Rachel: So, I'm going to get us started because we do have a lot to cover. We've got a wonderful expert in the room who is ready to go. So I want to give her proper time to cover this important topic.
Oh yeah. Kat, that…well, the song I was just playing was Irma Thomas. Anyone Who Knows What Love Is. But the previous song was a little Crosby, Stills and Nash. So, just some oldies to get us warmed up today.
Thanks to folks who responded to our poll. I'm going to go ahead and end that. It looks like we've got a lot of folks who are first timers. Welcome. I'm so glad to have you. And I'll talk a little bit more about what we're doing today. And some of you who are kind of in the middle of the road of your grants experience as well, great to hear. I appreciate you sharing your thoughts there.
Hi Tamara, great to see you.
We're going to jump right in, and if you haven't already, introduce yourself in the chat. Love to hear everybody that's coming in. Today, we are talking about the 3 Must-Have Skills for Your Nonprofit's Financial Future. This is a partner webinar and I'll talk a little more about our partner in just a moment. For any of our first timers, this is an educational webinar produced by Instrumentl. We're one of the most loved all-in-one grants platforms out there. We help with grant prospecting, tracking, and management, and we work with almost 4,000 nonprofits and grant consultants helping them save time and find and apply to more grants.
For those of you who don't already know me, my name is Rachel. I'm one of the events and community managers here at Instrumentl, and my job is to help create helpful and educational events just like this one. I have a decade plus of experience in the nonprofit sector, specifically in museums, and I'm based in Los Angeles, California.
Hi, Susan.
Hi, Sally. Great to see you.
A couple FYI's, we are going to wrap at the top of the hour. So we've got about 55 minutes to get through a lot of content. I'll share what we're going to do in just a second. You will get the recording and slides. I encourage you to honor your personal needs. You know, we have busy non-profiteers in the room. So, bring your hydration and your snacks and step away as needed. But don't miss the chance to win. If you stick around to the end, I have a little raffle prize that you will be eligible to enter in for. So, I'll share more about that in just a second. And if you'd like to read along, as well as listen, you can toggle on those closed captions on your own Zoom platform, so you can follow along there.
Hi, Marianne Cooper. Great to see you.
Hi, Jonathan.
Okay. So, where we're headed. I was going to tell you a little more about what we're going to cover today. We're doing our introduction right now. We're going to go into a moderated discussion with our special guest talking about our nonprofit’s financial future. I've prepped our guests with some questions that are things that I've heard come up from other nonprofits, and I've used those as our teeing off point for today to kind of dive deep on this subject. We'll talk about how we can assess our own financial readiness, and that's when our workbook will come into play. I'll talk a little bit about your grants pipeline and how that might kind of factor into some of this financial readiness or how it's being incorporated into your financial spend. We'll do a moderated live Q&A with you all. So, I encourage you throughout the program to drop questions into the chat. That'll really help me curate some good questions to wrap our program up with. And then we'll do a quick little reflection at the end.
As a reminder, I encourage you to stay till the end. I'd love to hear your feedback. This is a way that you'll be able to win coffee with us. So you'll be the champion of your office, or if it's just you, one person show you'll have $50 to spend at any coffee shop you would like, or if you're a tea aficionado, whatever your nonprofit fuel is, we want to help support that.
So I'm going to introduce our special guest. I'm really excited to have Tosha Anderson on with us and I'm going to quickly read her bio to just give you all some context on what her expertise is. Tosha has dedicated her entire career to serving the nonprofit community first as an auditor and then as a CFO board member, volunteer and consultant. After witnessing the struggles of small nonprofits to find affordable and reliable financial support, or even just answers to their questions, she started the Charity CFO to help organizations like yours get the help you need to grow and execute your mission. Tosha’s exposure to hundreds of nonprofits at all levels makes her an invaluable resource on accounting topics, but also fundraising growth strategy, organizational management and more.
Hi, Tosha. Great to have you.
Tosha: Hey! I'm so glad to be here. Quite the laundry list of things, but I'm excited to dive into the conversation. So thanks for inviting me on.
Rachel: So glad to have you. I had so much fun talking with Tosha before this program. She's just such a wealth of knowledge. So, we'll dive in on some of these questions. But before we get started, I'd love to hear from the room. I have a little poll prepped for everybody. What's maybe one of your biggest challenges right now related to financial readiness in your organization?
So, let me launch that poll and you can think for a second about where your organization stands here. Is it identifying and addressing financial red flags? Is it balancing mission-driven growth with financial stability? Is it understanding budget management and organization at the baseline? Is it preparing for and managing financial risks? Or is it something else? And if it's something else, I'd love for you all to share that in the chat box. I'll give everybody a moment to think about it.
We've got some good responses coming in. I've got almost 70 percent of folks participating. If you haven't seen that poll yet, we're asking about your nonprofit's financial readiness and some of those biggest challenges you might be facing. Almost 80.
Tosha: I’m seeing responses.
Rachel: Oh, yeah. Right? You’re seeing those come in.
Tosha: Not surprising either, yes.
Rachel: Absolutely. I'll give folks about 10 more seconds and then I'll share those results. And I'm curious, Tosha, too, if you have thoughts on kind of some of the things that are coming out of this.
Tosha: Yeah, these are all good options.
Rachel: Thanks everybody for sharing. I'm going to end the poll and share those results. It looks like the biggest challenge we are facing is balancing that mission-driven growth with financial stability. And I'm glad to see that it's a challenge for you all, that sounds tough, but that we actually are going to be covering that as content today. So, that's really great to hear. It seems like kind of in second place here is understanding budget management and organization of our budget. So that's something we could maybe touch on as well.
I saw Jessica added in the chat, “Budgeting for giving we won't know enough about for the year ahead.” I'm sure that's something that other folks can relate to.
So with that, let's get started on our first discussion question. We're going to kind of be diving deep on your nonprofit's financial future. And I've prepped some questions here related to that. The first one is focused on these kinds of red flags, the things that we want to keep in mind. What would you say are some of the most common financial red flags that leadership should look for in maybe financial statements? And then if you have thoughts, like how some of these organizations address those red flags when they've come up?
Tosha: Yeah, I love this question because the red flags are going to be different depending on the audience. But one of the things I think about with respect to red flags, if I was, you know, a nonprofit leader, and I want to go back and say, I actually have worked for a nonprofit. I was a CFO of a nonprofit, and I did that for four years, and that really gave me kind of an insight glimpse into some of the struggles that I think all the things that we're talking about in the polls, and then we'll continue to talk about. So that kind of gave me that insight to understand that balancing the growth with financial sustainability was top of my mind every single day. And I think for me then it became clear what those red flags were for me, and then also it's continued to be echoed through the clients that I continue to work with. And I would say, for me, too little unrestricted funding. I know there's lots of great writers in this space and they would probably agree with that, but what do I mean? Too little funding that doesn't have strings attached. And I've seen the organizations that we've worked with that have the hardest time growing, scaling, or even sustaining where they're at are those organizations that have such a narrow margin because maybe they get predominantly all of their funding through one particular source. And while our government funding partners in many cases were very good for nonprofits during the pandemic and beyond, one of the biggest issues is they might only give like a 10 percent indirect de minimis overhead line item, and we're really limited on what we can do to reinvest back in ourselves to add the support that we need, to expand our programming, to add on additional support services with those wraparound services that we know that our clients really need to move the needle. And so, we're really kind of chained to what that particular funder is looking for. And then, of course, there's always the risk that we could not renew the funding. So, I would say the biggest red flag for me, too little unrestricted funding. So we like to see more than 50 percent of our funding with essentially no strings attached, or some sort of like earned revenue that the proceeds can be spent in whichever way that we want, and some diversification in the funding. So no more than 20 percent coming from one funder. Now, that's a very aspirational place to be, but I've seen organizations that have a variety of different funders and they get their sources of funding from places that once they get the money, or they earn the money, they could choose to reinvest or spend it how they want tend to be those that can be most flexible and they can respond to either the needs of their clients or the environment.
So, I would say that's kind of a red flag for me. If I was a new leader, stepping into a place, or maybe moving up into an executive director role, that would be my goal to figure out how to grow that. And then, very simple, less than 30 days of cash on hand. And I mean, at your lowest point, not when all your funding hits on the first day of the month maybe, but at your lowest point is your organization operating with less than 30 days of cash on hand. I know many are. And if you are somebody that's in that place, you understand some of the consequences that come from having such little days of cash. I mean, you're really living kind of hand to mouth in that sense. I mean, the clients that we've worked with that are in that space, we’re spending so much time managing our accounts payable and responding to vendors that are reaching out, wondering when we're going to get paid, constantly checking the cash balance in our bank account to make sure we have enough money to make payroll. And if we're not, how are we going to get the money in the door? And we're just reacting in such a chaotic reactive mode, that it's really difficult to think more strategic, and certainly not in a place to be thinking about how we can expand our programming. So, to me, those are the biggest red flags. Too little unrestricted funding, whether that funding comes from events or individual giving or grants, or some sort of earned revenue. I see a lot more entrepreneurial programs that are selling their services or goods. So, too little unrestricted funding, too little diversification of funding. And I don't necessarily mean type like government versus foundations, right? I mean, one source of funding because their priorities could change, and we know they do. And then too little cash on hand. So…
Rachel: These are great reminders. And I think your point about the kind of survival mode, the like reactive loop that some organizations end up in, this is true in so many different capacities. So, if they're trying to run programming and if they're trying to get grants and if they're trying to keep their organization afloat, right? Something to kind of remind us to step back and take a look at some of these and make sure we have the baseline set before we're even pursuing maybe additional.
Tosha: Exactly.
Rachel: Yeah. That's so insightful. And the next question here is kind of, again, like something to kind of be an indicator to folks, like, okay, maybe something is going well, or something needs to be addressed. Beyond profit and loss, what do you feel is the most important financial metric that nonprofit leadership should prioritize to ensure their organization is on a path to financial health?
Tosha: Yeah, I'm going to sound like a broken record. But to me, it's cash flow. And I think in the nonprofit world, we're so forced to look at like a budget versus actual or a balance sheet or an income statement, or whatever technical words they want to use to describe those statements, or your audit report or your 990. And I would say nonprofit is not different than any other business that you need money coming in the door in order to keep the things moving along. And so, that's where things get, I think, really confusing, and they get really muddy for leaders of nonprofits, or being able to articulate that to funders or to their board, whoever it might be. So, if you're not having days of cash on hand, I like to see no less than 30 days at the lowest point. That's in dangerous territory because we know you can have delays and payments from your major funders, you might have that extra payroll hit, you know, the three times, twice a year that it hits in one particular month if you're on that pay cycle. So, I like to shoot for 90 to 100 days of cash on hand, and I'll give a little bit of a case study on this.
So, in March of 2021, the whole world was kind of shutting down, and we were in kind of a frantic mode, how does this shutdown impact the nonprofit industry and the clients, especially, because we know that many of their grants were set up in such a way, if you don't deliver the services on a unit basis, you don't get paid. So think of, you know, if you can't go to these schools and you can't offer school-based counseling, then you're not going to get paid. And we know since the schools are shut down, that our organizations where their grants and the contracts were written, they weren’t going to get paid. So, we went through this analysis of close to about 150 clients, and our number one metric that we calculated to see who was of the greatest risk with those organizations that have less than 30 days of cash on hand. Now, thankfully, we only had about 5 out of, you know, close to 100 clients that had less than 30 days of cash on hand. Now, unfortunately, only about two of those ended up going out of business, but frankly, it wasn't the pandemic that result, I mean, that was just the last straw for them. Frankly, they were struggling before that. But of the organizations that had more than that 30 days of cash, none of them went out of business during that short kind of time period. And I don't know. Maybe it was a fluke, but I like to think that that was the immediate metric that came to my mind. If we don't have enough cash to make sure our employees continue to get paid, that our doors can't stay open, then does it really matter what your budget to actual is if you don't have enough money to keep the operations going? And I applied that same philosophy in my own business, and I would make that recommendation to anybody running any sort of business, that the cash flow matters and making sure that you have a good model to pump that cash put into your organization on a continuous basis, or alternatively understand the seasonal nature of that cash flow, if you tend to be an event-driven organization or maybe you run on campaigns and that sort of thing and you get a surge of cash at one point, understanding the cyclical nature of that and when your organization might be kind of a dangerous territory for running out.
Rachel: That totally makes sense. And I have a follow-up question from Jessica here. I think I'm interpreting this quickly. How do you calculate cash on hand, I think, is her question, like months ahead or average months. Like, do you have a tip there to just give some folks to calculate that?
Tosha: Yeah. The real simple, easy way is go to your bank account, just look and see how much cash do you actually have on hand. And then you convert that to the number of days. So, I take like an annual budget. So, say your annual budget is like a million dollars. You divide that by 365 days a year. That's how much cash you need per day. And then you take your cash balance, say it's $100,000 divided by whatever that number is that cash that you need per day, that's how you can figure out how many days of cash on hand in a very simplistic way. So, take your annual budget, $1 million, $3 million, $500,000, whatever it might be, divide it by 365 days. That's how much cash you need every single day to operate in a very simplistic way. Then you go back and look at your bank balance, do the math there, and that's a good way.
Now, some people would argue, well, take out depreciation and all that. Okay. But for purposes of this conversation and keeping it simple, that's the way I look at it. So I like to have at least one month on my lowest point. So after all my payrolls have been made and before all of my funding heads. Don't take the highest point of the month. Take the lowest point of your month.
Rachel: Yeah, no. And that might give folks at least like that initial formula to get themselves set up and understand where they're at currently, so that they can evaluate for future months.
My next question here is, you know, I know personally, like I have very little finance background. You're the expert here, and you're coming in with so much knowledge and background on how you've applied that to your organizations. In what way should nonprofit leaders or folks kind of maybe involved in finance within their organization, without a finance background, develop the skills and confidence needed to make informed data-driven decisions?
Tosha: So, I love this question, and it's probably not going to be the answer that you think of because I think some people think we'll just go take a little course in accounting and no one wants to do that or has time for that. And, you know, I started this firm and I'm responsible for a lot of other things outside of just doing the accounting work. And when I think about this, I get really passionate about the idea that sometimes we just need to develop/start with baby steps. Start with specific KPIs, Key Performance Indicators, or data points that matter most to you, and pay attention to those KPIs and really understand what points, like what drives that KPI to change, what impacts it, what are the variables that are going to influence that number from changing. And focus on those first, those KPIs that matter to you, and then slowly build upon that.
So, for example, if I were a leader of an organization, I would probably care about things like cash on hand, like days of cash. That matters to me and I want to know that every single month. And then if I understand, well, why did cash go up, well it's because we got a huge grant payment. Or why did cash go down? Oh, well, we had to put that huge deposit down on our special event that we're having. So, you kind of understand, why did it go up, why did it go down, because that metric matters to you.
Alternatively, you have, say, operating reserve percentage, because that matters a lot to our funders, that matters a lot to your board maybe, or if you're writing grants. Sometimes that number may not really matter so much to you operationally, but it matters to your stakeholders. So you want to be able to have that conversation. And if something went up or down, you can speak to why it went up or down. Rather than understanding how to read a balance sheet, you can just speak to specific KPIs.
Some other ones that are maybe related to finance, I think all things are related to finance, but that's the CPA in me, but maybe it's like program performance. So, how are the individuals that you are serving in your program going up or down, and how does that impact your financial performance? So, for example, you know, I used to be an auditor. Now, I get audited every day, it feels like. I think we've done like 77 audits to date. So far, this year, we are constantly dealing with audits. And auditors will sometimes ask, well, you know, why did your salary expense go up? Well, we expanded programming. Well, why? We've doubled the amount of people that we've served. Like this is all interrelated here. So this kind of makes sense. But some of those KPIs might make most sense to you, and measuring what those are, and first of all, defining what those are. And some people ask me, Tosha, what are the benchmarks for the nonprofit industry? This has to be an individual plan. It has to make sense for what matters to you as a leader, what matters to your stakeholders, maybe what matters to your team in order to hold them accountable. So, developing those KPIs, assigning that responsibility. So, if they're fundraising metrics, maybe you sign that to your development director. If they're program-related metrics, you assign that to your program leadership. And if they're financial metrics, to your accountant or your bookkeeper, or you, if you're still doing the accounting and you really, as the leader, have to understand all the variables that impact those metrics, so that you can ask those specific questions when you are…you know, I don't want to use the word ‘holding somebody accountable’ in a punitive way, but in my company, we do this as a weekly leadership team. We all get together, we go through the KPIs, we have a conversation, why did this go up, why did that go up, not in a gotcha punitive way, but just for me as the leader to understand, okay, well, we didn't hit the mark here, what do we need to change going forward to get back on track?
And so, rather than just feeling overwhelmed with I'm not an accountant, I'm not going to understand an accountant, really just boils down to what are those KPIs that matter to you and to your organization and really start with understanding those inside and out. And I will give you an idea. I'm an accountant. So, the financial metrics for me, pretty simple, make sense. But I'm also responsible for sales. I'm responsible for marketing. So here I am trying to understand SEO and website conversion and all these things. I mean, you know, Rachel, this is part of running a business that is a virtual in nature. And so, I attempted, and why I give all this advice, I attempted one, we're just going to do a class in SEO on the weekend and figure out how to understand website conversion and traffic and all of these things only, you know, for the algorithms to eventually change anyway, and then I'm starting. Then I realized, this is a waste of my time. So, rather than trying to be a master of these things and set myself for failure in this way, I just focus on the things that matter most to me, is web traffic overall up or down, yes or no. If it's down right now, we gotta go figure out why, but I'm not understanding all of the mechanics. So, don't overwhelm yourself, in short with this unreasonable burden to become an accountant overnight. It's just not going to happen. Pick those things that matter to you and know them really well.
Rachel: This is such great advice. And you're right. It wasn't the answer actually I expected to hear from you, but it makes so much sense. I think too, you know, when we think about internal capacity within our nonprofit work, it's often very limited and we have a limited span of time. If we could clone ourselves and do a million things, we probably all would, but we can't. So, in what ways are we being most effective with our time? I love this idea of also just you should have those KPIs, those Key Performance Indicators, regardless, right? And if that's something you don't have yet, I encourage you to spend a little time, as you're prepping for 2025, thinking about what those KPIs are going to look like for your organization and how you're measuring success. If it is that up or down and how that ties into, yeah, your organization's finances as a whole. Love that. I think that's such a valuable advice.
Tosha: Yeah.
Rachel: I have another discussion question here and then we'll pause for a little moment to kind of hear some feedback from the audience. From your experience, what are the key indicators that signal a nonprofit is ready for strategic expansion? I know a lot of folks in the room are like, alright, we want to build up, we want to, you know, provide 10 more programs in these spaces. What are those indicators that you look for?
Tosha: I will answer that, but what I see more often than not, expansion happens when funding presents itself at times. Oftentimes, I see that the case. Well, we have an opportunity to get this grant, this federal grant, this local grant, whatever it might be, and this could fuel growth, or maybe it's in another geographic location, maybe it's just additional support in the existing program or whatever it might be. And it's usually a result of additional funding becoming available. But the problem is that that funding is usually partial and that partial funding. And so, all the fundraisers in the room can probably appreciate this. What many leaders don't realize, that if I say yes to expecting this 75 percent funding for this program expansion that we know that there's a need, I've now created a fundraising gap that I need to fill. And so, let's say this government source is going to fund us 75 percent of our program expansion, and this now creates a 25 percent fundraising gap. And sometimes it's hard enough, especially with fundraising trends, the way that they are and foundations becoming more and more difficult, grants, more and more strings to tie, like there's more and more competition for funding. We know that. It's not getting easier necessarily to raise money. And especially in a big gap like that. So, if you're saying yes to an opportunity to expand your programming, and you're only thinking about the additional dollars coming in, but you're not thinking about the additional dollars you still need to go find, I find so many organizations put themselves in a really difficult situation that puts ultimately too much pressure on their fundraising team to keep pace with that programmatic growth and also their administrative team to maintain or scale the infrastructure needed, which, by the way, there's never enough money for that either. So, to maintain the sustainability or the scalability of that program growth. And so, that's how oftentimes I see it actually happen in real life. Money becomes available when we jump on it, because if we don't, then when is the next time we're going to see this sort of funding? Not realizing the unintended consequences of getting that funding.
So what I really advise with the clients that we work with, that before you decide to say yes to things, you really start looking at all of those unintended consequences, like what are the things that are going to happen as a result and not necessarily in our favor. And so, what I really like to recommend to people is to, you know, first of all, do we have enough cash in the bank? Right? First, if we're already, and I see this all the time, organizations that have less than 30 days of cash on hand, they go and they take on additional government funding that triggers additional fundraising needs. Sometimes these grants are going to be reimbursement in nature, which means we have to fork over the cash ahead of time and then get reimbursed, you know, 60, 90 days down the road. We are just burying ourselves more and more and more in this burden of essentially administering this program expansion, for lack of a better word, right? And so, what I tell people, if you don’t have at least 25 percent of operating reserves, or at least 90 days of cash on hand, you shouldn't even be considering program expansion. Because of these nuance things, you don't think about when you say yes, like, oh, I have to front 2 months’ worth of payroll of this program before I even get paid back. Like, how am I going to finance that? And then what does that look like long term? So, if you don't have the baseline reserves, like the safety net, the savings account, the operating reserves to hit those basic benchmarks, I wouldn't be considering expansion at that point. I think it's just too much pressure without a solid foundation.
And second to that, hopefully program expansion is in a strategic plan. I think that's very idealistic, and we throw those words around like everybody has a strategic plan, but I also know many, many people don't have a strategic plan. So, if you don't have a formal strategic plan, are you at least having conversations at your board level that program expansion makes sense? And what does that look like? Is that in depth of the services we're offering to the same types of clients? Is it making it more broad? We're looking to serve more people? Is it in our local community? Is it beyond? What does that look like? And then start building some multi-year projections around that. Like what needs to be true three to five years from now for you to continue operating as you would? What does it look like three to four years from now, or three to five years from now, to expand into this program growth that you're looking for? And really, when you go in and ask for those additional dollars, you are putting in what you know you're going to need 3 to 5 years from now to scale this. So, you know, you're going to need a grants manager, you're going to need another accountant, or you're going to need another fundraising professional because they're only going to give you 75 percent of your funding and you're going to have to go find the 25 percent, or whatever it might be. So kind of thinking more long term before you decide to say yes to an opportunity. I know that's sometimes easier said than done, but those are the considerations I like to think about before I say yes.
Rachel: That absolutely makes sense. And I think that's a good reminder too. You know, folks often are pursuing, they're ready to apply for the grant and they're like, wow, that'll be $100,000 right into our bank. But it's truly, that's not, that's not the way that works, and you do need to be able to sustain yourselves in the meantime, right? That reimbursement reminder of like, you're going to have to front the cost, so enable your organization to actually be able to do that and then comply with the grant terms and then not be maybe caught off guard if that grant is a one-year grant and then you're scrambling to figure out how you're going to supplement that next, yeah.
Tosha: Yeah. I mean, it's just…and maybe if you're able to talk to people that are beneficiaries of these grants too and see, and when I think of these things, I'm thinking of really large grants. I'm thinking about organizations that carry a very heavy load to administer these programs. Think about HUD programs, the unhoused community, and running the cost of these shelters and things like that. When you expand into these programs, I know some of the turnaround time for payments, oh my God, some cities or states, it could be six months. It's incredible. And for an organization that doesn't have that solid foundation or some sort of line of credit or some sort of lever lifeline to pull when things get mixed up in the funding, they can, I mean, be put out of business quite frankly. So, I don't mean to be an alarmist, but those are the things that I definitely think about.
Rachel: Yeah. No, that's the reality to address, I think, before you consider that next programmatic expansion, as you said, which is such a buzzword.
Tosha: Yeah. Yeah.
Rachel: I want to hear from folks. We have a couple more questions for Tosha here, but I want to hear from folks in the chat box. What are some ways that your organizations have maybe ensured some of this long-term sustainability? I want to think about some of the wins we've had, some of the indicators that you all have seen for your organization that say, we are set up to be sustainable. And I'm just curious. I have a couple of ideas of examples, but what have folks seen in your organizations that are ensuring your long-term sustainability?
And, Diane. I see your question. I'm going to add that to our Q&A.
Rona says, “Establish estate giving.” Yeah, that's a great way to kind of have that backup. Like maybe it's not something that's happening every day hopefully to our funders to stick around a while, but that's a great way to kind of ensure that.
Annie says, “Strategic board member participation.” Love that, and corporate partnerships. Those are both great. We'll talk a little bit about board member involvement in a question in just a second.
Tamara says, “I've been thinking about establishing an endowment.” Oh, that's interesting as well.
Feel free to continue to add thoughts to the chat. And I'm going to pitch this to Tosha and ask her for her thoughts. Can you share an example of a nonprofit that you've maybe directly worked with that successfully implemented that kind of long-term strategy, and what were some of those key players?
Tosha: Yeah, I love some of these responses because I think this certainly shows up in some of our more sophisticated clients that we work with. And when I was thinking about a client, that would be a great example of this transformation, because I think sometimes we look at organizations that are doing these things and they've been maybe operating for hundred years, and they have had tremendous support like from the philanthropic community, and they have all of the systems in place, and you as an organization, that you're nowhere near that in maturity, whether it's age or processes or staffing or whatever. It's like, how do I go from here to there? And I was really thinking of a client that we've been working with that has had quite the transformation in a fairly short period of time. So, I'm thinking 3 or 4 years. And this particular client comes to mind. They get a lot of government funding that I described. They had a founder and a co-founder situation. It was a CEO and CFO that was in place for many, many years. They ended up retiring, and they created a succession plan. Both the CEO and CFO that replaced them ended up resigning within a year, and everything just kind of unraveled from there. And they had this government funding structure, which they on paper had plenty of money to continue operating, but when things start to fall apart, because they didn't have a solid accounting team in place, they didn't have somebody sending the bills to the funders to get paid. Something as simple as that. This organization, over a period of 6 to 9 months, had diminished their entire reserve because they didn't have good accounting processes in place, they didn't have a succession plan for some of these key processes, and found themselves in some pretty hot water with their funders, et cetera, et cetera. So, not only did they not have like adequate leadership, they did not have good documentation of their key functions, like invoicing, that sort of thing, and they really just deteriorated their entire financial position quite frankly.
So, for this particular client, I mean, first and foremost, we had to get in good standing with our auditors. And so, put a good accounting team in place. I mean, obviously I'm biased because it's my client, but at least get things back to status quo, and we're able to send the invoices off and we're able to get that cash flow running again. We're able to get the reports that they need and keep them kind of off our back in that way.
The second thing they had to do is really start building a system of accountability for earning and spending those dollars by program because they're very grant heavy and they're very diverse across different programs, not only geographically but the types of programming that they offer. So, developing a comprehensive budget that all of the key functional leaders of the business really understood and that they could have conversations about why money is coming in or going out in a certain way and making sure that they're fully utilizing those grants. So, sometimes we think about grant's like, oh, we got an award, but the problem is a lot of times those dollars not given to you until they're earned. And so, we don't have a framework for tracking or progression towards earning that full dollar amount. We might be at risk for leaving money on the table. So, we wanted to make sure we're getting every dollar that we've essentially been awarded to.
Because we had diminished much of our reserves and we were, you know, probably within a few months of going out of business after being operational for 40 plus years, we built a budget that assumed a surplus at the end of the year. And people ask me, okay, Tosha, I don't have, you know, 30 days of cash on hand. I don't have 25 percent operating reserves the United Way is asking me for. How do I get there? And the reality is just like, if you think about it from a personal finance perspective, the same is true for a business finance. The only way to build a reserve, a. k. a. savings account, is to have more money come in than it's going out, and you just kind of hoard that money. And we don't like thinking about that in the nonprofit world because if we're making surpluses, and you know, we're a nonprofit, we're not supposed to make it a profit, right? We're not supposed to have surpluses. But the reality is we must. We have to have surpluses at the end of many years to accumulate to having this reserve to make sure that we are sustainable. I mean, that's what we're talking about here today. So we had to build a budget that assumed a level of surplus that over time, over the few years, would allow us to accumulate that reserve to build that cushion. And that required some hard decisions, required us foregoing certain things and some hyper discipline to make sure that we're kind of staying in line with those financial goals that we set out.
Of course, beyond that, because then they want to start looking at expansion of programming because there's a huge need for the work that they're doing, we developed a multi-year plan, a financial plan, some of those projections that I was talking about earlier, do we actually know where we're going in the next 3 to 5 years with what we're currently operating. And then this allows us to start putting in scenarios that I think somebody mentioned in the comments earlier, how do I write a grant for a budget for a future year when I don't know what that looks like. Well, when you have some rough draft of a multi-year budget, it's a little bit easier to start adding different scenarios into those future year's budgets and get a better understanding of what that looks like.
So, we did all that to really know where we are going, and we could start better planning for like the long term. So we kind of switched from reactive. Everything's on fire. We have to really turn things around just to make sure our team gets paid or auditors get happy and the board gets reports again to having more future conversations. And now we're in a place where we're talking with the feds about expanding some grants. We're piloting opportunities for us to train other organizations on how to implement some of our programming. So, it's been a complete transformation, and we've been working with them for about three years. So you could do a lot within a short period of time but it takes some hyper discipline.
And then ultimately, once we get to that point, when we don't need it, I always advise our clients to really look at your banking relationships and start talking about a line of credit proactively because you all know you can't get money or a lifeline when you need it. You have to plan for that when you don't need it. So when things are not on fire, have conversations with your bank and look at a line of credit. That might help you with some of the program expansion we talked about, some of the reimbursement, or just as a risk management tool. And now we have over 150 days of cash on hand. And like I said, having these strategic conversations at the board level on what do we do with these reserves now. Because, as you know, many fundraisers on today, like it's sometimes hard having the conversation, why you need money from me when you have enough money of your own. And to be able to have thoughtful conversations with donors, well, actually the board is investing X amount of dollars into this initiative, but we don't want to spend beyond this amount for sustainability, et cetera, et cetera.
Rachel: Yeah. Yeah. That plan is tough.
Tosha: So that's a pretty big transformation that can happen even in the most dire situations, and this was certainly a dire situation.
Rachel: That's really great to hear. And I love that example because it just, yeah, also can prove that you can turn things around and with the right, like you said, kind of hyper focus on that. I am going to take us to this next question. And then I think like we only maybe have time for one more that I've pre-prepared so that I can get to some of the ones that came in in the chat.
So, what can nonprofit leaders do, this is one of our biggest challenges when we pulled people at the beginning of this webinar, to balance mission-driven growth with financial prudence? And actually I'm going to tie in a question that came into the chat. Diana asked, “How big a reserve should we target for a young organization?” So that's maybe like very specific when we're talking about financial prudence, but if you can give us some ideas there. Yeah, how do you balance that?
Tosha: So, I'll start with the reserve amount, because this is tricky for me, because not really tricky. I'm living in the self-discipline of it. I have a firm. I've been around for eight and a half years and we keep growing and growing and growing. And I practice what I preach. I have reserves. And it is so challenging to think about what you could be doing with those reserves when you have an opportunity to reinvest in yourself. So, the 25 percent operating reserves usually comes from kind of charity watchdogs, we call them. So think about the Better Business Bureau, the United Way. So our floor is that because that's oftentimes what some of these more sophisticated watchdogs, if you will, will grade or rate your organization. So, I like to start there. Now, what's really tricky about that is, if you go into hyper growth mode, 25 percent is maybe not realistic for you. Maybe it was 25 percent, but if you've got a huge gift, how do you…if you got $100,000 gift and your budget is now $100,000 and it was zero, how do you save $25,000 of that one year to the next? I mean, some people might balk at that, that you're not making the best use of the funding. So, you can kind of start in baby steps with a goal to eventually get to that 25 percent, again, to kind of keep the watchdogs off our back and the auditors and all of the people. But what I did when I kind of started out and what I advise my clients to do is kind of think about what are the key cash outflows for most organizations, substantially all organizations is going to be payroll related. I like to have at least two payroll cycles. So say, if your payroll is X amount of dollars, whatever it might be, $5000, $10,000, whatever it might be, at least have two payroll like amounts funded saved in your bank account because, like I said, you could have a situation where your largest funder is 30-45 days late for whatever reason I'm paying you. They had a change in staff or they had a glitch or they upgraded their software. Whatever it might be is not out of the realm of possibility that your largest funder, which might also be paying most of your staff, has some sort of delay in payment. So start with at least like two payroll runs because that's going to be your most critical, I would imagine probably your most critical expense. So, start there and an inch closer up to the 25 percent. It's not really my role. It's common practice to have that. So I think that should be something you aspire to.
Rachel: Yes. When you said always getting delayed, I was just relating to like, oh my gosh, I remember being so stressed. Like, okay. I mean, we had the money. I was at a large organization, but still, okay, well I'm on the line to make sure that we can actually get reimbursed and the delays are ridiculous at that time.
Tosha: It's so nerve wracking. It's so nerve wracking. And that was something that I put in place, even with this firm that I…you know, same. I mean, my entire business has ran off of professionals that do the work. And so, as you're a growing firm, like I said, your budget might change pretty significantly year over year. So, going from 25 percent one year could look drastically different 25 percent the next year. And that's not realistic, but kind of having a plan to get back up into that reserve amount and then working with your board or your finance committee to kind of discuss what that might look like. Yeah, that was 25 percent of entire budget. Your funders or the watchdogs would say 25 percent of your entire budget. If that is not realistic, a first step for me would be at the lowest point of the month, I have at least two payroll cycles worth of funding in there. So say your funding is $25,000 per payroll run, I’m making something up. At your lowest point in the month, I would like to see $50,000 in your bank account. Again, that's a whole month's worth of payroll essentially. And if you do have any delays in payment, or something goes haywire, you at least know that your team has funding for a full month. That's what I like to see. That's Tosha's opinion only. But the 25 percent of your total budget is typically, like I said, Better Business Bureau, United Way, like those sort of people that create these financial quality standards.
Rachel: Very cool. Yeah, that's good to keep in mind. This is going to be my last formal question before we move on to a moderated Q&A as we wrap up here. What role do you personally believe, or professionally believe, a nonprofits board should play in either overseeing financial health, and are there ways that we can better engage our boards in some of these strategic financial decisions?
Tosha: Oh, boy. Well, at a very basic level, they should be reviewing financial reports and helping you discuss long-term planning. What I would like to not see them do is argue with leaders about spending too much money in office supplies when, you know, maybe we have bigger issues, like how to better invest our cash reserves, or something to that effect. So kind of lifting them up out of the day-to-day details. So, in a perfect world, I would love the finance committee to be having more strategic conversations about what long-term planning should look like for the organization or helping an organization leader to find some of these kind of KPIs that seem relevant to them because while the finance committee are financial people, hopefully they have some baseline understanding of what your development is made up of, what your program is made up of. So maybe helping you build some of kind of high-level KPIs that makes sense for your organization and then helping you better, I guess, have a system of accountability for reporting out what those look like. Long-term though, I would love finance committee members to be aware of and understand some of those quality standards that organization sometimes are held to, whether it's a state that you live in that requires an audit and a certain threshold. I mean, there could be something as low as…you know, I'm in St. Louis, Missouri and across the river, 10 minutes away in Illinois. I think it's still $300,000 of annual revenue is now subject to an audit. So that's a pretty low budget for an audit. So, your finance committee is helping you understand what are the long-term considerations that you need to have, whether it's planning for an audit or looking for a risk management of your funding, whether it's helping you navigate getting a line of credit potentially, it could be building policies and procedures and really leaning on their experience. And by the way, your finance committee should hopefully be having a variety of skill sets, sometimes finance. It could be comprised of bankers that have tremendous experience and maybe investing and financing, but they don't really have an accounting background, so they can't really help you there. Or you might have a bunch of accountants there, but nobody can help you with investing. And so, those sort of things.
So, I definitely think that the finance committee should be focused on long-term financial health of the finances and not just the short-term granular things. And if you are an organization that's lucky enough to have enough reserves and you're kind of asking yourself what's next, that's a great thing to challenge your finance committee with. And what do I mean by that? Having a more intentional conversation and a decision internally but what you plan on doing with these excess operating reserves or dollars that you plan to do.
And I'll give you an idea that I implemented with an organization I worked with. We had more money than what we kind of knew what to do with it. We were having a problem, frankly, like fundraising, as you would expect because people are like, you know, what are you doing for yourself, what are you doing reinvesting in yourself. And so, we kept adding on all these government contracts and just kept piling them on, piling them on. And we didn't have enough administrative support. We didn't have the infrastructure that we needed. So I was able to come up with an operating reserve policy. Like we, as an organization, decide that our operating reserves are going to be 150 percent of our annual budget. And here's why. We have a lot of brick and mortar, a lot of government funding. We have high overhead subject to losing funding, et cetera. Well, once we go over that, we are going to make the decision to reinvest back into ourselves at a reasonable rate that we can't anticipate. Because here's what happens, most leaders might be sitting on a large quasi endowment, a large reserve, a large bank account. They're making a bunch of investment earnings off of it. No one allows them to spend anything. They have no mechanism to go to the board and say, I really need this thing, or I need this position funded, or there's this practice within our programming that's not quite evidence-based but we strongly believe that it should be pursued to for the betterment of our program, whatever it might be. But if you can get your board to really buy into, we need to reinvest in ourselves and we need to be intentional about what that looks like in, by the way, a predictable way. So, I was able to convince the board that we can spend down, like an endowment, 3 percent of our average over the last five years. We can spend down 3 percent of our funding from this operating reserve to reinvest in ourselves, because I tell them, I don't need a new copy machine, I need an HR director. Okay. And no one's going to pay me for an HR director. So, if you can commit to helping me fund this HR director, I will find a way over the next three years to get this into our core budget.
And so, how do you push the finance committee and get buy-in from the board to like reinvest in some of these strategic moves on your own rather than simply if it's not in the budget, we can't spend it. Meanwhile, we're just like collecting and hoarding money with no real plan. That conversation is important not just internally, but also externally with your funders and people you might be writing grants too. So…
Rachel: Yeah. Well, that's a really great place to kind of wrap us up. And I think what I want to do before because we've got like nine minutes left. We had so much to cover. And I wanted to remind folks that I did create kind of based on some of the discussion questions some little like markers for yourself. This is just as an introduction to some of this work that you might be doing in your organizations. We do have that workbook that I dropped in the chat. I'm curious to hear, kind of after hearing some of this conversation, where you feel your organization is at. And I don't have a formal poll to launch. I'm just curious at a one, two, or three in the chat box. Like, how do you feel, kind of what do you feel applies best to your organization regarding your financial readiness? You're a one, you're like set up, ready to go, you feel really strong. You're a two, maybe you have some work to do. Or three, maybe you're just starting and you're realizing like, oh, like I'm at like a baseline here and I need to kind of maybe apply some of the lessons we just learned.
Tosha: Hm-mmm.
Rachel: Awesome. Yes, definitely seeing some folks in twos. We've got some threes. Yeah, one here. That's great to hear, Barbara. Some threes as well. So I do have this workbook available for you. This is a place where you can kind of jot down some notes and I just kind of indicated a couple of things that might've come up in our conversation to give you a head start on maybe where you need to address some areas of growth and maybe where your organization is actually doing really well. And I'll drop that link in the chat as well. So folks can spend a little time doing that. This is your personal document. No one will have access to this unless you want to share it with leadership or invite that conversation to kind of open up if you are a member of leadership yourself.
And then kind of, I want to take a quick second. We have a couple of questions that came that I want to make sure we address. And if we don't get to any before the end of our program, I'll make sure to follow up in an email with this. But let's see. Nancy was curious, what are the important questions to think about before asking for additional dollars or deciding to say yes for a grant? Is there like just one question we should ask ourselves?
Tosha: If you don't already get an audit, will this trigger an audit? Like what are the additional compliance requirements that this new grant might trigger? Because I've seen organizations that are not required to get an audit. They say yes to a $20,000 grant only to find out that it now triggers a $20,000 a year expense for an audit.
Rachel: Yup. Okay. That's a great one to just, yup, keep on our…
Tosha: Super simple.
Rachel: Yeah.
Tosha: I have many other questions. I always have all the questions.
Rachel: No, but that's a good like, just baseline one to start with. Corey asked what dollar amounts or percentages would be ideal for the reserves? I think we talked about that 25 percent. That's kind of the same thing we're talking about here, right?
Tosha: Yeah. So, the United Way looks for 25 to 75 percent of your annual budget is sitting in operating reserves. And there's different formulas for that, depending on the United Way has their own specific formula, Better Business Bureaus. Some people will eliminate certain expenses, so the formulas are a little muddy, depending on which funder specifically you're talking about. Yeah. So, 25 to 75 percent typically is what these charity watchdogs require.
Rachel: Got it. And then Jessica was wondering, do you create a full budget for each new funding source? I mean, yeah, I'll leave that question as is. So, oh yeah. And then Corey asked, could you link to that United Way? Is there any like, yeah, somewhere where folks can go back to and…
Tosha: Let me see if I can find it really quickly. I am specifically referring to the St. Louis United Way quality standards, and if I could find a quick…
Rachel: I can always follow up with it and the resources.
Tosha: As I'm trying to Google, but it is called the quality standards and I am trying to find like a quick link for it, but if I find it, I would drop it in here.
Rachel: Yeah. And okay. So, I see this question again, which I also wanted to ask Tosha again before we get to the end. Do you offer these services to nonprofit organizations? How could they connect with you if they are interested in receiving access to some of these services?
Tosha: So I'm actually working on…I don't have it available yet. We're kind of in the final stages of kind of a design, kind of a whitepaper, if you will, with a lot of the principles. It's kind of a blueprint of things mostly financial but not necessarily financial that our most successful clients have in some ways implemented, whether it's specific KPIs. And again, I mentioned earlier, ok great. So, Queen put the St. Louis United Way thing in there. Great.
Rachel: Thanks Annie.
Tosha: So, I'm putting together kind of a blueprint of the kind of key principles that are organizations that are most successful and financially sustainable from our criteria, and it does include some of the ratios. But again, like some of these ratios don't make sense for every organization across the board. One organization might need this and one organization might need that. So, there's really not a blanket set of like KPIs. But anyway, we're putting this whitepaper together that essentially summarizes, I think it's like 18 different principles for kind of best practices for the clients that we've worked with over so many years. And we're hopefully going to have that available. You can go to our website, www.thecharitycfo.com and subscribe to our newsletter. Once that's out, I'm sure I'll be putting that out there and you all can certainly download it. It has examples of formulas and other considerations that you could have.
But typically, how it works, we just offer our advisory service as part of our ongoing relationship with clients. So we essentially function as a fractional CFO for our clients, and we do this work in assessments with our clients. So, initially, we will go in and do some of the initial assessment and just get things stable. I call it the triage department, the transition over to working with us and get everything stable. And then once we get up and running, we really start talking about some financial goal setting and some planning there, and that's also very individualized, depending on the organization. Some people need a lot more help and support. Some are a little further down the line. But that's the work that we offer with our ongoing services. I don't offer any sort of one off consulting services.
Got it. That totally makes sense. Great. Well, I dropped your website in the chat to for folks that are interested in learning more. Great. I saw you got the link. We are just about at the top of the hour. We are jam-packed with so many different ideas here, and I know that I'd love to hear from folks what they thought of the program. I also have a special link tied to today's webinar. For folks that are interested in exploring Instrumentl and seeing what grants we have available in there, you can click the link. There's also the link to our feedback form. That's how you can enter to win some coffees or whatever nonprofit fuel you use for the office. I would love to hear from you all and enter you to win this special prize.
As a reminder, we have some upcoming events coming up. I'll be out for a bit. This is actually my last week before maternity leave. So, my colleague, Nia, will be taking on some of the events and community work for the next few months. But she's going to be running our How to Find a Good Fit Funder Program next or actually the first week of October. And then we've got our grant chats coming up. So, we'd love to see you all there. Thanks, Annie. I appreciate that. We're getting down to the wire at 37 weeks. So fingers crossed he stays in a little bit longer. And I just want to thank Tosha again for her expertise. You're such a wealth of knowledge. No pun intended.
Tosha: That’s great.
I'm just glad we had an opportunity to have this conversation. Thank you.
.svg)
%201.png)
