Preventing Non Profit Failures

Preventing Nonprofit Failures

Why is this important?

Widespread state budget shortfalls have created tremendous pressure on nonprofit boards to run their organizations efficiently and effectively. States have cut both funding overall and the reimbursement rates for crucial social services. Nonprofits that fail to develop business strategies for better economic security will surely face tougher times. Some will merge with other organizations.  Some will not survive.

Business crises

Three kinds of crises can lead to a nonprofit’s demise. Regardless of what causes the crisis, nonprofit management executives and board members are often lacking in business crisis management and/or preventing these issues from threatening organization sustainability.

Program-related problems: when a client is abused or harmed in some way through program services or when a disgruntled and vocal client lodges a public complaint, the effect on a small nonprofit can be devastating.  Whether the matter is actual nonprofit wrong-doing or perceived negative programming the loss of community confidence can lead to a reduction in donor support. Ongoing feedback, timely response to client complaints and overall quality monitoring is required to prevent these disasters.

 

Human resource-related problem: when a current or former employee launches legal action against a nonprofit several problems arise: legal fees, negative publicity, and distraction from regular programming.  Even when an employer prevails the process is a costly and stressful diversion.  Finally, the lack of adequate funding over time leads nonprofits to operate without the technical human resource expertise required to ensure these challenges are prevented.  

 

Financial problem: financial mismanagement and malfeasance is increasing among nonprofits. The failure to monitor cash or to to engage in long rane financial planning invites cash management and other financial problems. Unfortunately nonprofit leadership and/or board members often lack this expertise. Lack of proper financial checks and balances may delay the discovery of serious problems so that recovery is more difficult.

Prudent program management

Program planning should always include the possibility of public funding losses or reductions. It is tempting to try to sustain programs that operate in the red but pressure on sound programs to help fund those with inadequate funds prevents the organization from building for the future. Worse, it can lead to organization-wide financial troubles. Because nonprofits are leanly staffed, setting aside time to focus on the future requires strong discipline. Large nonprofits with a mix of programs should consider narrowing programs to those with adequate funding. Sticking to one or two adequately funded key mission elements is one way to acheive sustainability.

Funding loss and funding diversity

Regardless of the funding source, dependence on any one funder is a mistake. State-wide budget shortfalls forced many states to retrench social service funding. But loss of state funding won’t necessarily sink a nonprofit. Those with a diversified funding base can survive cuts with efficiency gains and proper planning. Endowment funding is the most effective way to cushion funding losses and survive challenging economic times.

Cash and financial management

Poor cash management and lack of sound financial reporting makes it difficult for organizations to discover problems in a timely way. Nonprofits necessarily run with tight cash margins. Even a small funding reduction or brief receivables delay can result in difficulty meeting payroll. Reviewing historical cash flow and managing receivables is an absolute requirement.  It is surprising that nonprofit boards still tolerate unclear, inadequate or inaccurate financial information reporting from an executive director. In addition, boards do not always give full attention to the information they receive. Accounts payable and receivables aging reports should accompany the monthly profit & loss and balance sheet. Finally, as cash tightens, financial misfeasance is likely to increase for those nonprofits without proper financial controls.  Though this is changing, I still see occasions where nonprofit executive directors deposit funds, write agency checks and then sign them.  Retaining external bookkeepers who prepare accounts and write checks for an executive to sign ensures that there are two sets of eyes and at least one individual who is governed by an independent code of financial ethics watching day-to-day financial activities.  In my experience, external bookkeepers are more likely to contact board members when they have concerns than paid financial staff.

The burden of old facilities

Property ownership can be a blessing and a curse. Large, older nonprofits whose services depend upon brick and mortar facilities have the special challenge of repairs, upkeep and modernization. Many states have burdensome red tape meant to ensure safety that most nonprofits cannot meet completely. Further, an urban organization started 30 years ago might own a building with tempting market value. Commercial buyers have the cash to fund renovations that could bring top rental values. A building sale could yield capital as long as the nonprofit has reasonable equity in the building. Unfortunately, many will have used building equity for cash in the past. Another ongoing issue here is that public funding and foundations focus on program operations and not capital improvements. Some funding sources short-sightedly prohibit the accumulation of public funds for capital improvements, even when savings come from operating efficiency gains.

Spending and expense controls

Overspending is never acceptable in a publically funded environment and most nonprofits keep a close eye on expenses.  Real expense reduction requires staff reduction.  When gas and fuel price hikes increased the cost of nearly every type of service, some nonprofits reduce staffing levels.  Nonprofits in large or rural states consolidated staff into regional offices and unfortunately now, getting staff to where clients are located involves costly auto travel reimbursements. There are many creative ways to reduce expenses or to obtain resources for reduced price: recycling and corporate partnerships for example. Managers cannot control all expenses but failing to control the ones you can is poor mission stewardship.

Private fundraising challenges

A simple 10-year profit and loss projection immediately highlights funding increases needed to simply maintain current service levels. Public funding is nearly always level from year-to-year. Not many nonprofits have the private fundraising machinery necessary to raise substantial funds or to raise them quickly. Over the last five years well-run nonprofits have improved fundraising effectiveness. However, as overall comunity funding decreases and nonprofits improve these skills, competition with other worthy causes can result in local donor fatigue. Lastly, establishing an effective development department requires capital investment – a “Catch 22″ challenge.

Inadequate operating revenue

Income generated by program operations is a blessing if you have it. Social services “serve” vulnerable populations.  By definition this includes low income families, elderly, disabled and others who cannot pay the full cost of services needed to lift them from their present circumstances.  Even nonprofits that charge service fees cannot collect the full value from  most clients.  In addition, state reimbursement rates are not typically designed to pay the full cost. Services must be as efficient as possible with an eye to adequate funding both today and over the next five years.

Organization oversight

Turbulent times require everyone’s sustained attention and sound planning. Inattention for even brief periods by disengaged board members can allow a cash position to slide into dangerous territory.  Other negative board dynamics include boards:

Engaged in power struggles with each other or their executive director
Without financial management experience or nonprofit experience
With members who are afraid to speak up about problems they observe
Who fail to evaluate and confront strong but less competent executive directors 

Executive directors who are both strong and less competent can render the most well-intentioned board members reticent to speak up when needed. In addition, many executive directors ascend to leadership positions through the ranks without essential professional people management or financial skills. Nonprofit board members must represent the community in ensuring that public funds are used prudently and that services are efficient and effective. This means holding the executive director accountable and speaking up even when it may be perceived as “rocking the boat.” Passion for the mission is not enough.

Well-run nonprofits of varying sizes are working around the country to provide essential services to vulnerable groups.  If you serve on a board or donate, help them ensure forward planning and financial prudence and don’t be afraid to speak up about your management concerns.  It is not your choice, but rather your duty emanating from your role as a community representative.