The Organizational Development Muse

Five strategic questions of non-profit organizational leadership

Posted by Mark L. Vincent

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Your organization’s answers to five strategic questions strengthen your ability to manage from income and in real time. Managing from income and in real time stands in contrast to managing from your expenses and after you receive expense reports.

QUESTION 1: How does your organization answer the question: What is your organization’s income?

The best answer includes all income sources, not just contributions and fees that help to pay operating expenses. The answer should also include non-income contributions that reduce expense, income you do not control but can influence because of your organizational connections and affiliations, and capital you can leverage.

It might be better to change the question to what is the size of your organization’s economy? When you are aware of and track all your income sources, you discover additional possibilities in addressing the financial realities of your organization–more than you discover if you work solely from operating income and related expenses.

QUESTION 2: Do you set expenses then try to raise the income, or do you match a realistic income expectation to anticipated expenses?

This is much more than a chicken and egg question. When you begin with expense then try to get income, all fundraising activity takes on an anxious tone. Even more, the fundraising message shifts to trying to recover money you already spent, making it even harder for your organization’s development officers to raise the support you need. When you start with a realistic expectation of income, however, (we suggest averaging the last three to five years to get the most accurate estimate), and match your expenses to it, then you begin with confidence that the money will be available. Fundraising activity can then focus on what you want to do next in serving others, a much more appealing prospect for raising money.

The illustration in Figure 1 provides a visual picture of this important point. Government agencies start with an annual allotment of income and try to spend to zero. A surplus at the end of a budget raises the risk of receiving less funding in the future so government agencies are eager to spend to zero.

Many ministry organizations run in the opposite direction. They start with what they expect to spend to continue operating as before. They then try to raise the money to get back to zero, often having to cut programs and/or staff as a means to balance budgets in years where there is a shortfall.

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The best method, however, is to run the organization as a continuing enterprise, expecting to spend somewhat less than safely anticipated income, carrying forward an amount greater than zero into the next fiscal year so that ministry can continue next year too. This also helps fundraising activity look forward to what will happen next in ministry rather than looking backwards to try to recover money already spent.

 

QUESTION 3: Have you linked spending percentages to anticipated income?

Once you have established a reasonable expectation of income, you can then look at the pools of money available for:

1.  What your organization gives away in generosity to others (firstfruits),

2.  What your spend on personnel, and

3.  What you spend on facilities and program combined.

Two notes about this. First, many ministry organizations feel they receive firstfruits from others and that their programs are expressions of generosity. Why should they then give to others? Isn’t this an ethical problem–sharing money with others when the money was donated to their organization for their ministry?

The problem here is one of communication. Ministry organizations are in a position to know how to best carry out the mission they exist to serve–whether it is through the programs they house, or by sharing with other organizations or programs. This kind of sharing can be strategized, communicated and used in raising support–a means of giving from the first and trusting God to meet the needs of the organization.

One camp we worked with strategized their firstfruits by giving their full time staff opportunity to serve another camp for one week each year. While serving at another camp offered a continuing education opportunity for their staff, this camp targeted the busy seasons of other camps when their own camp would be slow so as to assist the ministry of others at a reduced cost for everyone involved. They then reported this intention to share the firstfruits of the organization with the donors who were supporting them. Donors rightfully saw this sharing as extension of the camp’s mission rather than a re-directing of funds.

Second, we suggest combining facilities and programs into a single percentage so that an organization does not lose sight of the fact that facilities exist to serve programs and not the other way around. Simply put, the two are functionally linked and programs need to be the driver in the relationship, not facilities.

Undergirding your spending percentages should be a cash reserve. The size of this reserve can be pegged to a percentage of income that best helps you maintain regularity of cash flow. Congregations normally do well on four to six weeks of income in reserve. Ministry organizations dependent on year end giving or major gifts may need as much as six months of income on hand. Without an adequate cash reserve your organization is forced to stop programs or to borrow from other accounts in order to cover cash shortages. With it your organization can anticipate adjustments it must make when income is tight and make those adjustments in advance rather than after money was already spent that may not be recovered. Monitoring your cash reserve as income comes in to the organization is yet another way to manage from income.

Knowing your percentages and keeping a cash reserve as the means to manage cash flow is also a help in raising funds. This is because the spending percentages can be converted to the mission priorities of the organization, that is, they can be turned into the story of what the organization intends to do with money it will raise in the next year.

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Here is an example of one such story from a small hundred and fifty year old congregation in Eau Claire, Wisconsin:

The 2010 Spending Plan for First Baptist Church

Our congregation’s mission shall be the advancement of the Kingdom of Jesus Christ. We shall seek to attain this through public worship of God, the preaching of the Gospel, consistent Christian Living by our members, personal evangelism, missionary endeavor, and Christian Education.

In 2010, we week to spend $114,531 in support of this mission.

In our missionary endeavor we plan to contribute $9,950 to the American Baptist Churches of   Wisconsin, Camp Tamarack, UW Eau Claire Campus Ministry, Bolton House and other     ministries. This amount reflects 9% of the money we intend to spend. Our special offerings for retired ministers and missionaries, One Great Hour of Sharing, Haiti Relief and more will raise this amount substantially, taking us above 10% of all money we receive going beyond the walls of our congregation to plant churches, relieve suffering and provide education.

In our worshipping of God and preaching the gospel, we will host approximately sixty worship services, including our weekly Sunday morning services. A significant portion of our pastor’s time and maintaining our facility are dedicated to making this possible. In 2010, we will spend approximately $57,484 or 50% of the money we spend.

In our efforts to build strong Christian living through Christian education, we offer weekly Sunday School classes, a Friday morning prayer group and all church fellowship events. We    also strive to make sure the sick are visited and adequate pastoral care is available when needed. During the first quarter of 2010, we increased our Sunday School offerings to include a     class on Inductive Bible Study that includes our youth and other interested adults. Another         anticipated event comes in May 2010, when Rev. John Sundquist of the American Baptist Church Foundation will be with us to provide a workshop on estate planning.  This reflects approximately 47,097 or 41% of our spending.

QUESTION 4: Are you managing according to spending reports or according to real time income?

This question connects to Question 3. Once you establish spending percentages, you can divide each dollar accordingly. This helps you function in real time–as the money comes in–rather than waiting for month end financial reports as an indicator of how you are doing, usually not available until the next month is already more than half over.

Working behind the scenes in the spending story of the congregation illustrated above are the spending percentages that were converted to their mission priorities. The behind the scenes percentages are:  9% on firstfruits,  33% on staff and nearly 58% on facilities and programs. Every dollar that comes in can now be divided accordingly so that payroll is met and budget categories are funded. The cash reserve the congregation maintains helps to manage the ebbs and flows of monthly and annual expenses in relationship to weekly income.

These are not the healthiest of percentages for this congregation, however. Determining spending percentages helped to diagnosis the problem. Long-term, they need to strengthen what they spend on staff in proportion to what they spend on facilities and programs. Given their small size, they will have to focus on increasing income to make this adjustment. By shifting to management from income rather than expense, they are in a much better position to look ahead to what they will do next to address the issue, rather than looking backwards and wondering what else they might cut in order to balance their budget.

 

QUESTION 5: Are you communicating according to what you will do next, or because of the anxiety of needing income?

This article has already demonstrated the value of communicating about what comes next–especially as a means to raise support for ministry.  The question now becomes whether your organization is moving in this important direction. Ask yourself what type of message characterizes your public communication with donors: that you need more money to survive, that you are prudent managers of limited funds, or that you anticipate extending or increasing the amount of ministering activity with the next money you receive?  Your choice in this matter reflects whether you count the money (managing from expense) or count the ministry the money makes possible (managing from income).

Conclusion: Take some time to work through these five questions with your leadership team and your board. Most organizations will benefit by moving more fully toward managing from income. All organizations will benefit by more strongly linking how money is managed with how money is raised.

-mark l vincent

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Topics: Mark L. Vincent, Design Group International, Whorled Viewz, Fundraising, economy of the organization, manage from income, ministry organizations, money management for nonprofit organizations, money pools, narrative spending