1. Living in the Gap AND WHAT TO DO ABOUT THE NONPROFIT SECTOR’S BROKEN BUSINESS MODEL

2. This is the new economic reality… THERE IS A CAPACITY GAP  Need continues to rise and it’s harder than ever to keep up.  Over 75% of nonprofits surveyed nationally by the Nonprofit Finance Fund saw increases in demand they could not meet in 2012 and 2013. THERE IS A FUNDING GAP  Revenues from government are declining at the rate of 5-10% per year in this region, but government support rarely covered the full cost of services to begin with.  And government payments are late for the majority of recipients….  Philanthropy is overwhelmed and has not been able to stem the financial slide.  And the costs of delivering services continues to rise….

3. Most nonprofits get by with little cash on hand. The less cash on hand, the greater the danger when revenue is late or unreliable. For safety net organizations: 60% are operating with 90 days of cash on hand or less. 27% had less than 30 days of cash on hand.

4. Erie County Nonprofit Profitability

5. This adds up to a broken business model.  Inability to meet demand  Dysfunctional funding strategy  Weakened infrastructure  Limited capacity  Liquidity challenges  Pursuing off-strategy and unscale- able funding

6. Strategies for Enterprise Adaptability  What is your most reliable, recurring revenue?  What are your fully loaded costs and the size of the gap?  How much risk can you take?  What types and amounts of capital do you need?

7. What makes nonprofit adaptability especially difficult?  Challenges of enterprise  No profitability in the mission-driven business…. Always!  Reliant on subsidies to just break even…..Always!  You can’t grow your way out of it. Growth makes it worse!  Challenges of bad best practices  Obsessive focus on expenses, not results  Inappropriately restricted revenue…. Like no overhead!  Overexploitation…. Always doing more for less!  Challenges of access to capital  Absence of “equity” equivalent  Lack of working capital is pronounced for small to mid-sized organizations.

8. SURPLUS-GENERATING BUSINESS MODEL EFFECTIVELY CAPITALIZED BALANCE SHEET OUTCOMES-DRIVEN STRATEGY Components of Nonprofit Sustainability

9. Building the sustainable nonprofit RULES OF FOR-PROFIT FINANCE In the for-profit world, the customer buys the product. RULES OF NON-PROFIT FINANCE  Client often does not pay or only partially pays for the product.  Nonprofits make the case for donors and funders to subsidize the cost.  Donors and funders want more of their contribution to go directly to the people served.  Overhead and profits are seen as unnecessary and unrelated to the mission.

10. Nonprofits need to understand “full costs.” Nonprofits need to cover the full costs of delivering programs:  Total direct operating expenses  Total indirect operating expenses  Depreciation allocation  New capital investments  Debt  Savings for the future

11. The Sustainability Challenge:  Securing enough reliable, recurring revenue from the total of all your available sources to surround vital programs with enough stable and sustainable revenue to cover the full costs and add to cash reserves.  This may involve picking winners and losers among agency programs based on which are most vital to mission and diverting resources from the weak to preserve the strong.

12. Why Liquidity Matters  Understanding liquidity helps to answer several important questions:  How much cash does the organization need to operate efficiently and effectively?  How long can the organization operate with the available resources?  What is needed in order for the organization to take its next big step? ___________________________________________ DO YOU HAVE ENOUGH OF THE RIGHT KINDS OF MONEY AT THE RIGHT TIMES TO CHANGE, GROW, INNOVATE, OR TAKE RISKS? Sustainability is the capacity to lay up enough resources for the organization to undertake it next critical step.

13. What Kind of Capital Is Needed?  LIQUIDITY  Does the organization have cash to meet its operating needs?  ADAPTABILITY  Does the organization have flexible funds that allow for adjustments?  DURABILITY  Does the organization have access to funds to address a variety of future needs?

14. Sustainable Business Model

15. In practice…. What is your most reliable, recurring revenue? DISTANT LOCUS OF CONTROL – MAY BE RECURRING, BUT HOW RELIABLE ARE THEY?  Government grants / contracts / fee- for-service payments  Foundation or corporate grants  Collaborators or nonprofit partners  Federated giving (United Way) YOUR LOCUS OF CONTROL MEANS RECURRING AND MORE RELIABLE  Earned revenue / fee-for-service  Self-pay  Individual donations  Fundraising events  Volunteers  Endowment

16. After School Program Budget Showing Full Costs REVENUE Self-pay fees……………………………. $16,000 United Way…………………………….. 10,000 Annual fundraising event……….. 7,000 Annual Appeal……………………….. 2,000 Food subsidy (Federal)………….. 4,000 Sale of products……………………. 1,100 Grants…………………………………… 5,000 TOTAL…………………………………… 45,100 EXPENSES 3 core staff @ 15 hours per week….. $12,000 Contracted specialists……………………. 6,000 Food @ $125 per week…………………. 5,000 Transportation………………………………. 4,000 Sub-total……………………………………….. 30,000 Indirect costs – Mgmt & General (15%) 4,500 Equipment (New) and Depreciation 4,000 Debt Service ………………………………… 1,500 TOTAL……………………………………………. 40,000 SURPLUS……………………………………… 5,100

17. A Conversion Story SINGLE SOURCE TIME-LIMITED FEDERAL GRANT An initial 21 st Century Community Learning Centers grant established a comprehensive middle school after-school program at the level of $150,000 annually. It evolved into a multi-source funding stream with: RELIABLE, RECURRING REVENUE STREAMS $30,000 in United Way funding $30,000 in new school district 21 st Century $ $20,000 in Community Devt Block Grant $ $20,000 in Learn-and-Serve Federal $ $20,000 in substance abuse prevention $ 2 dedicated, recurring foundation grants Arts and youth development grants School funding for food, supplies, and IT Parent fees

18. Take Control of Your Budget  Own your budget as a whole package, not one that is divisible by line items.  If it is divisible at all, perhaps it is by time. In the After-School Program budget example, the “full cost” of the program is $250 per day.  Your capacity to build reserves sustains your capacity to innovate and take the next needed steps for your programs and your organization in ways that are in your control.  It also allows you the freedom to access other sources of capital, including borrowed capital, when debt service is in the funding mix.

19. Use your whole team….  With the board of directors, dedicate time to understanding program economics and plan ahead based on various scenarios.  Move consistently toward a savings culture where you practice full cost budgeting and clearly articulate savings goals  Keep you eye on the big picture and encourage the whole board to understand how to think about financing, funding, and sustainability.

20. Thank you!