nonprofit board of directors
Financial sustainability seems to be the Holy Grail of the nonprofit sector. Everyone wants it, but few know how to find it.
But it doesn’t have to be that way.
I firmly believe that financial sustainability is attainable for any nonprofit, as long as board and staff are willing to ask the right questions and do the hard work.
In fact, there is a roadmap to nonprofit financial sustainability, which includes several components. Because a nonprofit’s board, their strategy, their vision and mission, their marketing efforts, their programs, all contribute to or detract from their ability to attract and use money well.
But often nonprofits struggle in so many areas (disengaged board, poor fundraising results, non-existent strategy, ineffective marketing) that it can be difficult for a nonprofit leader and board to know where to start in order to become more financially sustainable. So I’ve developed a list of questions that assess where a nonprofit is on that path and where staff and board should focus their efforts.
This mini-assessment of 7 questions is listed in priority order, so once one area is addressed, you can move on to the next. For example, you may have your “Vision” and “Strategy” all figured out, so next you need to tackle “Program Delivery,” and so on.
So to see where your nonprofit is on the path to financial sustainability, answer these 7 questions:
- Long-Term Vision: Do board and staff agree on the ultimate goals of the organization — what you are trying to accomplish in the world? If not, then articulate your Theory of Change, which will help you come to a shared long-term vision.
- Strategy: Have board and staff together articulated a strategy — how you will marshall staff, volunteers, programs, activities — to move toward that long-term vision? If not, then create a multi-year strategic plan that ties your long-term vision to the activities and resources necessary to get there.
- Program Delivery and Impact: Do your programs work with the people you hope to benefit or influence in your long-term vision? If not, review your target populations and analyze each of your programs’ ability to move toward your vision.
- Financial Model: Have you articulated how money will flow into the organization and how that money will be used to make your long-term strategy a reality? If not, then develop a long-term financing plan that articulates how much money you need, over what timeframe, and the tasks in each revenue area necessary to meet (and hopefully exceed) those expenses.
- Staff Effectiveness: Do you have the right staff expertise structured in the right way to deliver on your strategy? If not, analyze your staffing structure and capabilities and how they relate to what you need.
- Board Engagement: Do the vast majority of your board members embrace your mission and actively participate in moving it forward? If not, set clear expectations, establish accountability, and engage them one-on-one.
- External Relationships: Do you have the right partnerships and engagement with the right external people and organizations necessary to deliver on your strategy? If not, seek to understand the world outside your walls, develop a marketing strategy, and build the networks you need.
If you are interested in a deeper analysis of how to move your nonprofit forward on the path to financial sustainability, check out the Financial Model Assessment I conduct for clients.
Photo Credit: Jeff Power
Last week I led a planning call among the panelists on the “Supporting Nonprofit Sustainability” session I am moderating at April’s Center for Effective Philanthropy conference (which I described in an earlier post). One of the panelist suggested that we start the session by defining what we mean by “nonprofit sustainability.”
As we started to discuss this, it quickly became apparent that some of us had different definitions of “nonprofit sustainability.” And indeed, in the social change sector more broadly there is a long list of definitions of nonprofit sustainability.
Sometimes people use “nonprofit sustainability” to mean nonprofits moving away from private philanthropy and becoming self-sufficient through earned income sources (the sale of goods or services). I don’t believe that that is ever possible. Nonprofits are often borne as a response to a disequilibrium that the market created (income inequality, racial injustice, failing education). So it is rare that a nonprofit can figure out a way to make the market pay for something that it created. The vast majority of nonprofits will never be fully self-sustaining through earned income efforts; rather they will always be subsidized by non-earned sources, like philanthropy and government.
Others define “nonprofit sustainability” as the ability to attract multi-year, unrestricted funding. While that would be a positive step, foundations are largely the only nonprofit funding source able or willing to make unrestricted, multi-year commitments. Government funding is never unrestricted, and individuals rarely make multi-year commitments. And even if all foundation funders made these commitments, foundation funding only ever totals 2-3% of all of the revenue flowing to the nonprofit sector. So that’s not a big enough piece of the pie to ensure nonprofit sustainability.
Still others talk about “nonprofit sustainability” as having a diversified revenue stream. It may make sense for some nonprofits to focus on one or two revenue streams if that’s where their core competencies lie. So it is not a foregone conclusion that revenue diversification fits every nonprofit business model.
And other people define “nonprofit sustainability” as understanding and funding a nonprofit’s full costs, including direct and indirect costs. While this is absolutely a part of nonprofit sustainability, I don’t think it tells the whole story.
Therefore, none of these definitions of nonprofit sustainability satisfy me. They are either two narrow, too unrealistic, or inaccurate.
My definition, then, is:
Nonprofit sustainability occurs when a nonprofit attracts and effectively uses
enough and the right kinds of money necessary to achieve their long-term outcome goals.
So to break that down, nonprofit sustainability includes these elements:
Knowing Your Long-Term Outcome Goals
To be sustainable, a nonprofit must articulate the long-term outcomes that they are ultimately trying to accomplish (through a Theory of Change). You cannot hope to be sustainable if you can’t articulate why you exist and what you ultimately want to accomplish as a social change organization.
Having a Strategy to Achieve Those Goals
And you won’t achieve those outcomes (and be sustainable) if you don’t have a long-term strategy to get there. The strategy doesn’t have to be set in stone — it should be malleable as internal and external circumstances change — but it should ultimately guide your course to achieving those outcome goals.
Effectively Using Enough Money
But its not enough to simply plan for the future, you must then figure out what staff, board, volunteers, systems, technology, marketing, and other resources you need to bring your strategy to fruition. You must articulate the business model you will employ, and the corresponding money required, to realize your long-term outcome goals. And I don’t mean the band-aid version — I mean what it will really take to achieve the long-term outcomes you seek.
Attracting the Right Kinds of Money
But it’s also not enough to figure out what it’s going to cost. You have to figure out the other side of the money equation, which is how to bring that money in the door. A smart financial strategy attracts money that is the right fit for your organization. You have to be strategic (not reactive) about how money flows to the organization (fundraising, government grants, earned income). It might be that you focus solely on private sources, or you may have a mix of government and earned sources. But your financial model must align with your core competencies and your mission.
Nonprofit sustainability means that a nonprofit board and staff know what they want to accomplish, develop a smart strategy and business model, and use money as a tool to make it happen.
But nonprofit sustainability should not be up to just nonprofit leaders to figure out. Anyone who wants to realize social change (the government, private funders, social change leaders) must advocate for and support more sustainability in the sector. It must be a larger conversation. I hope that conversation grows far beyond the CEP conference in April.
Photo Credit: Philip Taylor
It amazes me how many nonprofit leaders form their organizational strategy, their fundraising pitch, or their program model inside their nonprofit’s own walls. In order to be successful, you must understand the market in which you operate. And in order to understand it, you must go investigate it.
It is a simple fact that nonprofits must compete for funding, for clients, for volunteers, for staff, for board members, for mindshare, for policymaker will and commitment. So you must understand the market in which you work – what’s happening out there and how you fit in.
Ongoing market research can help you understand how your clients and potential clients think, what your funders want now and in the future, what your competitors and collaborators are doing and where they might be going, and how the very problems you exist to solve might be changing over time.
And there is another huge benefit to this data gathering — it forces you to expand and strengthen your network, because in the very act of finding out what’s happening outside your walls, you will forge new and deeper connections with others out there. So while market research should definitely be part of your long-term strategic planning process, it is also something you should continue to do on at least an annual basis.
Market research is where you test the assumptions baked into your work. You are seeking to find the answers to questions like:
- How are the efforts of other groups in our space changing over time?
- How are these other groups funded?
- What are their program delivery models?
- What are their plans for the future?
- Where are there opportunities for alliance?
- How do they define the social problems they are working on?
- What other social, technological, economic, demographic, political, regulatory shifts are happening outside our walls that might affect the problem(s) we are working on?
Of those people or groups you are trying to influence or benefit (like your clients) find out:
- What are the demographic (age, gender, race, ethnicity, income, etc.) characteristics of these groups?
- What are their psychographic (attitudes, interests, goals, etc.) characteristics?
- How can we best reach them and change their attitudes and/or behavior?
- What specific subsets of these populations can we have the greatest impact on?
- How might our various funding streams (government, earned income, private donations, etc.) change over time?
- What might our current or future funders want in the future?
- What appeals to them about our solution?
- What appeals to them about alternative solutions?
Before embarking on any market research, think through questions like these and figure out which are most applicable to your situation. This becomes your market research list.
Then determine how you will find the answers to those questions. Very few nonprofits can afford a comprehensive market study, so it will likely be up to your staff to do the digging. This can include activities like:
- Web research on your competitors, collaborators, funders.
- One-on-one interviews with current and potential funders, collaborators and competitors, experts in your field.
- Surveys of your current or potential clients, members, influencers, funders, volunteers.
- Review of existing research on the social issues on which you work.
And don’t assume that you will do this type of market research only once. Rather, you want to make it a regular part of operations (at least annually, if not more often), so it shouldn’t be overly burdensome. Make it easy and interesting for you and your staff to get beyond your walls and better understand the market in which you work.
Armed with new and ongoing knowledge about your market, you will be better able to design effective programs, attract additional support, articulate your nonprofit’s unique value, grow your network, and much more. So get out there!
Photo Credit: Ministry of Information Photo Division Photographer, Wartime Social Survey
One of my predicted “5 Nonprofit Trends to Watch in 2017” is that we will see “More Analysis of What Nonprofit Financial Sustainability Requires.” In other words, I think (hope) in this new year that nonprofit leaders and their funders will work to figure out how to make nonprofits more financial sustainable.
Financial sustainability means that both the way money comes in the door (revenue) and the way money goes out the door (expenses) happen in a smart, strategic way. When they do, you have a robust financial model.
In my mind, one of the first steps toward that sustainability is for nonprofit leaders to look inward. While there are many reasons for the financial instability that plagues the nonprofit sector — from the Overhead Myth, to restricted funding, to lack of financial training — nonprofit leaders sometimes perpetuate the dysfunction themselves with an unhealthy attitude toward money.
Nonprofit leaders must embrace money as a tool — rather than a scourge — that can help them better achieve their mission.
So in this new year, in order to get closer to financial sustainability in your own nonprofit, I challenge you to ask yourself these questions about money:
- Do I embrace money as a tool to achieve our mission?
As the ultimate cheerleader of your nonprofit’s board and staff, you must ask whether you yourself fully embrace money. Money has long been viewed as a necessary evil in the nonprofit sector. We don’t want too much of it (for fear of scaring off donors); we don’t want to ask people for it (for fear of rejection); we don’t want to make our board go out and get it (for fear they will bolt). But it is your role as leader of your nonprofit to eschew those outdated notions and instead recognize that a smart, well-executed money strategy can be instrumental to achieving your mission.
- Do we know our actual costs?
Not just the full costs to run each of your programs (which is important), but the overall costs of executing on your strategic plan. I can’t tell you how many nonprofit leaders I meet who a) don’t have a strategic plan in place or b) if they do, they haven’t tied it to money. You simply will not accomplish anything if you don’t analyze and plan for what it will truly cost to accomplish your goals as an organization. So start by using this Bridgespan tool to figure out the full costs of your programs and then add to that the other organizational and infrastructure costs necessary to achieve your overall strategic goals.
- Do we have a financial model?
So that’s how money flows out of the organization, but to fully flesh out your financial model you need to plan for how money will flow into the organization. The funny thing about money is that if you are smarter and more strategic about it, you will attract more of it. So instead of hoping and praying that enough money will show up at your doorstep, create an overall financial strategy that includes your tactics for how you will attract each applicable revenue line (individuals, foundations, corporations, government, and/or earned income) that flows into your financial model.
- Does our board understand and contribute to our financial model?
Once you’ve figured out your financial model, you must get your board fully involved in it. A nonprofit will never be financially sustainable if money is left solely to the staff to figure out. That means the board needs to understand revenue and expenses, over the long-term, and how they apply to the overall strategy of the organization. And it is not enough for them just to understand it, they must contribute (in many and various ways) to the successful implementation of that financial model.
- Do we ask funders to support the effective execution of our financial model?
You can’t just have a great financial strategy on paper, you also need to invest in the structure and systems necessary to execute on that strategy. That means you have to hire talented money-raising staff, acquire functional technology, develop capable donor systems, create compelling marketing and communications. Those elements make up your money-raising function, and in order to make it effective you have to invest in those elements. So figure out what that will cost and convince some funders to pay for it.
It’s time to get over your money issues. You will not achieve financial sustainability unless you fully embrace money as a critical conduit to the social change you seek.
Photo Credit: Daniel Borman
One of the biggest complaints about nonprofit strategic plans is that once created, they just sit on a shelf. A strategic plan is completely wasted effort if you neglect the final step of operationalizing it.
And by that I mean creating an annual tactical plan and monitoring process that directly tie to the larger strategy. In fact, lack of the operational part of your strategic plan is one of the 3 biggest problems with nonprofit strategic planning.
It does absolutely no good to have big goals that you want to accomplish and a larger future direction for your nonprofit’s work if you don’t have a way to connect that to your day-to-day operations.
So here are the 6 steps to do just that:
1. Create the Strategy
Start with the broad goals and objectives of your strategic plan. Typically, I recommend a nonprofit have 3-6 broad goals over a future (say 3 years or so) period. These should always tie to your longer term Theory of Change, and each goal should be broken down into the 5-10 objectives necessary to get there. And it goes without saying, but you have to create this strategy through a defined strategic planning process.
2. Create Annual Milestones
Once the board has approved those broad goals and objectives, staff needs to create a milestone table that articulates a lead person responsible (“Lead”) and a deliverable for each objective at the end of each year of the strategic plan (“Milestone”), like this:
3. Create a Year One Operational Plan
Once you have that milestone table, you can pull out the milestones for the first year and develop your Year 1 operational plan (below), which lists monthly or quarterly checkpoints for each objective’s milestone for that year. This will helps you monitor (step #4 below) whether the plan is coming to fruition.
4. Monitor Monthly at Staff Level
This operational plan should be reviewed on at least a monthly basis, where the staff comes together to analyze their checkpoints and report on what’s working, what’s not, and where they need to make adjustments.
5. Monitor Regularly at Board Level
Whether your board meets monthly, quarterly or (yikes!) less, you need to report to them on the progress of your strategic plan at every meeting. Since the board is ultimately responsible for the strategic direction of the organization, they need to understand how it is going. Using the operational plan above, you can easily highlight where: things are moving smoothly (green), things need discussion or action (yellow), and serious problems or hurdles (red) lie.
6. Adjust Accordingly
On at least an annual basis, the full board should review the organization’s Theory of Change and goals and objectives of the strategic plan to determine if any revisions (due to changes in internal and/or external circumstances) need to be made.
I believe that a huge reason for the distaste nonprofit leaders have for strategic planning comes from the poor operationalization of those plans. You simply cannot hope to execute on a strategic plan without tactics to get there.
You can learn more about what a strategic planning process looks like here.
Photo Credit: Kevin Utting
Change is certainly happening within the nonprofit sector and the philanthropy that funds it. From efforts to make philanthropy better at addressing inequity, to movement away from the overhead myth (and other myths), we are witnessing important shifts in how we tackle (and fund that tackling of) social challenges.
But I’m hungry for more.
And more could emerge from honest and transparent conversations about what is holding the social change sector back. There are some key hurdles facing the sector, and we have no hope of finding solutions to those challenges unless we start some no holds barred conversations, like:
- What keeps nonprofits from creating more sustainable business models?
Everyone understands that nonprofits are sorely under-resourced and struggle to find sustainable financing for their work. But few are trying to really understand how we change this reality sector-wide. A few funders have commissioned research on the state of money in the sector, but it’s not nearly enough. I would love to see a real, solutions-oriented conversation about a problem that everyone (nonprofit leaders, boards, funders) knows exists.
- Why do we hold nonprofits to a different standard than for-profits?
Because the nonprofit sector was borne out of the charitable impulse, we continue to see it as more holy than and separate from the for-profit sector. Therefore we are uncomfortable with nonprofits being too political, raising too much money, or spending too much on infrastructure. As a stark example, the nonprofits working for reform to our fairly dysfunctional political system have many fewer resources for and many more restrictions on their efforts than the for-profit lobbyists that the nonprofit reformers are fighting.
- Why won’t we treat nonprofits as equal partners in the economy?
Related to this, because the nonprofit sector emerged as a side-note to the business-driven economy, nonprofits have always been viewed as secondary to, and thus less valuable and important than, the private sector. But you simply cannot have one without the other. The nonprofit sector often provides the research and development, worker support, quality of life and other services that fuel the success and profits of the private sector. Without the nonprofit sector there would be less profit and a weaker economy. So we have to recognize the critical (and equal) role that nonprofits play in creating a strong economy. And we have to begin investing equally in the success of those nonprofits.
- Why are nonprofit boards largely ineffective?
Another truism of the nonprofit sector is that boards just don’t work. I have yet to meet a nonprofit leader who doesn’t have at least some frustration with her board and many are resigned to their board’s deep dysfunction. It is extremely difficult to corral a group of volunteers, to be sure, but instead of accepting that challenge as a rule, let’s figure out how to fix it. Perhaps greater standards and regulations, perhaps compensation for their efforts — I don’t know what the right answer is, but let’s analyze the root causes of this inefficiency and change it.
- How do we direct more money to efforts that result in social change?
There is much debate about whether donors want to give based on the results a nonprofit creates. But if the government is going to continue to off-load social interventions to the nonprofit sector, we don’t have the luxury of letting the funders of those nonprofits give solely based on emotion, reciprocity, or duty. You may not believe in “effective altruism” (the idea that philanthropy should flow to the most effective social interventions), but the fact remains that with mounting social problems and a resource-constrained and gridlocked government, a growing burden for addressing social challenges is falling to the nonprofit sector. Nonprofits will only be able to rise to this challenge if the solutions that work have enough resources to actually work. So let’s recognize the tension among increasing social problems, less government involvement, and lack of money and figure out how to fix it.
It’s time for bigger conversations. We have to openly face the challenges standing in the way of social change and figure out a way forward together.
Photo Credit: Paul Thompson
I’m excited to be heading to Pennsylvania next month to speak at the 2016 Nonprofit Day Conference. My keynote address for the conference will be “The Future of the Nonprofit Sector.” I wanted to share an abbreviated version of the speech with you here via the Social Velocity Slideshare library.
In my mind, there are some fundamental shifts happening in the sector that will be important to watch. They include:
- Increasing competition in the space
- A greater demand for results and social change
- An increased use of advocacy to achieve that change
- A move to more “networked” approaches
- Less “starving” nonprofits of their operational needs
- And (of course) a move from fundraising to financing
These are interesting times, and they hold tremendous opportunity, I think, for the social change sector.
I recently received a note from a blog reader who disagreed with my argument that a nonprofit’s board of directors should be charged with raising 10% of their nonprofit’s budget. Not only did this reader disagree with the idea of setting a 10% board fundraising goal, but he disagreed with linking board governance and fundraising at all.
As he wrote:
“I recently resigned from a board of a nonprofit, after a 5-year stint. I was honored to be asked to join the board, until at my first meeting pledge cards were passed around, and I realized it was my money, not my leadership skills, that qualified me for board membership. I have given on numerous occasions, but I refused to pay a “bill” I received for my share of employee Christmas bonuses last year. There have been many instances where the board was expected to give money. Only a tiny fraction of the budget would be raised through these measures, so it seemed like it was a membership test. Governance should be totally separate from fundraising.”
While I appreciate this reader’s frustration as a board member, I would argue that his unfortunate experience had more to do with poor management of a board, and less to do with fundraising being part of a board member’s charge.
I don’t believe board members should ever be “billed” for a contribution. Rather, the board chair and the executive director should sit down with each board member individually on an annual basis and have an open conversation about that board member’s role on the board. This should be a much larger conversation than just what she wants her annual financial commitment to be, but that still must be part of the conversation. So while you absolutely should discuss why the board member has chosen to serve on your board and what she would like her role to be, you also can (and should) discuss how she wants to contribute to the financial model of the organization.
And if you define a board member’s “contribution” much more broadly than just a check she writes, the sum total of all of the contributions each board member makes can be much more significant than “a tiny fraction of the budget.” Every single board member, if truly right for the post, has many ways to contribute to the financial model of a nonprofit (here is just a beginning list of ways). If you ask board members to think strategically about how they can contribute, and if they are well versed in the financial model of the organization they serve, it should be fairly easy to get them involved in a significant way.
And getting each board member engaged and involved in the organization should be the aim. While I agree that the idea of a “membership test” is certainly unappealing, there should be a bar to being a member of the board of a nonprofit organization. If some members are allowed to be members in name only, but not required to have any skin in the game, then what compels any member to invest their time and resources in a significant way? If there is no bar that a board member must clear to be a board member, then what separates a board member from just an interested member of the public?
A board of directors must be a nonprofit’s staunchest supporters, most vocal advocates, and most committed allies. If a nonprofit cannot depend on its board to work tirelessly, not only to ensure achievement of the mission, but also to ensure financial sustainability, how can a nonprofit possibly expect those outside the organization to care? So, yes, being a member of a board must come with some level of commitment, both of time and of resources.
Because at the end of the day, there is no mission without money. By allowing any individual board member, let alone your entire board, to make programmatic and organizational decisions without fully understanding and contributing to the financial model of the organization you are creating an enormous disconnect between mission and money. A person cannot hope to understand something unless they have actually worked within it. So each board member must somehow contribute to the financial model of the nonprofit on which they serve.
Just because nonprofit leaders sometimes do a poor job of engaging their board in the financial model does not mean that we should separate the governance of a nonprofit from its financial model. All board members must understand, embrace, and actively work toward the financial sustainability of the nonprofit they govern.
Photo Credit: Susana Fernandez