Seven nonprofit dream killers (and how to avoid them)

Many good people want to start nonprofits. They usually have great passion for their cause, and want to solve problems. They expect smooth seas and clear sailing on the way to their destination. Unfortunately, they often run aground on the rocks of reality. Here are some common pitfalls associated with starting a nonprofit.

1. You haven't developed a support network.

Nonprofits don't function well as one-man (or woman) shows. Start by identifying supporters, and hold a well-publicized informational meeting or two to assess the interest in your nonprofit. These folks will be your potential board members, donors and volunteers and the meetings may generate immediate financial support.  

2. You think your organization is the only one that can address the problem you want to solve.

It is unlikely that no one else has seen the problem you are seeing. Don't re-invent the wheel. Check for nonprofits in your area that are addressing the same issues, especially those that are currently receiving funding. There is a good chance that you may find not only kindred spirits, but organizations that are already dealing effectively with the issues that you can join. If no one else is in the arena, there is probably a good reason why they aren't.

3. You believe it is easy to get money to support the organization.

You may be willing to invest every dime you have in your organization, but the world of nonprofit funding is competitive and notoriously difficult to access for fledgling organizations, particularly for day-to-day expenses. Only about 20% of nonprofit support nationwide comes from grants and unrestricted donations. The other  80% is up to you to figure out.

4. You haven't researched the skills needed to operate the organization.

The mission is important, but it takes real-world business skills to achieve success and longevity. There are serious legal, financial and administrative aspects involved in being a nonprofit. If you don't have all the skills needed, you will need to attract or hire people that can fill in the blanks.

5. You are easily frustrated when things don't immediately go your way.

Growing a viable nonprofit is often arduous, expensive, frustrating and time-consuming. Starting a nonprofit is not the place to find instant gratification.

6. You think it will be an easy way to create a paying job for yourself.

Founders usually form part of the board of directors, since their goal is (or should be) to guide and expand the organization. Board members normally don't and can't receive a salary for serving on the board. If you can accept being an employee of the nonprofit as the CEO or executive director and understand the potential risks associated with that, there may be income potential, but it isn't a sure thing.

7. You don't have a coherent plan for long-term success.

You may know what you want to accomplish, but you need to have a way to get there. The time you spend on a five-year plan now will save you innumerable wasted and expensive hours spent in crisis management later.

Knowledge really is power. Know what you are getting yourself into before you start. For more in-depth insight into the realities of starting a nonprofit, I offer a free whitepaper, "Climbing the Ladder to Nonprofit Success". Request your copy at granthelp@ida.net. If you need assistance  in implementing or understanding  any of the steps, or just have a comment, drop me a line. Want to know more about my services? You can view my website here.

Nonprofits aren't businesses. Really?

Every once and a while I see someone railing against the idea that nonprofits should be managed much like their for-profit counterparts. After all, nonprofit staff can and actually should work for peanuts, right? All supplies will be donated, all services will be free, and the quality of their programs will still be top-notch.

If only it was that simple.

This morning I was forwarded a link to a nonprofit asking for contract grant writing services. The ad sounded great. 21-year old community healthcare nonprofit, multi-million dollar revenues, offering a long-term contract with a somewhat reasonable budget range for grant writing services.

However, upon looking up their 990 history, I could see why they were looking for grant money. Over the past five years this nonprofit showed steadily declining income. Nearly their entire revenue stream was based on one source of income, i.e. government payments for services. Those payments had dropped by almost 30% in that same five-year time frame. In the meantime their payroll costs had gone up by almost the same amount as a percentage of income. In 2012, they posted their first loss ever and it was in the mid-six figure range.

Healthcare is a very labor and supply-intensive field. Good help does cost real money, supplies are not free, the utilities still have to be paid with real money, and being a nonprofit doesn't change that.

You can see where this nonprofit is going. Newly mandated increased costs for healthcare and the natural progression of increasing salaries as employees stayed in place longer and improved their skills was pushing them over the edge. In their entire 21-year history, they had raised less than one million dollars in funding not related to the provider payments from the government. 82% of their income was now going to employee-related expense. Even in healthcare, that's out of line.

Nonprofits are not immune to market forces or economic reality. If your costs of operation outstrip your income, you are going down the tubes, no matter how big or small you are.

I don't know exactly what happened to this nonprofit. Maybe their patient days went down, maybe the provider payments were less than previously received for services, maybe the employees were asking for unreasonably high salaries or the perks had gotten out of hand. Who knows? The point is, their trend line was obviously going the wrong way, and they waited too long to try to address it. Now they are operating in the red, and that means they are unlikely to be considered for grant funding.

If they survive it won't be due to hiring a grant writer. It will be because they get a hard-nosed business management consultant in there that can get their business operations back on track. That's where they should be spending their remaining dollars.

There is no doubt that there are real differences between the motivations and goals of nonprofits vs. for-profits and that is as it should be. I addressed that in another post. Still, whether you like it or not, the nuts and bolts of accomplishing  the end result are pretty much governed by the same realities. Ignore that at your peril. 

The effect of the ACA (Obamacare) on nonprofit revenues

The government-run health insurance law will suck up a lot of nonprofit support dollars. Regardless of whether you like it, hate it, or just don't know very much about it because of the well-publicized website problems, it seems likely that it will have a lot of impact on the amount of money available to nonprofits from government, corporate, individual and foundation sources.

After earned income, government contracts make up the bulk of nonprofit funding in the United States. It is a commonly held misconception that the government gives away money to nonprofits with no strings attached.

In most cases, nonprofits are funded through government-provided contract income for things like childcare. An article in the New York Times details the general squeeze nonprofits are still feeling after the recession, and the role of government dollars and programs in that picture. After earned income, government funding accounts for three times the income from foundations and forty times the income from corporate giving.

Aside from the costs to get the Affordable Care Act website up and running (estimated at half a trillion dollars to date) there is the cost of providing subsidized healthcare insurance under the current law. Often forgotten in all the hyperbole over deductibles and cancelled policies are the ongoing administrative costs. The money to train and pay the so-called navigators, maintain the website even after it is fixed, the personnel required to route and process applications all comes out of tax dollars, which of course come from each taxpayer. While nonprofits often face scrutiny for their administrative costs, the government doesn't face that constraint.

Healthcare comprises one-sixth of the U.S. economy. While not everyone will get insurance through the government-sanctioned exchanges (if you don't qualify for a subsidy, you still need to get government-compliant insurance from a "private" insurance company), the higher deductibles and in many cases higher premiums will impact both individual and corporate incomes, leaving less money available for them to donate.

If the federal deduction for charitable giving goes away, as it has in some states, that will  further impact how much money is available from donations.

From the government's side, there is a high probability that the actual cost of the subsidies may lower federal and state discretionary spending capability.

So far, the Internal Revenue Service has not issued final guidance on how these higher costs may factor into arriving at adjusted gross income. If the allowable deductible amount for healthcare increases, that could potentially impact the final amount owed on both individual and corporate business income, which effectively reduces taxes paid to the government. If the deductible is not raised, then the additional money has to come out of the operating budgets of each business and individual as a direct cost. That too lowers income, with the same net result.

With more money going out and less coming in, it stands to reason that there could be less money available for nonprofits from all of the traditional sources.

If your organization hasn't factored these uncertainties into your five year plan as yet, it might be time to do so. Although many nonprofits find generating earned income and operating like a business to acquire that income to be distasteful and in direct opposition to their mission, survival may dictate that you adapt to that model.

Need help with planning?  Drop me a line at granthelp@ida.net. 

Sexy financial statements - Are you kidding!?

On a one to ten scale of what's sexy or exciting, financial statements generally rank at about minus one for most nonprofit board members. Nonprofits still in the early growth phase may not fully understand the relationship of the board's financial or fiduciary responsibility to their overall governance role. There may not even be a formal accounting system in place.

Board members, whether nonprofit or for-profit, typically aren't finance or accounting majors. I can clearly remember sending out the financials to the board members of a small nonprofit in advance of an annual meeting. One of them called and very nicely but sincerely told me that I shouldn't waste postage and paper sending them to him in the future, since it was all "just so much gobbledygook to me". When I explained that I was required to send them because the board was responsible for understanding the financial position of the organization, he asked if I could just tell him where on the papers he could see whether the organization was making or losing money.

This is an all-too-common reaction to the financial portion of a board agenda. In many cases, once the board meeting starts, the chairperson asks if anyone has any questions or comments, and then there is a voice vote to accept all the financial information as written. It's almost a Pavlovian response.

Fiduciary oversight isn't optional.

The problem with that is once you vote to accept the financials, you are effectively saying that you know what's in them. If something is amiss, you can be held responsible for any problems.

For those nonprofits that say they don't need financial statements due to their small revenue streams, or because they are about mission, not money, listen up. If you are a nonprofit corporation, you may be required to use the accrual method of accounting. That means you do need some sort of basic accounting system that can produce financial statements. Leaving the tax man out of it, prospective donors and grantors expect it as well.

Most board members don't intentionally shirk their fiduciary duties, and they are not too lazy or mentally incapable of understanding financials. Financial reporting is simply a foreign language to them. Sometimes they are successful professionals in other fields, but they rely on a staff of accountants to keep the books and synopsize any findings. Other times they are community members whose closest brush with accounting is when they file their taxes. Sometimes they just don't understand the legal impacts of rubber-stamping the financials.

Ignorance isn't bliss.

Not knowing what's contained in the financials is not a defense. Shareholders, members, donors, and the IRS won't accept that as a reason if there is some sort of mismanagement, fraud, or other illegal act discovered. The solution to that is developing a basic ability to understand the financial statements.

There are a number of mini-courses, books and video presentations available that offer financial training for non-financial people. Think of them as sort of a pocket dictionary for another language. When you travel to another country, you may not need or want to know how to carry on an hour-long conversation in another language, but you do need to know how to ask for a doctor or a bathroom.

No degree required.

This isn't about becoming a certified financial professional and to some extent, it isn't even about that much argued-over bottom line. Depending on your board composition, even a one or two-hour presentation can be sufficient to provide all the knowledge most board members need.

Local associations of financial professionals often have seminars that can be scheduled into a retreat or executive training session. In a pinch, you could even have a independent accounting professional or instructor attend a board meeting and explain the financials once a year. The goal is to be sure that everyone has at least a basic understanding of what to look for relative to seeing problems or trends. The purpose of reviewing financials isn't to check the math, it is to obtain operational guidance for the board.

Financials are more than just numbers.

The purpose of this instruction is not to turn the board into bookkeepers or accountants. It is simply to provide a way for the board to recognize problems or trends. For instance, if the depreciation figure is significantly different from last year or the last quarter, does that mean that something new was purchased?  If so, what is it, what did it cost, and is that cost reflected elsewhere in the financials? If not, why was the figure adjusted? If it is significantly lower, does something need to be replaced because it is too old to function properly anymore? Does that affect net worth?

Financial statement training isn't very sexy, but going to jail or watching your organization dissolve in bankruptcy isn't much fun either.

For many organizations, November is approaching the end of the fiscal year. Think about offering financial statement training as a year-end training camp or informational webinar. Some members might even consider it a perk!

Grant Planning- What is it and why should you do it?

Grant planning doesn't start with finding a grant. I get dozens of inquiries like this every year.

" We provide decorated  Christmas trees to low-income families. We need a grant to assist us in purchasing 100 trees. Please help us find grant money for this worthy cause" Rcvd. Nov. 1

Requests like this don't take into account the lead time needed to find a grantor, and certainly doesn't allow any time for the grantor to respond. Grant planning requires you to be proactive, not reactive.

Grant planning requires foresight

Grant planning begins at least one year from the time you need the money and it starts with refining your mission into a program or programs with a budget, and a specific, measurable goal. Here are some of the questions I asked this particular nonprofit.

How many trees do you need?  What is your budget?  Are there trees available at a price that will allow you to furnish 100 trees? Have you worked with vendors (tree farms, direct sellers, etc) to get a discount? Do you have a contract to provide the trees at a stated price? What size trees do you need? What about transportation, both to you and to the recipients? What species of tree do you want? Do you have alternatives? How do you qualify people to receive a tree? Can you store the trees, or do you need them very close to the distribution date? Who has supported this cause in the past?

Setting up a prospect calendar

Typically, foundations plan their giving cycles at annual, semi-annual or quarterly intervals. The application closing date for the grants might be as much as a year ahead of when the grant is awarded. That's why this is called grant planning, not grant getting.

After you have mapped out the when, where, how much and why for your appeal, it still has to fit into the grant calendar for the foundation. That means finding the prospective grantors well ahead of the opening date of the grant application or RFP date. Arrange your prospective targets in a format that allows you to sort by RFP opening date, closing date, amount available, and enter those into a working calendar or spreadsheet.

Qualify targets

If your targets are local, establish some sort of relationship with them ahead of time. Follow them on Facebook, or go to events they frequent. Find out who is on their board, and look for common associations with your board. Check to see if they have a prequalifying phase (an LOI or online qualifying protocol). Look at their previous giving patterns and assign a priority to the ones that are most likely to respond well. There is no sense in "shotgunning" your requests to any and all foundations that have only a very remote connection to your cause. That's expensive both in terms of time and money, and seldom results in an out-of-the-blue award.

If you need help designing a grant plan, drop me a line at granthelp@ida.net, or visit my website, http://www.cloudlancerwriting.com.