john zietlow / southwest baptist university and indiana ... · example – fundraising letter:...
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John Zietlow / Southwest Baptist University and Indiana University/IUPUI Nonprofit Communication Conference Drury University Springfield, MO October 3, 2016
Why…should we pursue a healthy, sustainable, robust organization?
What…are some measures of financial health, focusing on cash and cash flow?
How…can we move the conversation and state of practice forward?
10/3/2016 © 2016 by John Zietlow. All rights reserved worldwide.
Research on faith-based organizations, including major “Lilly Endowment Study” in 1990s
Roughly 300 CFO interviews 2011 Indiana University Center on
Philanthropy study of 500+ mid-sized nonprofits (Moody’s Foundation)
2011 Financial Health Research Project (Malone University, CapinCrouse LLP – CPAs)
10/3/2016 © 2016 by John Zietlow. All rights reserved worldwide.
Type of organization
Size of organization (Total Revenues & Support)
Your role at the organization
How many serve on a nonprofit board?
10/3/2016 © 2016 by John Zietlow. All rights reserved worldwide.
The IDEAL context or frame for every finance committee conversation!
10/3/2016 © 2016 by John Zietlow. All rights reserved worldwide.
Source: Lilly Center on Philanthropy 2010 national survey of 500+ nonprofit organizations. Used by Permission.
10/3/2016
“Explicitly link the financial health of the organization with its goals and strategy. Explain why finances will or will not allow the organization to accomplish what it has set out to do.” - Tom McLaughlin
10/3/2016 © 2016 by John Zietlow. All rights reserved worldwide.
“…organization’s ability to manage the unexpected, adapt to changing circumstances, and pursue mission imperatives” – Peter Kramer (NFF)
“long-term stability in both programs and financial performance” – Kate Barr (NAF)
“ability to deliver effective and efficient services in both the present and future” – Elizabeth Keating (Boston University)
“the ability to generate resources to meet the needs of the present without compromising the future” – Jeanne Bell (CompassPoint)
10/3/2016 © 2016 by John Zietlow. All rights reserved worldwide.
“…ensuring that financial resources are available [today and in the future] when needed (timing), as needed (amount), and at reasonable cost (cost-effectiveness), and that once mobilized, these resources are protected from impairment and spent according to mission and donor purposes” – Zietlow, Hankin, & Seidner
Financial Management for Nonprofit Organizations (Wiley, 2007)
10/3/2016 © 2016 by John Zietlow. All rights reserved worldwide.
10/3/2016 © 2016 by John Zietlow. All rights reserved worldwide.
Structural Deficits
Revenues across the years
Expenses across the years
10/3/2016 © 2016 by John Zietlow. All rights reserved worldwide.
Use of Debt
Assets must be funded
Low-risk: Use donated capital or accumulated surpluses
High-risk: Use debt
Super-high-risk: Use debt to fund assets and structural deficits
10/3/2016 © 2016 by John Zietlow. All rights reserved worldwide.
Inattention to cash
Cash and cash flow are the lifeblood of your organization
Bring the cash in quickly
Slow the payout of cash
Make sure cash is in one or a very few locations and is accessible
Manage the risks of cash and cash flow
Faith-based homeless shelter in Canton, OH Set policies to accumulate cash and near-cash
through a “Liquidity Management Policy” Finance committee, and later the full board,
determined that “months in cash” was not the only metric to monitor and manage
10/3/2016 © 2016 by John Zietlow. All rights reserved worldwide.
Financial Health Index Trend for Refuge of Hope (2009-2015) Financial Health Index ranges from 0 to 100.
10/3/2016 © 2016 by John Zietlow. All rights reserved worldwide.
Be careful: Months in Cash Does Not Always Capture Your Near-Term Financial Strength (based on one-year percent change…to six-year percent change)
10/3/2016 © 2016 by John Zietlow. All rights reserved worldwide.
We advocate that your organization profile its financial health over the near future, out to three years. Why is this important?
Example – Fundraising letter: “All through the years we have just met expenses. Thus, there have been meager funds for much-needed leaky roof repair and other building upkeep. There has been a lack of funds for expansion, medical and other equipment, adequate support of our websites, etc. We must constantly be making plans and implementing them, to overcome these shortcomings. I ask you to please help me to do this.”
- Human Services Executive Director (March 2013 Fundraising Letter)
10/3/2016 © 2016 by John Zietlow. All rights reserved worldwide.
Many nonprofits (outside of large healthcare and educational institutions) are targeting liquidity and financial flexibility as their primary financial objective (IU Center on Philanthropy Study, as shown on next slide)
Yet, many nonprofits only monitor a basic measure of their near-term financial resources: Cash in terms of operating expenses
(3 months? 6 months? 1 year?)
10/3/2016 © 2016 by John Zietlow. All rights reserved worldwide.
Source: IU Center on Philanthropy 2010 Survey. Used by permission.
10/3/2016 © 2016 by John Zietlow. All rights reserved worldwide.
Audience Poll: (agree or disagree, by show of hands) “We must use all available resources to meet urgent/pressing needs now.”
Agree? You are snared in the CST: “Current Services Trap” * – in this zone, you are likely to undermine your long-term stability/viability * Elizabeth Keating
10/3/2016 © 2016 by John Zietlow. All rights reserved worldwide.
10/3/2016
Source: © 2013 Nonprofit Finance Fund and GuideStar. Used by permission of the Nonprofit Finance Fund.
© 2016 by John Zietlow. All rights reserved worldwide.
Months of (Operating Expenses) of Cash on Hand (or “Days Cash on Hand”) commonly touted
This measure is assumed to be the closest thing to a “one size fits all” measure of financial health
Three-months (90 days) is the default setting Question: Is my organization OK if it has four
months’ cash on hand?
10/3/2016 © 2016 by John Zietlow. All rights reserved worldwide.
Can benchmark against ourselves over time and against similar organizations
Can select one or more measures, one subscore, or maybe the overall Φ score and put it on your dashboard for monitoring and review
Can revisit your cash reserve policy based on insights (recall the primary financial target)
Can begin targeting one or more of the measures as a financial policy
Can assess development initiatives, growth plans and policy changes relative to financial health effects
10/3/2016 © 2016 by John Zietlow. All rights reserved worldwide.
When our primary financial target is relatively short-term it is essential to have a grasp of what constitutes/contributes to financial health over the near-term and out to three years
Financial Health/Sustainability/Robustness is critical for our mission, our clients, our employees – and our metrics must reflect financial health
Cash and Cash Flow are the Key Focus Points
10/3/2016 © 2016 by John Zietlow. All rights reserved worldwide.
10/3/2016 © 2016 by John Zietlow. All rights reserved worldwide.
Source: http://www.girlsinc.org/annual-reports/2016 Accessed: 10.1.2016.
One answer to that question…
1. Alert – to what lies ahead (environmental scans)
2. Agile – recruit, train, retrain, maybe redeploy talented, flexible workforce
3. Adaptable – build reasonable reserve funds in spite of donors and frequently ask why exist, whom serve, and how will know succeeded
4. Aligned – all operations toward mission
10/3/2016 © 2016 by John Zietlow. All rights reserved worldwide.
10/3/2016
Source: Lilly Center on Philanthropy. Used by permission.
10/3/2016 © 2016 by John Zietlow. All rights reserved worldwide.
10/3/2016 © 2016 by John Zietlow. All rights reserved worldwide.
10/3/2016 © 2016 by John Zietlow. All rights reserved worldwide.
10/3/2016 © 2016 by John Zietlow. All rights reserved worldwide.
10/3/2016 © 2016 by John Zietlow. All rights reserved worldwide.
10/3/2016 © 2016 by John Zietlow. All rights reserved worldwide.
10/3/2016 © 2016 by John Zietlow. All rights reserved worldwide.
10/3/2016 © 2016 by John Zietlow. All rights reserved worldwide.
Questions?
Further information Complete version of Financial Health Index write-up: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2049022
For copy of “How-To Guide for Calculating Financial Health Index,” request via email ([email protected]). Contact John: (417) 328-1480 www.johnzietlow.com
10/3/2016 © 2016 by John Zietlow. All rights reserved worldwide.