Best practices for social change and environmental action

Archive for the ‘Money management’ Category

Getting the board to talk math

In Finance, Fund raising, Money management, Nonprofit management on June 25, 2012 at 6:37 pm

It’s a rare board member who can really get into a nonprofit’s operating numbers. Yet, every board has to know where the money comes from…and how it’s used.  Moreover,  it’s essential that the board understand – at strategic, tactical, and priority levels – what the organization needs to meet its goals and live up to its mission.

The trouble, of course, is that such discussions can devolve into dreary dog and pony shows.  How much more effective would it all be if you could flip the model to get the board talking, taking notes, and running some numbers themselves?

Fund raising guru Gail Perry, author of Fired Up Fundraising: Turn Board Passion into Action and the excellent Fired-Up Fundraising blog has some good thoughts on that.  It essentially comes down to asking three questions:

  • Where does our money go?
  • Why does it cost so much?
  • What do we need to invest right now?

She gives some excellent real life examples in her article over at the Guidestar site: What’s the Math? Three Questions Your Board Members Really Need to Know. (The article is reprinted from the blog.)

It seems so simple…at first…but it really made me think.

# # #

Advertisements

The colors of money in social enterprise

In Finance, Fund raising, Grant writing, Money management, Nonprofit funding, Nonprofit management on April 18, 2011 at 5:24 pm

What should take priority in a social enterprise model: finances or impact? If some themes of the recent Skoll World Forum on Social Entrepreneurship are any indication, there’s probably no single “right” answer.

Idealists will lean naturally toward outcomes. Pragmatists will likely note that you put those outcomes at risk without a solid financial foundation. The rest of us naturally ask why we have to choose; money and impact are equally important.

There’s a lively follow-up discussion of the topic underway right now over at the Social Edge global online community sponsored by the forum’s organizer, The Skoll Foundation.

A consensus seems to be taking shape about the gap between the different lines of thinking. Smart social investors see the impressive results achieved by social entrepreneurs working worldwide and in multiple key sectors. Yet, they cannot really figure how to get a “market rate return” from investing in those enterprises while enabling the organizations to achieve the optimal social impacts.

Perhaps the key question is how foundations, funds and other “impact investors” can help social enterprises build financially stable and sustainable business models that actually strengthen their missions. How can they close the gap between the need for financial return and the mandate for maximum impact?

Root Capital founder Willy Foote offered a clearheaded approach in his Skoll Forum presentation about the “colors of money” … which he succinctly summarizes here:

Colors of money. We’re sure to be hearing that a lot as the social enterprise sector gets ever more dynamic.

# # #

Simple ratios, vital signs

In Fund raising, Grant writing, Money management on March 29, 2011 at 7:27 pm

Money management is clearly as important in nonprofit organizations as it is in the private or public sectors.  From the donor or funder perspective, it is perhaps even more so.

Not everyone — including this writer – can be completely adept at financial analysis. Even so, if you are in a leadership role for an NGO or nonprofit, you need to have a clear, current reading on the organization’s fiscal health.  Moreover, you should be able to answer some of the hard questions that foundations, corporate funders, government grant makers, and major philanthropies are now asking.

Fortunately, there’s an array of financial ratios to help you do so.  While some ratios are quite sophisticated and complex, the most important are relatively simple – even for non-accountants running them on basic spreadsheets.  Here are a few essentials.

  • Current ratio: Current assets/Current liabilities. This is probably the most widely recognized and easily understood measure of liquidity.  Generally, it should be better than 1:1 – for every dollar (or currency unit) of liabilities, there should be an equivalent amount in assets available to pay them.  Organizations with complex revenue streams need to have a more stable capacity to meet short term variations in liabilities than those with steady day to day income.
  • Days Cash: Cash x 365 / Operating expenses-depreciation. OK, this might look a little intimidating, but the figures are usually easy to get.  Most importantly, this ratio is for realists who want to know exactly where things stand;  it can open some eyes in larger organizations  that might be cutting cash flow too close for real comfort.  Higher is generally better – and any number between 0-10 days is cause for concern. (However, in many nonprofits there can be such a thing as too much cash. More on that at a later date.)
  • Days receivables: Accounts receivable x 365 / Operating revenue. This ratio is predicated on the venerable concept that Time is money. Simply put, it measures how long it takes the organization to collect its bills and receive its revenues.  Lower is better as a rule. Funders like to use it to gain insight on the organization’s management: a number higher than the field’s standard can indicate sloppy accounting practices while a number that is significantly lower might actually hint at some fiscal desperation. It’s wise to strive for the norm in your organization’s particular field.
  • Total Margin: Revenue – expenses /Revenue. This might look like the bottom line to most observers.  It’s the fundamental metric that indicates how profitable the organization really is.  Higher is normally better, but only to a point because too much is contrary to the basic ethic of a nonprofit organization.  How much is too much? That’s the real question this ratio will raise.  It’s critical to know the answer because smart grantmakers and funders will want to know.
  • Operating Margin: Operating revenue – Operating expense / Operating Revenue. In practice, many knowledgeable analysts consider this ratio the real bottom line. That’s because it directly compares the revenue from operations against the costs of those operations.  It removes extraordinary fund raising revenue from the equation to provide a more precise view of the organization ‘s business efficiency.  The tricky part is deciding what the number should be. Fundraising may be more fundamental to some nonprofits while others could run the risk of being overdependent on contributors.  Ultimately, senior management should probably work with the board to set the benchmark…and strive for it consistently.

These comprise just a basic start to understanding a nonprofit’s vital signs.  Whether or not you need to be well versed in more of them depends on your organization’s financial management capacity and resources.  Whatever the case, you should be able to produce them for funders …and the tax authorities (if asked of course.) There are plenty of nonprofit financial management resources online.  A great place to begin would be with the Nonprofit Finance Fund and the Nonprofit Organization section at About.com.

An outstanding, easy-to-understand text that is widely used for graduate level study is Streetsmart Financial Basics for Nonprofit Managers, by Thomas McLauglin of Grant Thornton, LLP.