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

Finance Fear Factor Ratios

At even the most solid nonprofit organizations some board members and executive directors are beginning to wonder and worry, "Are we okay? Should we be worried?" Watching the traditional indicators of financial health -- like performance-to-budget or reserve size are important, but they may not give you the immediacy of knowing whether you need to worry today.

One of the main problems is that they don't necessarily address cash availability. For example, you may have a large payment due to you from a government agency, but if they won't be paying it for another two months, you may not be able to meet next week's payroll.

Volunteer Time Financial Statement Illustrations

These financial statement excerpts illustrate the article, "Tracking Volunteer Time to Improve Your Bottom Line: A Complete Accounting Guide," by Dennis Walsh, CPA. See the full article here.

By reporting donated nursing and medical social worker services of $120,000, total public support (before earned revenue) increases from $250,000 to $370,000, or 48%. We also see that inclusion of these services in program expense increases the spending efficiency ratio from 80% to 83%.

Hometown Hospice Care explains the nature of recognized services, as required by GAAP, in the following footnote to . . .

Tracking Volunteer Time to Boost Your Bottom Line: A Complete Accounting Guide

Tracking volunteer time: sounds like another chore? Actually it can help you meet match requirements, improve your financial statement presentations, and reduce liability. In this article, CPA Dennis Walsh of North Carolina explains why and how to include volunteer time in your budgets and financials:

An all-volunteer suicide hotline was having a hard time raising funds. Its total budget was $45,000, which paid for a small office, telephone lines, and advertising. It asked for operating support, overhead and other funds in its fundraising proposals. Unfortunately, many foundations and donors are allergic to those terms. But when the hotline added up the time its volunteers spent answering phones, attending trainings and . . .

Nonprofit Layoffs and Furloughs: Do Them Right

Dear Rita: It looks like we're going to have to lay some people off in the next couple of months. But the management team is also considering furloughs, a week's shutdown, and other choices. The decision about what to do won't be made by us in HR. But we will need to carry out the unpleasant acts. How can we do these legally and nicely? --Dreading It All

Dear Dreading It All: My sympathies are with you and although it probably won't help you feel better, many community nonprofits are in the same boat. And your attention to the HOW is important: how people are laid off (or hear about pay cuts, etc.) makes a big difference in how the departing staff feel and how the remaining staff can move forward in a positive way. Each group has to assess what works best on their own particular boat, but here are some things to think about:

Six Things Every Board Member Should Know About the NEW 990

Just the thought of an IRS form can bring out the clouds on a sunny day. But now that this annually required nonprofit form is on the web for everyone to see (at GuideStar.org), it goes beyond compliance to being an important way to tell your organization's story.

Federal Form 990 from the Internal Revenue Service (IRS) is like a tax return for nonprofits, but since we are tax-exempt, it's called an "information return."

You may have heard by now that the IRS Form 990 has been substantially revised for the fiscal years beginning in 2008 and in the future. The issues disclosed on the form that especially interest the media, potential donors, and the general public still include executive compensation and overhead costs, but with this revised form, the

Nonprofit Retirement: Part 1 of 3

This issue we begin a three-part series on nonprofit retirement, written by Blue Avocado columnist Steve Zimmerman. You've read about how organizations should prepare for people retiring, but not much about how you can prepare. In our trademark fast read style, Part 1 looks at calculating retirement needs and using that information to explore choices. Part 2 is aimed at people who still have time to save: how and where to save. And Part 3 is for people who are running up close to traditional retirement ages: what to do now. Part 1:

When Pat Joyce retired in March from the regional arts council she ran for 23 years, the agency and its board threw her an elegant gala dinner. They provided her with some beautiful thank you gifts . . . but a retirement fund wasn't one of them.

Pat isn't alone. One Blue Avocado reader told us, "When I started in a public service career I knew I would never be wealthy, but I didn't think we would be at risk of living in poverty!" And another said wryly, "I'm in training to be a bag lady."

Low salaries and nonexistent retirement funds make it especially hard for . . .

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 . . .

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