San Diego Grantmakers2018 Annual Conference: Frameworks for Good

Transcription

1 Nonprofit Finance Fund San Diego Grantmakers2018 Annual Conference: Frameworks for Good Presented by: Renee Patey, Director Advisory Services Nonprofit Finance Fund March 29, 2018

2 About The Full Cost Project The Full Cost Project -a joint initiative of Philanthropy California (Northern California Grantmakers, San Diego Grantmakers, and Southern California Grantmakers) and Nonprofit Finance Fund. Bringing together education, advocacy, and skill-building with the goal to increase the number of funders that provide full cost funding and to build the skills and capacity of all those engaged in grantmaking foundations, corporations, individuals, and government. 2

3 Nonprofit Finance Fund: Where Money Meets Mission NFF envisions a world where capital and expertise come togetherto create a more just and vibrant society. We unlock the potential of mission-driven organizations through NFF s Values Tailored investments Strategic advice Accessible insights Guided by our Core Values Generosity of Spirit Responsive -ness Leading By Doing Rigor Without Attitude 3

4 What Do Nonprofits Feel They Can Discuss With Funders? Asking Nonprofit Leaders: My NPO can have open dialogue with funders about... Expanding programs 53% General operating support 32% Multiyear funding 20% Acquiring or renovating a facility 19% Felxible Flexible capital for change/growth 9% Working capital (cash flow needs) 11% 0% 20% 40% 60% 80% 100% Source: NFF 2014 State of the Sector Survey nff.org 2017 Nonprofit Finance Fund 4

5 Funders Report More Openness Than Nonprofits Perceive Asking Nonprofit Leaders: My NPO can have open dialogue with funders about... Asking Funders: Overall, are you willing to engage in an open dialogue with nonprofits on funding for these purposes? Expanding programs 53% 85% General operating support 32% 70% Multiyear funding 20% 65% Acquiring or renovating a facility 19% 51% Felxible Flexible capital for change/growth 9% 47% Working capital (cash flow needs) 11% 40% 0% 20% 40% 60% 80% 100% Source: NFF 2014 State of the Sector Survey Source: Grantmakers for Effective Organizations 2014 Survey nff.org 2017 Nonprofit Finance Fund 5

6 Introducing Full Costs Total Expenses Operating,non-operating, and unfunded expenses Working Capital Access to cash for day-to-day needs Must haves for all organizations Reserves Savings, a rainy day fund Debt Principal Repayment Mortgage, line of credit, etc. Fixed Asset Additions Money to purchase a new building, equipment, vehicles, computers etc. Change Capital Resources to adapt, grow, and/or expand Sometimes needed by some organizations 6

7 3 Rules of Full Cost Funding Nonprofits need profits. Surpluses support sustainability. Conversation is critical, financial statement s won t give the full story. Know what kind of money you give, and match expectation to the dollars. 7

8 Nonprofits Need Profits: Understanding Full Cost Full Cost Rule #1: Nonprofits need profits Nonprofits need to cover the full cost of delivering programs Most full cost needs are met by generating year-over-year surpluses 8

9 Challenge: Communicating Use of Surplus Some (funders, board members) demand a $0 Bottom Line Budgeting to break-even will not cover an organization s full costs and undermines ability to deliver on mission in the long-run Nonprofits can indicate plans for use of surplus below the line to demonstrate good management and satisfy the request for a balanced budget 9

10 Total Expenses 10

11 Total Expenses Total Expenses What ItIs Operating expenses Direct program expenses Indirect / overhead expenses Depreciation Unfunded expenses * What It Is NOT How to Calculate Questions to Consider Any purchase that is capitalized Repaying debt Past spending from income statement or P&L Projected budget Consider changes Consider unfunded expenses * Are you adequately accounting for upfront and ongoing costs of data collection, analysis and sharing to measure impact? Do you have any unfunded expenses related to staff capacity/ sweat equity? 11

12 *Defining Unfunded Expenses Unfunded Expenses:expenses that are not currently incurred, but, if covered, would allow the organization to work at their current level in a way that is reasonable and fair. Sweat equity overworking and underpaying staff is the most common example, such as: The gap between current wages and fair wages for the exact same amount of work. The cost to hire a 20hr/week assistant that would allow the ED to reduce her time from 60hr/week to 40hr/week. Other examples: unfilled positions, sub-par supplies, slow internet Unfunded expenses are NOT: Expenses to expand or do more Full Cost Rule #2: Financial statements will not reveal all full cost needs. Conversation is required. 12

13 Reserves 13

14 Reserves What It Is Dollars used for specific a purpose; eventually replenished Often board designated, such as: Operating reservethat protects from risk by covering short-term deficits Fixed asset reserveto maintain building & equipment, pay for repairs/replacement R&D reserveto allow for trial & error (e.g., take artistic risk reserve, investigate new program approach) Investment reserveto generate revenue Reserves are need by all, but size & purpose varies by organization Accessible to management under certain conditions Often requires board approval to access May be held as cash in savings account, or investments that can be liquidated in a reasonable timeframe 14

15 Reserves, con t How to Calculate Varies by reserve type Operating reserverequires assessment of likely risks and time needed to respond or recover Fixed asset reservelook to estimates on the timing and cost to replace buildings and equipment R&D reserverequires assessment of expected opportunities and associate costs Investment reservecalculated based on income stream needed and expected return rate Balance sheet and audit mayprovide information on current reserves Questions to Consider Does your organization have a reserve? Can leadership and board articulate its purpose? Are reserves or reserve goals aligned with priorities and needs? 15

16 Change Capital 16

17 Change Capital What ItIs Periodic reinvestment into the organization to change its business model (i.e., the size or reach of mission and/or how to make and spend money) Covers up-front costs of change and deficits until new business model revenue exceeds new business model expenses Typically large, flexible, multi-year funding from an external source What It Is NOT Organic growth How to Calculate Questions to Consider Detailed projections for a surplus-generating business model planning/up-front/startup costs for revenue generating activities, programs, and other infrastructure Timeline to secure new revenue and revenue sources Will any program/service approach delivery require change? What sources of change capital might exist to finance this change? How are you planning to outgrow change capital? 17

18 Capital or Revenue? Our sector does not distinguish capital for change from revenue for operations on financial statements (for-profits do!) Lack of clarity creates unrealistic expectations, frustration and disappointment for both nonprofits and funders Matching the right kind of money to the need sets us up for greater results and a successful grantor/grantee relationship Full Cost Rule #3: Know what kind of money you give 18

19 Ways We Can Get it Right Nonprofits Begin by knowing the truth for yourself: Know your full cost needs Approach full cost as a journey: Make progress over time Engage funders as partners Ask for your full cost needs honestly and unapologetically Ask for the right kind of money (capital vs. revenue) Funders Acknowledge that full cost needs are real; interrogate why you do or do not fund certain costs Know when you are giving capital vs. revenue dollars Have full cost conversations with grantees: Create a safe space to have the discussions Don t ask too much of grantees: With great power comes great responsibility 19

20 Closing Summary Nonprofits need profits; surpluses support full cost coverage Create the space to have the right conversations Match your funding with your intent (capital vs. revenue) Recommended Next Steps Review internal practices and policies Use your social capital Visit fullcostproject.org or contact NFF for more resources nff.org payforsuccess.org 2018 Nonprofit Finance Fund 20

21 Stay Connected! Thank you. twitter.com/nff_news facebook.com/nonprofitfinancefund nff.org/contact Where Money Meets Mission nff.org payforsuccess.org 2018 Nonprofit Finance Fund 21

22 Appendix The Full Full Cost Profile: Definitions & Questions Expenses Working Capital Reserves Debt Principle Repayment Fixed Asset Additions Change Capital Conversation Guide Scenario 1: Deficits Scenario 2: Reduced Funding Scenario 3: Surpluses Scenario 4: Grant Structure nff.org payforsuccess.org 2018 Nonprofit Finance Fund 22

23 The Full Cost Profile 23

24 Total Expenses Total Expenses What ItIs Operating expenses Direct program expenses Indirect / overhead expenses Depreciation Unfunded expenses * What It Is NOT How to Calculate Questions to Consider Any purchase that is capitalized Repaying debt Past spending from income statement or P&L Projected budget Consider changes Consider unfunded expenses Are you adequately accounting for upfront and ongoing costs of data collection, analysis and sharing to measure impact? Do you have any unfunded expenses related to staff capacity/ sweat equity? 24

25 Working Capital What It Is Dollars to cover predictabletiming of cash ebbs & flows Maintains business operations if receivables are late or bills must be paid early Easily accessible to management: in the checking account, not restricted or strictly designated Needed by all organizations Amount needed varies by organization What It Is NOT Dollars to cover lost revenue, unplanned expenses, or deficits How to Calculate Cash flow planning/projections Consider past cash flow performance Questions to Consider How much working capital do you currently have? When are cash low points projected? How will you manage them? 25

26 Reserves What It Is Dollars used for specific a purpose; eventually replenished Often board designated, such as: Operating reservethat protects from risk by covering short-term deficits Fixed asset reserveto maintain building & equipment, pay for repairs/replacement R&D reserveto allow for trial & error (e.g., take artistic risk reserve, investigate new program approach) Investment reserveto generate revenue Reserves are need by all, but size & purpose varies by organization Accessible to management under certain conditions Often requires board approval to access May be held as cash in savings account, or investments that can be liquidated in a reasonable timeframe 26

27 Reserves, con t How to Calculate Varies by reserve type Operating reserverequires assessment of likely risks and time needed to respond or recover Fixed asset reservelook to estimates on the timing and cost to replace buildings and equipment R&D reserverequires assessment of expected opportunities and associate costs Investment reservecalculated based on income stream needed and expected return rate Balance sheet and audit mayprovide information on current reserves Questions to Consider Does your organization have a reserve? Can leadership and board articulate its purpose? Are reserves or reserve goals aligned with priorities and needs? 27

28 Debt Principal Repayment What It Is Dollars to pay down debt. Debt can be: Line of credit Mortgage Loans from board members Other forms of borrowing Debt can be a valuable financing tool, but there must be a plan to repay it Repayment is commonly financed through year-to-year surpluses How to Calculate Balance sheet and notes from audit Loan documents and proof of payments Questions to Consider What debt does your organization currently hold? If your organization does not currently hold debt, have you been able to build credit in the past? How might you want to do this in preparation for any debt associated with adaptation or change? 28

29 Fixed Asset Additions Fixed Asset Additions What ItIs Purchase of NEW equipment, buildings, furniture, land, leaseholder improvements, etc. What It Is NOT Replacement or simple maintenance of existing fixed assets Small equipment purchases that won t be depreciated How to Calculate Vendor quotes Questions to Consider Are there new fixed assets needed by changing program service approach? How will you pay for such fixed asset additions (e.g., debt, special campaign, surpluses, etc.)? 29

30 Change Capital Definition & Considerations What ItIs Periodic reinvestment into the organization to change its business model (i.e., the size or reach of mission and/or how to make and spend money) Covers up-front costs of change and deficits until new business model revenue exceeds new business model expenses Typically large, flexible, multi-year funding from an external source What It Is NOT Organic growth How to Calculate Questions to Consider Detailed projections for a surplus-generating business model planning/up-front/startup costs for revenue generating activities, programs, and other infrastructure Timeline to secure new revenue and revenue sources Will any program/service approach delivery require change? What sources of change capital might exist to finance this change? How are you planning to outgrow change capital? 30

31 Conversation Guide: Better Funder/Nonprofit Communication Overall Considerations Funder Create a safe space Don t make assumptions Remember that both debt and deficits can be a result of strategy Don t be afraid to let organizations know the challenges with funding Know that both parties desire to benefit/positively impact the community we are all on the same team Nonprofit Avoid defensiveness Don t make assumptions Have a definitive strategy Own your financial story and tell it with confidence Don t be afraid to ask for something different or reject something that doesn t work Know that both parties desire to benefit/positively impact the community we are all on the same team 31

32 Scenario 1 Desired Impact/Potential Impact New Approach New Response Funder Nonprofit Why did you run a deficit in the last two years? Expressing concern Defensiveness Need for understanding of organization s Concern that this inquiry may prohibit challenges/opportunities funding Attempt to elevate undisclosed issues Anxiety about challenges faced Create a safe space Rephrase question to demonstrate concern for organization not their potential incompetence Sample: I have a number of grantees who had deficits in recent years some because of a tough fundraising environment, some because of a strategic choice. I d like to hear more about your last two years of deficits. What was their cause? How have they impacted your organization? Clearly articulate challenges/plans to address Ask how funder views deficits Sample: We lost two key funders when they changed their strategies. We cut expenses in the following ways and we are seeking new funding in the following ways Thankfully, we have been able to draw down our reserves as we develop new funder relationships. 32

33 Scenario 2 Funder Nonprofit We reviewed your proposal and would like to offer you funding; please cut your budget from $100,000 to $50,000. Desired Impact/Potential Impact Support for organizations having community impact Spreading funding to more organizations Avoiding being sole funder Frustration Fear of rejecting funding/compromising funding relationship Compromise resulting in failure and/or unfunded expenses New Approach Explain that the desire is to spread funding to more organizations Allow organizations to adjust their deliverables to meet funding available Adjust committed outputs to reflect offer Reject funding New Response Sample: We won t be able to fund your full ask because of our internal budget constraints. We can probably fund $50,000, and of course we would only expect $50,000 of work. Can you put together a revised budget and deliverables based on a $50,000 award? Sample: Yes, let me talk with my team about how we might adjust. There are some upfront costs that remain the same whether we deliver 10 [units of service] or 100 [units of service], so you will likely see deliverables reduced by more than 50% in the revised proposal. 33

34 Scenario 3 Desired Impact/Potential Impact Funder Nonprofit You have surpluses and over $100K in unrestricted cash. Why do you need additional funding? Clarity about current financial practices Understand value-add of our grant Fear that organization s strength will prohibit additional funding New Approach Acknowledgement of the benefit of surpluses/unrestricted cash/reserves/working capital Attempt to identify a purpose or need for the unrestricted cash Definitive explanation for purpose of unrestricted cash working capital/reserves Strategy for using surplus/unrestricted cash (working capital/reserves) New Response Sample: I was really impressed that you have been able to generate surpluses, and I noticed you have built up your unrestricted cash. I d love to hear more about how you are thinking about this cash and how it supports your mission. Sample: Thanks! It has taken lots of work by staff and board to build up that safety net. $60,000 is used to manage our receivables. We have many reimbursement-based contracts that require we do the work upfront before being paid. $40,000 is a board designated reserve for facility repairs and upgrades. Our goals to save another $200,000 over the next 5 years to replace our roof and HVAC system. 34

35 Scenario 4 Funder Nonprofit Why should we change the way we structured this grant for your organization? Other organizations have been able to comply with the terms offered. Desired Impact/Potential Impact Need to answer to foundation trustees regarding success of grants Concern for integrity/failure of program Assessment of desired outputs/outcomes Defensiveness Fear of losing funding, inability to properly service community, inability to meet terms, and/or damaging funding relationship New Approach Remember organizations are doing direct delivery and may offer substantial insight into helpful restructuring Be open to new ideas Emphasize the need to meet funder s own philanthropic mission and answer to trustees Offer strong evidence of desired outcomes Be prepared to walk away/seek other funding New Response Sample: I definitely want to hear about your needs and how we can better structure the grant to meet them. I d like to do what I can. I also want to be clear that I can t make that decision unilaterally, and would need to get buy-in from our CEO, the board of trustees, and Sample: We sincerely appreciate your willingness to hear our proposal and recognize that what we are asking may not fall in line with this particular grant; however, we believe that we can provide greater outcomes with the following adjustments: X, Y, and Z. and why 35