Strategic Financial Management — Building Reserves
Let’s face it, nonprofits take their tax status seriously – most find it hard to make a profit! They spend every penny they have – and then more. We know we should be saving for a rainy day, but with day-to-day crises and ever-increasing costs and needs, it’s hard to save.
A recent survey conducted by The Nonprofit Finance Fund found that a quarter of nonprofits have less than a month of operational funding in reserve, 40 percent reported an operating deficit in 2012, and as many predict a deficit in 2013.
With federal cutbacks, the state’s inability to develop a long-term plan for its fiscal viability, and a sector that is overly dependent on governmental funding, Alaska’s nonprofits face unique challenges in building reserves. If nonprofits want to do this, they must either generate more revenue or cut expenses – it’s a basic financial rule. But maybe more than anything, we must develop the discipline to save. The specifics of how to build reserves are simple to state, yet hard to achieve. Still, we must try.
One may ask, “How do we generate more revenue?” The Foraker Group has been consistent with its advice on this matter. Determine what drives your “economic engine” and maximize its potential.
In our book, Focus on Sustainability: A Nonprofit’s Journey, we explain that there are only two sustainable revenue sources. Those same sources of revenue also provide the most unrestricted cash, which is the income we should strive to generate. Those sources are either earned revenue or individual charitable giving. Grants and events can definitely provide financial support, but are less likely to provide ongoing sustainable revenue.
Charities can earn revenue through providing mission-based services or products. Nationally, charitable nonprofits generate about half their income through earned revenue. The customers could be clients, the general public, even the government. When done well, regardless of the source, earned revenue has the potential to be the most sustainable revenue for nonprofits – and it has other advantages.
Earning revenue requires business acumen. The problem for nonprofits is that often their board members with business skills forget the basics and don’t stress making money when they serve on the board. To be prudent nonprofits should determine what they charge based on the cost to deliver the product or service, balanced by what the customer is willing to pay. Most nonprofit organizations try to keep their charges as low as possible – often so low they lose money on every transaction.
In Alaska, when we go to the theatre, the symphony, any performance art, we are accustomed to having the oil companies and banks pay for half our admission. If we lived anywhere else, we would have to pay almost double what we pay here. Thankfully, we have very generous corporate citizens that like to support the arts. But if they really wanted to build the capacity of arts organizations, they would encourage them to charge more in order to generate a “profit,” or in nonprofit terms, to build their reserves.
The reluctance to charge a market-based price for products or services is a challenge for nonprofits, including Foraker. Capacity builders similar to Foraker charge two to three times what we charge, most in locations that are far less expensive to serve. Again, we depend on generous corporations and foundations to keep our costs low.
Nonprofits should periodically compare their charges to others in the same or similar markets and adjust as needed. The goal of any earned revenue is not to break even, it’s to generate more income than expenses – therefore providing much needed unrestricted cash for the mission.
In addition to earned revenue, individual charitable giving is the other sustainable income that provides unrestricted cash. Raising money from individuals requires supreme commitment from the board and the staff. Alaska nonprofits have made progress in recent years raising money from individuals – but most have a very long way to go. The steps to raising money from individual donors are:
- A competent and engaged staff and board,
- Dedication to identifying prospects,
- Cultivation of a relationship with the prospects, so that eventually they can be asked to give, and
- Then nurturing the relationship so that it is sustained over time with continuing support.
We have more tools today to raise money from individuals in Alaska thanks in major part to the Rasmuson Foundation’s support of the state’s community foundation network and Pick.Click.Give.
Alaska has a growing number of dedicated volunteers in over 15 communities helping to build philanthropy by developing local community foundations. This is a long-term strategy. It will be a decade or more before most of these efforts pay off in a significant way. But at least there is measured progress in telling the story of how generous citizens can build their own permanent fund for community good.
Pick.Click.Give. is another established tool. The growth in the number of donors and contributions continue to exceed expectations and much more potential exists. I was with a group of highly informed people recently who asked why more nonprofits involved in Pick.Click.Give. have not asked them for money, nor why other nonprofits had thanked them once they gave. (This is the real concern.)
Ongoing training and communication with PCG nonprofits could not be more specific. It says that someone must ask a potential donor, and it demands that the nonprofit follows up with donors, stewarding their investment. To be honest I am amazed at how otherwise smart and caring people assume that their constituents will give without being asked. They also assume that donors know their gift is appreciated and that it is helping the organization. But donors can’t read our minds – we need to ask, we need to thank, and we need to tell the story of how their gift is used. We must work as a sector to maximize the potential of Pick.Click.Give. – it’s one way to build a sustainable future.
Another challenge we face is a frequent misunderstanding among the public about why nonprofits should save money. Unfortunately some donors or contractors, especially local governments, penalize nonprofits with reserves. These misinformed people must assume that if an organization has money in the bank, it doesn’t need more. (For your information, I will get on the next plane to any of your communities to speak on your behalf if elected officials threaten support because your nonprofit has reserves. In the past year I have made four such trips and am willing to do what it takes to overcome this ill-informed thought process.)
We should do what we can to educate donors as well as private and governmental customers about why charities with reserves most deserve their support and loyalty. Those stronger organizations have the best ability to continue providing service. On the other hand, “needy” charities are not the ones to reward because they seem somehow more righteous or more deserving.
Building a reserve is as simple and as hard as budgeting for savings at home, and sticking to the budget. We must work to resist our tendency to spend all that we have. Nonprofits justify spending everything by rationalizing that it is their mission to meet as many needs as possible. Peter Brinckerhoff, the noted nonprofit consultant, told attendees at our first leadership summit in 2008, “No money – no mission!” Now that’s a novel concept!
The way to start thinking about building a reserve, or saving, is to embrace the concept that putting money aside for unforeseen incidents or for future priorities is the only right thing to do. The next step is to have a budgeted line for savings. Plan in your your fiscal year to save some, any, amount of money.
Some nonprofits develop their budgets to reflect that expected revenue would be greater than expense and therefore assume that they will somehow end up at the end of the year with money to put into savings. I have seen evidence that this strategy works – sometimes. However, to be serious about putting money away, build a savings line into the budget and put money into reserves every month. An example is how most of us fund our 401k’s – through an automatic deduction. I doubt many of us would have the discipline every month to take money out of our paycheck and put it into a long-term savings plan. And that is my argument for what we should all begin to do for our nonprofits.
If we think of building reserves as something we do after a good year, when we have a little extra to stash away, we won’t succeed most of the time. If we want to save, we must budget for savings.