07.21.08
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The dramatic increase in the cost of energy, coupled with the dramatic increases in cost effective alternative energy systems creates a unique opprtunity for nonprofit organizations, which have typically found it easier to raise charitable gifts for capital expenses than for operating expenses. In an editorial in the Washington Post (July 20, 2008) energy executive James Tisch refers to the arrival of the “lift-off point” for photovoltaics, with a rooftop solar panel on a house now paying for itself in less than tne years, thereby genereating a 10% return on investment. And the cost of wind energy is now just one third of what it was a few years ago, and delivers power at 7 cents per kilowatt, compared to 12 cents per kilowatt for a gas-fired power plant.
There is little doubt that the United States will experience a dramatic shift to alternative energy sources including hydro, solar, wind, and biofuels over the next ten years, reducing costs and pollution. The big question is this: will nonprofit organizations fall further behind or lead the parade?
I, for one, believe that the financial structure of nonprofitsdemands that they lead the parade toward energy independence. If a nonprofit can raise funds for alternative energy systems and thereby reduce or eliminate energy costs that currently require 6%-8% of opertating budgets, the bottom line impact can be dramatic. Too often nonprofits have raised funds for capital expenses (such as new buildings) that have simly driven up the operating expenses. But when a donor invests in alternative energy systems, the organization should be able to demonstrate long term reductions to operating expeneses and a healthy return on the donor invenstment. This is a terrific opportunity, and nonprofit organizaations should be leading this parade.
04.30.08
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Michigan’s Jackson Citizen Patriot reported this week (April 27, 2008) on a wonderful example of corporate citizenship benefiting charities across the state (http://www.mlive.com/news/citpat/index.ssf?/base/news-24/120929072048720.xml&coll=3 ).
In 2002, in the midst of financial crisis that included plummeting stock values, a 50% drop in dividends, and $6 billion in debt, CMS Energy made a long term charitable commitment as it dug out of financial distress. While battling for solvency, CMS gave the United Way of Jackson County 1.5% ownership in its business, based on the belief that strong communities would benefit CMS corporate. Now, six years later, that arrangement has yielded over $10 million to the United Way, more than three times the amount projected when the original deal was crafted.
America’s nonprofit sector delivers an incredible array of services that touches the lives over every citizen in every community, from healthcare to education to social services, sports, the arts, and associations. Absent the outstanding work of these organizations, government and business would find it impossible to fill the gap at anywhere near the same cost. It is in everyone’s best interest that nonprofit organizations be financially viable to deliver on their missions in the future.
Hats off to the leadership at CMS Energy for recognizing that stronger communities (served by stronger nonprofit organizations) would actually strengthen the corporation. In the face of fiscal distress, CMS exhibited extraordinary vision by viewing its charitable commitment as part of the financial turn-around plan.
04.28.08
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In the absence of board policies, management and staff will tend to establish their own operating protocols. If, for instance, the board fails to establish policy for reviewing donor restricted gifts, documenting the restrictions, and monitoring the disbursement of the funds, management will tend to take more liberties with such donations. If the board does not have a policy for reviewing the expense account of the CEO, the CEO is more likely to abuse privileges. If the board does not talk regularly about its commitment to avoid conflicts of interest, then board members will be inclined to abuse privileges. If the board does not have policy regarding budgets, target margins, performance ratios, and risk, management will be inclined to take more risk.
Is everyone in your organization’in the loop’?
04.25.08
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Auditors understand that they are well served by a degree of skepticism about management representations. But donors and boards of nonprofit organizations tend to have unrealistic expectations about the value of audits. An annual audit is a critical component of assuring fiscal integrity, but audits are not guarantees. However, clean audits by internationally recognized audit firms preceded their scandalous collapses. Audits are undeniably valuable, but to place blind trust in the audit is risky business. At best, audits are historical in nature, and may not be helpful in identifying sudden changes in the environment that impact future business viability.
Is your organization prepared for a financial trend NOT historically foreseen by auditors?
04.24.08
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The board that does not receive timely financial reports is a board at risk. Management must be held accountable to a reasonable and timely reporting cycle in spite of natural occurrences such as position vacancies and system upgrades. Organizations in financial distress will often realize in retrospect that a period of untimely financial reporting masked the true depth of the problem. A board’s ability to respond to financial challenges is enhanced by shorter reporting intervals and inhibited by longer gaps in reporting.
Does your organization receive updated financial analysis? Does this forcast financial trends for your organization?
04.23.08
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Financially weak nonprofits tend to lack investment policies and skills. Many will state wistfully that they wish they had something to invest. And those that do have something to invest will be inclined to very conservative investments that result in lost opportunity for revenue, or, in very risky investments, hopes of big gains. Building the institutional discipline and skill to manage investments based on appropriate board policy is new territory for many weaker organizations, but critical to success, even if applied to limited funds initially.
Is it better to invest on the blind… or not invest at all?
04.22.08
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This is an area that is particularly difficult for nonprofit organizations and most difficult for faith-based nonprofits. Employees, executives, and even board members are drawn by the nonprofit mission because they want to “do good.” Participation is based on feeling good about the mission of the organization. The operating assumption then migrates to an assumption that all other participants have the intent, discipline, and skills to “do good,” i.e. operate with integrity at all times. Skepticism is not part of the culture, and is, in fact, often discouraged. When a board establishes a long-term trust relationship with an executive, it can be difficult to exercise due skepticism.
Is it dangerous to trust too much?
04.21.08
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Accountability is generally infectious. An organization where the board is serious about its accountability role with the CEO, the culture of accountability will typically trickle down through all levels of the organization. An organization where the CEO is not held accountable, or worse yet operates on the assumption of entitlement. That culture of entitlement will trickle down through all levels of the organization. The corporate culture, and the behavior of leadership and peers, will have tremendous influence over the behaviors of all employees. Even the most conscientious employees will take more liberties when immersed in a culture of entitlement.
Does your director embody the overall character of the organization you work for?
04.18.08
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Fiscally weak nonprofits tend to exhibit a total lack of curiosity about the operating environment. As a result, market changes take them by surprise, and they tend to be more reactive than proactive. One might argue that environmental scanning is too costly for an organization short on cash, but in reality these organizations cannot afford not to scan the environment in hopes of identifying new revenue opportunities.
Is your company prepared for surprise market changes? Can you afford to be unprepared?
04.17.08
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1. In what ways does this organization lock itself into financial distress through its operating systems and policies?
2. What specific actions can we take to move this organization out of perpetual financial distress?
3. Do we have adequate skills in board and management to escape from or avoid the Zone of Insolvency?
4. What is the deductible per claim on our Directors and Officers Liability insurance, and how would it impact our budget?
5. What are our most significant deficiencies in regard to our financial management?