Transcript Living in the Gap - The Nonprofit Partnership

Living in the Gap
AND WHAT TO DO ABOUT THE NONPROFIT SECTOR’S BROKEN
BUSINESS MODEL
This is the new economic reality…
THERE IS A CAPACITY GAP
 Need continues to rise and it’s harder than
ever to keep up.
 Over 75% of nonprofits surveyed nationally
by the Nonprofit Finance Fund saw increases
in demand they could not meet in 2012 and
2013.
THERE IS A FUNDING GAP
 Revenues from government are declining at
the rate of 5-10% per year in this region, but
government support rarely covered the full
cost of services to begin with.
And government payments are late for the
majority of recipients….
Philanthropy is overwhelmed and has not
been able to stem the financial slide.
And the costs of delivering services continues
to rise….
Most nonprofits
get by with little
cash on hand.
The less cash on hand, the
greater the danger when
revenue is late or unreliable.
No Cash
One Month
2-3 Months
For safety net organizations:
• 60% are operating with 90
days of cash on hand or less.
• 27% had less than 30 days of
cash on hand.
More than 3
0
10
20
% of Nonprofits
30
40
50
Erie County Nonprofit Profitability
Percentage of Erie County Nonprofits Showing a Surplus
2013
2012
2011
2010
2009
2008
2007
2006
0%
10%
20%
30%
40%
% Profitable
50%
60%
70%
80%
90%
This adds up to a broken business model.
Inability to meet demand
Dysfunctional funding strategy
Weakened infrastructure
Limited capacity
Liquidity challenges
Pursuing off-strategy and unscaleable funding
Strategies for Enterprise Adaptability
 What is your most reliable, recurring revenue?
 What are your fully loaded costs and the size of the gap?
How much risk can you take?
What types and amounts of capital do you need?
What makes nonprofit adaptability
especially difficult?
 Challenges of enterprise
 No profitability in the mission-driven business…. Always!
 Reliant on subsidies to just break even…..Always!
 You can’t grow your way out of it. Growth makes it worse!
Challenges of bad best practices
 Obsessive focus on expenses, not results
 Inappropriately restricted revenue…. Like no overhead!
 Overexploitation…. Always doing more for less!
 Challenges of access to capital
 Absence of “equity” equivalent
 Lack of working capital is pronounced for small to mid-sized organizations.
Components of Nonprofit Sustainability
SURPLUS-GENERATING BUSINESS MODEL
EFFECTIVELY CAPITALIZED BALANCE SHEET
OUTCOMES-DRIVEN STRATEGY
Building the sustainable nonprofit
RULES OF FOR-PROFIT FINANCE
RULES OF NON-PROFIT FINANCE
In the for-profit world, the customer buys the  Client often does not pay or only partially
product.
pays for the product.
Nonprofits make the case for donors and
funders to subsidize the cost.
Donors and funders want more of their
contribution to go directly to the people
served.
Overhead and profits are seen as
unnecessary and unrelated to the mission.
Nonprofits need to understand “full costs.”
Nonprofits need to cover the full costs of
delivering programs:
Full Costs
 Total direct operating expenses
Total indirect operating expenses
Depreciation allocation
New capital investments
Debt
Savings for the future
Direct Expenses
Fixed Assets/Depreciation
Reserves
Working Capital
The Sustainability Challenge:
 Securing enough reliable, recurring revenue from the total of all your available sources to
surround vital programs with enough stable and sustainable revenue to cover the full costs
and add to cash reserves.
This may involve picking winners and losers among agency programs based on which are
most vital to mission and diverting resources from the weak to preserve the strong.
 Understanding liquidity helps to answer several
important questions:
Why Liquidity
Matters
 How much cash does the organization need to
operate efficiently and effectively?
Sustainability is the capacity to
lay up enough resources for the
organization to undertake it
next critical step.
 How long can the organization operate with the
available resources?
 What is needed in order for the organization to take
its next big step?
___________________________________________
DO YOU HAVE ENOUGH OF THE RIGHT KINDS OF
MONEY AT THE RIGHT TIMES TO CHANGE, GROW,
INNOVATE, OR TAKE RISKS?
What Kind of Capital Is Needed?
 LIQUIDITY
 Does the organization have cash to meet its operating needs?
ADAPTABILITY
 Does the organization have flexible funds that allow for adjustments?
 DURABILITY
 Does the organization have access to funds to address a variety of future needs?
Sustainable Business Model
5
4.5
4
3.5
3
2.5
2
1.5
1
0.5
0
Start Up
Proof of Concept
Expense
Expansion
Revenue
Sustainability
In practice…. What is your most reliable,
recurring revenue?
DISTANT LOCUS OF CONTROL – MAY BE
RECURRING, BUT HOW RELIABLE ARE THEY?
YOUR LOCUS OF CONTROL MEANS
RECURRING AND MORE RELIABLE
 Government grants / contracts / fee-  Earned revenue / fee-for-service
for-service payments
 Foundation or corporate grants
Collaborators or nonprofit partners
Federated giving (United Way)
Self-pay
Individual donations
Fundraising events
Volunteers
Endowment
After School Program Budget Showing
Full Costs
REVENUE
EXPENSES
Self-pay fees……………………………. $16,000
3 core staff @ 15 hours per week….. $12,000
Contracted specialists…………………….
6,000
Food @ $125 per week………………….
5,000
Transportation……………………………….
4,000
30,000
United Way……………………………..
10,000
Annual fundraising event………..
7,000
Annual Appeal………………………..
2,000
Sub-total………………………………………..
Food subsidy (Federal)…………..
4,000
Indirect costs – Mgmt & General (15%) 4,500
Sale of products…………………….
1,100
Equipment (New) and Depreciation
4,000
Grants……………………………………
5,000
Debt Service …………………………………
1,500
TOTAL……………………………………
45,100
TOTAL…………………………………………….
40,000
SURPLUS………………………………………
5,100
A Conversion Story
SINGLE SOURCE TIME-LIMITED FEDERAL
GRANT
An initial 21st Century Community Learning
Centers grant established a comprehensive
middle school after-school program at the
level of $150,000 annually.
It evolved into a multi-source funding stream
with:
RELIABLE, RECURRING REVENUE STREAMS
$30,000 in United Way funding
$30,000 in new school district 21st Century $
$20,000 in Community Devt Block Grant $
$20,000 in Learn-and-Serve Federal $
$20,000 in substance abuse prevention $
2 dedicated, recurring foundation grants
Arts and youth development grants
School funding for food, supplies, and IT
Parent fees
Take Control of Your Budget
 Own your budget as a whole package, not one that is divisible by line items.
 If it is divisible at all, perhaps it is by time. In the After-School Program
budget example, the “full cost” of the program is $250 per day.
 Your capacity to build reserves sustains your capacity to innovate and take
the next needed steps for your programs and your organization in ways that
are in your control.
It also allows you the freedom to access other sources of capital, including
borrowed capital, when debt service is in the funding mix.
Use your whole team….
 With the board of directors, dedicate time to understanding program
economics and plan ahead based on various scenarios.
 Move consistently toward a savings culture where you practice full cost
budgeting and clearly articulate savings goals
 Keep you eye on the big picture and encourage the whole board to
understand how to think about financing, funding, and sustainability.
Thank you!