Nonprofit Financial Management: Sustainability in a Volatile Market

Posted by Matthew Thomas

Even small nonprofits often have endowment funds invested to sustain long-term work toward the cause for which they were founded. Large nonprofits typically have a significant source of their annual revenue generated by earnings off of investments. So when the market begins to jump around, as it has done since the middle of the summer, nonprofit leaders begin to get nervous about what downward market trends might do to their revenues. This induces some to pull their funds from the markets, or hesitate putting funds into the markets. 

matthew-thomas-2Downward markets trends tend to cause no small amount of panic. However, sound financial management suggests that there are four things we can do intentionally, and four others we can avoid, that will strengthen our organizations' financial health, and ride out downturns in the markets.

  • Do: Follow your Investment Policy Statement (IPS), even in a market downturn. An IPS specifies the investment objectives, who is responsible for achieving those objectives (and who is responsible for monitoring), asset allocation, diversification, rebalancing, and so forth. Rebalancing should typically take place on a regular, predetermined basis, rather than at the whim of the managers. 
  • Don't: Try to time the market. In the moment, it's never clear where the market bottom is, or its top. In the long term, markets show trends; in the short term, they're a little (a lot?) crazy. If people could predict where the market was going to go in the short term, a lot of people would be making a lot of money. Most people want to sell during a downturn and buy as the wave rides higher. The problem is, that for most people, this means buying high and selling low, which is just the opposite of what would create a strong return. The best option is to buy and sell on a regular basis, according to the IPS, as the budget dictates, taking advantage of the lows to buy more shares, and taking advantage of the highs to gain more appreciation. 
  • Do: Maintain a cash reserve large enough to sustain your organization through a short-term dip in the market, to prevent having to sell securities low, if at all possible. Once the markets rebound, replace the cash reserve.
  • Don't: Focus too much investment in one type of security, or one sector of the market. Diversify. Chasing hot stocks does not typically work for funds that expect to remain in perpetuity. 
  • Do: Allocate assets based on risk tolerance and goals. Can your organization handle the risks associated with the potential rewards of investing? Remember, too, that inflation is a risk - and that securities that offer returns below the rate of inflation are actually losing buying power. 
  • Don't: Rebalance based on short-term swings in the market. Set a time window, and asset allocation variance window, and stick to it.
  • Do: Make sure your organization maintains compliance with the Uniform Prudent Management of Institutional Funds Act (UPMIFA) in a down market. UPMIFA requires that the long-term purchasing power of a fund be maintained, not just its historical dollar value. Prudence (the P in UPMIFA) requires sound judgment in a market downturn. The law requires a seven-point test for prudence. (Ohio's version is here, which matches UPMIFA Section 4(a), applicable in all states (and DC, and USVI) with the exception of Pennsylvania.) We have helped organizations implement UPMIFA. We'd be glad to help. 
  • Don't: Panic. Take a deep breath. This, too, shall pass.

These do's and don't's will help sustain your organization's financial health in a market downturn. Taking a step back from the day-to-day headlines, looking at the long-term trends, and focusing on your organization's mission will help get you through the days when the market seems crazy. We're in this with you!

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This article is for informational purposes only and does not constitute an offer or solicitation to sell shares or securities. Design Group International and its associated consultants are not brokers, dealers or registered investment advisors and do not attempt or intend to influence the purchase or sale of any security.

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Topics: nonprofit leadership, Matthew Thomas, financial management, Financial Health

Charitable Challenges: Nonprofit Public Image and Financial Health

Posted by Matthew Thomas

Much is being made these days of how much (or little) money raised for various charitable causes is actually "going to the cause." Both traditional and social media regularly cry foul with accusations of waste and excess in charities large and small. (This has been part of the impetus behind the idea of taxing nonprofits or using PILOTS, which we discussed here.) Among charities, religious organizations have escaped some (but not all) of the vitriol leveled against others, largely because their financial statements aren't public in the same way: in the US, they are not required to report on IRS Form 990. 

matthew-thomas-2In scanning through the various arguments, accusations and finger-wagging, it seems there are three major issues that come up regularly:

  1. Executive Compensation
  2. Assets and Reserves
  3. Administrative Costs vs. Direct Program, Grant or Research Costs

Each of these issues impacts charities' reputation and capacity to achieve the goals and purpose for which they were founded - along with their financial health. And each has its source in a wider issue going on in society.

Executive compensation has been in the spotlight recently, particularly after the financial industry handed out large bonuses during and after the US government bailed them out. This was a particularly tone-deaf response, given the size of the bonuses and the increased scrutiny by a public whose median income was several orders of magnitude smaller than the typical bonus. 

While charities must work within the economics of comparable compensation for executives managing similarly-sized organizations, arguing from this reality does not typically reduce the challenge of the perception of excessive executive compensation. Charities must, of course, exercise due diligence that they are not harming their brand and their purpose by excessively compensating executives. Nevertheless, finding a way to use the executive compensation conversation to keep the charity on message and further promote the cause does seem to be the best way forward. Narrative seems to work well.

Assets and reserves - along with endowment principal - are another explanatory challenge for charities. Most charities that intend to fulfill their mission must have reserves large enough, at minimum, to meet the offset in expenses and income, and at best, enough to take care of emergencies that would put them out of business before they have time to get to donors for an ask. In those sort of serious emergencies, even winding down the charity and closing its doors will cost something. Moreover, endowments look quite large, but a charity can really only spend at most $50,000 in earnings off of every $1 Million it holds on an annual basis. (It is often prudent to spend less than that, in reality.)

With the average median household income in the mid-$50,000 range, and the typical household emergency solved by credit rather than by savings, there is often a disconnect between the reserves numbers (that appear astronomical to most people), and the average person's budget and earning capacity. Here, working with percentages can help, especially as it helps keep the charity on message. 

The issue of administrative costs vs. direct program, grant, and/or research costs catches many charities in a bind: in reality, the cost of raising funds is necessary to pursuing and fulfilling the charity's mission; the way these costs are reported often (partially due to the Form 990 breakdown of expenses) make it look like they are some sort of necessary evil that charities should find a way to minimize. The relative costs of administrating and fundraising for a cause, compared to overall revenue speaks to the efficiency of the organization in achieving its goals, but not the actual dollar amount. Efficiency often is affected by scale (smaller being, in reality, often LESS efficient), and larger scale involves more actual dollars going in every category, not just one pocket or another.

Mathematically, though, if 80% of a $100 Million per year charity goes to fundraising and administration, then $20 Million is still going to the core programs, grants, etc. A charity with only 20% going to fundraising and administration would still have to raise $25 Million per year to equal the actual output of the other charity. The question is, then, whether market conditions (in this case, donors, grants, and so on) would actually allow that to happen, or if the "inefficient" charity is really doing the best it can, and the other is a pipe dream. Of course, if the $100 Million per year charity would be able to be more efficient at $90 Million per year, and even less efficient at $110 Million per year, then reducing the scale would make sense.

In addition to this, there is often a matter of misunderstanding of mission: if the perception is that your mission, purpose, and fundraising objective is one thing, and the reality is another, there is going to be outcry. 

In all of these cases, the best answer is to tell the story, tell it clearly, and tell it often. Tell the why and the what. Tell the how. Without becoming defensive, teach others about your realities. This is where vision grows, mission develops, and work has meaning. 



How financially healthy is your organization? If you work for, sit on the board of, or donate to a charity, and would like us to conduct a snapshot review of your charity's public financial statements (e.g., Form 990, your annual report, or audited financial statement) to gain a preliminary understanding of where your organization stands today, click the button below. 

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Topics: nonprofit leadership, Matthew Thomas, Financial Health

Steward Leaders: What Value Proposition Do You Present to Others?

Posted by Matthew Thomas

As we have discussed in a previous post (Non-Profit Leadership: Taxing Non-Profits), many charitable organizations have significant difficulty making the value proposition to their local communities to retain the previously unassailable rights and privileges to all forms of tax exemption. Communities requiring PILOTS (Payments in Lieu of Taxes) of certain non-profit entities believe that the non-profit is creating a greater burden in community services than it is offsetting through its charitable work – the expense of which would otherwise have to be then borne by the community or done without.

matthew-thomas-2The difficulty here is disconnected and incongruent assumptions between the non-profits and their communities as to what their value proposition is. Steward leaders wrestle with how to state their organization’s value proposition, whether they are leaders of a non-profit or a local community struggling with its finances.

As Design Group International CEO Mark Vincent outlines in his Stewardship Manifest (pp. 3 – 4), there are three main ways in which a stewardship value proposition develops, outside of faith-based entities:

  1. Obligation
  2. Philanthropy
  3. Prosperity – which I will take the liberty of re-naming “Investment.”

Obligation occurs when someone owes someone else something. This obligation allows certain benefits, and often avoids certain difficulties, penalties or otherwise undesirable consequences. In the context we are discussing here, the most obvious form of obligation takes the form of taxes imposed by a community on its citizens and businesses. Nevertheless, charitable organizations can also act as though their communities (and by extension, their donors and other stakeholders) owe the charity something for the work they are doing. Any time the conversation begins to revolve around how there would be negative consequences if certain donors, stakeholders or community governments don’t allow some benefit, obligation is at least implied, if not explicit. Obligation often is more out of the avoidance of negative consequences than the enjoyment of certain benefits.

Philanthropy occurs when people are invited to “make the world a better place.” The motivation behind this can be anything from altruism to legacy-building, and anything in between. This is often the motivation when people use the term “civic pride” or “making our community a better place to live”. Philanthropists often will attach restrictions to how their gifts are used, even within the context of a non-profit, for specific projects or purposes. Philanthropy is a value proposition based on legacy, reputation, and the public good.

Investment occurs when people contribute with the expectation of gaining something in return. Whether this is the right to advertize in the playbill for a local theater production, or to gain “intangible religious benefits,” as the IRS so elegantly phrases it, investment is a value proposition offered with the expectation that the donor will benefit personally from involvement.

Being clear on the value proposition steward leaders communicate to their communities, their donors, their clients and themselves will help whenever questions of value – such as in the taxation of non-profits – arise. Each value proposition has its place, and each has varying amounts of power to motivate in its context. Faith-based groups can add yet another value proposition, which we will discuss in a separate post.

What value proposition are you offering to others as a Steward Leader?

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Topics: nonprofit leadership, Value Proposition, Matthew Thomas, Tax-Exempt

Organizational Management: Using an Investment Policy Statement to Promote your Mission

Posted by Matthew Thomas

Organizations often place a list of types of companies they won’t invest in somewhere in their Investment Policy Statement. This is sometimes called the “embarrassment list.” In other words, it is the list of companies and/or company types that we would be embarrassed by if our constituency / the general public / key donor-contributors / competitors found out we are invested in.

As we have previously mentioned, it’s important to have a good handle on what that list is, and to review it regularly, comparing it to the funds in which we are invested. Nevertheless, it is possible for socially, civic, or values-minded organizations to take these investment screens one step further than mere avoidance of embarrassment (as important as that is). 

Instead of merely avoiding unwanted bad press, how about considering which companies, and which kinds of companies genuinely promote your organization’s values?  Whether your organization is a for-profit business with reserves to invest, or a non-profit or religious organization, you can use your funds to promote your values.

Granted, the more specific you become in your investments the more actively you have to manage your funds. And granted, the more you invest in specific companies the more your diversification risk grows. Nevertheless, it is possible to invest actively without becoming over-invested in one company, or driving investing costs through the roof by fiddling with your portfolio on a daily basis.

Values investing can go beyond embarrassment avoidance – but should still be investing. It is still important to screen funds based upon their financial performance first, before applying social screens – both pro and con.  This is because, in the end, your organization’s board is still responsible for the financial health of your organization, no matter the other causes you are trying to promote.  A company with great values but a terrible business plan is still an investment too risky to take in most cases.

When you seek out investment in companies that share your values, you have the opportunity to promote your values beyond your immediate sphere of influence: you provide ownership and additional funding to the types of values and business practices you desire to promote. 

Interested in help navigating the risks and pitfalls of values investing? Contact us! Just click the button below. 

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Topics: nonprofit leadership, Matthew Thomas, Design Group International, Financial Governance, Investment Policy Statement

Organizational Management: Why Reviewing (and Enforcing) your Investment Policy Statement will Save you from Certain Headaches

Posted by Matthew Thomas

Shortly after the tragedy in Newtown, Connecticut this past December, CNN ran a story outlining the institutional investment by the California State Teachers’ Retirement System into the makers of assault rifles and other firearms.  (

After the story broke, the private equity fund behind the CalSTRS investment, Cerberus Capital Management, moved quickly to sell the firearms group. (

CalSTRS has an investment policy statement, titled “Statement of Investment Responsibility” ( which outlines the basic philosophy and values of the CalSTRS funds.

In this case, CalSTRS either didn’t know that it was invested so significantly in a fund that owned an assault weapons company, or, prior to the Connecticut tragedy, investment in such a fund didn’t raise a whole lot of attention that would lead to divestment.

Either way, now that people are taking swift action to sell the California State Teachers’ Retirement Fund’s stake in the assault rifle business, organizational / institutional investors are reminded of the risks associated with investing that go beyond the dollar value of the investments.

Organizational and institutional investors should review the contents of the funds in which they are invested on a regular basis.  Funds add and subtract particular companies regularly, and disclose big-picture holdings in their prospectuses.

In addition, organizations need a clear “including, but not limited to” type list of companies from which they will limit or restrict their investment in their Investment Policy Statement, so that they can maintain good accountability with the funds investing on their behalf.

Choice of investment is often not made easy by investment funds, which often package funds solely on risk tolerance factors other than social consciousness. Nevertheless, most larger firms offer a socially-conscious fund that assembles the stocks of companies that operate outside most standard socially-conscious red flags. 

Moreover, organizations and institutions should consider investing not just to avoid embarrassment when a social issue develops: consider how your organization might invest to extend your values beyond your institution’s work into its asset allocation.

Interested in help in navigating the risks and pitfalls of organizational investing? Contact us! Just click the button below.


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Topics: nonprofit leadership, Matthew Thomas, Design Group International, Financial Governance, Investment Policy Statement

Organizational Management: Your Organization Needs an Investment Policy Statement

Posted by Matthew Thomas

Let’s face it: people have a wide variety of views and practices when it comes to managing money.  People have varied risk tolerances, varied spending habits, differing views of savings or reserves, differing approaches to appropriate efforts of creating income, differing needs or desires for accountability, record-keeping, and reporting. Couples often dispute over money matters more than anything else. 

So drawing together a group of people into a board to govern your organization’s funds could lead to quite differing views on how to manage the organization’s finances.  In order to come to some level of consensus, and measure results by reasonable action rather than by gut, your organization needs a commonly-developed, written policy for how it will invest its funds.  In addition, by the time your organization gets around to trying to invest actual money with a broker, mutual fund, exchange-traded fund, particular stock or bond, or other non-cash property, you will likely get nowhere before you have a formal investment policy statement.

An Investment Policy Statement defines

  • the role of the governing board or committee relative to the funds being managed
  • the investment objective(s)
  • how the money in the fund(s) may be spent
  • how the money will be invested – including asset allocation, rebalancing, diversification
  • what types of companies the organization wants to invest in or avoid investing in due to its mission / values
  • what investment practices are proscribed or otherwise to be avoided
  • metrics for measuring fund performance
  • metrics for measuring broker/vendor performance

Taken together, the items listed above cover the main issues most organizations face. Not only does this provide an investment bank with the legal wherewithal to do investing on the organization’s behalf, it compels the organization to work through its basic perspective on investing and come to a level of organizational agreement.

For a very good sample Investment Policy Statement, check out Vanguard’s:

If you would like assistance developing an investment policy statement or help developing your organization’s financial governance, please contact us! Just click the button below.


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Topics: nonprofit leadership, Matthew Thomas, Design Group International, Financial Governance, Investment Policy Statement

Surplus and Sacrifice: the Organizational Development Impact

Posted by Matthew Thomas

In times of economic growth, donor-based organizations can appeal to people’s sense of wealth and surplus: “Hey, you have a little bit extra this year, why not give it to [fill in the blank].” In surplus times, we can ask for someone’s extra and may get away with it.

Quarter or Dollar? Surplus or Sacrifice?In times of economic pressure – or even in times of long-term stability or stagnation – donor-based organizations must dust off another term: sacrifice. We ask people to give up something that they have that is good (maybe even necessary) for our cause, in order to gain something often much less tangible.

These two approaches create different relationships with donors and place different levels of responsibility on the organization. In the first instance, people’s passion and involvement can be relatively low – they had a little extra, we asked for a little extra, and that’s what we get. In the second instance, we are asking donors to become more deeply involved in our cause. Moreover, we are saddling ourselves with a greater responsibility to use those funds wisely and prudently – since someone gave up something beyond their “extra” to promote our purpose. We realize then that we are in something of a partnership with our donors and that it matters how we handle what they have given us. This has the potential to change our organization’s financial priorities – to make sure we do what we do with quality, and on purpose.

How does the difference between surplus giving and sacrifice giving affect your organization’s sense of responsibility, financial priorities, and relationships with your donors?

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Topics: nonprofit leadership, resource development, Matthew Thomas, Design Group International

A Fund Usage Policy: Developing Board Clarity for Restricted Funds

Posted by Matthew Thomas

A few weeks ago, I wrote about gaining clarity in non-profit restricted funds. Reader feedback has inspired me to write a little more on the subject to help bring clarity to funds whose restrictions are often vague.

Many nonprofits (particularly churches) have funds that are collected for a designated purpose that is so broad that it is hard to allocate the funds. Often, this is because the collection of these funds is laden with assumptions about their use. In addition, when the funds are received, the only controlling document is a event program / bulletin or the verbal expression of purpose of the fund. In most cases, this is the most clarity the fund holds.

implement clarityConflict then erupts when the use of the funds is applied. Organizations with funds like these operate on precedent – since there is no resolution or solid designation from the donors, they can do little else without effort. Nevertheless, precedent is squishy and memories differ in the first place.

In this case, the best option for organizations with such funds is to create a solid fund usage policy and a process for reviewing requests for disbursements and distributing funds. The process needs to be financially accountable, using normal levels of internal controls common to healthy organizations: no one person controls the transaction from start to finish, decision-makers are confined to those without conflict of interest, standards of review and approval exist and are followed, no one writes checks to cash (or themselves), and so on. Most importantly for the process, the Fund Usage Policy creates the framework in which the process operates.

The Fund Usage Policy basically answers the questions known to beginning essay-writers everywhere: who, what, where, when, why, how (and in this case, how much). For example:

  • Why does the fund exist? Why does the fund need a policy to govern it? Why is there a need for the fund / what need inspired a person or persons to set the fund up in the first place?
  • What are the organization’s goals for the use of the fund? What does the organization intend to accomplish with the fund? What written donor-based restrictions exist? What verbal donor-based restrictions exist? What review process exists (or can be created) to measure whether the goals are being met in practice?
  • Who is eligible to request funds? Who is eligible to receive funds? Who reviews the requests? To whom is the requester / recipient / reviewer accountable? Who sets the policy or may change the policy for the use of the fund? Who are the fund’s donors? Who are the fund’s recipients / beneficiaries?
  • Where are the funds held? Where will future contributions be collected or received? From where will disbursements be issued? Where is the fund’s information kept? Where do those requesting funds go to make their request?
  • When did the fund originate? Is there any passage of time that could cause the fund’s restrictions to expire? When does the fund make disbursements? When does the fund accept requests? In what time frame does the fund respond to requests? In what time frame is the fund’s activity reviewed?
  • How much may be requested in any one request from the fund? How much is the average request? How will requests be made? How will review take place? How will accountability be maintained? How will disbursements be made? How will contributions be received? How will the fund’s assets be managed?

If your organization can build consensus around those questions, you will be able to use your restricted funds with clarity and integrity. This will break through the unspoken and unwritten assumptions and help your organization speak clearly to how it uses its funds.

Design Group International Consultants are available to assist your organization in finding clarity on fund usage and implementing accountable solutions so that your organization can accomplish its purpose. Contact Senior Consultant Matthew M. Thomas at 1.877.771.3330 x20 or at for assistance on fund clarity. You can also follow him on twitter @mattthomasdgi for updates on Sustainable Vision.

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Topics: board governance, nonprofit leadership, restricted funds, board development, board policy, internal controls, Matthew Thomas, Design Group International

Organizational Development: Using Trends to Build Budgets

Posted by Matthew Thomas

As I mentioned in a previous article, it is important to build budgets based on trends that last longer than just one fiscal year. As I mentioned there, using 3- to 5-year trends for both income and expenses will help create reasonable estimates for the next fiscal year. Using these trends disciplines an organization not to over- or under-state any new initiatives that may begin in the upcoming fiscal year.

Financial Management: Using Trend DataWhen examining trends, it is important to look at the various sectors (or streams) of income, as well as the sectors of expenses: staff, facilities, programs/product lines, etc. Each of these may be moving in different directions, but this gets muddy when only looking at the macro trends of the bottom line. It is likely that each one of these pieces will have a trend distinct from the others – which, when combined, will provide the information necessary for strong budgeting.

Standard business spreadsheet software (I am most familiar with the Microsoft suite) has the capacity to create statistically-accurate trends from raw numbers. It is then possible to use these trend lines to forecast how those trends play out over the period of time the budget addresses. Organizations are often surprised where a slow, but steady increase or decrease takes them in a relatively short period of time. A trend-based budget is a great starting point for planning: whether winding down old initiatives, services, or products, or starting something entirely new.

Design Group International provides budget creation support as one of the financial roles we have mapped out for organizations of various sizes. Have you gotten your financial role map yet?

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Topics: nonprofit leadership, organizational development consulting, Matthew Thomas, budget, stewardism, Design Group International

Organizational Development: Beware the Micro-Trends

Posted by Matthew Thomas


Beware the Micro-Trends

Many organizations use the early fall to begin their budget process for the next year, with fiscal new beginnings in January. One of the biggest challenges to healthy budgeting is often built in to the way most organizations (and their accounting software) report the amounts in each line item on the budget.

matthew thomas, budgeting micro-trendsMost accounting software will compare this year to the previous year, natively. The problem is that most organizations need to look at longer-term trends. What is more useful is a rolling 12-month actual line item measurement. Comparing this number to previous years removes seasonal cycles of income and expenses.

Beyond the rolling 12-month line item measurement, most organizations should look at 3, 5, 7 and/or 10 year trends in both revenue and expenses. Even if a single year looks really good or really bad in that time frame, it is more likely that the overall trend will continue unless significant changes occur in the organization’s purpose, approach, products or services.

Therefore, it is good to be wary of micro-trends: the bumps, whether up or down, in a particular budget item, in a given 8-, 9-, or 12-month period. If examinations of the trends show a radical shift in a particular line, dig a little deeper: and it may still be best to take the low estimate of income and the high estimate of expenses until the overall trends adjust.

-Matthew Thomas

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Topics: nonprofit leadership, organizational development consulting, stewardism, Design Group International