Featured Article – 2008 July
Putting a Nonprofit Back on Track
by Christopher H. Todd
A nonprofit organization that spends more than it receives may seem true to its definition. But it won’t remain a nonprofit forever. Eventually, it will be out of business, and the services it provides to benefit the public will be lost.
Over the years, many nonprofits have been slow to grasp this reality. The allegiance of their leaders has been more toward the agency’s mission of service than to its bottom line. However, the difficulties of operating in the current troubled economy have made financial realities more obvious than ever. There’s nothing wrong with bringing in more than you spend. In fact, it’s a good idea.
In the past few years, struggling not-for-profit organizations have become more interested in seeking out the services of turnaround advisors — either for help in reversing negative cash flows or for support and guidance in setting a new direction to enhance their financial stability.
Having worked on turnarounds in both the corporate and nonprofit sectors, I’ve learned that troubled organizations in both sectors encounter the same sorts of problems and that the steps you take to assist them are essentially the same. Key warning signs include: unexpected cash shortages, lack of timely financial reporting, continuing operating losses, high turnover, boards that decline to take responsibility, decreasing memberships and failed new programs.
Key warning signs include: unexpected cash shortages, lack of timely financial reporting, continuing operating losses, high turnover, boards that decline to take responsibility, decreasing memberships and failed new programs. Sometimes the underlying causes can be beyond management’s control, but it’s more likely to be the result of insufficient revenue and reserves, a board and/or management that lacks needed skills, a drift away from the agency’s mission, or the lack of management information systems that would help show the top brass how it has gotten off track.
Here are the steps to take:
- Change the management (sometimes the personnel, but almost always the philosophy and strategy).
- Analyze the problems.
- Implement an action plan.
- Restructure the organization.
- Return to profitability.
The key difference between the corporate and nonprofit sectors is that the nonprofit’s emphasis on its mission sometimes impedes the effort to reorganize the business side of the operation.
That’s especially true when the organization’s top manager, as is often the case, has advanced through the program side of the agency, and then winds up in charge of a multi-million-dollar budget without having had training in financial management and contract negotiations. In such situations, the key challenge in a turnaround is to convince the organization’s management and staff that severe cost-cutting and revenue-enhancing measures are absolutely essential if the agency is to continue to fulfill its public-service mission. Simply put, nonprofits don’t turn a profit simply for the sake of profit, they do it to ensure their own survival.
While navigating core philosophical differences can be a major challenge, more practical factors can prove equally daunting.
For example, if the organization relies on an annual campaign for collecting dues or memberships, it can’t comfortably tap its constituent base for more money until the next campaign rolls around.
Many nonprofits rely heavily upon revenues from programs — classes at art museums, swimming lessons and basketball leagues at the YMCA, for example — that are scheduled on cycles throughout the year. Due to the planning involved in scheduling and marketing these programs, pricing may be determined two cycles in advance, making it difficult to immediately generate increased revenue from ongoing activities. It’s not like the private sector where, for example, it’s relatively easy to add a dollar to the price of a gallon of paint to cover the increased production and shipping costs.
For these reasons, it takes a little longer to start seeing the evidence of a nonprofit’s turnaround and it may be necessary to make some unpleasant decisions. Layoffs may be required to stem the flow of red ink until the revenue picture improves. Decisions must be made carefully, with an eye toward eliminating the positions that are least essential to the agency’s core mission.
The most significant difference between the corporate world and the nonprofit sector is the vital role of the nonprofit’s board.
Not only are board members responsible for protecting the organization’s mission and assets and expected to make significant financial contributions to the organization, but they are also valued for having established networks that extend into service clubs, country clubs and board rooms.
Because the operational aspects of a nonprofit turnaround can be slow to develop, board members in a struggling organization must utilize their talent and connections to maximize fundraising potential. The turnaround professional may have to "teach them to fish" — by coaching them through the sales pitch process and baiting the hook with compelling reasons for supporting the organization — but ultimately it will be up to the board members to reel in the new donors. With a dedicated board and a management that understands the inextricable link between a healthy bottom line and strength in programming, a struggling nonprofit should be able to re-establish itself and continue providing valuable community services.