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Sustainability

Jul 20

When best-laid plans go awry: Prepare with reserves

By Finance, Leadership, Sponsor Insight, Sustainability

By Lauren Kreutzinger, supervisor, VonLehman

In any business, in any organization, even the best-laid plans can go awry.

In the nonprofit sector, this can lead to disaster.

But that doesn’t have to be the case — if you’re prepared. For example, a major grant your organization counted on could fall through. Or your facilities might require emergency repairs. And, as many nonprofits have learned in recent years, even slightly lower-than-anticipated donations can make meeting obligations difficult.

Cash reserves can help cushion the blow of unbudgeted expenses. They may also enable your nonprofit to seize growth opportunities.

Your target number

The ideal reserve depends on an organization’s unique qualities, including its operating structure, sources of funding and types of expenses. But most experts agree that a minimum of three months’ cash can help mitigate the risk of budget shortfalls and unexpected events. But some nonprofits need greater reserves and some may be safe with less.

Generally speaking, the more predictable and steady your nonprofit’s cash flow, the less you need to stash in reserves. To determine the optimal amount, however, talk to your financial advisor.

Unrestricted is best

Reserves must be easily accessible and unrestricted, if they’re to be effective in emergencies. Program-specific donations and grants aren’t much help when you need to pay your office rent or make payroll. To increase unrestricted revenue, educate donors about the inflexibility of such gifts. Although some will insist on targeting their dollars, many are likely to respond when you explain that unrestricted donations can be more valuable to your nonprofit than those with strings attached.

For their part, foundation and government grantmakers traditionally have been reluctant to give unrestricted funds to charities. But according to several recent studies, many are increasing the proportion of grant money available for general operating support. So consider asking grant providers if they can relax restrictions on funds they’re currently providing, and start looking for grants with looser restrictions.

Accessibility is just as important when you’re deciding where to store operating reserves. Avoid investments that might restrict or penalize withdrawal of funds on short notice, such as equity investments or certificates of deposit. Instead, look for the highest interest-earning checking, savings or money-market account, or possibly Treasury bills or short-term bond funds.

Justifying withdrawals

One difficult aspect of managing reserves is to know when to tap them. Using cash to address operational shortfalls or when expenses exceed income is usually justified.

Even if your nonprofit runs efficiently and typically sticks to its budget, unplanned events, such as natural disasters or economic crises, can throw a wrench in the plan. But be careful that such withdrawals don’t become routine. If you’re dipping into reserve funds every month to pay ordinary expenses, it’s time to reevaluate your budget.

Reserves aren’t just a rainy-day fund, though. Many organizations use them to seize opportunities, expand programs and services, and even improve access to credit. Prudence is essential when using reserves proactively. Your board should draw up a policy that defines reasonable uses of reserves and outlines the evaluation and approval process for specific proposals.

Too much is risky

While keeping an adequate amount of operating reserves is critical, it’s also important not to retain too much cash. Money market and other easily accessible accounts typically earn minimal interest. You can almost certainly better “invest” reserves elsewhere — for example, earning returns for your long-term endowment or helping to expand services.

What’s more, charity watchdog groups take a dim view of what they consider excessive reserves, which can negatively affect how they rate your nonprofit, and in turn, how the public perceives its effectiveness. Of course, what constitutes “excessive” depends on the organization. But several years’ worth of expenses certainly merits scrutiny.

A priority

If your nonprofit has been running lean for several years, it’s time to start fattening up your cash cushion. As the economy improves and donors increase their support, make building your operating reserves a priority.

Lauren_Graham_revLauren Kreutzinger is a supervisor at VonLehman CPA and advisory firm in Indianapolis.  Lauren focuses on audit and accounting services for nonprofit and manufacturing and distribution organizations.

 

For more information on this topic or many other tax, business and investment topics, contact your CPA, Business Advisor, or Lauren Graham of VonLehman at lgraham@vlcpa.com.

About VonLehman

Founded in 1946 and with offices in Kentucky, Ohio and Indiana, VonLehman is a leading full-service CPA and business advisory firm. VonLehman provides forward-thinking accounting, tax and strategic business advice to closely-held businesses, nonprofits and governmental entities throughout the Kentucky, Ohio and Indiana region. VonLehman provides clients with the depth of services and resources expected from larger national firms, but with an unmatched measure of personal care and attention. See http://www.vlcpa.com for more information.

DISCLAIMER: The technical information in this article is necessarily brief. No final conclusion on these topics should be drawn without further review and consultation. Please be advised that, based on current IRS rules and standards, the advice contained herein is not intended to be used, nor can it be used, for the avoidance of any tax penalty assessed by the IRS.

Jun 16

Nonprofit startups are just like their counterparts

By Feature, Sustainability

By Sarah E. Needleman, reporter, The Wall Street Journal |

What’s different about building a successful for-profit and nonprofit startup?

Not much, according to Paul Graham, founder of Y Combinator, an elite accelerator program in Mountain View, Calif., that accepted a nonprofit for the first time this month, Watsi.org. “You could never tell there was a nonprofit mixed in,” he said in a phone interview on Friday.

Watsi, a medical crowdfunding platform that launched in August, is among 47 startup businesses in the latest Y Combinator class. Past graduates of the competitive three-month program include DropBox, Reddit and Airbnb.

Mr. Graham began thinking about inviting nonprofits to join Y Combinator about a year ago. “I was talking to a friend who wanted to do a nonprofit project and I realized I was giving exactly the same advice I’d be giving to a startup,” he said.

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Jun 16

A social entrepreneur transforms nonprofit to profit-making

By Feature, Sustainability

By Esha Chhabra, contributor, The New York Times |

In 2013, The New York Times published a case study about a social entrepreneur, Saul Garlick, discussing what kind of legal structure would be best for his enterprise, ThinkImpact, which encourages entrepreneurship in third-world communities. He fundamentally had three options: continue as a nonprofit, go commercial, or find some sort of hybrid route.

The Times asked three experts which option would be best. Pamela Hartigan, director of the Skoll Center for Social Entrepreneurship at Oxford, who is constantly advising aspiring social entrepreneurs, suggested that Mr. Garlick hop off the “treadmill of donor dependency.” Jonathan Lewis, a lecturer at the University of California, Berkeley, and a social entrepreneur himself, also suggested going commercial. Lastly, Shivani Siroya, an entrepreneur who runs InVenture, a hybrid organization, noted that it was possible to raise revenue even as a nonprofit and thus suggested that ThinkImpact should not dismiss a nonprofit model too quickly.

Many commenters agreed with Ms. Siroya, suggesting that Mr. Garlick use revenue streams as a nonprofit to raise money rather than going purely commercial. Others, however, noted that the nonprofit field is evolving and a profit-making enterprise can be driven by social impact and not the bottom line. Several readers pointed to new legal structures like a benefit corporation or L3C, which incorporate social impact into the core mission of a company. The Times contacted Mr. Garlick for a follow-up conversation, which has been condensed and edited, to see which option he chose.

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May 19

Government reimbursement rules

By Feature, Fundraising, Sustainability

By Council of Nonprofits |

Governments at all levels – local, state, and federal – that hire nonprofits to deliver services are now required to reimburse nonprofits for the reasonable indirect costs (sometimes called “overhead” or “administrative” costs) they incur on behalf of governments when federal dollars are part of the funding stream.

The new mandate is embedded in grantmaking rules that the federal Office of Management and Budget (OMB) put into effect at the end of 2014. In addition, the new OMB Uniform Guidance streamlines and clarifies cost allocation and other rules related to government grants and contracts, removing some areas of confusion and inconsistency while treating more of a nonprofit’s expenses as direct (reimbursable) costs.

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May 12

Putting overhead under scrutiny

By Feature, Fundraising, Indianapolis, Sustainability

By Lynn Sygiel, editor, Charitable Advisors |

So you donate money to your favorite charity, and you find out later that the money went to buy a new roof. Or new computers. Or to replace the muffler on the company van that shuttles needy clients around the city. Was this a good use of your money?

For many people, any conversation about money is difficult.

But when the conversation is about overhead or unrestricted dollars, and it’s between a nonprofit and a donor, it can be even more difficult.

Six years ago, in the Stanford Social Innovation Review, Ann Goggins Gregory and Don Howard wrote about what they called the nonprofit starvation cycle and challenged foundations to start an open conversation about overhead and analyze the true cost of running a nonprofit. They cited statistics from a five-year study by IU’s Lilly Family School of Philanthropy and the Urban Institute’s National Center for Charitable Statistics, which reviewed more than 220,000 IRS Form 990s and surveyed more than 1,500 organizations with revenues over $100,000.

At the time, the nonprofit sector equated low overhead with high performance and best allocation of dollars. Donors depend on online rating sites such as Charity Navigator or GuideStar to help them give wisely. If there’s a perception that a nonprofit spends too much on overhead, it can have a negative effect on donations.

Indiana grantmakers have started a conversation to address the issue.

Last year, the Indiana Philanthropy Alliance included the topic at its annual statewide conference for grantmakers. There were two sessions that took on the topic, said Marie Beason, director of professional development and special initiatives for IPA.

“It included both sides — not only the direct costs of overhead but true costs of programming. It was a very rich conversation,” said Beason.

Besides a keynote address by Bob Lupton, author of Toxic Charity, five Indiana foundations shared experiences about what it truly costs a foundation to run all the programs it funds and operates.

Based on the responses to these sessions, IPA felt there was an opportunity for additional conversations on the topic. So in early June, they are hosting five IPA/GIFT regional forums facilitated by Lupton. Besides outlining the elements of toxic charity, the sessions will provide foundations and nonprofit partners an opportunity for frank communication about achieving results, using these practices.

While Beason has seen some change, she said conversations have been more casual. She also cautions that no two nonprofits are created equal when it comes to overhead.

“It comes up, I’m sure in every internal grant application review committee. We have not found a format or template that has been strong enough to lead us to a formal initiative, but what we have learned is that folks want to learn more.”

At McCoy, President John Brandon said it is a regular internal staff conversation, and annually with his finance and budget committees.

In the last five years, he has broached the topic with donors, too.

“We have had conversation fairly regularly with donors and givers because I think we have to help them understand the true cost of doing business,” he said.

Sometimes, though, the toughest conversations he has about overhead are in his own head.

“I’m justifying allocating money in my budget to buy that or pay for that and even though it’s not direct programming expense and it improves the quality and effectiveness of our organization. We’re trained to say, ‘Let’s do more with less.’ If we spend hours and hours trying to figure out how to do more with less, we’re wasting time and effort, that we could really be putting into more effective things,” he said.

Without accurate data, and open communication with funders, both argue it is difficult for donors to know what actual costs are.

“So instead of making excuses for overhead,” said Beason, “I do see a movement afoot to really articulate the importance of the work, the importance of the investment and the outcomes, rather than, “Oh, we’re sorry but we could really do this for much cheaper.’

“It all leads back to communicating the value of the work. Oftentimes the nonprofits come begging, which is not the appropriate mindset to raise funds. Now I’m seeing a shift both in donors as well as foundations to recognize it more as an investment,” she said.

The Nonprofit Finance Fund (http://nonprofitfinancefund.org/), according to Beason, has done a great job articulating overhead costs associated with a cup of Starbucks coffee and how that might equate to the nonprofit sector.

Beason suggested that nonprofits start by asking:

  • What is the true cost of programming?
  • What are the real outcomes and not just outputs of what the organization does?
  • What are the things that work and how does the organization build support for that?
  • What are the donor’s expectations?
  • Why is this an appropriate funding source?
  • What will the nonprofit gain from this funding source that will that allow it to effectively reach the outcome that it is hoping to achieve?

Both Brandon and Beason agree this has to be a two-way conversation, and it is critical to have open conversations about how each partner – donor and nonprofit — can benefit from the work.

“It’s not just the foundations understanding that personnel and insurance, and utilities and fully funding a program is important, it’s also getting the nonprofits to understand how best to plan for, manage and raise funds for those line items effectively,” she said.

May 12

The human factor

By Feature, Fundraising, Sustainability

What’s the best way to solicit donations for a charity? New research suggests that telling donors that none of their money will go toward overhead may be very effective at raising money. But it also comes with a few potential pitfalls.

In a study published in Science on Thursday (10/30/2014), a team of researchers showed that giving people the opportunity to donate directly to a charity program — with a promise that the money wouldn’t go to overhead — was far more effective than either matching donations or letting donors know about existing seed money.

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