Living in the GapAND WHAT TO DO ABOUT THE NONPROFIT SECTOR’S BROKEN BUSINESS MODEL

This is the new economic reality…THERE IS A CAPACITY GAP

Need continues to rise and it’s harder than ever to keep up.

Over 75% of nonprofits surveyed nationally by the Nonprofit Finance Fund saw increases in demand they could not meet in 2012 and 2013.

THERE IS A FUNDING GAP

Revenues from government are declining at the rate of 5-10% per year in this region, but government support rarely covered the full cost of services to begin with.

And government payments are late for the majority of recipients….

Philanthropy is overwhelmed and has not been able to stem the financial slide.

And the costs of delivering services continues to rise….

Most nonprofits get by with little cash on hand.The less cash on hand, the greater the danger when revenue is late or unreliable.

For safety net organizations:

• 60% are operating with 90 days of cash on hand or less.

• 27% had less than 30 days of cash on hand.

More than 3

2-3 Months

One Month

No Cash

0 5 10 15 20 25 30 35 40 45 50

% of Nonprofits

Erie County Nonprofit Profitability

2006

2007

2008

2009

2010

2011

2012

2013

0% 10% 20% 30% 40% 50% 60% 70% 80% 90%

Percentage of Erie County Nonprofits Showing a Surplus

% Profitable

This adds up to a broken business model.Inability to meet demandDysfunctional funding strategyWeakened infrastructureLimited capacityLiquidity challengesPursuing off-strategy and unscale-able funding

Strategies for Enterprise Adaptability What is your most reliable, recurring revenue?

What are your fully loaded costs and the size of the gap?

How much risk can you take?

What types and amounts of capital do you need?

What makes nonprofit adaptability especially difficult? Challenges of enterprise

No profitability in the mission-driven business…. Always! Reliant on subsidies to just break even…..Always! You can’t grow your way out of it. Growth makes it worse!

Challenges of bad best practices Obsessive focus on expenses, not results Inappropriately restricted revenue…. Like no overhead! Overexploitation…. Always doing more for less!

Challenges of access to capital Absence of “equity” equivalent Lack of working capital is pronounced for small to mid-sized organizations.

SURPLUS-GENERATING BUSINESS MODEL

EFFECTIVELY CAPITALIZED BALANCE SHEET

OUTCOMES-DRIVEN STRATEGY

Components of Nonprofit Sustainability

Building the sustainable nonprofitRULES OF FOR-PROFIT FINANCE

In the for-profit world, the customer buys the product.

RULES OF NON-PROFIT FINANCE

Client often does not pay or only partially pays for the product.

Nonprofits make the case for donors and funders to subsidize the cost.

Donors and funders want more of their contribution to go directly to the people served.

Overhead and profits are seen as unnecessary and unrelated to the mission.

Nonprofits need to understand “full costs.”

Nonprofits need to cover the full costs of delivering programs:

Total direct operating expenses

Total indirect operating expenses

Depreciation allocation

New capital investments

Debt

Savings for the future

Full Costs

Direct Expenses Fixed Assets/DepreciationReserves Working Capital

The Sustainability Challenge: Securing enough reliable, recurring revenue from the total of all your available sources to surround vital programs with enough stable and sustainable revenue to cover the full costs and add to cash reserves.

This may involve picking winners and losers among agency programs based on which are most vital to mission and diverting resources from the weak to preserve the strong.

Why Liquidity Matters

Understanding liquidity helps to answer several important questions:

How much cash does the organization need to operate efficiently and effectively?

How long can the organization operate with the available resources?

What is needed in order for the organization to take its next big step?

___________________________________________DO YOU HAVE ENOUGH OF THE RIGHT KINDS OF MONEY AT THE RIGHT TIMES TO CHANGE, GROW, INNOVATE, OR TAKE RISKS?

Sustainability is the capacity to lay up enough resources for the organization to undertake it next critical step.

What Kind of Capital Is Needed? LIQUIDITY Does the organization have cash to meet its operating needs?

ADAPTABILITY Does the organization have flexible funds that allow for adjustments?

DURABILITY Does the organization have access to funds to address a variety of future needs?

Sustainable Business Model

Start Up Proof of Concept Expansion Sustainability0

0.5

1

1.5

2

2.5

3

3.5

4

4.5

5

Expense Revenue

In practice…. What is your most reliable, recurring revenue?DISTANT LOCUS OF CONTROL – MAY BE RECURRING, BUT HOW RELIABLE ARE THEY?

Government grants / contracts / fee-for-service payments Foundation or corporate grantsCollaborators or nonprofit partnersFederated giving (United Way)

YOUR LOCUS OF CONTROL MEANS RECURRING AND MORE RELIABLE

Earned revenue / fee-for-serviceSelf-payIndividual donationsFundraising eventsVolunteersEndowment

After School Program Budget Showing Full CostsREVENUE

Self-pay fees……………………………. $16,000

United Way…………………………….. 10,000

Annual fundraising event……….. 7,000

Annual Appeal……………………….. 2,000

Food subsidy (Federal)………….. 4,000

Sale of products……………………. 1,100

Grants…………………………………… 5,000

TOTAL…………………………………… 45,100

EXPENSES 3 core staff @ 15 hours per week….. $12,000

Contracted specialists……………………. 6,000

Food @ $125 per week…………………. 5,000

Transportation………………………………. 4,000

Sub-total……………………………………….. 30,000

Indirect costs – Mgmt & General (15%) 4,500

Equipment (New) and Depreciation 4,000

Debt Service ………………………………… 1,500

TOTAL……………………………………………. 40,000

SURPLUS……………………………………… 5,100

A Conversion StorySINGLE SOURCE TIME-LIMITED FEDERAL GRANT

An initial 21st Century Community Learning Centers grant established a comprehensive middle school after-school program at the level of $150,000 annually.

It evolved into a multi-source funding stream with:

RELIABLE, RECURRING REVENUE STREAMS $30,000 in United Way funding

$30,000 in new school district 21st Century $

$20,000 in Community Devt Block Grant $

$20,000 in Learn-and-Serve Federal $

$20,000 in substance abuse prevention $

2 dedicated, recurring foundation grants

Arts and youth development grants

School funding for food, supplies, and IT

Parent fees

Take Control of Your Budget Own your budget as a whole package, not one that is divisible by line items.

If it is divisible at all, perhaps it is by time. In the After-School Program budget example, the “full cost” of the program is $250 per day.

Your capacity to build reserves sustains your capacity to innovate and take the next needed steps for your programs and your organization in ways that are in your control.

It also allows you the freedom to access other sources of capital, including borrowed capital, when debt service is in the funding mix.

Use your whole team…. With the board of directors, dedicate time to understanding program economics and plan ahead based on various scenarios.

Move consistently toward a savings culture where you practice full cost budgeting and clearly articulate savings goals

Keep you eye on the big picture and encourage the whole board to understand how to think about financing, funding, and sustainability.

Thank you!