of the matrix map process. Everyone in the room is committed to the organization’s mission and with the appropriate lens of continuous improvement, the organization will have an opportunity to better understand the perception and reality of its programs’ impacts.

CausePlanet: What is the most critical step in the Sustainability Mindset process?

Zimmerman: Moving toward greater sustainability requires making hard decisions. It isn’t that the leadership doesn’t necessarily want to make decisions, but they’re fraught with implications. Constituents who depend on services may find them suddenly not available or the staff may find shifts in their jobs. These are difficult decisions. The leadership may feel it doesn’t have enough information or even worse, may have conflicting information about which decision to make. Like any strategic decision, the leadership is ultimately guessing at what the future may hold. The matrix map is a useful tool for engaging key stakeholders in a discussion about what the future should be. However, it is just a tool. It ultimately is up to the users to make a decision, learn from implementation, adjust and learn again. We say often that sustainability is the integration of financial viability and mission impact, but there is a third equally important component–leadership. The most critical step is the leadership ultimately making a decision to begin implementation and move toward greater sustainability.

If you and your fellow leaders on the board are in a place where you could benefit from taking a rigorous and candid look at the viability of your current programs, I encourage you to get a copy of the The Sustainability Mindset. You may never allow yourself to look at sustainability the same way again.

See also:

Nonprofit Sustainability: Making Strategic Decisions for Financial Viability

The Six Secrets of Change: What the Best Leaders Do to Help Their Organizations Survive and Thrive

The Necessary Revolution: Working Together to Create a Sustainable World

Image credits: pixabay.com, wiley.com, Steve Zimmerman and Jeanne Bell

 

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The worst of economic times brought out the best in nonprofits

“A crisis is a terrible thing to waste,” American economist and NYU professor Paul Romer was credited for saying in 2004. His sentiment, unfortunately, is appropriate again today as nonprofits throughout the sector learn from tough decisions that help them recover from the Great Recession and what we are now seeing will likely be dubbed, “The Great Correction.”

Many of you are familiar with the notion that negative news often gets repeated more often than positive news. This post is an effort to tip the scales toward encouraging information I recently read in The Chronicle of Philanthropy: “How Recession-Racked Charities Emerged Stronger Than Before.”

Paul Romer would be pleased to learn the nonprofit sector did not waste the Great Recession. They’re making good use of it and demonstrating impressive resolve. “Hopeful lessons” are shared in the Chronicle article, and one in particular involves Voices for Children. Voices is a nonprofit dedicated to providing every foster child in San Diego County with a volunteer court advocate.

Voices for Children

After laying off a quarter of the staff, the board resigned itself to the fact that it would have to scrap its ambitious fundraising goal set years earlier and rebuild by stepping up with its own members and setting up a skeletal development shop. The executive director courted and hired a seasoned development director from the arts arena and paid the fundraiser more than anyone else. Today the budget is approaching $6 million, double the amount of its pre-recession budget. Payroll has reached 73 employees. Voices is now in a better financial position and perhaps better equipped to handle the next economic downturn.

Administrative and space collaborations

Stronger nonprofits have also resulted from collaboratives to share space and administrative resources. For example, in Denver, international development nonprofits renovated a 19th-century horse and trolley barn, which they call the Posner Center. The Center is a 25,000-square-foot space that now houses 60 nonprofits. According to the Chronicle, “The Center recently awarded $60,000 in grants to fund partnerships among its tenants, including one between Engineers Without Borders and a group that builds footbridges in Guatemala.”

Built to last

In a related article, “Bold Choices in Dark Times,” St. Louis Opera general director Timothy O’Leary was faced with collecting promised pledges on the day the stock market crashed. The donors told him they needed to “trim” their major gift commitments. O’Leary reported, “The difference [between pledges and fulfillments] was not unsubstantial.”

On the heels of these discouraging donor visits, O’Leary, the new board chair and artistic director, set to work creating a long-term strategic plan that would weather a long economic crisis. While other arts organizations were reducing schedules and turning to crowd-pleasing classics, the St. Louis opera committed to commissioning new and creative work. O’Leary was convinced new and exciting material would compel loyal patrons to return and support the opera.

“The downturn hit the opera’s corporate sponsorships the hardest, and revenue slipped further when the company reduced its draw from its $16.5-million endowment. To compensate, it froze salaries, suspended staff 401(k) contributions, and renegotiated deals with its unions. Yet as the opera rallied donors around its commitment to risk-taking productions, individual giving climbed — gradually at first, and then 21 percent in 2011.”

In 2013, a commitment to innovation and collaboration paid off with an unprecedented debut of “Champion,” which generated more ticket sales than any other production in the history of the St. Louis opera. “Champion” was named a finalist for international opera of the year. Today, the endowment is now topping $28 million.

Always in crisis

With the Great Recession over and a market correction that hopefully will be fleeting, it might be tempting to try risky ventures or allow yourself some wiggle room with financials. Perhaps the lesson here is that nonprofits should act as if they’re always preparing for a crisis. Look for ways to work smarter and leaner and focus on what’s working and core competencies. If you’re interested in engaging in financial forecasting or looking at different scenarios, consider contacting us at Execute Now! where we can help you assemble a financial plan you can feel confident about following.

Image credits: nonprofitcenters.org, urpe.wordpress.com, nytimes.com

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Nonprofit technology doesn’t need to be a burden

There are co-ops for everything from farmers to food merchants, and many have existed for decades or longer.  So why not technology cooperatives for nonprofits ?

The simple response to this question is – there already are technology co-ops.  Sort of.  Large hospitals and universities have been quietly operating technology-oriented co-ops for decades.  Not far from where this is being penned there is a substantial cooperative whose members are nonprofits such as hospitals, universities, colleges, a health insurer and a private high school.  What they have in common is that all or a large percentage of each of their operations are within the area served by the co-operative.  This mutual proximity doubtlessly made it easier to initiate and cheaper to run the co-op, a lesson we should apply to other similar ventures.

The institutions that belong to the co-op are mostly large, highly sophisticated nonprofits.   In effect, they succeeded because they were adequately capitalized and served a ‘closed’ market.  No one needed to carry out an expensive advertising campaign because the members themselves decided to build a shared platform and created the co-operative as a way of accomplishing this.

But what about the vast majority of nonprofits, the ones whose smallest bank accounts don’t have six zeroes behind the first digit?  The story is very different for these groups, which are the majority of nonprofits in the country.   Yet their need for technology is proportionately the same and perhaps even greater.  There are three aspects of this riddle that need to be solved in order to improve technology use and access for nonprofits that otherwise wouldn’t be able to afford a complete program on their own.

Fixed costs

Fixed costs are one of the quietest of the Budget Devils.  Most costs rise or fall in some kind of coordination with the demand for a nonprofit’s service.  Direct staff, for example, usually increase if the need for the organization’s service grows.  These are called variable costs, because if one were to chart the arc of growth in the need for an entity’s services, the volume of direct staff hired would almost certainly vary according to the arc of the demand.

By contrast, in an ideal world the growth in the need for administrative services should not be comparable to the growth in service demand because administrative costs tend to be a ‘step function’.  This means that growth in administrative resources is likely to come in ‘spurts’ and frequently over time administrative staff can actually lower the overall administrative costs by creating efficiencies greater than the growth in demand.

At its economic simplest, technology is a fixed cost.  That computer server has the same price tag if it is going to be used 24 hours a day or just a portion of each day.  The upgrades to the wiring system to power the thing also had to be incurred even if it was just intended to be a backup system.  That finicky server needs just the right blend of temperature and humidity, which drives up the utility bills.  And the additional Computer Guy’s salary and benefits are inescapable.  Members of co-ops can better manage the costs by collaborating at the infrastructure level (servers, storage, etc.) or at the software level.  Or both.

Fixed costs abound in technology which is one of the reasons it is so hard for most nonprofits to develop a robust technology platform.  Large nonprofits such as universities and hospitals can absorb a substantial amount of these fixed costs before their budgets start to complain, but smaller nonprofits find it difficult if not impossible to take on such fixed costs.

Capital

Having the financial resources (or ‘capital’) is a second technology hurdle.  Economists refer to technology as a ‘capital-intensive’ operation, meaning that one has to buy a lot of assets such as computer equipment.  Here, capital means something akin to ‘reserves’, or cash that’s not needed for day to day operations.   The problem for nonprofits is that, unlike for-profit businesses, nonprofits can’t invite outsiders to invest in the operation in return for a share of ownership.  The only way a nonprofit can gain resources for capital acquisitions is through profitability or donations (development specialists: which ask would you rather make – requesting that a potential donor ‘buy a few computer servers’ or ‘invest in kids’?).

Productivity

The third need is to run a productive and economically feasible operation.  This is more difficult than one might imagine because staff productivity is not necessarily an automatic must-have unless a nonprofit operates in certain areas of health or human services.  Large for-profit companies, by contrast, often demand a certain number of ‘billable’ hours from each employee whether the company is a law firm, an internet cable company, or a medical laboratory.   No matter what the tax status, low productivity is a Budget Devil itself.

The Co-op Model

The obvious solution to this dilemma for most nonprofits is to buy as little as one can get away with, at as low a price as possible.  But this can lead to disastrous trade-offs in which an organization makes too many compromises.  The formula is to minimize variable costs while managing fixed costs as

tightly as possible, and this is where the co-op model comes in.  In effect, the co-op carries the fixed costs and the burden for falling short of revenue goals (as does any for-profit service provider).  They also assume responsibility for hitting productivity targets.

The co-op model can be viable in this setting because it is not like a drugstore, with items sitting patiently on the shelf, waiting to be scooped into shopping baskets.  Both parties must make a commitment to each other, and it almost certainly will take the form of a written contract.  The composition of their client base gives the co-op not only funds for operations but – if the market co-operates – some level of capital accumulation as well.

Perhaps surprisingly, there are already a number of cooperatives accepted by the IRS, such as co-operatives serving hospitals and educational organizations – and even farmers (who helped originate the model two centuries ago).  This may be good encouragement to begin a technology co-op in your area if there are no comparables in existence.  Perhaps more likely, a nonprofit is free to go out of the sector to find companies that provide these kinds of services.    Whether your information technology supplier is an actual co-op or a for-profit company offering professional services should be largely immaterial: good service is good service.  What is more pressing as a new client is what you will get for your money.  Note that if you and your peer organizations decide to form a co-op you should automatically have an advantage in the value-for-payment transaction.

The models we have sketched are most likely to succeed in an urban or suburban setting because it’s easier to achieve the desired productivity levels when your customers are located relatively near each other.  Sixty percent productivity for your field staff should be a good starting point, though it may be possible to push it higher.   More intriguing is that finding the capital may be easier than you think.  After years of promoting collaboration in general, some major foundations are beginning to experiment with funding certain aspects of collaborative processes.  Program Related Investments may be an option from savvy, well-established foundations.  L3C corporations were designed for social enterprise ventures, and they can be an invaluable structure on which to build a robust new service for the nonprofit field.  And the B Corp, or ‘Benefit Corporation’, offers traditional for-profit businesses an opportunity to convert to a different status as long as they can prove that they seek to create a ‘public benefit’ in tandem with private gain.  In fact, we know a for-profit entity that recently completed just such a switch.

With a little imagination, some energy, and some good financial strategic thinking, it should be possible to develop market-serving entities for information technology purposes and/or find existing suppliers that are effectively doing the same thing.  Good IT may be a cost but it doesn’t need to be a burden.

See relevant Page to Practice book summaries:

Managing Technology to Meet Your Mission: A Strategic Guide for Nonprofit Leaders

Zone of Insolvency: How Nonprofits Avoid Hidden Liabilities and Build Financial Strength

Zilch: The Power of Zero in Business

Image credits: naturalpapa.com, craftcouncil.org, somdnews.com

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Collaborative Capitalism: Positive social outcomes and competitive financial returns

As Millennials move into new leadership roles, they are demanding the opportunity to align every facet of their lives with making a positive difference in the world. A new capitalism, what the authors of The Impact Investor call Collaborative Capitalism, is focused on more than just financial returns to make an impact on the world’s issues.

One tool of Collaborative Capitalism is impact investing–investing that focuses on delivering positive social and environmental outcomes alongside competitive financial returns–is a response to this changing world.

Two years, 12 outstanding funds, four primary practices

In a two-year study, the most detailed release of information on impact investing to date, the authors of The Impact Investor examined 12 outstanding impact investment funds that met or exceeded the expectations of their investors.

In this book, they uncover the four primary practices that make these funds successful and outline the strategies that all investors, from corporate executives to change agents to philanthropists, can apply to their own organizations to achieve high performance in both social and financial outcomes.

We interviewed coauthor, Jed Emerson, about The Impact Investor and what you should consider if you want to take the first steps toward blending social causes with financial returns. We also asked about the most significant obstacles.

CausePlanet: If someone wants to jump into the field of impact investing, what does he/she need to focus on first?

Emerson: The first thing those interested in impact investing need to focus on is to get up to speed with what is already known about the field, its practices and the variety of ways one can become involved. For example, CASE at Duke has a great web site (http://bit.ly/casei3100) with seminal research and insight every impact investor should read. ImpactAssets has its Issue Brief series which presents a set of concise memos addressing various aspects of the field. Finally, The Blended Value website (www.blendedvalue.org) also has a host of resources worth perusing. Attending a few conferences would also be a good thing to do—SoCap or High Water Women are both good places to start. And Cathy just made a great 12-minute video intro to the field: http://youtu.be/zwGCKhTis5s

CausePlanet: What do you really want nonprofits to take from your book? For example, are you giving them ways to attract impact investors or become more of impact investors themselves?

Emerson: Nonprofits should take away many of the same principles as other types of organizations, namely that there is a shift taking place in both capitalism and the arena of how we address social issues, and this shift represents real opportunities for nonprofits to position themselves as providing a unique value to society that is distinct from traditional business or government. There is a growing universe of funders, investors and procurement officers who want to understand how best to leverage this distinct approach and bring it to scale, including through the provision of operating capital, which has been historically difficult to come by in the nonprofit sector.

Nonprofits also have an important role to play in driving the impact investing field forward considering two key attributes. One is their attention to stakeholders. Nonprofits are built on the premise that constituencies matter and much of the field of impact investing is taking this lesson into the arena of finance. The other attribute is heightened attention to social outcomes. Impact investors need to manage to specific, intentional outcomes and are often drawing on nonprofit practices to do so.

CausePlanet: What do you think is the most significant obstacle to becoming an impact investor?

Emerson: Perhaps the most significant obstacle is simple inertia, the challenge of overcoming analysis paralysis and actually making an investment. Some folks feel impact investing is new or that people must accept below market returns and so are waiting for it to become so mainstream that the actual investment opportunities may pass them by. The best way to explore and learn about the practice is to make smaller investments, to collaborate with other investors or take other initial steps to simply get going and learn by doing. And in fact, one can become an impact investor now with as little as $20 online, through a site called vested.org, where you can choose the places or impacts that are important to you.

Increasingly, financial institutions and corporations around the world are using Collaborative Capitalism as a tool to generate clear, positive social outcomes in addition to profits. This book will help nonprofits learn how capital can be used to drive social and environmental change as well as how to attract potential investors. Financial tools are increasingly being used to support community vehicles, including nonprofits, cooperatives and social enterprises. The Impact Investor gives a comprehensive overview of the approaches successful impact investors have used to increase their probability of success.

See other Page to Practice nonprofit book summaries related to this topic:

The Impact Investor: Lessons in Leadership and Strategy for Collaborative Capitalism

Zone of Insolvency: How Nonprofits Avoid Hidden Liabilities and Build Financial Strength

The Nonprofit Business Plan: The Leader’s Guide to Creating a Successful Business Model

Cash Flow Strategies: Innovation in Nonprofit Financial Management

Image credit: blendedvalue.org

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Donors: Help your causes ask the right questions

Erica McGeachy Crenshaw

“The sector has fallen into a trap we created. By focusing on what we DON’T spend, and not on what has been accomplished, we have completely missed the mark in our messaging. We are part of this problem and it’s up to us to educate our way out of it,” asserted Paulette Maehara, former president of Fundraising Professionals in Dan Pallotta’s groundbreaking book Charity Case (Jossey-Bass 2012).

I recently re-watched Dan Pallotta’s highly popular TED Talk about Charity Case and was energized by such a credible and well-researched argument about the commonly misinterpreted topic of administrative costs and overhead. Unfortunately, we’re working against a flawed philosophy reinforced for decades by donors and nonprofit executives alike. Consequently, this week’s post is a message to nonprofit donors and contains some of Pallotta’s main points worth repeating.

Stop asking the flawed question and get to the heart of what really matters

Donors have to stop asking the question, “What percentage of my donation goes to the cause versus the overhead?” Pallotta argues this question is flawed in several ways:

1) The question makes us think overhead is not part of the cause but it absolutely is.

2) It also promotes the notion that overhead steals from the cause, forcing charities to obsess over keeping short-term overhead low at the expense of long-term solutions.

3) This question ironically gives the donor really bad information. It tells nothing of the charity’s quality of work, shares nothing about how it defines the cause, leads donors to discriminate unknowingly, gives the wrong overhead figure because it’s measuring against the wrong result.

Help your charities advertise, take risks and give reasonable time to build sustainability

Pallotta further argues nonprofits have to operate under a separate and discriminatory rule book from businesses. For example, in the area of advertising and marketing, charities can’t build demand for donations to their causes while businesses advertise until the last dollar no longer produces a penny of value.

On the topic of risk taking in pursuit of new donors, while it’s okay if the movie industry spends $100 million on flops, a $5 million charity walk that doesn’t show a 75 percent profit in the first year is considered suspect. Consequently, nonprofits shy away from large-scale fundraising ideas and cannot benefit from powerful learning curves.

Yet another example relates to time horizon. New companies can go six years without returning any profits to investors in the interest of building market dominance while charities that have long-term goals are expected to yield short-term, direct services. If they don’t deliver, they are pariahs. You can help dismantle some of these rules by leveraging your dollars on projects that raise much-needed awareness, allow for calculated risk and long-term growth toward meaningful goals.

Nonprofits are starving financially

You can help by asking new questions like “What kind of impact are you able to accomplish with your cause?” or “What meaningful progress are you making toward systemic change?” Help charities break the starvation cycle of what feels like mandatory low or no overhead. Leverage your donor investments in new ways to get the community looking at the cause differently or to accommodate long-term systemic change.

by Erica McGeachy Crenshaw, President/CEO of Execute Now!

See also:

Charity Case by Dan Pallotta

CausePlanet blogs about Charity Case

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