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.
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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
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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
5nff.org ©2017 Nonprofit Finance Fund®
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
6nff.org ©2018 Nonprofit Finance Fund®
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
7nff.org ©2018 Nonprofit Finance Fund®
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.
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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
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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”
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Total Expenses
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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
12nff.org ©2018 Nonprofit Finance Fund®
*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.
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Reserves
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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
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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
Questions to Consider
Does your organization have a reserve? Can leadership and board articulate its purpose?
Are reserves or reserve goals aligned with priorities and needs?
16nff.org ©2018 Nonprofit Finance Fund®
Change Capital
17nff.org ©2018 Nonprofit Finance Fund®
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
Questions to Consider
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?
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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
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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
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Where Money Meets Mission
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Thank you.
Stay Connected!
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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
23nff.org ©2018 Nonprofit Finance Fund®
The Full Cost Profile
24nff.org ©2018 Nonprofit Finance Fund®
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
25nff.org ©2018 Nonprofit Finance Fund®
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
Questions to Consider
How much working capital do you currently have?
When are cash low points projected? How will you manage them?
26nff.org ©2018 Nonprofit Finance Fund®
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
27nff.org ©2018 Nonprofit Finance Fund®
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
Questions to Consider
Does your organization have a reserve? Can leadership and board articulate its purpose?
Are reserves or reserve goals aligned with priorities and needs?
28nff.org ©2018 Nonprofit Finance Fund®
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
Questions to Consider
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?
29nff.org ©2018 Nonprofit Finance Fund®
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
Questions to Consider
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
30nff.org ©2018 Nonprofit Finance Fund®
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
Questions to Consider
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?
31nff.org ©2018 Nonprofit Finance Fund®
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
32nff.org ©2018 Nonprofit Finance Fund®
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.
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Funder Nonprofit
Scenario 2We reviewed your proposal and would like to offer you funding; please cut your budget from $100,000 to $50,000.
Desired Impact/Potential Impact
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.
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Funder Nonprofit
Scenario 3You have surpluses and over $100K in unrestricted cash. Why do you need additional funding?
Desired Impact/Potential Impact
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.
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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.
Desired Impact/Potential Impact
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…
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