Finance


The U.S. public debt burden is $7.75 trillion, and “most economists agree that our rising deficit poses a very real threat to the health of our future economy.” We could start paying down this debt – as many Americans are struggling to do with their own personal finances – but our federal government continues to run up even larger deficits.

One of the reasons we cannot reign in our spending ways is our political leaders continue to care more about representing the interest of their state, and getting reelected, than about the future health of the U.S. economy. Take Senator Ken Conrad (D-ND), Chair of the Senate Budget Committee, for example. Sen. Conrad is adamant that Congress and the President need to reign in their irresponsible spending ways and pass a balanced budget. He has even gone on record as saying:

“Yes, the small things are important to my state, but I also recognize that the big things are what matter from a national perspective. What really matters is that we have an overall (budget) plan that is balanced.”

As Chair of the Senate Budget Committee, Sen. Conrad has arguably more clout over this process than any of his Congressional peers. So, in practice, how does he use this influence? Well, Sen. Conrad awarded his home state of North Dakota with the third highest amount of federal earmarks per capita of any U.S. state ($213 per capita versus the U.S. average of $41 per capita for fiscal 2008 -2009).

In a time when we as a country are spending 10% of our revenues ($250 billion) to repay our federal debt, and Social Security, Medicare and Medicaid consume another 57% of our budget ($1,430 billion), it’s good to know our leaders are “looking out” for our best interest. Oh, least I forget, the current 2011 budget request is likely to add another $1.6 trillion to our growing public debt (Did you know that China and Japan, collectively, own $1.5 trillion of U.S. debt?), which went before the Senate Budget Committee this week. The best part of it all is that the Obama administration projects the entitlement programs and the interest on our deficit will “absorb 80% of all federal revenues by 2020.” Therefore, let’s all be clear, our current political leaders, much like their recent predecessors, are fully aware of the approaching fiscal crisis and are doing nothing to avert it.

Speaking of fiscal crisis, let’s not forget about our own state’s budget woes. Last year, the state of Pennsylvania took 101 days after its constitutional deadline to pass its $28 billion budget. PA was the last state to pass its budget amidst the worst recession since the Great Depression. By August of last year, most of the state’s 67 counties could not afford to fund their nonprofit agencies without state money. (Harrisburg did manage to pass an interim budget that would pay the state’s 71,000 government workers, but nonprofit agencies were not included.) During a time of great community need, and declining public contributions, foundation funds, and already scaled back government contracts, Pennsylvania politicians could not decide on how to fill a $3 billion hole in our budget (or 10% of the total budget, which is pretty “cheap” in comparison to our projected 33% federal budget hole for fiscal 2010 – 2011). Instead, nonprofits were forced to take out private loans to continue to operate; reduced their services; furloughed or reduced their staff; and, in some cases, closed their doors altogether.

The bad news for nonprofit agencies and Pennsylvanians alike is the fiscal picture in Harrisburg is sure to only get worse because of the looming debts in both the state employees’ and teachers’ retirement funds. PA legislators entered the millennium with a pension surplus and spent the surplus funds despite the fact that they would one day have to deliver on this “accounts payable”, just as their federal counterparts did (remember Al Gore’s 2000 platform promise to create a Social Security “lockbox”?). Unfortunately, the “payable” starts coming due in 2012, and the Tribune Review and Post-Gazette both estimate it’s going to cost the state approximately $3.5 billion (the Trib says $4 billion, the PG says $3 billion). Mind you, this money will not be used to improve our schools, create new jobs, or improve living conditions in our cities and rural communities, but rather will cover the state’s entire employer contribution for state workers and half of the employer contribution for school workers for fiscal 2012 – 2013. Essentially, the folks in Harrisburg are imitating the same fiscal irresponsibility of their federal counterparts. May the most irresponsible lawmaker “win”, I guess?

I realize that I work for a university, but, believe me, there’s no conflict of interest in my opposition to the proposed Pittsburgh tuition tax on students.  And then, when the tax was challenged as being unconstitutional and City Council responded by passing special, unique zoning procedures only for universities, I just had to write the following Letter to the Editor (it’s the fifth one on the page):

http://www.post-gazette.com/pg/09331/1016483-110.stm

I hope you agree with me that this is an embarrassing, anti-intellectual seeming step backward for Pittsburgh — a city that  has been transforming itself into an exciting and progressive new image.

We nonprofits are in a touchy position right now.  Some of the universities and hospital systems have tremendous wealth, and there is certainly a reasonable argument to be made that they should be paying into the coffers for the services they receive.  On the other hand, they are providing tremendous services in exchange for their tax-exempt statuses.  And, the vast majority of nonprofits struggle day to day to survive as they provide essential safety nets, high quality arts and culture, and countless other benefits for the common weal.

So, on the one hand, it’s a dangerous can of worms to open for any nonprofit to pay some version of taxes.  On the other, we’re all — government included — financially stressed right now.  But whatever the solution, it seems to me that taking a leadership role in adding even more to the already exorbitant cost of education can’t be a good idea.

What do you think?

Upon joining the non-profit sector, a number of people opined to me that they are happy I’ve decided to dedicate my time and effort towards strengthening the sector’s work. In fact, one of the sound bites I kept hearing is that non-profits – despite their inability to sell equity (and thus raise money through either private investors or the larger public capital market) or the lack of an agreed upon “profit” metric for measuring organizational success – need to behave more like for-profit businesses. So, listen up my fellow non-profit professionals, I’m going to impart some words of wisdom I learned from my days working in the for-profit world (at institutions such as Freddie Mac, UBS Investment Bank, and others).

We need larger pay packages to attract and retain qualified professionals. In order to create the type of fast thinking, innovative companies such as AIG, Bear Stearns, Enron, Tyco and others, we need to increase our compensation packages. Currently, this kind of fast-thinking/innovative executive talent retails for approximately $10.5 million, or roughly 344 times the average worker’s salary ($30,700). Since the average executive director of Southwestern Pennsylvania only makes a mere $96,110, or 3.6 times the average worker’s salary – that’s a lot of innovation we’re leaving on the table! Lesson #1: if we are to attract for-profit executive talent then we must start paying our non-profit executive directors better.

Ignore sustainability and adopt a “do whatever it takes” attitude to exceed your short-term goals. We in the nonprofit sector spend far too much time talking about creating sustainable programs and achieving long-term outcomes. Instead, we need to adopt a more market-centric view of the world, just as for-profit businesses have to when their performance is measured by the market. Take General Motors, for instance. In the late 1990s and well into the first decade of the 21st Century, GM ignored suggestions that the company should rethink its focus on the sale of light trucks and SUVs and instead become a pioneer in the production of fuel-efficient (sustainable) automobiles. However, GM’s short-term focus on becoming the premier seller of light trucks and SUV (its most profitable product line) seemed to be paying off:

In 2002, GM sold more than 8.5 million cars and trucks and was the first auto manufacturer to sell 1.2 million SUVs and 2.7 million trucks in a calendar year. The company set industry sales records in the United States and owned nearly 15 percent of the global vehicle market. And investors took notice – the company’s stock rose approximately 45% over the next year.

Of course, you know the rest of the story by now – fuel prices rose and consumers grew tired of paying for non-fuel efficient vehicles. GM was stuck with a bunch of cars and trucks (mostly trucks) that they tried to “give away” with 0% financing and large rebates – again, focusing on exceeding the company’s short-term sales numbers even at the expense of hurting long-term profit margins – but nobody wanted them. Lesson #2: for-profits rarely practice sustainable planning so why should your organization.

The market rewarded GM's banner 2002 year with stellar market returns in '03. Nevertheless, GM's lack of a sustainable business model finally forced the company into bankruptcy in '09.

Transform your board. Nonprofit executive directors, not only are you egregiously underpaid relative to your for-profit brethren, but also you need to hold more board power. This year’s Nobel Memorial Prize in Economics winner, Oliver Williamson, in a recent article, “Corporate Boards of Directors: In Principle and in Practice,” submits that today’s corporate boards are largely ruled by the CEO and are passive financial stewards. He writes:

The CEO is in de facto control of the operation and composition of the board…most boards most of the time are responding with nodding approval, and boards are beset by inertia, hence are slow to become active when the corporation experiences adversity” (260).

In hindsight, we’ve spent far too much time espousing the idea that nonprofit boards need to be active and chart the agency’s strategy, raise money, etc. After all, when is the last time you heard of a corporate board functioning this way? No, on a corporate board the CEO/Chairperson sets the agenda and the remaining board members are asked to “nod in approval.” Lesson #3: we need to retrain our board members to be passive financial stewards and centralize all power with the executive director (and newly appointed chairperson).

As you read these “lessons,” I hope it is apparent by now that there is an awful lot each sector – the for-profit and non-profit – can stand to learn from one another. I think the three lessons above illustrate areas the for-profit sector should take a cue from the nonprofit sector and consider adopting these practices. Conversely, there are a number of for-profit practices – strategic planning, capital budgeting, using data to inform evaluative programmatic judgments and more – that I believe are beneficial for nonprofits to adopt. However, to think that either sector has a monopoly on best practices is just over simplistic and flawed logic. As Jim Collins’ writes in his monograph Good to Great and the Social Sectors, “We need to reject the naïve imposition of the ‘language of business’ on the social sectors, and instead jointly embrace a language of greatness” (2). Touché, Jim.

“Well, how much cash should we have?” a client asked during a recent Board meeting. Scott and I explained that an organization should have at least a 3 month operating cash reserve (90 days of cash), and aspire to a 6 month cash reserve (180 days of cash). In keeping with statewide best practices, it was absolutely the right answer.

Still curious, our client inquired, “According to whom should we have 3 months of cash on hand?” And there you have it – the question that kicked off in each of our minds the need to move beyond conventional wisdom and arrive at an empirical explanation as to why nonprofits should maintain at least 90 days of operating reserves. Or should they?

Logically, the next step in our thinking was to obtain a national sample of nonprofit financials to begin our analysis. We turned to the National Center for Charitable Statistics (NCCS) for our figures, and obtained financials for over 230,000 U.S. nonprofit agencies.

As you may have already guessed by now, our empirical findings call into question whether or not a 3 month cash reserve is a realistic guideline for all nonprofits to follow, indiscriminate of an agency’s size or mission. For starters, out of the 230,759 nonprofit organizations we examined, the median number of days cash on hand was approximately 75 days, with 25% of the upper distribution (top quartile) holding 187 days of cash or more, and the lower distribution (bottom quartile) holding 19 days of cash or less.

Further, an agency’s unique mission and size illustrate why it’s arbitrary to apply the 3 month cash operating reserve to all agencies without taking into account these important characteristics. For example, to ask that a human service organization target a cash reserve of 180 days seems unreasonable given that the median number of days cash on hand for an agency with such a mission is 62. Additionally, we can see that arts organizations should attempt to grow a cash reserve in excess of 90 days since that is the empirical “norm” finding. We encounter similar difficulties when analyzing cash operating reserves by organizational size (operating budget).

Days Cash on Hand by Mission TypeIn the final analysis, we recommend you benchmark your agency relative to organizations of comparable mission, size, and even location to assess your financial health. This is something we can do for you with our statistical data analysis as part of the Bayer Center’s Financial Wellness Package.

Only when you are fully aware of your internal financial performance (trends) and external positioning (benchmarking) can the Board and senior management truly begin to layout a realistic and informed cash reserve policy, one that is both realistic and in line with peer organizations.
Days Cash on Hand by Budget Size

Over the last six months, Scott Leff and I have observed a greater proportion of nonprofit Boards seeking clarification of their agencies’ finances – distilling the important and necessary financial information into a condensed report – and financial health. With that in mind, the Bayer Center recently unveiled a set of diagnostic tools that we are calling our “Financial Wellness Package.” To borrow a little medical parlance, we liken it to a “financial check-up” with your friendly Bayer Center consultant.

One piece of our “Wellness Package” consists of looking at your agency’s financial performance relative to organizations of similar mission and (budget) size. As a part of this analysis, we analyzed close to 240,000 nonprofit organizations that filed 990 information and calculated numerous financial performance ratios as one approach towards answering the Board question: “How financially healthy is my organization?” We refer to these figures as our “Financial Benchmarks.”

Originally, we had just planned to use the benchmark results as one component in our Wellness Package, and thought nothing of the broader sector implications that could be gleamed from our analysis. However, after further review and discussion, we’d like to share with you some of the broader takeaways we discovered that may influence how you think about your agency’s finances and where you stand relative to peer organizations of mission and size.

We look forward to sharing some of these findings with you as we all continue to seek and share industry best practices. Stay tuned…

A how-to guide on getting more out of your board

A how-to guide on getting more out of your board

One of the really nice things about my job at the Bayer Center is the abundant amount of learning opportunities around me. Accordingly, yesterday I sat in on Sally Mizerak’s “Using a Dashboard” class.

For those of us not in the automotive sector, an organizational “dashboard” is likely a “user-friendly, often color coded summary chart(s) of the key indicators of an organization’s performance.” I liken it to CliffNotes for staff, management, board members, donors, etc.

The “art” of designing your organization’s dashboard really depends on what story/message you’re trying to summarize. For instance, Scott Leff and I have been busy recently helping organizations reduce the stacks of internal financial reports they disseminate to board members and instead replace these trees with a single, colorful, summary financial report. From this report, board members can quickly glean how the organization is performing (actual vs. realized budget), how much cash is available, and how the organization is financially performing relative to its local and national peers (benchmarking) and its own past results (trending).

[Editor's note: My colleague Jeff Forster points out that he posted about Dashboards last month with two big points: 1) dashboards aren't just about financial measures, although they're obviously quantifiable and 2) CRM databases have thrust dashboards to the fore as though they're something new under the sun (but they're not). Also, Jeff and me rode together in CDCP's Pedal Pittsburgh (50+ mile) ride last week and spent much of the time discussing this blog entry and nonprofit dashboards, kind of.]

One way to get the internal dashboard dialogue started is to ask yourself if your board’s financial reports are telling the story that you are hoping to convey. If the answer is “yes,” then next ask yourself if you can do a better job of summarizing this information into one report?

If you think you can be doing better, then you probably are not using your board’s time wisely. (You’re supposed to be talking about mission-related information and not spending all your time on financial minutia.) A suggestion – consider putting aside a few hours to spend with your staff/colleagues/Finance Committee and conference on what financial picture/story you’d like to convey to your board. The benefits you’ll get in return from a more mission-focused board will far exceed your time investment.

Have a question or something to add to this post? Leave a comment, and you’ll be entered to win a 1 GB USB drive. One winner per week through the end of May.

As nonprofits go, most of us know that it’s rough out there right now and likely to get worse in the immediate future before it starts to get better. (PNC Chief Economist Stuart Hoffman forecast that the U.S. economy will continue to suffer into the second half of the year. In fact, it will be 2010 before the economy gets real traction from the various federal policy stimulus initiatives, Hoffman believes.)

So what’s a nonprofit to do? Well, below are some tips (in no particular order) your organization can use to manage its cash flow deficit, if by some chance you find yourself in this current predicament:

1. Cut expenses – look for items in your current budget that can be deferred or cut outright. Also, keep your eye on costs that continue to outpace your revenue growth.

2. Liquidate investments – perhaps your organization has stocks, bonds or certificate of deposits (CDs) that you can liquidate. If you know you’re going to have a pressing cash need in coming months, consider working with your local bank to structure the maturity of your CDs for imminent cash needs.

3. Increase fundraising efforts – consider rearranging your fundraising schedule to accommodate your cash flow needs. For instance, you could consider moving a direct mail appeal to another time in the year when your organization is in need of unrestricted funds to cover overhead costs.

4. Speed up collection of receivables – if there are government agencies that owe you money, you could cask for an up-front payment in advance of the schedule. Similarly, a foundation may consider rearranging its disbursement schedule if you anticipate a cash flow deficit.

5. Obtain a loan or line of credit – a line of credit typically is used to fund short-term working capital needs such as payroll, rent, or overhead expenses. Also, it’s useful to cover incoming receivables. The only costs incurred when obtaining a line of credit involve closing costs and interest expense (once you begin using your line).

6. Reduce program expenses – the for-profit sector does it, so why shouldn’t the nonprofit sector at least explore this option? And while this may seem unthinkable to you at first glance, consider the alternative: burning out your staff (see Cindy Leonard’s “Preventing Burnout” blog entry from May 12).

Appropriately, the Bayer Center will offer a class on debt management best practices appropriately titled, “‘Debt’ Is Not a Four-letter Word,” on June 26, from 9 – 11 A.M. The class will feature instructors Scott Leff and me of The Bayer Center; Lisa Kuzma, Richard King Mellon Foundation; Gloria Ware, Fifth Third Bank; and Misty Parshall, CPA, Schneider Downs & Co., Inc. We’ll instruct you on the ins and outs of the right reasons to borrow money in these tough economic times.

Finally, I invite you to email me with any questions you might have regarding this topic and you’ll be entered to win a 1 GB USB drive. One winner per week through the end of May. Happy cash flow management!

Last week’s announcement of the Presto Fund demands one key question of regional nonprofits: Can we truly transform ourselves?

The Presto Fund, in case you’ve been lost on some desert island, is the new fund created by CMU alumnus Dominic Presto “to free nonprofits from the grinding pressure of daily fundraising and enable them to focus on innovative, system-changing service delivery models.” With initial assets of around $1 billion, and expected to grow significantly from there, the Fund is a major new philanthropic force in Pittsburgh and southwestern Pennsylvania.steel

According to its website, the Presto Fund will:

“.. provide a minimum of $50 million annually in multi-year, unrestricted grants of at least $100,000 for overhead, management, administration, and research and development. The Fund will not offer program-related funding, nor will it limit the number of consecutive years of support it may grant. The Fund seeks to free its recipient agencies from the cycle of fundraising and enable them to focus on figuring out how to do what they do best even better.”

To really understand the philosophy that drives the Presto Fund, it’s important to know a little about Mr. Presto.

Dominic Presto is from a small, southwestern Pennsylvania town. His father was one of the last deep-mine coal miners in the region and was tragically killed in a mining accident when Dominic was just 8 years old. The mining company went bankrupt as a result of the accident, and what little settlement the family got was lost after the mine owners talked Dominic’s mother into investing in a new mine that turned out to be a scam.  For the rest of his childhood and most of his teen years, Dominic (an only child) and his mother lived on friends’ couches on the good days and in the street or shelters the rest of the time.

Given his success later in life, it’s not surprising that Dominic was an extremely bright child. He has often said that very early on as he bounced from shelter to shelter, he was perplexed by seeing the same faces over and over again. Why, he wondered, couldn’t these agencies change the system?

Dominic earned a scholarship to Carnegie Mellon University (then Carnegie Tech) and became an engineer. He spent the next 20 years in research departments where, in his words, he was “the driving force behind more hare-brained failures than Homer Simpson!” Eventually, he came up with a concept for using rice syrup as an annealing agent in the fabrication of steel that was so far-out his usually tolerant bosses refused to let him work on it. So he left, formed his own company… and today he’s giving billions of dollars to philanthropy.

The Presto Fund appears to be a dream come true. A simple application process, openness to all types of regionally-located nonprofits, and unrestricted, multi-year funding of at least $100,000. So, the question is, are we ready for it? Are we ready to become risk-takers? Are we willing to fail? Do we have the discipline to stay rigorous when the worry over funding is removed?

Mr. Presto did not get where he did by continuing to do things the same old way. And he won’t fund us if we do.

Finally, as you consider transforming your agency through the generosity of this major new funder, keep in mind one last requirement from the Presto Fund’s website:

“The Presto Fund will not support nonprofits that are taken in by blog entries posted on April 1st.”

Some months back, I came across a fascinating NY Times article that discussed how the “kids” at Google found yet another innovative way of taking our “free data” and using it for a good cause. In this case, recent evidence suggest that when Internet users’ search for information on, oh, let’s say “flu-like symptoms” that Google “may be able to detect regional outbreaks of the flu a week to 10 days before they are reported to the Center for Disease Control and Prevention.” What a Brave New World (Mr. Huxley)!

What this example succinctly illustrates is what “Researchers have long said–that the material published on the Web amounts to a form of [collective intelligence] that can be used to spot trends and make predictions” (NY Times). Wikipedia, a kind of “collective intelligence,” turned author, is harnessing such wisdom through its Wikinvest Web site; Wikinvest is building and archiving a database of user-generated investment information on popular stocks, for free of course.

Now, where I’m going with this is back in October of 2008, the Harvard Business Review published an article entitled “How Wise Crowds Can Advance Philanthropy,” by Steven H. Goldberg. Mr. Goldberg, the Chief Operating Officer of Cradles to Crayons, a nonprofit that aims “to provide children-in-need with high quality everyday supplies,” suggests that we in the nonprofit sector should be thinking about how to harness this “collective wisdom.”

Mr. Goldberg writes that most mid-sized nonprofit organizations possess some of the most “innovative solutions” to today’s problems. However, as he notes, there is a dearth of “reliable information about the relative performance of nonprofits,” so as a result “billions of philanthropic dollars annually are distributed haphazardly among more than 1.5 million organizations, some deserving, some less so.”

His solution: use guidance markets to “consolidate information about which nonprofits provide the highest social returns on investment, thus guiding donors to the most attractive opportunities.” He further elaborates on just what this guidance market might look like: “This market could list virtual [stocks] in the form of questions,” and essentially evaluate each nonprofit on whether they accomplish their beginning of year outputs and outcomes.

The idea here is that the collective wisdom of the public “would drive virtual prices up or down depending on whether traders considered the market assessments too low or too high based on dispersed information including strategic hires, grants and sponsorships, regulatory developments, and…performance.” Furthermore, “by revealing the consensus judgment of potentially millions of donors, employees, and volunteers in the nonprofit sector, the market could forecast the relative success of organizations competing for donations.”

Finally, what I like most about this idea is that as Goldberg writes, “If collective intelligence could index nonprofits’ effectiveness, social enterprises would have an incentive to collect and report performance data to improve their [stock].” Think of it: greater sector transparency, a clearer recognition by stakeholders of nonprofit best practices, and more opportunities for smaller nonprofits to compete against larger organizations for funding. Sounds like an idea worth investing in.

Might women be the key to our economic salvation?  Perhaps I am biased, but after reading the New York Times article, Mistresses of the Universe, it’s hard not to agree with this notion.

 

According to the author (and corroborated by countless studies), elevated testosterone levels often lead to greater assumption of risk.  So is it any coincidence that male-dominated Wall Street just placed far too many leveraged bets?  No, we can’t place the country’s peril on the shoulders of men, nor are women the panacea for the nation’s problems, but, it is interesting to think of how more estrogen might have changed the course of the financial market’s future. 

 

After all, women have made quite a few marks in history.  Marie Curie introduced the world to X-ray and radium therapy.  Amelia Earhart flew solo across the Atlantic Ocean.   Rosa Parks sparked the Civil Rights Movement. With accomplishments like these, it’s no wonder why we encourage diversity in our schools, in our communities, in our organizations. 

 

According to research, women are more risk averse and less susceptible to peer pressure.  Perhaps we need more gender diversity at the top — and not just in the private sector, but in the nonprofit sector, too!  The Bayer Center’s 2008 Wage and Benefit Study found the majority of executive directors are female, but NOT in the largest organizations.  This begs an enduring question, how do we see greater shared power among our leaders?

 

 

Next Page »

Follow

Get every new post delivered to your Inbox.