Cancer Charities Fraud Fallout – Will it affect you?

Current news is bad news for online and small scale charitable giving programs.

When four cancer charities were charged with fraud, one of the disturbing facts published was that most of the actual money that was donated came from small donors, $20 or $30 at a time.

The total amount, as charged in the settlement was reported at more than $187 million. The published terms of repayment apportion repayments between the main defendants, but give no specific date for final payment. Consumers will likely not receive more than pennies on the dollar, since the proceeds of the scam have been spent.

Another disturbing fact was that although these charities (all tied to one family) had been under scrutiny for several years, their websites and fundraising activities were not shut down

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Charity related fraud is one of the FTC's most often reported offenses. That puts all charities in a bad light.

There were indications that these charities weren't on the up and up, and donors who regularly decline telemarketing calls until they have vetted the charity in question through sites like Charity Navigator soon saw that something was amiss.

It's apparent from the amount of money in question that most people didn't bother to check them out at all.

   

The problem is that going forward, most people still aren't going to do that. They are simply going to say no to any and all fundraising calls.

There were red flags for those who did the research, particularly the amount of in-kind donations and fundraising costs, but most people aren't going to do that. It just isn't worth their time for a measly $20 or so.

Smaller nonprofits seeking to expand are going to bear the brunt of that public distrust. Larger organizations can withstand temporary revenue downturns but the little guys and startups can't. Given that very new charities depend mostly on individual donations, they may well be the real losers.

How can you counteract the bad press?

It goes without saying, or should, that you need to establish as much publicly available legitimacy information as you can.

•          Have a well done and informative website in addition to social media accounts.
•          Make your contact information easy to access, including a phone number.
•          Have an IRS determination letter and corporate documents.
•          Have good board and executive staff bios online
•          Have unrelated board members with online profiles on the board of directors.
•          Have audited financials on hand to back up your 990 filings.
•          File long form 990's even if you qualify to use the e-postcard
•          Keep detailed and accurate records of your donors.
•          Limit your large-scale fundraising costs. Frankly, if you are only getting 15 cents on the dollar, they aren't worth your time anyway. That's only viable when you are talking about millions of dollars in donations.
•          If you are truly new, have a business and strategic plan, complete with financial projections.
•          Track your results and impact and be prepared to provide that documentation when asked. 
•         Where possible, provide names of people or agencies that you partner with or who have received assistance from your charity.
•         Register your charity with one of the ratings sites, like Charity Navigator or GuideStar. (Although they may not actually rate you, since rating criteria are often based on minimum revenue amounts, often over $1 million, just the fact that you proactively offered up your information helps interested donors make decisions.)

Eventually, the bad PR will fade, but it's going to remain important to avoid even the appearance of impropriety or mismanagement. You can do that by being as business-like and professional as possible. 

Don't be this person.

An email from a prospective client reads like this:

"I am looking for someone to tell me how to start a nonprofit.  I need to put my business degree to work, and I like to help people, so I think that starting a nonprofit would give me the best of both worlds."

Of all the reasons to start a nonprofit, this is the least likely to succeed.

I'm not sure exactly why people think that the best path to financial or professional success is to start a nonprofit, but apparently a lot of them do.

In "Climbing the Ladder to Nonprofit Success" I wrote this:

"How do most nonprofits start? The founders find each other through their mutual interest in a problem."

Notice that nowhere in that quote do I say "to make a living." Not that making a living is a bad thing, but it's not a good reason to start a nonprofit. 

Nonprofits should exist because there is a societal problem that can be addressed on some level by a consortium of people with ideas to solve or mitigate the problem.

There are a lot of pitfalls in starting any business. Finding operating capital for the initial year or two, finding good people to move the business forward, marketing, managing growth, and dealing with setbacks are common to any new venture.

Add in the unique challenges of running a nonprofit, and you can multiply all of those challenges by ten.

In "Climbing the Ladder to Nonprofit Success" I try to give an unvarnished, down and dirty look at the world of startup nonprofits from that first meeting of minds through the next two or three years.  It's still a free whitepaper, and I offer it to anyone who asks for guidance in starting a nonprofit.

I also offer an inexpensive service designed to measure the viability of a specific group or nonprofit idea from a financial and organizational viewpoint.

Those resources aren't going to help win the race if you start from the wrong gate.

The person who wrote that email doesn't understand the differences between the motivation behind a startup for-profit and a nonprofit. I can help someone with either concept, but if they don't start with the right expectations, nothing I say or do is going to overcome that handicap.

Don't be that person. If you need help in deciding between the two business models, give me a shout. I'm happy to help you find the right gate. 

How should you court a major donor?

Most solvent nonprofits today have long since gotten over the idea that they can exist solely on income from grants. They have developed a diverse funding strategy that accesses funding from various sources, and that often includes major donors.

So what is a major donor?

There is no hard monetary definition of a major donation.  For one organization it might be $1,000, while another may define a major donor as anyone donating over $10K or even $50K.

Of far more importance is the connection, the relationship if you will, of the donor to your organization.

Developing a major donor is not about a predator-prey relationship. It is about developing long-term friendships that can result in contributions to your income stream.

All nonprofits struggle with maintaining a minimum constant income stream. Whether that's $5,000 or $500 million, the income has to at least equal the outgo. Grants are nice, but they don't last. Even fee-for-service or fee-for-performance government contracts or grants have a fairly short life cycle.

Major donors on the other hand can remain interested and involved in your organization for a lifetime.

When I review a new client's revenue sources,  I look for evidence that they have major donors, or at least someone who could become a major donor.  That's why I strongly recommend that you record every donor's contact information, even if their donation is well under the threshold that requires you to give them a receipt.

Let's say you receive a new donation from someone prominent in your community. It's only $50, but hey, it's nice to know they've noticed you.

If you stop there, you could be throwing away a chance to make a long-term friend for your nonprofit.

That person could be a candidate for your major donor database. So, what now?

Of course you want to acknowledge the gift, but you should be doing that for every donor. How do you move beyond the pro forma receipt?

One way is to add a little something extra.  Write a nice letter of thanks, and include some additional information on your program or organization. Invite them to a meeting or a tour of your facility.

Take some time to research the person. If you have any people in common, you might mention that connection. Perhaps they have a personal connection to your mission, such as a family member who once needed the type of help you offer. Or you might invite them to your next event.

Don't get too pushy.  People with money have heard every pitch there is from people and organizations that want to relieve them of some of it. Concentrate on developing a relationship.

One strategy is to develop a list of major donor prospects and send them a special newsletter or invitation to an event. It's not that they won't understand the motivation behind the invite, but if it's done tastefully and the event (or the other attendees) piques some interest for them, they may show up.

Look for areas of common interest.  Maybe someone on your board also serves on a board with the prospect. Perhaps you belong to the same gym or country club. Look for ways to connect where you can share more information on your mission and goals.

In some cases, it might be wise to wait and see if they donate again, which can show some genuine interest in your mission.

In short, you have to do the same things you would do to cultivate any other relationship.  Building rapport and mutual respect will benefit everyone. 

Business planning tip - Calculating payroll costs

When doing financial calculations for a business plan or 1023 application, don't underestimate payroll costs and other government-mandated overhead.

For instance, see the Payroll cost worksheet sample below.

Labor Base Rate (1 employee@ each rate)	Wage or Salary/mo	FICA/SS	401K (or other benefits)	WC Ins (2.65/$100)	SUTA (1.53%)	FUTA .06% of $7000	Health Insurance	Other	Estimated Hrs/mo
$10.00	$1,600.00	$120.48	$90.00	$42.40	$24.48	$42.00	$100.00	$-	160
$11.00	$880.00	$66.26	$45.00	$23.32	$13.46	$42.00	$-	$-	80
$12.00	$1,440.00	$108.43	$67.50	$36.16	$22.03	$42.00	$75.00	$-	120
$13.00	$2,080.00	$156.62	$90.00	$55.12	$31.82	$42.00	$100.00	$-	160
Total annual w/o benefits	$72,000.00

Cost/Mo.	Annual Total Actual Cost	Payroll Overhead
$2,019.36	$24,232.32
$1,070.05	$12,840.58
$1,791.12	$21,493.49
$2,555.57	$30,666.82
	$89,233.20	$17,233.20

I often see clients disregard these costs, or only include part of them when I review projections for business plans or 1023 applications. The overhead significantly increases the cost of labor. In this example, it is 19.3% of your actual payroll costs.

As a rule of thumb, I generally recommend adding at least 20% to your base wage or salary rate for the first year, and increasing the cost by at least 3-4% for subsequent years to allow for wage or tax increases.

If you fail to account for significant mandated costs it will seriously affect your cash flow, selling price of goods or services and your profit margins. If your target adjusted net profit (profit after all expenses and deductions from income) is in the 5-10% range, you can easily see how you could wind up in the red at the end of the year. Coming up with an extra $1436 every month is significant for any new enterprise.

Nonprofits are particularly prone to disregarding the cash flow realities of being in business.  If your cash flow depends on donations and program-focused grants, you MUST allocate funds separate from most grant funding to pay these relatively non-negotiable costs. Typically, these costs are paid from unrestricted donations, and to know your target amount, you must know your needs.

Don't lowball when it comes to estimating other overhead. I once saw a business plan that allowed $500 for an annual financial audit. After checking with a few accounting firms in the area, the actual cost was between $2500 and $3500.

You do yourself no favors by painting the most optimistic picture of your operation. First, it will leave you scrambling to find the money to pay for all the unaccounted-for costs, and second, investors, lenders or grantors will see right through that fog of optimism.

If your target income or revenue won't cover the actual projected expenses, you may have to adjust the target. Raising your selling price of goods might be an option, or adding contracted income from fees could balance the equation.

And yes, there is a chance that you will discover that your business or nonprofit can't generate enough cash under any scenario to stay afloat.

It's far better to know that now, than discover it after you are already deep in debt.