NonProfit Finance Fund: Making Finance Work For You.

nonprofitfinancefund.org ©2011 Nonprofit Finance Fund®

Nonprofit Finance Fund

Using Finance to Improve Institutional Sustainability

Presented by

Gar Kelley, Vice President

AEO Annual National Microenterprise ConferenceWashington, DCMay 3, 2011

1nonprofitfinancefund.org ©2011 Nonprofit Finance Fund®

Goals for This Session

Equip you to incorporate your organization’s business dynamics and financial condition in planning and decision making for programmatic success

Provide you with financial tools & strategies to manage in a changed and changing environment


Nonprofit Finance Fund: Where Money Meets Mission

Served thousands of nonprofits and funders since 1980

CAPITAL ACCESS

Alone and through strategic partnerships: Debt, PRI management, New Market Tax Credits, “Philanthropic Equity,” Catalyst Funds

$280 million in loans; $100 million in New Market Tax Credit deals; over $1 billion in capital leveraged

CONSULTING

Over 1,000 consulting engagements and workshops in past 5 years

Financial advisors and educators

Collaboration/Merger specialists

All sub-sectors served: $300,000 to $50 million

―[NFF is]… arguably the most influential voice in the ongoing effort to reshape thinking and practice about nonprofit capitalization.‖

–The Nonprofit Times


The NFF Triangle

Mission and Program

What you do, and how you do it.

Capacity

The people, space, and processes that allow you

to do what you do.

Capital

What resources and assets you to have to

work with.


Mission and Program

CapitalCapacity

Mission and Program

CapitalCapacity

Mission and Program

CapitalCapacity

Mission and Program

CapitalCapacity

Mission and Program

CapitalCapacity

Mission and Program

CapitalCapacity

Mission and Program

CapitalCapacity

Mission and Program

CapitalCapacity

Mission and Program

CapitalCapacity

Mission and Program

CapitalCapacity

Mission and Program

Capital

Capacity

Mission and Program

Capital

Capacity

Mission and Program

Capital

Capacity

Mission and Program

Capital

Capacity

Mission and Program

Capital

Capacity

The NFF Triangle

Establishing and maintaining a balance among the three components is essential to long-term health and viability.

5nonprofitfinancefund.org ©2011 Nonprofit Finance Fund®nonprofitfinancefund.org ©2011 Nonprofit Finance Fund 5

Agenda

Some Perspective

Nonprofits in Recession

Considerations for Sustainability

Capitalization Tools and Strategies

Assessing your Nonprofit‟s Current Financial Situation

Planning a Strategic Response That Encourages Stabilization and Sustainability

Concluding Thoughts

Communicating your Financial Story and Resource Needs

Overcoming the Knowing-Doing Gap


How Did This Recession Compare?

Steeper and deeper than the past 3 recessions

Source: Board of Governors of the Federal Reserve System, 2009 research.stlouisfed.orgNote: Shaded areas indicate US recessions.Index: 2002 = 100


Percentage of Nonprofits Reporting Deficits

(Post-Depreciation)

31%33%

40%

44%

41%

38% 38%

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

FY1999 FY2000 FY2001 FY2002 FY2003 FY2004 FY2005

More Nonprofits Experience Deficits During and After Recession

Recession Recovery Lag


NFF 2009, 2010, & 2011 Surveys

Nationwide survey of nonprofit managers

To assess the real-time financial challenges

To surface the most critical areas of need

both for the immediate and longer-term

durability and effectiveness of the sector

Over 1,900 nonprofit leaders responded in 2011

Results suggest US nonprofit sector continues to experience:

Downward pressure on both government and philanthropic funding

Cash and liquidity constraints for an indefinite period

60% of respondents had 90 days or less of cash available

Financial Vulnerability

44% of 2011 survey respondents ended 2010 with a surplus, versus 35% in 2009 and 40% in 2008.

Only 25% of 2011 survey respondents added reserve funds in 2010.


What Are the Trends Among These Lifeline Organizations?

“Lifeline” organizations that provide critical services to people in need are finding it hard to meet the demands in their communities:

87% saw an increase in demand for services in 2010, compared with 68% of non-lifeline organizations.

60% of lifeline organizations increased the number of clients served in 2010, yet only 43% were able to full meet the demand for services.

Just 37% of lifeline organizations expect be able to fully meet demand in 2011.


Summary of National Survey Findings

Nonprofits face ongoing increases in service demand, while the financial situation for many continues to be difficult.

Nonprofits are responding to this „new normal‟ with creativity and resilience, even finding ways to increase services in the face of funding uncertainty.

While some nonprofits are adapting to changed circumstances in healthy ways, such as strategic collaborations and careful expense management, others are entering into situations that threaten their survival, such as substantial layoffs or deficits.

Now more than ever, nonprofits need open dialogue with internal and external stakeholders, and support for the overall organization and core programs.


Agenda

Some Perspective






Concluding Thoughts




Focus, Focus, Focus

Revisit your mission and define your priorities:

Which activities are core to your mission?

Are they positive financial contributors or do they need subsidy from other programs?

What is non-negotiable in your budget?

Once you define what is core to your mission then define programs as:

What we MUST do

What we SHOULD do

What we WANT to do

Make Mission-Driven Decisions:

The goal is to ensure you stay afloat to serve the community. This may mean partnering with other complimentary organizations or making tough business decisions


Questions to Consider Around Sustainability

What businesses are you in?

What do you sell in each business?

Who buys ―it‖?

What does ―it‖ cost? How do you price ―it‖?

Is there a ―Model of Sustainability‖ for our organization?

How does our Model of Sustainability change if our circumstances and/or environment change?

How do our enterprise/balance sheet needs impact and influence our Model of Sustainability?


Need vs. Demand

Who decides if there is a need for your programming?

How do we know if there is demand for your programming?

Who are your local competitors and how does that affect demand?

Why are you best suited to offer your programming in yourmarket?

Demand = combination of reliable sources willing to pay full-cost price annually

Sustainability

Demand

Need


Agenda

Some Perspective






Concluding Thoughts




Determining Your Risk Tolerance:Focus on the Balance Sheet

Revenue minus Expense = Surplus / Deficit

Statement of Cash Flows

Assets

Cash

Liabilities

Net Assets

Surplus / Deficit

Statement of Activities

Statement of Financial Position


Assess Risk: Understanding Current Position

Assess your exposure and risk

Understand your income statement

– How might your revenue and expense components be affected?

– How will operating performance impact the organization?

Understand the strength of your balance sheet

– Are you operating now from a position of strength or weakness?

– Can you afford a deficit and, if so, how large and for how long?

– What is your risk tolerance?

The urgency and type of action leadership should take depends on your organization’s current financial position.


Assess Risk:Know your Income Statement

Revenue Dynamics

Where does the organization‟s money come from?

Is it reasonably diversified or at risk?

Do revenue streams appear reliable / consistent?

Cost Dynamics

What does the organization spend on operating activities?

Are expenses adjusted in line with revenue changes?

Note: Statement of Activities will not present expenditures on capital items or debt principal repayments.

Profitability and Savings

Does the organization cover its costs?

Are surpluses sufficient to meet balance sheet obligations?

Is the agency saving? If so, is it enough?

*Conversation with leadership will offer greater clarity than financials alone.


Generate Surpluses to Cover the Full Cost of Business

Total Cost of All Business Activity($ in thousands)

0

400

800

1,200

1,600

2,000

2,400

2,800

2010B

Reserve, one monthexpenses

Depreciation expense

Purchases of property& equipment (P&E)

Estimated debtprincipal payment

Expenses (beforedepreciation)

Revenue (includingnon-operating)


Assess Risk: Know your Balance Sheet

First things first: Know where you stand

Assets Cash – How much? How “liquid?”

Receivables – Are they slow to collect? Are any at risk for collection?

Fixed Assets – How do you address maintenance issues?

Liabilities Line of Credit – How do you manage cash flow? Are you using debt appropriately?

Net Assets & Reserves

Unrestricted Net Assets – Do you own more than you owe?

Temporarily Restricted Net Assets – Do they fully support your core programs?

Reserves – Do you have them? Are they suitable to your needs? Agreement on use?

Balance Sheet

Assets

Liabilities

Net Assets


EXAMINE NET ASSET COMPOSITION

Earned Revenue

Permanently Restricted Contributions

Unrestricted Contributions

Temporarily Restricted

Contributions

Temporarily Restricted Net Assets

Permanently Restricted Net Assets

Net Assets Released

Investment Income

Operating and Non-operating Expenses

Ice: Receivables

Rocks: PP & E

Water Bottle:Board Designated Reserve

Water: Unrestricted Cash


Months of Cash =

Total Cash

(Total Expenses / 12)

Months of Liquid Net Assets =

Unrestricted Net Assets –(PPE – PPE Debt)

(Total Expenses / 12)

Working Capital =

Current Assets – Current Liabilities

Measuring Liquidity


Assess Risk:Months of Cash- Rule of Thumb

What is the right amount of liquidity? In good and bad economic environments?

Months of Expenses Covered by Cash Operating Situation0 Crisis – Scrambling for cash, delaying payment to

vendors, overdrawing checking account.

Less than 3 months Cash is tight – Relying on line of credit, delaying payment to vendors.

3-6 months Room to breathe – Can do some long-term thinking. Little room for “rainy days.”

6+ months Handles risk – Able to withstand increasingly acute shocks such as large facility repairs, funding cuts and possibly recessions.


Types of Board-Designated Reserves: Tools for Supporting Organizations

Rainy Day (Emergency) Reserve

For the unexpected and unbudgeted (i.e. to replace lost income)

Cash Reserve for Operations

Internal line of credit to bridge funding delays

NOT to replace lost income or cover ordinary expenses

Facility Reserve

Building maintenance, systems replacements, etc.

Investment Reserve

A “self-governed” endowment with board authority to use the principal for other purposes if necessary


Agenda

Some Perspective






Concluding Thoughts




Program Profitability Analysis

Scenario Testing

Explore strategic partnerships, collaborations, mergers

Debt Consultingand Access to Capital

A Planning Continuum

Cash Flow Planning

Financial & Organizational Assessment


Cash Flow Management Best Practices

Estimate how much cash to keep on hand and, if appropriate, how much short-term debt and/or reserves you will need to access during low cash months

Distinguish between ―cash flow‖ issues (timing of receipts) and ―cash‖ issues (shortage of cash overall)

Cash flow planning is an iterative process, requiring constant monitoring and adjustment


Address Risk: Cash Flow Management

Proj. Actual Proj. Actual Proj. Actual Proj. Actual Proj. Actual Proj. Actual

Beginning Total Cash 0 0 - - - - - - - - - -

Unrestricted Operating Cash on

Hand [Beginning of month] 0 0 - - - - - - - - - -

Operating Cash

Unrestricted Operating Cash Receipts

Earned Income 0 0 0 0 0 0 0 0 0 0 0 0

Unrest. Contributions 1 0 0 0 0 0 0 0 0 0 0 0 0

Restricted Cash Releases - - - - - - - - - - - -

Total Op. Cash Receipts - - - - - - - - - - - -

Operating Cash Spent

Personnel 0 0 0 0 0 0 0 0 0 0 0 0

Professional Fees 0 0 0 0 0 0 0 0 0 0 0 0

Occupancy 0 0 0 0 0 0 0 0 0 0 0 0

Interest on debt 0 0 0 0 0 0 0 0 0 0 0 0

Other 1 0 0 0 0 0 0 0 0 0 0 0 0

Total Op. Cash Spent - - - - - - - - - - - -

Net Cash from Operations - - - - - - - - - - - -

Non-Operating Cash

Non-Operating Cash In

Draw on LOC/ Long Term Debt Receipt 0 0 0 0 0 0 0 0 0 0 0 0

Capital Campaign Contributions 0 0 0 0 0 0 0 0 0 0 0 0

Other Non-Op. Cash In 0 0 0 0 0 0 0 0 0 0 0 0

Non-Operating Cash Out

Principal Payment on LOC 0 0 0 0 0 0 0 0 0 0 0 0

Principal Payment on LTD 0 0 0 0 0 0 0 0 0 0 0 0

Other Non-Op. Cash Out 0 0 0 0 0 0 0 0 0 0 0 0

Net Non-Op. Cash - - - - - - - - - - - -

Temporarily Restricted Cash

Temp. Rest. Cash In 0 0 0 0 0 0 0 0 0 0 0 0

Temp. Rest. Cash Released 0 0 0 0 0 0 0 0 0 0 0 0

Net Temp. Restricted Cash - - - - - - - - - - - -

Ending Cash - - - - - - - - - - - -

Monthly Operating Cash Flow

Projection vs Monthly Actual: 0 - 0 - 0 - 0 - 0 - 0 -

Month 1 Month 2 Month 3 Month 4 Month 5 Month 6


Building Your Cash Flow Projections:Tips and Techniques

Be disciplined and conservative, but not too conservative – an unrealistic cash flow projection is useless

Revisions to your projections will be necessary. Each month, check for anomalies and subject them to further review

Look for trends in the end of the month cash balances:

How do projections stack up against actual cash balances?

Which months end with positive/negative cash levels?

What are the patterns?


Quantifying the Challenge: Debt and Access To Capital

Lines of Credit

Can help address periodic or recurring CASH FLOW issues

Provide a bridge for timing gaps between fund expenditure and receipt of offsetting revenue

By securing a line of credit, particularly when you need it least, you build your banking relationship and credit history


Quantifying the Challenge: Debt and Access To Capital

Conversations with your banker must be ongoing, deep, and fully transparent. Be prepared to share:

Short- and long- term plans for the organization

A management team that has the ability to lead through changing economic and funding environment

Evidence of reporting and processes in place to measure progress against budget and ability to course correct

Funding commitments / contracts for next 12 months (at minimum)

Multiple scenarios for potential reductions or loss in funding

Track record of support from community and funders

Engaged board of directors


Using Program Profitability Analysis to Assess Risk

Assessing underlying program economics informs strategic decisions about:

Whether and how to cut costs

Where to focus fundraising efforts

Whether to sustain, grow or cut/change programs

How to respond to operating changes

How to allocate resources among competing priorities

Nonprofits often make decisions to maintain deficit programs critical to their mission

The key is to understand the size of, and identify the source for the subsidy needed to cover, these deficits


Program Profitability Analysis: A Visual Tool

+ $

- $

High $ contribution High mission alignment

What can we cultivate and preserve?

Are there opportunities for growth?

High $ contribution Low mission alignment

Assess threat of „drift‟

Opportunity to align with core programs?

Non-financial costs?

Mission

Low $ contribution Low mission alignment

Relevance to the organization?

Legacy? One-off?

Opportunities for strategic realignment?

Low Impact

Low $ contribution High mission alignment

Potential to cut costs?

Can the revenue model change?

Does subsidy exist elsewhere in the organization?

High Impact

Mo

ney

Con

trib

uti

on

M

arg

in


NFF’s Program Profitability Model

NFF’s Program profitability model helps frame many key decisions in a way that nonprofit managers can easily understand and act on

It removes complex cost allocations:

Total cost allocations are often critical for funder reports and pricing analyses

However, they are not always best suited for devising financial strategy and making operating decisions


PPM Methodology

Step 1: Use most recent annual financial information

Using current budget or latest projection for current fiscal year is critical to improving decision making

Focus on operating revenue available for the fiscal year. Capital revenue and expenses are not considered in the model (e.g., the cost of a new building)

Step 2: Identify items that are directly tied to programs

If the program goes away, does the revenue (or expense) go away? Eg., After School Teacher may leave if after school program goes away, but Director of Programs would likely stay (at the same salary)

The PPM thus reveals a specific program-based “bottom-line” surplus or deficit

All supporting expenses (management, occupancy, fundraising, admin., etc.) are examined separately.


PPM Methodology

Step 2, continued:

Note that PPM is both art and science

Eg., A foundation may give program restricted funding, but if the nonprofit ended the program, the foundation may fund another program of the organization because they hold the nonprofit in high regard and trust management‟s decisions. Given the funder‟s flexibility in this case, the grant would be considered “capacity,” rather than “program”

Given cases such as these, a good PPM would draw on the knowledge of the CFO, CEO, and other key managers


Tips for Using the PPM as a Management Tool

This is not a one-time analysis, it is meant to get better over time as staff and board use it

Real power of the model comes over time, when it is fully integrated into planning. Stakeholders will have strong foundation to make financial decisions

This analysis is for internal use only


Program Economics:Methodology

Step 3: Calculate contribution margins

Program 1

Revenue: $500,000

(-) Dir Exp: $200,000

Contribution Margin:

$300,000

Program 3

Revenue: $100,000

(-) Dir Exp: $600,000


($500,000)

Program 2

Revenue: $400,000

(-) Dir Exp: $1,200,000


($800,000)

Program Totals

Direct Revenue: $1,000,000

(-) Direct Expense: $2,000,000

= Total Direct Contribution Margin: ($1,000,000)


Sample Program Profitability Model

After

School

Youth

Program Literacy

Senior

Services

Program

Subtotal Fundraising

Special

Events

Program

Mgmt Admin.

Capacity

Subtotal Total

Revenue (A) Earned

Government contracts $457 $110 $800 $1,367 $0 $1,367Ticket Sales $0 $0 $0Client Fees $156 $100 $256 $0 $256

Subtotal $613 $110 $0 $900 $1,623 $0 $0 $0 $0 $0 $1,623

(B) ContributedFoundations & Corporations $113 $120 $233 $10 $10 $243Government $27 $27 $80 $80 $107Individuals $85 $85 $704 $242 $946 $1,031Trustees $12 $12 $152 $185 $337 $349

Subtotal $237 $0 $120 $0 $357 $946 $427 $0 $0 $1,373 $1,730

Total Revenue $850 $110 $120 $900 $1,980 $946 $427 $0 $0 $1,373 $3,353

ExpensesSalary & Benefits ($441) ($80) ($525) ($1,046) ($188) ($85) ($475) ($748) ($1,794)Consultants & Contractors ($239) ($100) ($172) ($511) ($20) ($175) ($195) ($706)Professional Fees $0 ($48) ($85) ($13) ($146) ($146)Occupancy ($112) ($259) ($371) ($62) ($46) ($108) ($479)Office & Supplies ($3) ($12) ($5) ($20) $0 ($20)Program ($85) ($8) ($10) ($103) $0 ($103)Interest $0 ($20) ($20) ($20)Miscellaneous ($15) ($29) ($44) ($44) ($15) ($102) ($161) ($205)

Total Expenses ($894) ($100) ($100) ($1,000) ($2,094) ($300) ($337) ($85) ($656) ($1,378) ($3,472)

Surplus/Deficit ($45) $10 $20 ($100) ($115) $646 $90 ($85) ($656) ($5) ($120)

CapacityPrograms


Scenario Testing

By building a financial model using alternate case scenarios, you can project a range of outcomes to inform decisions

Scenario testing provides a means to explicitly and transparently communicate in financial terms the viability of plans for the future

Determine how and under what circumstances you willmid-course correct

Consider which expenses you can reduce, eliminate or postpone

Evaluate how cuts will impact delivery of mission and economic viability

Consider ways to increase revenue, if once reliable sources seem questionable.

Ensure new revenue opportunities are “net” positive


Determine the triggers that lead to Plan B, Plan C, etc.

For example: if X% of revenue doesn‟t arrive by Y, we will cut Z% of expenses

Plan for a worst-case scenario

Easier to add back later than to be forced to take drastic action without a thoughtful plan

Plan for the impacts of scenarios on programming

What is the impact on specific program metrics (i.e., clients served, number of housing units produced or managed, schools and youth served, etc.)

Can be as complex or as simple as needed:

What would we do differently if budgeted revenue dropped 10%? 20%? 30%?

What is the likelihood of receipt for each revenue source within each program? What adjustments will we make within these programs and to our supporting capacity?

Planning Your Response: Scenario Testing


How Will Scenarios Impact Your Organization’s Long Term Health?

How do the scenarios impact the organization’s ability to withstand risk?

How will earned revenue or philanthropic dollars raised change? Will overhead/capacity costs change?

Which scenarios produce deficits? Surpluses?

Will deficits deplete cash and liquidity or result in larger debt obligations?

Will surpluses be converted to cash savings or invested in fixed infrastructure?


Concluding Thoughts

―Programs‖ are not necessarily synonymous with ―Lines of Business‖

Determine lines of business by assessing what it is you are selling in terms of services, who the buyers of those services are, and how much those services are costing you and your buyers

Once you establish clearly defined lines of business, you will gain visibility into the sustainability of program and enterprise level plans

Use scenario planning to adjust strategy and respond to potential shifts in your internal or external environment; revenue and expense contingencies can:

Help mitigate the effects of a dire situation Completely neutralize the effects of a negative

occurrence Identify opportunities to improve the organization‟s

bottom line going forward


Agenda

Some Perspective






Concluding Thoughts




Communicate Early and Often

Engage staff in conversations about options. Valuable source of creative ideas and solutions

Bring alternatives to the Board for decision making. Remember: Board has a fiduciary duty to safeguard the organization‟s assets

Stay in front of donors—don’t pull back. Be candid about the continued impact of the economic climate on your programs and organization


Knowing-Doing Gap: Where are You?

Information Gap: Do you develop transparent, accurate and timely financial planning and management reports that give you the information you need?

Interpretation Gap: Do management and board collectively have the ability to understand, interpret and discuss the implications of financial information?

Decision-making Gap: Do you have a culture of making and following through on tough decisions?


Minimizing the Information Gap: Developing a Financial Toolkit

Do your financial planning and management tools provide the information you need?

Year-to-date actuals vs. budget

Balance sheet

Monthly cash flow

Revenue and expense by program

Who is involved in preparing the reports?

How frequently?

Who receives them?

When and how does the Board get involved?

Tools are only as good as the assumptions behind them. Be prepared to work with and adapt to imperfect information


Concluding Thoughts

Good financial decision-making requires timely, accurate and transparent financial information

Use financial planning tools to guide decision making but bear in mind that tools are not a substitute for making difficult decisions

Beware of the knowing-doing gap

A healthy capital structure is critical to long term programmatic vibrancy and financial viability

Seek funding opportunities that cover full costs and meet full enterprise needs

Manage costs in the context of revenue and capital realities

Establish reserves that enable the organization to manage risk


Appendix: 2011 National Survey

2011 State of the Nonprofit Sector Survey Results

March 2011

For more information, please visit nonprofitfinancefund.org

For full survey results, please visit http://nonprofitfinancefund.org/2011Survey

Data is based on a nationwide Zoomerang survey of nonprofit leaders conducted by Nonprofit Finance Fund, January-February 2011.

Generously supported by Bank of America Charitable Foundation

http://nonprofitfinancefund.org/2011Survey


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Transcript of NonProfit Finance Fund: Making Finance Work For You.