Nonprofit Finance Fund San Diego Grantmakers2018 Annual ... · Dollars to pay down debt. Debt can...

nff.org ©2018 Nonprofit Finance Fund®

Nonprofit Finance Fund®

San Diego Grantmakers 2018 Annual Conference: “Frameworks for Good”

Presented by:

Renee Patey, DirectorAdvisory ServicesNonprofit Finance Fund

March 29, 2018

2nff.org ©2018 Nonprofit Finance Fund®

About The Full Cost Project

The Full Cost Project - a joint initiative of Philanthropy

California (Northern California Grantmakers, San Diego

Grantmakers, and Southern California Grantmakers) and

Nonprofit Finance Fund.

Bringing together education, advocacy, and skill-building

with the goal to increase the number of funders that

provide full cost funding and to build the skills and

capacity of all those engaged in grantmaking –

foundations, corporations, individuals, and government.


Nonprofit Finance Fund: Where Money Meets Mission

We unlock the potential of mission-driven organizations through

• Tailored investments

• Strategic advice

• Accessible insights

Guided by our Core Values

NFF envisions a world where capital and expertise come together to create a more just and vibrant society.

NFF’s Values

Responsive-ness

Leading By Doing

Generosity of Spirit

Rigor Without Attitude


11%

9%

19%

20%

32%

53%

0% 20% 40% 60% 80% 100%

Working capital (cash flow needs)

Felxible capital for change/growth

Acquiring or renovating a facility

Multiyear funding

General operating support

Expanding programs

What Do Nonprofits Feel They Can Discuss With Funders?

Asking Nonprofit Leaders: My NPO can have open dialogue with funders about...

Source: NFF 2014 State of the Sector Survey

Flexible


40%

47%

51%

65%

70%

85%

11%

9%

19%

20%

32%

53%

0% 20% 40% 60% 80% 100%

Working capital (cash flow needs)

Felxible capital for change/growth

Acquiring or renovating a facility

Multiyear funding

General operating support

Expanding programs

Funders Report More Openness Than Nonprofits Perceive

Asking Nonprofit Leaders: My NPO can have open dialogue with funders about...

Asking Funders: Overall, are you willing to engage in an open dialogue with nonprofits on funding for these purposes?

Source: NFF 2014 State of the Sector SurveySource: Grantmakers for Effective Organizations 2014 Survey

Flexible


Total ExpensesOperating, non-operating, and unfunded expenses

Working CapitalAccess to cash for day-to-day needs

ReservesSavings, a “rainy day” fund

Debt Principal RepaymentMortgage, line of credit, etc.

Fixed Asset AdditionsMoney to purchase a new building, equipment, vehicles, computers etc.

Change CapitalResources to adapt, grow, and/or expand

‘Must haves’ for all organizations

Introducing Full Costs

Sometimesneeded by someorganizations


3 Rules of Full Cost Funding

Nonprofits need profits. Surpluses

support sustainability.

Conversation is critical, financial

statement’s won’t give the full story.

Know what kind of money you give,

and match expectation to the dollars.


Nonprofits Need Profits:Understanding Full Cost

Nonprofits need to cover the full cost of delivering programs

Most full cost needs are met by

generating year-over-year

surpluses

Full Cost Rule #1: Nonprofits need profits


Challenge: Communicating Use of Surplus

Some (funders, board members) demand a “$0 Bottom

Line”

Budgeting to break-even will not cover an organization’s

full costs and undermines ability to deliver on mission in

the long-run

Nonprofits can indicate plans for use of surplus “below

the line” to demonstrate good management and satisfy

the request for a “balanced budget”


Total Expenses


Total Expenses

What It Is

Operating expenses

‘Direct’ program expenses

‘Indirect’ / ‘overhead’ expenses

Depreciation

Unfunded expenses *

What It Is NOT Any purchase that is capitalized

Repaying debt

How to Calculate

Past spending from income statement or P&L

Projected budget

Consider changes

Consider unfunded expenses *

Questions to Consider

Are you adequately accounting for upfront and ongoing costs of data collection, analysis and sharing to measure impact?

Do you have any unfunded expenses related to staff capacity/ sweat equity?

Total Expenses


*Defining ‘Unfunded Expenses’

Unfunded Expenses: expenses that are not currently incurred,

but, if covered, would allow the organization to work at their

current level in a way that is reasonable and fair.

“Sweat equity” – overworking and underpaying staff – is the most

common example, such as:

The gap between current wages and fair wages for the exact

same amount of work.

The cost to hire a 20hr/week assistant that would allow the ED to

reduce her time from 60hr/week to 40hr/week.

Other examples: unfilled positions, sub-par supplies, slow internet

Unfunded expenses are NOT:

Expenses to expand or do more

Full Cost Rule #2: Financial statements will not reveal all full cost needs. Conversation is required.


Reserves


Reserves

What It Is

Dollars used for specific a purpose; eventually replenished

Often board designated, such as:

Operating reserve that protects from risk by covering short-term deficits

Fixed asset reserve to maintain building & equipment, pay for repairs/replacement

R&D reserve to allow for trial & error (e.g., take artistic risk reserve, investigate new program approach)

Investment reserve to generate revenue

Reserves are need by all, but size & purpose varies by organization

Accessible to management under certain conditions

Often requires board approval to access

May be held as cash in savings account, or investments that can be liquidated in a reasonable timeframe


Reserves, con’t

How to Calculate

Varies by reserve type

Operating reserve requires assessment of likely risks and time needed to respond or recover

Fixed asset reserve look to estimates on the timing and cost to replace buildings and equipment

R&D reserve requires assessment of expected opportunities and associate costs

Investment reserve calculated based on income stream needed and expected return rate

Balance sheet and audit may provide information on current reserves


Does your organization have a reserve? Can leadership and board articulate its purpose?

Are reserves or reserve goals aligned with priorities and needs?


Change Capital


Change Capital

What It Is

Periodic reinvestment into the organization to change its business model (i.e., the size or reach of mission and/or how to make and spend money)

Covers up-front costs of change and deficits until new business model revenue exceeds new business model expenses

Typically large, flexible, multi-year funding from an external source

What It Is NOT Organic growth

How to Calculate

Detailed projections for a surplus-generating business model

planning/up-front/startup costs for revenue generating activities, programs, and other infrastructure

Timeline to secure new revenue and revenue sources


Will any program/service approach delivery require “change”?

What sources of change capital might exist to finance this change?

How are you planning to outgrow change capital?


Capital or Revenue?

Our sector does not distinguish capital for change from

revenue for operations on financial statements (for-profits do!)

Lack of clarity creates unrealistic expectations, frustration and

disappointment for both nonprofits and funders

Matching the right kind of money to the need sets us up for

greater results and a successful grantor/grantee relationship

Full Cost Rule #3: Know what kind of money you give


Nonprofits

Begin by knowing the truth

for yourself: Know your full

cost needs

Approach full cost as a

journey: Make progress over

time

Engage funders as partners

Ask for your full cost needs

honestly and unapologetically

Ask for the right kind of

money (capital vs. revenue)

Ways We Can Get it Right

Funders

Acknowledge that full cost

needs are real; interrogate

why you do or do not fund

certain costs

Know when you are giving

capital vs. revenue dollars

Have full cost conversations

with grantees: Create a safe

space to have the discussions

Don’t ask too much of

grantees: With great power

comes great responsibility

20nff.org payforsuccess.org ©2018 Nonprofit Finance Fund®

Closing

Summary

Nonprofits need profits; surpluses support full cost coverage

Create the space to have the right conversations

Match your funding with your intent (capital vs. revenue)

Recommended Next Steps

Review internal practices and policies

Use your social capital

Visit fullcostproject.org or contact NFF for more resources

21nff.org payforsuccess.org ©2018 Nonprofit Finance Fund® 21

Where Money Meets Mission

twitter.com/nff_news

facebook.com/nonprofitfinancefund

nff.org/contact

[email protected]

Thank you.

Stay Connected!

22nff.org payforsuccess.org ©2018 Nonprofit Finance Fund®

Appendix

The Full “Full Cost” Profile: Definitions & Questions

Expenses

Working Capital

Reserves

Debt Principle Repayment

Fixed Asset Additions

Change Capital

Conversation Guide

Scenario 1: Deficits

Scenario 2: Reduced Funding

Scenario 3: Surpluses

Scenario 4: Grant Structure


The Full Cost Profile


Total Expenses

What It Is

Operating expenses

‘Direct’ program expenses

‘Indirect’ / ‘overhead’ expenses

Depreciation

Unfunded expenses *

What It Is NOT Any purchase that is capitalized

Repaying debt

How to Calculate

Past spending from income statement or P&L

Projected budget

Consider changes

Consider unfunded expenses


Are you adequately accounting for upfront and ongoing costs of data collection, analysis and sharing to measure impact?

Do you have any unfunded expenses related to staff capacity/ sweat equity?

Total Expenses


Working Capital

What It Is

Dollars to cover predictable timing of cash ebbs & flows

Maintains business operations if receivables are late or bills must be paid early

Easily accessible to management: in the checking account, not restricted or strictly designated

Needed by all organizations

Amount needed varies by organization

What It Is NOT Dollars to cover lost revenue, unplanned expenses, or deficits

How to Calculate Cash flow planning/projections

Consider past cash flow performance


How much working capital do you currently have?

When are cash low points projected? How will you manage them?


Reserves

What It Is

Dollars used for specific a purpose; eventually replenished

Often board designated, such as:

Operating reserve that protects from risk by covering short-term deficits

Fixed asset reserve to maintain building & equipment, pay for repairs/replacement

R&D reserve to allow for trial & error (e.g., take artistic risk reserve, investigate new program approach)

Investment reserve to generate revenue

Reserves are need by all, but size & purpose varies by organization

Accessible to management under certain conditions

Often requires board approval to access

May be held as cash in savings account, or investments that can be liquidated in a reasonable timeframe


Reserves, con’t

How to Calculate

Varies by reserve type

Operating reserve requires assessment of likely risks and time needed to respond or recover

Fixed asset reserve look to estimates on the timing and cost to replace buildings and equipment

R&D reserve requires assessment of expected opportunities and associate costs

Investment reserve calculated based on income stream needed and expected return rate

Balance sheet and audit may provide information on current reserves


Does your organization have a reserve? Can leadership and board articulate its purpose?

Are reserves or reserve goals aligned with priorities and needs?


Debt Principal Repayment

What It Is

Dollars to pay down debt. Debt can be:

Line of credit

Mortgage

Loans from board members

Other forms of borrowing

Debt can be a valuable financing tool, but there must be a plan to repay it

Repayment is commonly financed through year-to-year surpluses

How to Calculate Balance sheet and notes from audit

Loan documents and proof of payments


What debt does your organization currently hold?

If your organization does not currently hold debt, have you been able to build credit in the past?

How might you want to do this in preparation for any debt associated with adaptation or change?


Fixed Asset Additions

What It Is

Purchase of NEW equipment, buildings, furniture, land, leaseholder improvements, etc.

What It Is NOT Replacement or simple maintenance of existing fixed assets

Small equipment purchases that won’t be depreciated

How to Calculate Vendor quotes


Are there new fixed assets needed by changing program service approach?

How will you pay for such fixed asset additions (e.g., debt, special campaign, surpluses, etc.)?

Fixed AssetAdditions


Change CapitalDefinition & Considerations

What It Is

Periodic reinvestment into the organization to change its business model (i.e., the size or reach of mission and/or how to make and spend money)

Covers up-front costs of change and deficits until new business model revenue exceeds new business model expenses

Typically large, flexible, multi-year funding from an external source

What It Is NOT Organic growth

How to Calculate

Detailed projections for a surplus-generating business model

planning/up-front/startup costs for revenue generating activities, programs, and other infrastructure

Timeline to secure new revenue and revenue sources


Will any program/service approach delivery require “change”?

What sources of change capital might exist to finance this change?

How are you planning to outgrow change capital?


Conversation Guide:Better Funder/Nonprofit Communication

Funder Nonprofit

Overall Considerations

Create a safe space

Don’t make assumptions

Remember that both debt and deficits

can be a result of strategy

Don’t be afraid to let organizations

know the challenges with funding

Know that both parties desire to

benefit/positively impact the community

– we are all on the same team

Avoid defensiveness

Don’t make assumptions

Have a definitive strategy

Own your financial story and tell it

with confidence

Don’t be afraid to ask for something

different or reject something that

doesn’t work

Know that both parties desire to

benefit/positively impact the

community – we are all on the same

team


Funder Nonprofit

Scenario 1 Why did you run a deficit in the last two years?

Desired Impact/Potential Impact

Expressing concern

Need for understanding of organization’s

challenges/opportunities

Attempt to elevate undisclosed issues

Defensiveness

Concern that this inquiry may prohibit

funding

Anxiety about challenges faced

New Approach

Create a safe space

Rephrase question to demonstrate

concern for organization not their

potential incompetence

Clearly articulate challenges/plans to

address

Ask how funder views deficits

New Response

Sample: I have a number of grantees who

had deficits in recent years – some because

of a tough fundraising environment, some

because of a strategic choice. I’d like to hear

more about your last two years of deficits.

What was their cause? How have they

impacted your organization?

Sample: We lost two key funders when

they changed their strategies. We cut

expenses in the following ways… and we

are seeking new funding in the following

ways… Thankfully, we have been able to

draw down our reserves as we develop new

funder relationships.


Funder Nonprofit

Scenario 2We reviewed your proposal and would like to offer you funding; please cut your budget from $100,000 to $50,000.


Support for organizations having

community impact

Spreading funding to more organizations

Avoiding being sole funder

Frustration

Fear of rejecting funding/compromising

funding relationship

Compromise resulting in failure and/or

unfunded expenses

New Approach

Explain that the desire is to spread

funding to more organizations

Allow organizations to adjust their

deliverables to meet funding available

Adjust committed outputs to reflect

offer

Reject funding

New Response

Sample: We won’t be able to fund your full ask because of our internal budget constraints. We can probably fund $50,000, and of course we would only expect $50,000 of work. Can you put together a revised budget and deliverables based on a $50,000 award?

Sample: Yes, let me talk with my team about how we might adjust. There are some upfront costs that remain the same whether we deliver 10 [units of service] or 100 [units of service], so you will likely see deliverables reduced by more than 50% in the revised proposal.


Funder Nonprofit

Scenario 3You have surpluses and over $100K in unrestricted cash. Why do you need additional funding?


Clarity about current financial practices

Understand value-add of our grant

Fear that organization’s strength will

prohibit additional funding

New Approach

Acknowledgement of the benefit of

surpluses/unrestricted

cash/reserves/working capital

Attempt to identify a purpose or need

for the unrestricted cash

Definitive explanation for purpose of

unrestricted cash – working

capital/reserves

Strategy for using

surplus/unrestricted cash (working

capital/reserves)

New Response

Sample: I was really impressed that you have been able to generate surpluses, and I noticed you have built up your unrestricted cash. I’d love to hear more about how you are thinking about this cash and how it supports your mission.

Sample: Thanks! It has taken lots of work by staff and board to build up that safety net. $60,000 is used to manage our receivables. We have many reimbursement- based contracts that require we do the work upfront before being paid. $40,000 is a board designated reserve for facility repairs and upgrades. Our goals to save another $200,000 over the next 5 years to replace our roof and HVAC system.


Funder Nonprofit

Scenario 4Why should we change the way we structured this grant for your organization? Other organizations have been able to comply with the terms offered.


Need to answer to foundation trustees

regarding success of grants

Concern for integrity/failure of

program

Assessment of desired

outputs/outcomes

Defensiveness

Fear of losing funding, inability to

properly service community, inability

to meet terms, and/or damaging

funding relationship

New Approach

Remember organizations are doing

direct delivery and may offer

substantial insight into helpful

restructuring

Be open to new ideas

Emphasize the need to meet funder’s

own philanthropic mission and answer

to trustees

Offer strong evidence of desired

outcomes

Be prepared to walk away/seek other

funding

New Response

Sample: I definitely want to hear about your needs and how we can better structure the grant to meet them. I’d like to do what I can. I also want to be clear that I can’t make that decision unilaterally, and would need to get buy-in from our CEO, the board of trustees, and…

Sample: We sincerely appreciate your willingness to hear our proposal and recognize that what we are asking may not fall in line with this particular grant; however, we believe that we can provide greater outcomes with the following adjustments: X, Y, and Z. and why…

Nonprofit Finance Fund San Diego Grantmakers2018 Annual ... · Dollars to pay down debt. Debt can...

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