Savi Student Loan Workshop: Status Update on One-Time Debt Relief

Join this LIVE workshop and Q+A session with student loan experts to discuss the current status of One-Time Debt Relief.

The Supreme Court has officially blocked the Biden-Harris Administration’s One-Time Debt Relief program today, which means The Department of Education cannot proceed with issuing $10-20k in debt relief for borrowers. This news may be disappointing to your employees or members. There may still be other relief options available to them, like Public Service Loan Forgiveness. Savi is hosting a free webinar on Thursday, July 6th at 4pm ET to explain what this decision means for borrowers and to talk about the options they still have. Borrowers can register here. If you are looking for materials to promote this event, reach out to your Savi Account Manager. We’ll be covering:
  • What this decision means for borrowers
  • What other programs are still available to borrowers right now
  • How borrowers should prepare for payments resuming starting in October 2023
  • How Savi can help borrowers find the best options for their loans
 
For more information on our partnership with Savi, please click here.

Signs your nonprofit should invest in expense management software

By Akhono Seleyi | May 13, 2021

Running a nonprofit is often a balancing act. 

Most nonprofit leaders and staff tend to focus on the mission solely, but they also have to accomplish basic business tasks to keep the organization going. For example, they have to:

  • Pay employee salaries and volunteer expenses
  • Be prepared for unexpected costs and expenses
  • Manage budgets based on multiple projects

Many nonprofit leaders hesitate to spend money on administrative expenses. But investing in technology is not the same as spending on technology. For instance, investing in an automated program, such as expense management software, can help you save time, yield better results, and increase efficiency.

This post discusses the signs a nonprofit should consider expense management software. We also talk about the various benefits such programs offer.

Signs it’s time to start looking at expense management software

Manual, paper-based processes can work if only one or two people are managing a limited number of routine expenses. The more people and accounts you add to the mix, however, the more likely it is you’ll need a more sophisticated solution. You know it’s time to consider expense management software when your old methods:

  • Start taking too much time and resources
    Employees and volunteers need a way to submit expenses. Managers need to approve them. You may need to designate certain expenses to a specific account, such as one related to a grant your organization has received. You need to document your internal controls that separate the receipt of income from the payment of expenses. Eventually, these processes will require more human labor and additional operational costs. In remote settings, working with outdated methods can also increase stress and workload for the staff. 
  • Lack transparency
    The conventional expense management process can make it difficult to track expenses through the system and ensure they are handled properly. Volunteers and staff can find expense tracking confusing, leading them to submit inappropriate bills, which can hurt you during audits. Additionally, the inability to monitor multiple expenses incurred from various sources can make it difficult for project managers  to keep up with real-time insights into project spending and trends.
  • Make it hard to enforce expense policies
    You need to ensure expenses are appropriate, documented correctly, approved by the correct people, and charged to the right accounts. Traditional expense management processes can make it hard to determine who’s spending what and why, which limits your ability to ensure expenses are consistent with your organization’s policies.
  • Lead to accounting errors
    Confusing expense management practices can cause accounting errors. Delay in expense submission can also force accounting closing books late and missing out on auditing errors. Such inefficiency can affect relationships with donors and potentially put your organization at risk.

Benefits of switching to an automated expense management system

An automated expense management program allows you to:

  • Establish a smooth expense submission process
  • Automate credit card reconciliation
  • Enable project-based allocation and policy compliance
  • Centralize your organization’s spending data

Establish a smooth expense management process

Nobody likes a broken process. If you have a broken expense reporting and tracking process in place, chances are your staff and volunteers avoid it as long as possible. 

Last-minute reporting also means your accountants or bookkeepers receive expense data right before deadlines. The lack of time to audit each expense claim can lead to account discrepancies.

Organizations can encourage on-time reporting by ensuring the expense submission process is straightforward and hassle-free. For example, with an expense management app, your volunteers and staff do not have to manually keep track of receipts and mileage logs. They can easily record and store them within the app. This means no missing receipts or inappropriate expense claims. And instead of worrying about receipt storing and tracking, your staff can concentrate on carrying out your mission.

Automate credit card reconciliation

Business credit cards offer visibility into organizational expenses.  Automated expense management software makes credit card reconciliation easier. It can help you track every expense made using the card and eliminate the manual work of matching every expense against the card statements. You can also integrate live feeds with the software to get a detailed view of the card usage.

Project-based allocation and policy 

Projects can vary geographically, and each project can have its own set of requirements, challenges, and associated expenses. Policies for a specific project may also vary from other projects or organization-wide policies. 

Expense management software mitigates confusion and makes expense tracking easy by:

  • Enabling staff and volunteers to allocate expenses based on project, location, and cost center. 
  • Allowing volunteers and staff to split and report their expenses based on projects they’re working on. 
  • Making it possible to define a project’s budget and limit expenses by category to ensure expenses are within the allocated budget.

Centralize your organization’s spending data

Donors often want to understand how and where their money has been spent. Organizations should also keep expense records from the past to analyze spending and make informed decisions. 

With an automated expense management tool, all your expense data related to receipts, card payments, approvals, and budgets are readily available to the accounting and finance teams. Additionally, these reports can be easily exported and shown to the donors. 

Organizations can also configure their expense management software to sync with their preferred accounting software in just a few clicks, eliminating the need for manual work to coordinate them.

Conclusion

Traditional expense management processes have hidden operational costs and can eat away at precious hours and revenues. 

By adopting modern technology such as expense software, organizations can save time on mundane tasks and increase visibility into their work. Additionally, by opting for a smarter solution, your staff can be more productive and efficient at the end of the day. 

Click here for link to original article.

IS A BIG CORRECTION WAKE-UP CALL NEAR?

IS A BIG CORRECTION WAKE-UP CALL NEAR?

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“ARE YOU PREPARED?”

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By:  J. R. (Jim) Hollon

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Why will the next big market correction bring us a major wake-up call?  Are you prepared?

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Preparing you for the next wake-up call, ask the question, how can you compare your internal doctor and your cardiologist treatment to the 1990 Nobel Prize for Economics.  The doctors give you a gallon zip lock bag full of different medications.  Ask you to bring them to each visit, and keep you alive, after five bypasses, for another 30 years.  Now for comparison, the Nobel Prize gave us the reason to own all the different asset classes of equities, along with the “Efficient Market Frontier” where you can compare the risk you are taking with the return you are getting.
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To bring us up to date, stating March 9, 2009 the market, the Dow Jones Industrial Average closed at 6547, ending the correction downturn.  Now, on February 21, 2020, the Dow closed at 28,992 a difference of approximately 22,445 which amounts to approximately 342{eaddf4113e57f93ee9e205bacfde438b10594693bc9d55053511519bea921fc7} increase.  So, there has been no major correction in this 11-year history of the market.
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Why should you be concerned about a huge wake-up call?  Can you say you have studied the cost that comes out of your ETF and Mutual Funds annually each year before you can have any return at all?  That cost is made up of management cost, gross expense ratio, probably 12b1 fee, and your advisor’s fee, just to name the obvious ones.  Other cost is there, but not as obvious, such as turnover of portfolio cost, and trading cost, etc. Please read the article “How “Independent Brokers Make Money” recently published in Barron’s publication by Daren Fonda, then let it blow your mind as to what other cost do they get from me?  When you do not know your cost, you have to wonder which class ETF or Mutual Fund did they sell me. May I give you an example to wake you up?  Go to Morningstar, print out all the classes (I went to the A’s) and found American Funds Global Growth Port A through R6 and found 14 of them.  Then I studied the 5-year returns and the low one was 5.60{eaddf4113e57f93ee9e205bacfde438b10594693bc9d55053511519bea921fc7}* and the best one was 7.29{eaddf4113e57f93ee9e205bacfde438b10594693bc9d55053511519bea921fc7}*.  What caused this wide range of returns?  You guested it, cost.  So, you think you know you are prepared for a huge wake-up call.  Can you say which class you own in all of the asset classes of equities in your ETF’s and Mutual Funds portfolio? This reminds me of the article I wrote, ”You Can’t Do This By Yourself”.  You need someone to analyze the portfolio for you.  Another example, if I may, on a recent analysis of a potential client who held 3 million of assets in 18 ETF’s and Mutual Funds.  The difference in his 18 funds, three-year return, was 1.47{eaddf4113e57f93ee9e205bacfde438b10594693bc9d55053511519bea921fc7} less than he could have owned in a low-cost asset allocation plan with a much less cost structure than his ETF’s and Mutual Funds.  Compound his 3 million another 1.47{eaddf4113e57f93ee9e205bacfde438b10594693bc9d55053511519bea921fc7} for the next 30 years, he is expected to live, and you will see how much more the allocation using the 1990 Nobel Prize for Economics could do for him.  Definitely he is not prepared for the wake-up call because if you are truly diversified, you can usually go up with the rapid growth as the market rises very fast to get back to where it corrected.  So, compounding approximately 3 million over 30 years at 1.47{eaddf4113e57f93ee9e205bacfde438b10594693bc9d55053511519bea921fc7} would provide this person with approximately $1,647,836 extra money.  Now we can see that a little extra return over a few years can make a huge difference.
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Behavioral research done by “Dalbar 2019 QAIB Report” for the period ending December 31, 2018 shows the S & P 500 lost 4.38{eaddf4113e57f93ee9e205bacfde438b10594693bc9d55053511519bea921fc7} for the year while the average equity investor lost a staggering 9.42{eaddf4113e57f93ee9e205bacfde438b10594693bc9d55053511519bea921fc7} in 2018.  Some investor behavior, page 14 of the same report, shows the following behavior:  loss aversion, narrow framing, mental accounting, diversification, anchoring, herding, regret, media response and optimism is what causes major problems for the average investor.  A chart published in USA Today showed where 41{eaddf4113e57f93ee9e205bacfde438b10594693bc9d55053511519bea921fc7} of people will not change their investment for any reason while a banker offering a toaster would cause people to move.  Our behavior becomes a major problem for us.
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Do you really want to know if you are prepared for a huge wake-up call?  May I help you determine if you are?  Ask yourself, and you are currently trusting someone else to choose investments for you, so now you have to be honest with yourself and answer some questions which will tell you how prepared you are for the next big wake-up call.  Has your portfolio kept your return close to the Dow return for the last 11 years, since March 9, 2009?  Do you even know the answer to that question?  Are you someone who moves in and out of the market?  Do you know what risk you are taking for the return you are getting?  Do you know all of the different asset classes or Mutual Fund or ETF fund?  Do you know how many equities there might be in a truly diversified portfolio?  Do you know how to determine what risk factor (standard deviation) you have in your portfolio and how it relates to a portfolio, like fixed income, balanced or moderate, long-term or aggressive?  Do you know what percentage fixed income and equities would tell you what risk portfolio you are in? We can go on with this because there are 15 plus things in your portfolio that have an effect on the return you receive.
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When you think about investing outside of your company retirement plans, ask the question if I have limited assets available, what is available to truly diversify those assets? Let’s face it, even in a 401k or 403b retirement plan there are not enough asset classes holding enough equities for you to truly diversify your account.  Now, look at the choices and see if you can determine the objective of the fund or what asset class it is?  In a target 401k plan, ask yourself why would you want to stop taking risk or drastically reduce it when you are expected to live another 30 to 35 years after retirement age.  Do you know that there are 2 asset allocation programs that are following the 1990 Nobel Prize for Economics, where your small account would have the same diversification as one with millions has?  Do you know that one of them has a much lower cost than the other?  Do you know you have to have an advisor to help you invest in either of those asset allocation plans?
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I could keep going with helping you determine if you are truly diversified and ready for the next huge wake up call.  Those of you that are, please join me and become like myself just waiting to be fully invested and truly diversified when the market correction is over and the fast rise of the market to get back where is started the correction, I know that is where I make my money!
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May I help you become prepared for any market wake-up call?  May I analyze your portfolio at no charge?                 
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*Returns shown on Morningstar data sheet.
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James R. (Jim) Hollon           205-919-8661
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Shirley Hollon                        205-492-7916

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©Copyright 2020                                                                                                                                                                    

Accounting Standards Update (ASU) 2016-14: Is Your Nonprofit Ready?

by Your Part-Time Controller

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Accounting Standards Update (ASU) 2016-14, Presentation of Financial Statements of Not-for-Profit Entities, represents the first major change to not-for-profit (NFP) financial reporting in over 25 years! Are you ready?
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By issuing this guidance, the Financial Accounting Standards Board (FASB) hopes to provide financial statement users with statements that are clearer and more transparent, and provide increased consistency of information.

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At Your Part-Time Controller, LLC (YPTC), we feel the guidance contains two major groups of changes: 1) changes in financial statement presentation, and 2) enhanced note disclosures (additions to the footnotes that accompany the financial statements). There are a few minor changes, which we’ll review at the end.

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To assist with the implementation of these changes, YPTC has also provided an Implementation Checklist.

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For the checklist and extensive information on the new rules, click here to find out if you are prepared!

GuideStar Blog: Loan Tips for Nonprofits

by Marc Rand, 7/26/18

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I’ve been lending to nonprofit organizations for close to 20 years. Most organizations take on debt responsibly, but I’ve also seen some nonprofits with loans that are more harmful than helpful.

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For instance, I helped one organization that houses special needs individuals realize that they have a negative amortization loan. This means that at the end of the loan term the bank would have owned the property and the residents would have to leave.

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I actually don’t blame the nonprofit for this entirely. The executive director started the program when she was in her twenties and didn’t have the financial training required to grow an organization. That said, she wasn’t totally innocent. The organization should have had a board member or attorney review the loan documents to prevent such a possible calamity. The bank that underwrote the loan was also at fault.

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There are several issues most bankers would like any nonprofit to consider before taking out a loan. Most of these restrictions are described in what is commonly referred to as Ts and Cs, or terms and conditions. I’ll spell out the key points below, but please note these are not exhaustive. I always suggest having an attorney or board member with relevant experience go over loan requests.

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One of the biggest items to consider when taking out a loan is the timeframe. Make sure the term fits the purpose of the loan. For instance, if you think your construction project is going to last 18 months, then make sure your loan has a two-year time frame. That way if/when the construction timetable slips, you won’t need to scramble at month 17.

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Many financial institutions will also outline financial and social covenants. That’s fine, but just make sure they are based on your historic performance. Don’t set yourself up for failure.

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Typically, a lending institution will require liquidity, leverage, and profitability covenants. Liquidity requirements are usually some form of current ratio (current assets/current liabilities). Basically, they want to see that you have enough cash to pay your bills. This makes sense and requires you to focus on your operating cash.

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Leverage covenants focus on how much debt your organization has compared to your net assets, in most cases, your unrestricted net assets. The issue being addressed is how much debt you are taking on to pay for assets. The bank may also limit the amount of debt you can take on in the future. So be aware of that restriction, especially if you may be expanding in the coming years.

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Profitability covenants focus on whether your organization is in the black or red. Of course, with temporarily restricted funding and cost accounting, this gets a little confusing. So make it clear whether the covenant is for the program the lender is funding or for the organization overall. Ask how they want to deal with multiyear grants and temporarily restricted funds. Call out any questions up front to limit problems later on. Likely the covenant will require a certain level of net income and may have a debt coverage ratio.

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Make sure that you understand what these ratios are and how they’re derived. For instance, can restricted cash be included in your current account? Confirm the definitions of these ratios with your lender and ask questions where there’s ambiguity.

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Now, if you’re borrowing from a foundation, social investor, or impact investor, they will most likely require social covenants as well. Social covenants are very similar to grant outcomes; however, they’re specifically spelled out in loan documents. If you fail to meet them, your loan could be in default. So be clear about what you can actually accomplish and when. Don’t fall into the trap of thinking you’ll be able to scale at the pace the foundation proposes. Be reasonable and give your organization a little leeway.

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Another big red flag I will share is around the frequency and amount of reporting. Some lenders may require quarterly reporting. If you don’t produce quarterly statements, don’t agree to this. Push back a bit and suggest every six months.

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The last point is to ensure that the number of social and financial covenants is reasonable. I worked with one foundation that required 25 social covenants, 10 financial covenants, and a narrative every quarter. It’s important that lenders understand your concerns and limitations. It should be possible to figure out a happy medium as they want to see you succeed.

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If you have questions about how to structure a loan, feel free to send me an email at  mrand@americannonprofits.org.

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ACTION STEPS YOU CAN TAKE TODAY

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Click here for link to original GuideStar blog.

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This post is reprinted from the GS Insights Blog.

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TnC Is Not Just a Cable Channel: Loan Tips for NonprofitsMarc Rand is a seasoned nonprofit executive, having spent time in the trenches and at the funder’s table. As executive director of American Nonprofits, he leads the launch and operations of the Bridge to Bridge Fund. Marc also supports foundations interested in impact investing through his work with Community Capital Advisors, where he serves as a managing partner. 

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The latest FASB Accounting Standards: How do I characterize thee?

July 18, 2018 | National Council of Nonprofits

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There have been a lot of changes in the accounting practices for nonprofits over the past couple of years. It’s not really surprising, because it has been 25 years since the Financial Accounting Standards Board (FASB) has made major updates to generally accepted accounting principles (GAAP) for nonprofits. The recent changes began with Accounting Standards Update (ASU) 2014-09Revenue from Contracts with Customers (Topic 606), which modified the timing and methods nonprofits use to recognize revenues generated through contracts. ASU 2016-14, Not-for-Profit Entities (Topic 958): Presentation of Financial Statements of Not-for-Profit Entities, which goes into effect this year (“for annual financial statements issued for fiscal years beginning after December 15, 2017”), revises several accounting practices. It changes the classification of net assets from unrestricted, temporarily restricted, or permanently restricted to net assets without donor restrictions and net assets with donor restrictions;increases disclosure requirements, including those related to asset liquidity; and requires that expenses be presented by function.

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The most recent update, Accounting Standards Update (ASU) 2018-08, Not-for-Profit Entities (Topic 958): Clarifying the Scope and the Accounting Guidance for Contributions Received and Contributions Made, was released on June 21, 2018, and will take effect in 2019 for most nonprofits. The update attempts to address the longstanding confusion around characterizing grants and contracts, particularly government grants and contracts, as “exchange transactions” or “contributions.” The distinction matters because revenues received from the two are treated differently from an accounting perspective. If revenue is determined to be a contribution rather than resulting from an exchange transaction, it must then be furthered distinguished as being either a conditional or unconditional contribution. Conditions include activities that must occur for the nonprofit to earn the money from the grant or contract. This can be outcome related, raising required matching funds, a right of return of assets if conditions aren’t met, helping a specific number of people, etc. Whether an agreement is conditional or unconditional also depends upon whether the grantor or grantee has primary decision-making authority in terms how the activities are conducted.

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To offer some perspective, based on federal definitions, a grant is an award of financial assistance from a government agency to a nonprofit to carry out a public purpose, or what FASB will now refer to as a conditional contribution. Contracts are for the purpose of obtaining goods and services for the purchaser’s benefit—or what FASB calls an exchange transaction. To further clarify this, the ASU specifically points out that benefit provided to the general public is not considered an exchange of commensurate value. Therefore, this is likely to have a big impact on government grants and contracts, which in the past have often been considered exchanges, but many of which will now be treated as conditional contributions.

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With some new principles already in effect (ASU 2014-09 and ASU 2016-14) and this latest update becoming effective in just a few months, nonprofits should consult with their bookkeepers and/or accountants to ensure that their financial recordkeeping is in order. If changes are needed, it’s best to start discussing and preparing for those changes now rather than on January 1.

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Click here for link to original article.

Don’t Let Chargebacks Limit Your Chance to Make + Change: How Nonprofits Can Prevent Online Fraud

by Drew Sementa, Tidal Commerce 4/25/18

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Don’t Let Chargebacks Limit Your Chance to Make Positive Change: How Nonprofits Can Prevent Online FraudDespite attempts by banks to make online transactions safer, as much as 60-70 percent of card fraud still occurs online. And it seems that no sites are sacred. Unscrupulous hackers are increasingly stealing from well-meaning nonprofit organizations, and even running transactions on insecure nonprofit websites to test stolen cards, costing groups thousands of dollars in chargeback fees from fake donations.

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Traditionally designed to protect consumers from fraud, chargebacks enable card holders to dispute any “mystery” expenses that appear on their bills directly with their banks or credit carriers. Since new legislation which came into force in October 2015, it’s now the merchant’s responsibility to repay chargeback funds if they cannot prove fraud occurred—a liability that has the potential to devastate small nonprofits trying to do good.

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So to avoid these costly situations, let’s delve into three ways nonprofits can prevent fraud, so they can spend their funds where it really counts:

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CHECK THE BILLING ADDRESS AND CVV CODE

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Many nonprofits have pretty basic websites, and that’s OK. When it comes to accepting payments, however, it is vital to have professional systems in place. Having poorly protected payment systems could really land nonprofits in hot water by ruining the trust of donors, and costing organizations extensive chargeback fees.

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A key first step to preventing fraud is to check the CVV codes and billing addresses associated with the card used for every donation. Upon payment, ask donors to supply their CVV codes and be sure to use an address verification service (AVS), which compares the billing address a customer provides to the address the card has on record. If these don’t match up,the transaction should not be accepted.

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And while this may seem complicated for non-tech savvy non profits, products such as Visa 3-D securemasterpass by mastercard, and American Express’s expresspay can take care of it all. The platforms not only offer consumers a secure payment experience—that is, they don’t have to give their payment information to an unfamiliar website—but it also means nonprofits don’t have to worry about being responsible for holding all that card data.

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All in all, having these security features on board makes it difficult for consumers to request illicit chargebacks successfully, as it’s tough to prove the transaction wasn’t valid. Having the right systems in place reduces the risk of having to pay the charge and return needed funds.

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BE SUSPICIOUS OF MULTIPLE SMALL DONATIONS

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When fraudsters use charity sites as testing platforms, they usually do not spend large sums of money—they want to keep their heads low and avoid being noticed. It’s therefore important for nonprofits to be on the lookout for multiple small donations.

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If these are out of the ordinary, nonprofits need to speak to their payment processors for advice on how to handle the situation—that is, if the processor doesn’t contact the nonprofit first. A good payment processor will likely send a fraud specialist to the rescue, which is a huge advantage to partnering with a trusted company.

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To prevent these fraudulent “donations” from happening in the first place, nonprofits might want to consider blocking small contributions all together. For example, a nonprofit may decide to not accept donations of less than $2 on its website, an amount that doesn’t count for much after processing fees, anyway. A payment processer would happily speak to the charity’s webmaster and help get the ball rolling and put the change in place.

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REQUIRE THE DONOR TO CREATE AN ACCOUNT ON YOUR SITE

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Yes, scammers can be relentless. But they likely won’t jump through online hoops in order to commit their crimes.

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To discourage fraudsters from testing their cards on your donation site, your shoud consider asking donors to make online accounts on the website before they make a donation. A genuine donor is unlikely to have a problem sharing a bit of information with a nonprofit they’d like to help. But a fraudster? Well, upon being faced with making an account, they’ll likely just move onto another insecure nonprofit website that doesn’t require one.

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Not only do these account requirements help prevent fraud but they also give nonprofits a rich set of data about their donors. On the sign-up page for each account, nonprofits have the opportunity to ask donors for their gender, interests, concerns, cities, names, and email addresses to help develop donor personasbasically, profiles that represent the types of people the nonprofit wants to market to. This will help nonprofits convey content that really makes an impact—and, hopefully, get more donations coming in. It also means that they can use this data for targeted marketing campaigns, and also share the results of fundraising campaigns with the people who supported them.

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Nonprofits generally have a tough time making ends meet as it is, without having to add fraud into the mix too. It is important to have the right online security precautions in place to keep cherished funds out of harm’s way and allow nonprofits to spend the majority of their time doing what they do best: helping the community.

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About the Author: 

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Drew Sementa is CEO of Tidal Commerce, a merchant solutions and payment processing company that focuses on helping small and medium-sized businesses grow.

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Click here for link to original article.

Cash Flow in the Nonprofit Business Model: A Question of Whats and Whens

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This article is from the Nonprofit Quarterly’s fall 2017 edition, “The Changing Skyline of U.S. Giving.”

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“flowing” by Mathias Erhart

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In recent years, the concept of the “business model” has gained a great deal of currency within the nonprofit sector, with nonprofit leaders as well as grantmakers and other stakeholders focused on understanding and improving the business and financial underpinnings of how organizations deliver on their missions. Discussions of the nonprofit business model often include considerations of things like cost to deliver services, mix of sources of funding, and key drivers of financial results.(1) Discussions of financial stability and sustainability often focus on the overall health of the balance sheet and (accrual-based) operating results. While these are all essential elements to understanding an organization’s finances and business model, such conversations sometimes miss one critical component of any business—namely, day-to-day liquidity. This article will discuss ways in which cash flow impacts—and is impacted by—the way a nonprofit organization does its business.

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Cash flow is simply the mix—and timing—of cash receipts into and cash payments out of an organization’s accounts. It is where the numbers on budget spreadsheets and financial reports translate into the reality of money changing hands. And as such, it is a very specific lens on the reality of a business model—one that takes into account not just whatan organization’s revenues and expenses look like, but when they come and go. Managing cash flow, therefore, is primarily a question of when—when we pay our staff, when this bill is due, when the grant payment will come in. And as there are many varieties of nonprofit business models, each one has a particular bearing on many of those whens.

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Nonprofit business models have two main components: what kinds of programs and services nonprofits deliver, and how they are funded.(2) For nonprofits, the latter component is a bit more complicated than for our colleagues in the for-profit world, for whom the answer is (nearly) always “by selling them to customers.” Of course, this isn’t to say that cash flow is perfectly smooth or frictionless even in the for-profit sector, only that the range and variety of funding models for nonprofits (including not just “customers” but also third-party funders such as foundations, governments, and even individual donors) adds additional complexity.

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Each component of the nonprofit business model—the delivery model and the funding model—has implications for organizational cash flow that should be understood for effective financial planning. We’ll look at each one in turn before discussing some strategies for addressing the almost inevitable occasions when the cash flowing in doesn’t match the cash flowing out.

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What Do We Do?

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“What do we do?”—what kinds of programs and services an organization delivers (and how it delivers them) is really a more high-minded way of asking, “What do we spend our money on?” (Granted, some services may be delivered by volunteers or use donated goods, but money is still necessary to pay managers and fund operations.) Really understanding “what we spend money on” will also generally give us a good idea of “whenwe spend it.” For example, a performing arts company that does four productions a year will have a fairly steady base of ongoing expenses, with spikes during the periods when productions are being prepared and staged. An emergency relief organization may have its baseline of operating expenses, with sudden (and unpredictable) surges of cash needs in response to a local hardship or disaster. A public policy research organization may have very predictable and consistent monthly cash outlays: payroll every two weeks, rent on the first of the month, invoices on the fifteenth and thirtieth. In each case, the cash flow demands are inherent in the business model.

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Job one for cash flow management, then, is to understand the timing of cash needs—the magnitude and due dates of an organization’s bills.(3) Again, the “what do we do” side of the business model is the guide. If what you do is relatively stable, consistent, and predictable (as in the policy research organization example), your cash needs likely will be as well. If what you do is predictable but not consistent (as in the performing arts company with productions at various points throughout the year), you know to plan for the surge in cash needs when the programming picks up. If what you do is unpredictable (as in the disaster relief agency), you will need cash available to deploy at a moment’s notice.

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The examples above only take into account normal operations—businesses also need cash at certain points for longer-term investments like moving to a new space or buying a building. And while a major investment like that wouldn’t happen without a solid plan, there are also the occasional random but significant expenses like repairing a broken elevator. Again, the business model tells the story of the cash needs: while the policy research organization may not be making capital purchases beyond a new set of computers, a housing development organization may need enough cash for major real estate purchases or construction of buildings. However large or small the investment, at the end of the day it means cash flowing out of your account.

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How Are We Funded?

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Wouldn’t it be nice if the biggest task were simply thinking through one’s program delivery model to identify when the cash will be needed, and then turning on the tap to make it flow? Unfortunately, cash doesn’t work like a tap (and in fact, we have to have cash to keep water flowing). While the ideal case scenario is that cash comes into an organization at a similar volume and velocity to how it goes out, in reality nonprofit funding streams very often don’t work like that. In fact, an organization with a balanced (or even surplus) budget can still end up running out of cash due to timing mismatches. Looking at the “how are we funded” side of the business model can give us a better sense of what to expect in terms of cash inflows and of what to do if they don’t line up with the “what do we do” side. Each type of income stream tends to have particular implications and challenges for cash flow, so a business model built primarily around one type of funding will need to understand and plan for those implications and challenges.(4)

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In Fiscal Management Associates’ (FMA) consulting work, a revenue-side business model that we see posing one of the biggest challenges for cash flow management is funding from government (particularly state and local) sources. In general, contracts with government entities pay for services only after the services are delivered, forcing the service-providing nonprofit to cover the initial outlay of cash to deliver those services. This is actually fairly typical of any business (for example, a retailer has to front the cash for inventory before generating income from sales; a professional services firm delivers services to clients prior to invoicing and collecting cash), but it is often compounded in the case of government funding by bureaucratic delays in registering contracts or processing invoices and payments. In some extreme cases, we have seen gaps of six months or more between an organization’s disbursement of cash to deliver contract services and collection of cash under the terms of the contract. In the absence of other revenue streams or other ways of accessing cash (about which more later), nonprofits in situations like this can face true cash flow crises.(5)

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Earned income from nongovernment sources—for instance, ticket sales for a performing arts organization—brings some of the same challenges, although (ideally) without the additional bureaucratic delays sometimes inherent in working with government. Even so, cash outlays typically happen in advance of cash collection—performances are rehearsed and sets are built before the audience buys tickets. This means that an organization needs cash to finance those costs that will later generate revenue back into the organization. (Any sort of prepayment on earned income—for example, advance ticket sales for performances or advance payments or retainers for service delivery—can help to fund the initial cash outlays.)

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Cash from contributions and donations doesn’t come with the bureaucratic delays of government funding or the up-front outlays required to generate earned income. But organizations whose revenue model is primarily driven by voluntary contributions often face another reality of managing cash, which is that cash inflow can be very concentrated at a particular point (or points) within the year. For example, an organization that generates a significant portion of its income from an annual gala-type fundraiser may have an event in spring whose receipts may have to carry it much of the way until the next spring. Another may see much of its cash come in from an annual campaign timed to take advantage of end-of-year holiday (and tax write-off) giving. Nonprofits with highly concentrated cash inflow can exist in something of a “feast or famine” mode flush when the money is rolling in but concerned that it will have to carry all the way until next year, or at least the next campaign.

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Support from foundations and institutional philanthropy has its own implications for cash flow. On the positive side, grants are generally paid at the start of a funding period rather than following the delivery (and costs) of programs and services. On the negative side, grantmaking calendars can vary considerably from a nonprofit’s own programming calendar, so there can still be periods when ongoing program or operating costs have to be financed from other sources. Another relatively common characteristic of foundation support (and a cash flow consideration unique to the nonprofit sector) is its restriction to particular programs or activities, meaning that a condition of a grant is that its funds be used only for a specified purpose. So, what may look like readily available cash to meet current needs could technically be a set-aside for expenses weeks or months down the road.(6)

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Each side of the nonprofit business model—what and how we deliver, and how we fund it—helps set expectations about the timing of cash into and out of the organization’s accounts. But, particularly given the fact of nonprofit life that our “customers” and “payers” are often different entities, there’s only so much we can do to line up that timing to smooth out cash flow. If it does happen to line up perfectly, it’s probably due more to coincidence (or miracle) than conscious effort. So, once we establish solid expectations for what our business model means in terms of the timing of cash going out and coming in, the task is how to manage the many and inevitable instances when the timing doesn’t line up.

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Balancing Cash In and Out

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Regardless of the nature of our business model, or of how well we plan, there will inevitably be periods in which more cash is going out of an organization than is coming into it. This is most obvious during a start-up phase, when the initial investments made in (or loans made to) a new organization are essential to meeting cash needs before income generation kicks in. But even for an established organization in a relatively steady state, “you have to spend money to make money” (and generally in that order) is a rule of business. So, how do we meet our cash needs in those times when there is not enough coming in from operations?

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Before discussing that question, one critical point: It’s true that in almost any business, there will be times when cash coming in doesn’t cover the full need for cash going out. That may be because of certain timing issues inherent in the organization’s business model—slow payments for services delivered under a government contract, say. But it may also be because there’s simply not enough revenue in the business model to cover the expenses of operating the business. If the issue is a temporary cash shortage, then an organization’s leaders will know (or have a reasonable sense of) when the situation will be back in balance, with sufficient cash coming in to cover expenses. If the issue is a more permanent imbalance, what may be presenting as a cash flow problem (i.e., a matter of timing) is in reality a broader business model problem—not just a disconnect between when money is coming in versus going out, but between how much money is coming in versus going out. If an organization’s overall business model is in deficit and out of balance, cash flow problems will certainly exist, but not ones that can be resolved by the methods discussed further down. In those cases, cash flow problems are just a symptom of the bigger challenge of overall revenues not being enough to cover expenses; treating that situation as a matter of cash flow timing will only delay and intensify the necessity to address the deeper need to increase revenues and/or decrease expenses.

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On the flip side, an apparently healthy cash balance doesn’t necessarily translate to cash fluidity. For instance, particularly in organizations that have multiple streams of funding for individual programs (where, as alluded to earlier, some money is restricted to certain activities), it is easy to lose track of the purposes for which each stream may be used. You may have enough money to run the program, but the money may end up being spent in ways other than what each funder requires. To make a bad situation worse, such mistakes can be punishable by a requirement to repay, making future cash even harder to come by. Thus, in nonprofit finance, cash is not fungible like it is in most for-profits: you cannot necessarily take it from one overfunded function and devote it to another that is underfunded. This can be confusing to boards—and also, too often, to unschooled executives. Such mistakes with government contracts and other forms of restricted funding can have serious high-profile repercussions for your long-term financial health and cash flow.

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With that major caveat out of the way, let’s turn back to the question of how to address timing issues when last month’s collections are lower than this month’s bills. The most basic (and important) solution is drawing on an organization’s own cash reserves, which supply the working capital to keep current on payroll, rent, and other expenses. Having a cushion of a few months’ worth of expenses built up in the bank account provides the liquidity necessary to avoid being at the mercy of each day’s cash receipts to determine which bills to pay. Cash reserves are a good indicator of a nonprofit’s overall financial health and sustainability, but from an even more practical perspective they are an essential resource for managing cash flow and payment schedules.

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Unfortunately, development of a robust cash reserve can be a significant challenge for many organizations. While financial surpluses and accumulations of reserves should always be a goal of budgeting and financial management, some organizations’ business models make this particularly challenging. For instance, heavily government-funded social service providers face a Catch-22, in that expense reimbursement contracts cannot by definition operate at a surplus, yet the typically slow pace of cash receipts makes it particularly important to maintain a significant cash reserve. What options exist in such cases?

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For any business unable to meet cash needs with its own resources, it must meet them by borrowing from someone else’s resources (that is, taking on debt). To meet operating cash needs in the absence of adequate cash reserves, a nonprofit can turn to a line of credit as a “floatation device” to meet the temporary imbalance between available cash and expenses due. We stress the word temporary here to echo the important point made a few paragraphs back: that lines of credit should be used only to address a timing discrepancy between payment of expenses and receipt of cash. Without a reasonable and relatively specific understanding of when the cash will be available to repay the line of credit, an organization is at risk of using credit to fund an operating deficit—and, of course, exacerbating the deficit with the interest expense associated with the debt!(7)

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That said, credit lines used responsibly can be a useful and vital tool for cash flow management, particularly for those organizations whose business models entail slow collection of major receivables or long gaps between cash infusions. We typically recommend that organizations in those situations secure a credit line at least as a safety net, since using credit is generally a better course of action than delaying payment of expenses that are critical to the functioning of the organization. And, as a general rule, it’s much easier to secure a line of credit before it’s needed than it will be when and if the situation becomes urgent. Of course, credit doesn’t come free, and organizations using lines of credit must also plan and budget for interest expenses and any other transaction costs associated with taking on debt.

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If neither reserves nor credit are options in a cash crunch, nonprofits may be forced to resort to less appealing means of riding out the storm. These may include measures such as approaching funders for accelerated or advanced payments (here again, it would be critical to show that the problem is only one of timing mismatch in order to avoid raising a huge red flag to a funder) or delaying payment of certain noncritical vendors. An even less appealing option would be a loan from a staff or board member, which could raise conflict-of-interest concerns. Probably the worst-case scenario is delaying payroll for some or all staff, which could jeopardize the organization’s programs as well as potentially raise legal issues. Far better to understand your business model and budget, and plan in such a way as to establish a solid cash cushion for the lean times.

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Cash Management across an Organization

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The challenges and consequences nonprofit organizations face with respect to cash flow are to a large extent inherent in the business models those organizations operate with—what kinds of programs and services they deliver and the way(s) they are funded. But this isn’t to say that nonprofit leaders are purely at the mercy of the business model; understanding the way the model impacts cash flow is the first step toward planning for and managing it. While it may be impossible to ensure that cash is coming into the organization exactly on time and on target to keep things on automatic pilot, it is certainly possible to plan for those times when it isn’t, and to take advance measures to be sure that bills (and staff) are paid on time.

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In this effort, it helps to take a team approach. While one person or department (finance) will be in charge of the central cash flow projection tool, effectively planning and managing cash requires input from across an organization. Program and human resources staff have the most insight into the timing of expenses. The fundraising team knows the most about timing of grant payments and donor gifts. Contract managers can set expectations about reimbursement schedules. Team members working on earned income projects can estimate billing and collections. Ultimately, all of this information should flow to the CFO to project and plan for any potential shortfalls (or, in the happy event of significantly more cash than necessary, to park it in safe short-term investments). Staff across the organization may also be asked to help manage challenges as well—perhaps by rethinking timing of certain expenses or working on accelerating collection of cash from donors or customers. Being informed, strategic, and collaborative in cash flow management can help to ensure that a nonprofit’s long-term strategy isn’t derailed by avoidable—if inevitable—short-term obstacles.

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Notes

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  1. Of course, there isn’t one single version “nonprofit,” as we often say, is a tax status, not a business model—and the variety of ways nonprofits create, deliver, and fund their impact is at least equal to the range of business models in the for-profit sector.
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  3. See the discussion of nonprofit business models and the “business model statement” in Jeanne Bell, Jan Masaoka, and Steve Zimmerman, Nonprofit Sustainability: Making Strategic Decisions for Financial Viability (San Francisco: Jossey-Bass, 2010).
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  5. A tool developed by FMA for projecting and monitoring cash flow needs is available for download at http://www.wallacefoundation.org/knowledge-center/resources-for-financial-management/Pages/Cash-Flow-Projections-Template.aspx.
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  7. Funding that is diversified across income types can mitigate some of the cash flow challenges particular to a single type of income, although that kind of diversification is itself challenging to achieve successfully.
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  9. Some government agencies do offer cash advances or no-interest loans to their nonprofit contractors, but these practices are far from universal.
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  11. That said, tapping into restricted funds to meet immediate cash needs is a potentially dangerous (but not uncommon) practice among nonprofits. Organizations doing this need to be very confident that they will be able to replace those funds when the time comes to deliver on the activities promised in the grant.
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  13. Again, FMA’s cash flow projections template, cited in note 3, can help nonprofit leaders map out projected inflows and outflows of cash, offering insight into both when the use of credit may be necessary and when it could be repaid.
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ABOUT 

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Hilda H. Polanco is the founder and CEO of FMA, a management consulting firm focused on building the financial and operational strength of nonprofit organizations.

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ABOUT 

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John Summers is FMA’s director of consulting services.

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Click here for link to original article. 

Preparing for the One BIG Change in Nonprofit Financial Reporting per FASB

By Nonprofit Quarterly, 6/28/17

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For the first time since 1993, the financial reporting standards for nonprofit organizations are being updated, with the goal of improving the communication of financial results to donors and other outside stakeholders. In this webinar FMA’s Hilda Polanco discusses key changes in reporting requirements.

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Click Here To View Webinar (1 hour)  

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Click here to download FMA’s accompanying slides

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Key questions for all of us are: 

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  • Practically speaking, what do these changes mean for your nonprofit?
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  • As the implementation deadline approaches, are your leadership and board ready?
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Of particular importance, the guidelines require enhanced disclosure of the board’s policies to manage the organization’s ability to pay its bills even during periods of difficult cash flow. But before you can disclose your policies, you first need to have them!

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This one point regarding liquidity planning will need a good deal of preparation on your part. Hilda explores the importance of defining a framework for managing liquidity, including establishing reserves, securing a credit line, accessing endowment earnings, and other strategies to make sure that in times of tight cash flow, your nonprofit can pay its bills without interruption to service delivery and has the clarity necessary to share that framework externally as part of the ongoing financial story told by your audited financial statements.

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Especially relevant for Executive Directors, CFOs and Board Members, this webinar recording will help jump start some critical conversations at your organization in advance of the impending reporting changes.

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Click Here for a link to the original article. 

The Looking-Glass World of Nonprofit Money: Managing in For-Profits’ Shadow Universe

 

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Money-looking

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Editors’ Note:  More than a decade ago, Nonprofit Quarterly attended a presentation given by Clara Miller to a group of foundation representatives. Her talk, presented in the form of a true/false test, challenged attendees to look at the rules of money and finance that govern the nonprofit sector in comparison to those in the for-profit sector. It was a funny and at times painful look at the strange world of nonprofit finance and the contortions that tie nonprofits up in knots that no one from the private sector would recognize. Nonprofit Quarterly found Clara’s presentation compelling and is happy to bring you the next best thing to Clara herself: an article based on the presentation. Take the test below—but be careful; it is more difficult than it seems. Then, read for yourself how our shadow universe compares to the “rational” and “time-honored” ways of the for-profit sector.

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If business is part mystery and part art, a big part of it is also basic science and arithmetic. Some fairly ordinary rules predict typical financial results. Moreover, whether we flout them or honor them, they seem to be universal—almost like laws of nature—and difficult to ignore.

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But enter the nonprofit sector, and it’s a new and irrational world, like stepping through a looking glass. The rules, when they apply at all, are reversed, and the science turns topsy-turvy. Not only are nonprofit rules that govern money—and therefore business dynamics—different from those in the for-profit sector, they are largely unknown, even among nonprofits and their funders. Or at the very least, they remain unacknowledged and unspoken. Some say they are a closely guarded secret. Even when revealed to for-profit cognoscenti, they are so at odds with the listeners’ familiar world as to prompt confusion, disbelief, and related feelings of cognitive dissonance.

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Some of this is also true for government. But there, at least, reporters are sometimes inclined to pass through the looking glass and send back the occasional cautionary dispatch. For example, soon after he was elected, New York Mayor Michael Bloomberg turned to fellow business tycoon Richard Riordan, the past mayor of Los Angeles, for advice on making the leap from private to public management. The New York Times picked up the story, reporting that the Californian advised the New Yorker “to brace himself for a journey to Mars. ‘Don’t do your own thinking. You are going into another world. It is like going to Mars and having a different logical and mathematical system.’ ” 1

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The logic and the math are at least as upended in nonprofit management as in government . However, fewer reporters are apt to cross that divide, and even if they did, they would be hard pressed to find a returning Mars explorer like Riordan willing or able to guide them along. Nonprofit managers sometimes find it difficult to explain their unique universe to board members and the public, partly because the rules sound so improbable. In the words of one for-profit businessman joining a nonprofit board, “It’s as if we’ve been transported back in time and we’re bartering chickens for tools!”

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Yet at a time when both government and philanthropy are placing substantial bets on the virtues of business and free markets—swept up by venture philanthropy, market-based strategies, social enterprise, and earned-income models for the delivery of public services such as education and healthcare—it would seem more timely than ever for the looking-glass universe of nonprofit management to be revealed. To the extent that government, philanthropy, and the for-profit sector rely on nonprofits to tackle many of our society’s greatest challenges, and are investing public and private funds to that end, a short tour across the Martian surface and into this “shadow economy” might prove helpful.

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The following true/false quiz is based on seven core assumptions—rules, really—that are pretty dependable in the for-profit sector. In each case, the nonprofit answer is supplied, and the pattern that develops reveals a business and management environment that would give the best, most heroic for-profit managers challenges tantamount to the Seven Labors of Hercules.

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Test Yourself First In Nonprofits…

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THE CONSUMER BUYS THE PRODUCT

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TRUE

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FALSE

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PRICE COVERS COST AND EVENTUALLY PRODUCES PROFITS, OR ELSE THE BUSINESS FOLDS.

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TRUE

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FALSE

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CASH IS LIQUID

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TRUE

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FALSE

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PRICE IS DETERMINED BY PRODUCERS’ SUPPLY AND CONSUMERS’ ABILITY AND WILLINGNESS TO PAY

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TRUE

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FALSE

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ANY PROFITS WILL DROP TO THE BOTTOM LINE AND ARE THEN AVAILABLE FOR ENLARGING OR IMPROVING THE BUSINESS

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TRUE

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FALSE

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INVESTMENT IN INFRASTRUCTURE DURING GROWTH IS NECESSARY FOR EFFICIENCY AND PROFITABILITY

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TRUE

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FALSE

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OVERHEAD IS A REGULAR COST OF DOING BUSINESS, AND VARIES WITH BUSINESS TYPE AND STAGE OF DEVELOPMENT

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TRUE

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FALSE

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Rule #1:  The consumer buys the product. True or false?  In much of the nonprofit sector, the answer is usually “false.” One of the primary jobs of many nonprofits is to provide vital services to people who can’t pay for them, or at least can’t pay the full freight. Especially in health and social services, a third party usually pays for the product on behalf of the consumer. Therefore, the lion’s share of nonprofit social service, healthcare, job training, housing, and similar businesses provide services to one consumer but are paid by another—or, frequently, by a dizzying array of others, including several levels and programs of government, various private philanthropies, and individual givers. Each has varying ideas of what kinds of products, in the form of job training or social services, are needed. Each also has limitations on what kind of product it is willing to buy for the person who can’t pay.

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What is a rough for-profit equivalent? Let’s imagine a hotel (on Mayor Riordan’s Mars, perhaps) where the guests arrive needing a room for the night, but most lack the money to pay for it. Before you check them in (you’re the desk clerk as well as the owner; it’s a low-overhead hotel) you need to make sure there’s someone else who is willing to pay for their rooms. For someone in the hospitality business, this is a challenge. Luckily, a variety of people and organizations are willing to pay for these guests. However, each has a different idea about what the guests really want, how much the room should cost, even whether some guests should be able to stay or not. You get on the phone for several hours, making deals and ensuring that there’s someone to pay for the guest’s room, that all the guests will be served, and, to the guests themselves, that the rooms will be OK.

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Sound exhausting? That’s one aspect of the job of managing a nonprofit organization that provides services to one group of constituents but receives funding from a range of other sources, including government, individuals, and private philanthropy. The sellers of the hotel’s services (in this case, you) are much like a typical nonprofit director; the third parties who pay for the rooms (donors) are analogous to government and philanthropy; the rooms are the services that nonprofits are paid to render (social, educational, medical, cultural); and the ultimate consumers are the people your nonprofit serves (homeless adults, school children, young adults, the unemployed).

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Many nonprofit organizations provide services to people who can’t pay for them and therefore must “sell” their wares both to the users and to the people who do pay. The players in these two markets have diverse and sometimes contradictory goals, and nonprofit manager s spend time and attention marketing to them all. This adds complexity and high transaction costs to the business—and a constant tension over mission.

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Rule #2: Price covers cost and eventually produces profits, or else the business folds. True or false? This is false, and it is really very difficult to manage around. It is particularly awkward when growth or change occurs, and is one of the harshest business realities of the sector. In the nonprofit world, you do lose a buck on virtually every widget (or guest at the nonprofit hotel) and no, you don’t make it up in volume in the nonprofit sector, either. The difference is, you keep doing it! In the for-profit universe, a manager operating an unprofitable business will eventually fold, but most nonprofits’ missions dictate that they accept a “market defect” of some kind—lack of profit being the most common—as a standard operating condition. Why don’t they exit an unprofitable business? Because their nonprofit missions dictate that they stay in it, providing shelter, medical care, disaster relief, and similar services to people with no means to pay and no other options.

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There are other contributing factors to lack of profitability. First, most of the work is skilled and labor-intensive (human services, education, surgery, nursing care, theater). In institutional settings in particular, fixed costs of operation outside of labor are also high. As former Princeton President William G. Bowen and colleagues so masterfully demonstrated in their classic, The Charitable Nonprofits,2 economies of scale are elusive for a variety of reasons, including, most important, qualitative ones (i.e., if we increase class sizes to 100, all kindergartens will be profitable; and if we simply use volunteers to do brain surgery and provide nursing care, all hospitals will be, too).

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Second, prices to constituents are inelastic, whether they pay or third party payers do. It’s difficult if not impossible to raise prices for elderly, low-income, or uninsured patients, for example. Therefore, absent the option of full cost pricing to the many market constituents, growth inevitably deepens red ink for the preponderance of nonprofits. And if the payer won’t offer full cost pricing of services, it can be sure that a bullying posture to negotiate lower prices will work. There’s a reason nonprofits operate most of these services: staying in this unprofitable market—peopled by abused children, frail elderly people, terminally ill, and similarly needy citizens—is a moral imperative for the nonprofit manager and employees. They won’t walk away from the highly unprofitable business, even when it’s to the eventual detriment of their programs.

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This creates a double whammy for management: lack of profit-generated working capital to fund growth (as noted previously), and a continuing need for larger subsidies as growth proceeds. To make up for a lack of profit in the core business, nonprofits, almost by definition, run two businesses—the core, mission-oriented business, and a second “subsidy” business or businesses.

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The former is easily recognizable in the mainstream economy because it’s quite similar to a for-profit enterprise. The nonprofit is paid for its “core business”: delivering services such as drug treatment, home care, education, or innovative cultural programming. Many of these services receive market derived revenue—via government contracts, ticket sales, tuition, and similar “fees for service,” even when they are paid indirectly (by third party payers). Almost always, however, the cost of these services is greater than the price the government, or foundations, or ticket buyers, or parents paying tuition are able or willing to pay. Even Phillips Academy charges a mere $28,000 in tuition for an education that it notes costs it $50,000 to supply.

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This requires that most nonprofits operate what is, in essence, a “subsidy business,” to make up the difference between the price it can get for mission related services and what the services really cost to deliver. Subsidy businesses include fundraising, dinner dances, special events, bingo, the capital campaign, for-profit related and unrelated businesses (bookstores, gift shops, parking lots), donated services, wine and cheese parties, endowment management, and any number of creative fundraising ideas long a staple of the sector. The subsidy business needs staffing and investment all its own and is subject to its own laws of growth. Nonprofit Finance Fund’s experience has shown that the cost per dollar raised via the subsidy business varies a great deal, but that scale is key: a dollar raised from individuals at a small social service agency, for example, might cost 50 cents (or even $1.53!). A major institution with highly efficient subsidy businesses (major universities or hospitals, for example) may spend only a fraction of a cent. However, the efficiency of use of that subsidy dollar is subject to another set of rules, making the monitoring of “fundraising expense” as an indicator of anything useful for most nonprofits subject to question. More important, how much does it then cost to deliver high quality services?

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Rule #3: Cash is liquid. True or false? For the lion’s share of many nonprofits’ revenue, the answer is false. When is cash not liquid? When it’s restricted cash! As a good manager in the nonprofit economy, you bring in revenue from direct customers, donors, foundations—a large group of interested “buyers.” These buyers often restrict their purchases and gifts to specific purposes—teacher’s salaries, for example, or books. It’s understandable: this gives your donors a direct, defined connection between their funds and the program. Nevertheless, by nonprofit accounting rules, the restricted cash must then sit in the bank until you go out and buy the item or perform the service its purchaser or donor prescribes. Let’s say your donor restricts the cash donation to replacement mattresses for your homeless shelter. If there’s a plumbing crisis, or you decide to add maintenance staff, you can’t touch that cash. Even if you have cash in the bank, you’re going to need another source of payment, fast. This creates the impression among some that a nonprofit is solvent—flush, even—when it’s actually in a cash crisis.

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And when you expand services, it can be just as dicey. With grants for growth, it’s common for generous donors to give a large gift for a relatively narrow purpose—to expand the number of people served, for example—and to restrict the use of the funds to a just a few purposes related to that growth. What is less evident to the donor is that an unintended effect of paying only for new beds (for example) is that even more money will be needed for the things the restrictions don’t cover—the other furnishings in the rooms, the heat, blankets, case workers, and similar parts of the operation that you will need to add if you accept the money for new beds. In other words, it actually costs you money—sometimes lots of it—when a donor shows up with a check that has restrictions on its use.

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Most of us are prone to feelings of cognitive dissonance here. Does this mean that when an organization gets a huge government contract or a large foundation grant, even when it has received the cash and it’s in the bank account, that it’s possible to have no operating cash? How can a nonprofit have cash but not be able to spend it? It’s common, and generally it’s because the cash is restricted with respect to purpose and timing. Sometimes another donor has already given funds with the same restrictions. This often means that the manager needs to raise money to pay for costs the other funds don’t cover in order to be able to fulfill the contract or grant terms. When government funds go unspent, and the announcement is made that there was (for example) “all this day care money, and nobody needed it…” it’s often because, ironically, many nonprofit agencies can’t afford to take the money, given the restrictions and the lack of funds to pay for all the necessities those restrictions rule out.

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Rule #4: Price is determined by producers’ supply and consumers’ ability and willingness to pay. True or false? The triangular aspect of the nonprofit customer relationship makes this answer false as well. The elementary supply-and-demand relationship is usually plotted on a two-dimensional graph. But the nonprofit relationship is not two-dimensional. It’s more than a battle for market share from consumers making relatively simple buy/no buy decisions about a commodity available from competing suppliers. It’s a complex market in which the battle is for both subsidy and fees, depending on product and market. Moreover, those providing one or the other have different, often conflicting, goals and values. This is most evident in the negotiation around quality and price, where one set of customers is most concerned with quality (I want my child to have a first-class, public education), and the other with price (I want the greatest number of children to be served for our tax dollar).

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One variation on Rule #3 above is the case of the payer (government, for example) who can’t or won’t cover the entire cost of the services. This creates a situation where the nonprofit provider is left with the difficult task of finding additional subsidy, turning proffered money away, or providing undercapitalized services to clients, with eventual decline in quality.

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Rule #5: Any profits will drop to the bottom line and are then available for enlarging or improving the business. True or false? False: To most for-profit business people, Rule #5 might seem like the last straw. Even in the unlikely event that a nonprofit finds a way to become more profitable, save money, or build up cash for the next year’s cash needs or multi-year investment, it is frequently unavailable for your use. Thus, the primary source of working capital is systematically eliminated from most nonprofits’ managerial toolboxes, with predictable consequences.

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Here’s what it’s like. As the executive director of a nonprofit residential social service business, you ordinarily receive a fixed amount to deliver services to, let’s say, children in foster care. One year, you decide to weatherize your building, make the boiler more energy efficient, and upgrade electrical appliance efficiency. Even though the government foster care agency won’t pay for capital improvements, you and your board decide to go ahead anyway—the project will lower costs and make the children more comfortable. It turns out that the energy efficiency makes a big difference, and you end the year with a surplus in your foster care program. Because of reductions in energy use and operating costs, you don’t use the line item for “energy” completely. Can you use it for other approved purposes in the agency—maybe for training or to fund some of the capital improvements, or for extra tutoring? In this case, absolutely not! Under your standard contract, even line item savings within a budget cannot be shifted to another purpose within the budget, and profits (surplus or revenue over expenses) must be refunded, usually by lowering cost reimbursement levels for the next year (or contracting period). At the other end of the spectrum, if you exceed your budget, you must absorb the excess of cost over payment from the contracting agency. And to top it all, the capital expenditures are non-reimbursable. Even though not every case or contract is as draconian as this one, the mentality pervades the sector: surpluses are bad! They signify that you don’t really need the money, and that we’re giving you too much.

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Rule #6: Investment in infrastructure during growth is necessary for efficiency and profitability. True or false? It stands to reason that this rule is false, just because the other rules are! And while this rule is true in both the for-profit and nonprofit sectors, the nonprofit rules of business largely prohibit investment needed to increase efficiency as growth occurs. Third parties paying for a service prohibit or put limits on spending for anything but “direct program,” not realizing that there are costs of growth in this highly regulated business. Some donors imagine that by limiting the use of their funds to certain direct services only—teachers’ salaries, blood to be transfused, youth workers, food for the soup kitchen, new productions—all other costs (which take on the appearance of wasteful luxuries anyway) will disappear. Moreover, many donors (including those with economics degrees or MBAs) don’t recognize the concept of marginal cost in nonprofit work. They forget, or in some cases deny outright, that growth carries costs of its own separate from direct cost increases (although given the other irrational aspects of the nonprofit economy, who can blame them?). Training of staff for a new facility; people with more sophisticated management skills for key management functions; marketing to a larger audience; managing a larger, more complex organization; additional supervision to help teachers and administrators get used to a larger group of classes; improvement of computer or phone capacity, and the attendant training needs—all these things improve efficiency but are neither regular overhead nor direct costs of program or program expansion.

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Thus, funds to defray costs that all of us—nonprofit or for-profit—consider a regular, sensible cost of business and a desirable investment in greater efficiency are frequently unavailable, ill-timed, and considered a cost “above and beyond” the real cost of providing services.

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Again, the desperation of the people being served, and the dedication of those who serve them, make nonprofit managers only too eager to take this untenable deal. Givers, almost invariably well-meaning, generous individuals or foundations, often imagine that this practice improves the likelihood that more money will be spent on services, and increases the number served. Actually, this practice only accomplishes two things: it increases the likelihood that the dedicated manager will lie to protect the people served, or it encourages the manager to seriously underinvest in support and systems, thereby undermining the entire operation, and eventually the quality of services. The irony is that these money rules end up undermining program quality most consistently among the best and the brightest: the innovative community-based programs with important successes, which are going to scale.

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Rule #7: Overhead is a regular cost of doing business, and varies with business type and stage of development. True or false? It’s unanimous! They all are false! The nonprofit manager operates in another business universe from the earth of Riordan and Bloomberg: no profits; no path to folding the unprofitable business or weed out the walking wounded; restricted revenue; and to top it off, a general allergy to the dread “overhead.” For some reason, overhead is seen as a distraction—an indication that an organization is not putting enough of its attention and resources into program. But wait a minute, say the for-profit managers. Purchasers tell you how to use your revenue? And it can only go to certain kinds of expenses and not others? And on top of this, the amount that can go to overhead is pretty much set at around 10 to 15 percent, unless you have the brand and clout of a major institution (or defense contractor!), no matter whether you run a school, a fundraising organization, a growing research and advocacy group, or a 300- year old major university? Now you’re getting the idea. Because resources (capital) are scarce, the nonprofit capital market, such as it is, assigns to this capital a manufactured high cost of funds via conflicting rules, high transaction costs, and similar complexities.

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It’s a little like this. You’re now back in the for-profit universe (having landed from Mars) and you’re the owner of a restaurant. Your paying guest comes to pay the bill, offers a credit card, and prepares to sign the charge slip. But before signing, the guest says, “I’m going to restrict my payment to the chef’s salary. He’s great, and I just want to make sure I’m paying for the one thing that makes the real difference here. I don’t want any of this payment to go for light, or heat, or your accounting department, or other overhead. They’re just not that important. The chef is where you should be spending your money!”

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The irony for the field as a whole is that a technique meant to control costs actually undermines efficiency and program quality. The inability of nonprofits to invest in more efficient management systems, higher skilled managers, training, and program development over time means that as promising programs grow, they are going to be hollowed out, resulting in burned out staff, under-maintained buildings, out of date services, and many other symptoms of inadequately funded “overhead.” A colleague who heads the nonprofit side of a hybrid nonprofit/for profit computer consulting firm explained, “The difference between me and my for-profit counterpart is that he instinctively overstaffs operations for growth, and I instinctively understaff in the same management situation.”

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Why are these “facts of nonprofit business life” important, or even relevant? For one thing, in light of these rules, it’s fairly easy to see why executive leadership in the nonprofit sector is difficult to find and retain (and keep from burning out); why nonprofit self-sufficiency is in reality an ephemeral state in the tradition of Brigadoon and Camelot; why sustainability is so difficult for managers to attain without reaching substantial scale over many years; why keeping the promise of social enterprise is a complex problem for managers from Edison Schools to the PTA; and why economies of scale are so difficult for the sector to attain while maintaining program quality. All the good will, brain power, capacity-building, finger-waggling, standard-setting evaluation and impact measures will eventually be undermined by the way we finance these enterprises. The financial system we have put in place and support is the worst enemy, not only of the improvements everyone is trying to make, but of the socially critical programs and services this system is meant to sustain. All efforts to improve the sector will be merely palliative without essential, systemic reform of the way the rules of finance work.

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To complicate things, in the nonprofit sector the big spender is most often the government and the real guest is a homeless person who desperately needs a bed, or a child in need of an after school program so she won’t be home alone. Turning them away goes against the grain for all of us, but most viscerally, for the social worker or teacher who is called to take care of them.

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Society pays dearly for having to do business on Mars. Here are some thoughts on how the system can be improved, and how some well-meaning improvements will simply backfire:

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Nonprofits need to make profits, just like their for-profit counterparts, or their enterprises falter. This alone would improve things. Behind nonprofits’ difficulty pricing their services to cover their costs is a wider struggle for resources. In government contracting, for example, for profits now price to cost plus profit, and generally enjoy better business terms. The for-profit and nonprofit government contracting rules should align with respect to pricing, profit margins, growth capital, overhead, and other well-known and accepted aspects of business operations.

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The focus on overhead or fundraising cost rules of thumb for nonprofits is generally misplaced. It doesn’t get at the productivity of the organization with respect to mission, and ignores the nuances of a variety of business types and stages of development. Delta Airlines has a different cost structure from e-Bay’s; and the Boys & Girls Clubs’ is different from Compumentor’s. Let’s be intelligent about their financial needs.

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More and more diverse scrutiny from government and other funders will create more transaction costs in an industry already carrying an overly high level. This will burden large and small alike, making small, innovative, and efficient organizations experience an infusion of cost just as growth is proceeding, and increasing the length of the already long climb to scale. Funders can go a long way toward lowering transaction costs for themselves and their grantees via small modifications to the way they do business, and by taking on the formidable task of tracking program and mission productivity—rather than questionable financial indicators—field-wide.

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Funders of all types and at all levels—individuals and government alike—need to be aware of the toll the financing system takes on “human capital.” Our capital “supply side” is fragmented and expensive to access, which is burdensome and discouraging for far too many valuable people—from young, innovative teachers to heads of established social service agencies.

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For all donors, unrestricted grants are the most positive financially and should be the rule and not the exception. This is because anything else, generally speaking, creates cost for the recipient. There may be exceptions, and giving unrestricted funding does not mean that funders cannot or should not be actively involved in communicating with the recipient about plans for the funds, budget, and program strategy. However, anything but unrestricted grants generally creates cost within the grantee’s operation.

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With self-discipline and a little creativity, we can improve the business environment for our sector, creating a more intelligent, nuanced system of finance for “social enterprises,” and nonprofit services. This will work better than the current approach, which substitutes well-meaning but counterproductive rules of thumb for sensible, informed financial practices. And it will allow us to power sustainability, management improvement, and innovation in the sector by leveraging appropriately some effective and time-tested rules of business.

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Endnotes

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  1. Dean E. Murphy, “Two Cents from a Rich Ex-Mayor: Los Angeles’s Riordan Gives Bloomberg a Few Tips,” The New York Times, December 17, 2001, p. 2-B.
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  3. William G. Bowen, Thomas I. Nygren, Sarah E. Turner, and Elizabeth A. Duffy, The Charitable Nonprofits: An Analysis of Institutional Dynamics and Characteristics, Indianapolis: Jossey-Bass, October, 1994.
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ABOUT 

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Clara Miller is president of the F.B. Heron Foundation, which helps people and communities help themselves out of poverty. Prior to assuming the foundation’s presidency, Miller was president and CEO of Nonprofit Finance Fund, which she founded and ran from 1984 through 2010. In addition to serving on Heron’s board, Miller is on the boards of the Sustainability Accounting Standards Board (SASB), Family Independence Initiative, The R.S. Clark Foundation and StoneCastle Financial Corp. She is a member of the U.S. Advisory Committee to the G8 on Impact investing, named in 2014. She is a member of the Social Investment Committee of the Kresge Foundation. From 2010–2014, Miller was a member of the first Nonprofit Advisory Committee of the Financial Accounting Standards Board.

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