I’m still thunderstruck by a concept that I bumped into a few years ago. I found it in a  paper whose title is a mouthful: Supporting Financial Vibrancy in the Quest for Sustainability in the Nonprofit Sector. It was authored by Marilyn Struthers of The Ontario Trillium Foundation.

In the paper, Ms Struthers poses that we build financial vibrancy in our quest for organizational sustainability. The article outlines six capacities that contribute to financial vibrancy and the creation of resilient and adaptive organizations rather than merely stable ones.

But tucked away in all this very compelling analysis,  under a box four pages into the study, was the sentence that left me speechless:

“Financial vibrancy is the capacity of an organization to make the transition from one sustainable moment to the next.”

I experienced a moment of ultimate clarity, marveling at the purity, the honesty of that statement.

When I share this marvelous saying with the participants in my workshops, I can see a great burden of guilt fall from their shoulders. Smiles emerge.

Nonprofit organizations exist in an incredibly dynamic world. The ground is shifting even as I write, with great uncertainty about the economy, about the future of employment, about cuts to government funding, unending technological innovation, coming shifts in our ecosystems, and even about our very security and survival.

“Experts” glibly chastise nonprofits for so many wrongs — chasing grant funding, for not having diverse revenue streams, for scorning individual giving, for lack of board fundraising. Yet, the reality is that there are no best or right answers for any nonprofit. Each must craft its way, unique to its own circumstances and opportunities.

I share the pain of my nonprofit colleagues, having shouldered that  Sisyphean task of revenue generation myself. I marvel that there are any strong spirits left at the end of the day.

Me, I’m still humbled that given all the financial handcuffs nonprofits wear that so many have carved out, no matter how awkwardly, business models that enable their work to continue, some for decades, others for centuries.

Here’s a list to get you started. If you have other questions, we’d love to share them.

1. Does spending align with your program and operational priorities?

If you think of your budget as an investment, are you investing in the right things? What is the return in community results based on your expenditures? Does the budget match your strategic plan? It should.

2. Does the budget honor your commitments to your funders?

First, your donors give to you because you have promised to make the world a better place. Does the budget enable that?

Second, as the Nonprofit Finance Fund tell us, all cash is not fungible in a nonprofit. Board members should know whether dollars that have been restricted by funders are being spent on schedule and for the designated purposes. I’ve seen boards who thought they were okay cash wise blindsided when an audit revealed they were covering general operating out of dollars restricted for other purposes.

3. Does the allocation of the Executive Director’s time reflect Board-approved priorities?

In a full cost accounting system, a proportion of your Executive Director’s time will be apportioned to program, management and fundraising based on the amount of time your Executive Director spends there. So if the budget says that 80% of your Executive Director’s time is in management, is that what you expected?

4. Is the percentage spent on program acceptable, that is, does it meet voluntary standards and funder guidelines? (Follow up question: how many of your board members even know what that percentage is?)

There are no federal standards in the USA (unlike other parts of the world) on how much of your funding should be spent on your programs (though the IRS has been kicking up it’s heels on this issue). But know that charity watchdog organizations like Charity Navigator are tracking this number.

While I happen to think that rankings based on how little you spend on management and fundraising are too simplistic, I also think that it is important that the board pays at least some attention to where the bulk of spending is going.

The standards of the Wise Giving Alliance of the Better Business Bureau are that no less than 65% of your spending should go to programs. If you wish to participate in workplace campaigns such as the Combined Federal Campaign or a state or federation campaign, the standard is 75%. Other funding sources may have different standards.

5.  Are you taking in as much or more than you plan to spend?

The equation is pretty simple. Spend more than you bring in and you’ll end up with a deficit. Remember that unspent restricted funds from the prior year still need to be spent on what they were designated for (see above). Not only do you most likely want a balanced budget, you might also want to run a surplus to help build your operating reserve. It’s nice to have adequate cash throughout the year and perhaps even earn a little interest.

6. Are you building cash reserves at a sufficient rate to match your growth?

This follows from the question above. As your budget grows, so should the amount you have in reserve. Accountants tell us that it is prudent to have a minimum of three to six months of operating expenses in reserve.

7.    Does spending on salaries and compensation achieve your staffing objectives?

What is your compensation strategy? Does it match your organizational values? Are you trying to attract and keep the most talented staff? Are you providing a living wage to employees at the lowest pay scale? Can you afford to replace employees who leave?

8.  Are compensation packages within IRS standards for reasonableness to avoid excess benefit sanctions?

If you have no idea what I’m talking about, run to the IRS web site discussion on excess benefit transactions and intermediate sanctions or ask your auditor for a tutorial. This is a really important issue as individual board members could find themselves personally slapped with steep penalties from the IRS.

9. Are you confident in the probability of projected revenues — enough to approve the requested level of expenditures?

No playing games here. If you don’t have a plan to bring in revenues that allows you to sleep fairly well at night, then don’t pretend that you can fund all those expenses. A good conversation for your board to have is to ask what level of risk you are willing to bet on revenues … and what goes when your best laid plans fail to meet expectations.

10.  Are lobbying expenditures within IRS restrictions?

If do any lobbying at all, you should know the IRS limitations on lobbying. Check out the Center for Lobbying in the Public Interest for the full scoop.

The report is worth looking at, even if you aren’t from the Bay State, as it provides a very intriguing analysis of nonprofits by size and business model. The report categorizes the sector into three segments based on budget size and “value proposition” as follows:

Grassroots organizations create civil society through grassroots action and volunteerism. They have budgets below $250,000.

Safety net nonprofits provide a societal benefit and a “safety net” through the delivery of services and quality of life contributions. They have budgets between $250,000 and $50 million.

Economic Engines provide large scale services and contributions to the state’s economic health and competitiveness. These are the largest institutions, primarily universities and hospitals (60%), that represent just 2% of nonprofit numbers but 80% of assets and 72% of their spending. (GG: It’s interesting to me that the description of these economic engines says nothing about their charitable purpose. Why is that?)

The report looks at success from a financial perspective only. To me, it displays the Nonprofit Finance Fund’s bias that a nonprofit needs to have a budget in the over $50m category to be considered financially robust.

In my book, any nonprofit that has lasted for 20 to 150 years and continues to achieve important societal outcomes, while nimbly executing on a measly budget (by report standards) of a cool $1-5 million without accumulating debt, is doing pretty well and shouldn’t feel that it hasn’t worked out a viable financial model.

I’m not disputing the financial difficulty that so many nonprofits face and the harsh reality of living payroll to payroll. But having worked at an organization that had an annual budget of $25 million, let me tell you, there was no edge-of-the-abyss financial struggle going on there.

While the report has many recommendations worth echoing, the little hairs on my neck are standing up as I fear that it could result in discounting the resilient financial model of many small and very worthy organizations and push much needed financial resources into the pockets of some of those mega organizations that frankly, in my estimation, don’t need another charitable dime. See our earlier post How much is enough? Philanthropic Greed.

glg