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. 

 


 

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