Finance & Strategy

Real world nonprofit finance matters, and real world thinking about strategies for financial, programmatic, and leadership sustainability. This column is written by Steve Zimmerman, principal of Spectrum Nonprofit Services.

photo of Steve Zimmerman

Is It Time for an Audit?

Blue Avocado reader Bill Mitchell writes: "As a board member of both a small ($400k/year) and a much larger ($1.8m/year) nonprofit,what are the criteria to determine whether or not to conduct a formal outside audit? I have worked on staffs, sat on boards and have been a foundation program officer and I have never had a clear set of guidelines. Thanks!"

Blue Avocado columnist Jeanne Bell replies:

Dear Bill: In these tough economic times it makes perfect sense that a board of directors would weigh the costs and benefits of spending $10,000 or more on this administrative expense. The short answer to your question is: "As soon as you have to."

The longer answer: A first tier for nonprofit audit requirements may be set by whether or not you receive federal funding. The federal government has not . . .

Just Tell Me: What's the Best Way to Raise Money? Choosing a Revenue Strategy

We're pleased that this article appears this month in the Grassroots Fundraising Journal as well.

It's aggravating to have someone say (at a board meeting, for example), "Look at how they over there raise money! That's better than what we're doing . . . we should do that!" Or for a funder to tell you what they think is the best way to raise money: from major donors, or from government, or from black-tie dinners, or . . . . you get the idea.

Think for a moment about two very successful stores: Target and Williams-Sonoma. Both sell cookware. Target sells inexpensive cookware through large stores in outlying areas and it advertises through newsprint inserts in local newspapers. Williams-Sonoma sells expensive cookware through boutique stores in high-rent districts and it advertises through glossy, full-color catalogs mailed to high-income zip codes. Each has put together a winning formula.

But what if Target were to try selling its colanders and measuring spoons at the same prices that Williams-Sonoma charges?

In Search of Unicorns: Finding and Hiring Outside Grantwriters Part 2

In Part 1 of this article, Wes Mukoyama of Yu-Ai Kai asked the question: "As a small agency . . . how do I look for a grantwriter? I have talked to a few who either want to be paid by the hour or receive a percentage of the grant. Any suggestions?" We discussed why hiring outside (contract) grantwriters seems to work so seldom - either for the community nonprofit or for the grantwriter. We also suggested two additional choices: hiring support staff to free up your program managers and executive director to write grants, and growing your own grantwriters.

In this issue's Part 2, we'll discuss how to find grantwriters, select them, how much to pay them and what kinds of payment arrangements to choose. (And in Unicorns Found, we profile two of these elusive creatures.)

A. How to find one

Nonprofit Budgets Have to Balance: False!

As nonprofits serving people and communities in these difficult financial times, we don't expect things to turn around for our communities in the near future. Many of us are wondering: how can we achieve a balanced budget in these times? When is it okay not to have a balanced budget?

A potentially harmful habit practiced in many community nonprofits is presuming that a break-even budget is mandatory. Board members and staff may be under the influence of the false but persistent 'nonprofits can't make money' myth as they develop the year's income and expense plan. Like other conventional wisdom, the balanced budget is based on sound concepts, but can become unnecessarily constricting. Instead of "How can we make the budget balance?" the annual budgeting cycle should begin with the question, "What financial outcome does our organization want or need this year?" Different scenarios lead to different decisions about what the budget's bottom line should look like:

1. We need to increase reserves or pay down debt: adopting a surplus budget. When the organization's leaders decide that its cash and other reserves are lower than ideal, the organization can plan to generate more income than expenses, creating surplus funds that can be used in future years. A surplus may also be needed to provide funds for paying down debt or for easing cash flow. The board should direct staff to develop the draft budget by determining realistic income targets that nonetheless outpace expenses. If the organization can deliver on a surplus budget, it will have higher net assets (net worth) at the end of the year, and enjoy a stronger financial position.

2. We can't gain ground now, but we can't lose ground either: the break-even budget. Typically, organizations choose break-even budgets by default and the skin of their teeth. A first cut on the budget shows expenses much higher than revenue, so the staff then tries to figure out how to increase the revenue number (but still stay close to reality) and decrease the expenses (but not damage programs). The staff and the Finance Committee tack their way towards a break-even budget, and hope that their cautiously optimistic projections work out.

3. There are three typical reasons for adopting deficit budgets. First and rarest, the organization's leadership decides that its cash and other reserves . . .

Five Ways to Let Government Money Run You Over

Is government funding a way to expand what you do for important constituencies, whether they are families living with autism, low income people seeking legal help, or people attending your dance performances? Or is government funding a trap that will mire you in reporting nightmares, take you away from your values, and turn you into a heartless bureaucracy?

Let's start with a reality: local, state, and federal government agencies are major buyers of social services, education, health, and arts in the United States. In fact, government funding made up 52% of total income for social service nonprofits in 1997 (Lester Salamon in The Resilient Sector). For many organizations, the question is not whether to take government funding, but how to get more of it. Whether you are thinking about your first RFP (Request for Proposals) or are already knee-deep in existing grants and contracts, here are five ways to do it WRONG.

1. Don't assign anyone to oversee contracts management. Successful completion of a government contract requires not just doing the work well, but customized reporting of activities and finances. If no one is explicitly responsible for contracts management, some program directors may under-bid on costs, and you'll end up losing money on the contract. In other cases you may not pay attention to ensuring that the full amount of allowable costs is charged to the contract. Someone needs to make sure that budgets are appropriate prior to submission, that financial and programmatic performance is monitored, and that reports are done promptly and completely -- these are not entry-level responsibilities!

2. Stay out of politics. Political engagement is an essential responsibility of government-funded organizations. It's not enough to help social service . . .

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