Donors are using their business tactics and strategy to choose the charities and projects in which they get involved; an increasing trend that has received even more attention since Dan Pollotta’s TED talk.

So I thought it was fortuitous that I was invited to attend a conference for new financial start-ups, essentially a chance to listen to the concerns and foci of investors. After all, donors’ logic dictates that the same tactics should apply to both their for-profit and nonprofit investments.

After listening to the advice offered by the various speakers, I can say that opponents to the changing nonprofit landscape should stop bemoaning the ruining of the charitable sector by the business tactics of today’s “venture philanthropists.”  In addition to understanding donors, there is much to be learned from the for-profit sector.

Here are 9 tips offered to businesses at the conference that nonprofits should internalize, as well:  

Tip #1 – Outsource Less

To Businesses: “While it might be cheaper to outsource many back-office activities, having these menial tasks done in-house present a more established company to investors.”

Applications for Charities:

In my experience, there are two types of outsourcing for nonprofits: administrative and fundraising.  While administrative outsourcing or conglomerates can be a useful thing, fundraising can be tricky.

Outsourcing fundraising refers to the use of fiscal sponsors or intermediaries to raise funds.  Essentially, checks are being written to a name other than the intended charity.  While many factors can be used to judge the effectiveness of fiscal sponsors or the like, it has been argued that raising funds through another organization dilutes a charity’s name recognition and presents the organization as more amateurish.

As a matter of fact, many consultants and seasoned fundraisers will decide whether to establish an “American Friends” supporting charity in the United States based on this last criteria and not on any financial incentives.

Tip #2 – Voluntary Registration with the SEC

To Businesses: “While many firms do not need to register with the SEC [Security Exchange Commission] or other government watchdogs, it was suggested that voluntary registration can certainly show investors that a company takes itself seriously.”

Applications for Charities:

Whether in the States or in Israel, there are organizations that are either exempt from or can opt out of certain registration or reporting requirements.

One of the best examples of this, is houses of worship in the America, who are exempt from filing the dreaded 990.

In Israel, the two “main” certifications that a charity can receive are the Nihul Takin [Certificate of Proper Management] from the Registrar of Charities) and Seif 46 [tax-deductible status] from the Tax Authority.  While much can be said for not applying for tax-deductibility status (read my previous article), the extra filing to obtain the Nihul Takin seems to always be worth it as many institutional donors expect to see it and the government themselves views this certificate as the litmus test for proper management.

Tip #3 – Third-Party Verification

To Businesses: “Investors always feel better when a company has a third party checking their numbers. And yes, sometimes this costs money.  But do it anyway.”

Applications for Charities:

Charities have a few ways that they can verify their numbers: impact measurement and charity ratings.

Whether it’s business tactics or limited funding for the nonprofit sector, in general, the need for impact measurement has become clear (though the source of financing this research has inspired many an article).

Charity rating have been in existence for years, though here too the exact nature of the ratings is also a source a great debate.  The evolution of Charity Navigator, for example, is the perfect test case for this challenge.  With that said, many seem to agree that it helps to have someone’s stamp of approval — and there are more rating sites for charities to choose from every year.

(It is interesting to note that in Israel, there is only one organization that rates nonprofits, Middot, whose business model has Israeli charities paying for the evaluation.  Not only has this financing model not caught on but 2012 saw a big backlash to some of Middot’s joint initiatives with the government — the subject of another piece altogether).

Here too, with charities’ “mismanagement” of funds making the headlines every month, third-party verification is continually playing a more important role.

Tip #4 – Simplicity

To Businesses: “The more complicated your market strategy the harder it is to explain to investors.”

Application for Charities:

Where to start?!

With increased competition in the nonprofit world, it is critical for charities to distinguish themselves from other organizations and highlight their added-value.

• Internally, nonprofits and their employees must understand their mission, what Guy Kawasaki refers to as the company’s mantra.
• Externally, the nonprofit needs to ensure that all their programs and PR are sending the same messages.  A nonprofit engaged in mission creep or sending mixed signals presents a watered-down identity.

Tip #5 – Manage Risk

To Businesses: “We care about good risk managers.”

Applications for Charities:

In the for-profit world risk-taking is an understood part of doing business and an integral part of business strategy.  Navigating risk is much more important than avoiding risk — avoiding risk entirely robs a business venture of potential revenue streams.

In the nonprofit world, risk appears in a number of forms: programmatic risk, proper due diligence, and embezzlement, to name a few.  While the possible tools and tests available to donors and charities are too numerous to even begin to list, it boils down to one thing: a properly functioning board of directors.

A well-run board will not only help avoid most pitfalls, but it is also the first thing (and sometimes the only thing) that many donors inspect.  (Example: A Healthy Board Imbues Trust with Potential Donors.)

Tip #6 – Don’t Reinvent the Wheel

To Businesses: “You Don’t Need to Reinvent the Wheel.”

Applications for Charities:

New charities are formed every day based on the tenet that it can be done differently or better than previously before.  (Need a I mention, “innovation?”)

While proving uniqueness and value is critical, not every aspect of the business model needs to be one-of-a-kind.  Building on previous proven methodology is a great way to save money and time.

Tip #7 – Educate Investors

To Businesses: “Educate investors.”

Applications for Charities:

Take nothing for granted.

Donors don’t necessarily see the need, appreciate the subtleties, nor value organizational priorities. And they won’t unless an organization decides to explain it to them.  (This is why G-d invented  fundraisers and PR experts.)

An axiom in the nonprofit sector states that donors will only give when asked.  True.  Just as importantly: donors will give more when they understand.  

Tip #8 – Always Preserve Your Reputation

To Businesses: “Play by the rules. Your reputation is all you have.”

Application for Charities:

• Innovation is great…but in a controlled environment.  When a new project or donation has the potential to call into question the entire organization then it isn’t worth it. Stay far away.
• When Murphy’s Law rears its ugly head – whether as a scandal, foe pa, or a simple typo – respond quickly.  Don’t let others dictate the conversation surrounding your reputation.  (Example: No News is NOT Good News: What Went Wrong with Komen for the Cure.)

Tip #9 – The Buck Stops Here

To Businesses: “Due diligence questionnaires should be filled out by the CEO.”

Application for Charities:

Nothing exists in a vacuum.

In order for any new initiative or fundraising effort to succeed, it must have the support (and sometimes the active help) of the top brass.  Staff and volunteers look to the leaders as personal examples.  If it ain’t flowing from the top, it won’t get far.

CONCLUSION

Jim Collins said that “Great business corporations share more in common with great social sector organizations than they share with mediocre businesses.”

Instead of focusing of the differences between the two types of corporations, more attention should be given to the similarities.  And if donors are more business-thinking then so be it.  There is plenty to learn and apply from businesses.

Though, if we’re already quoting Collins then I’ll end off with this: “Social sector organizations increasingly look to business for leadership models and talent, yet I suspect we will find more true leadership in social sectors that the business sector.”

A little off the topic but I couldn’t resist.

Keep an open mind and tizku lemitzvot,

Shuey

Disclaimer:  This blog houses my personal opinions and is for informational purposes only — not advice. As charity laws can be quite complex and ever-changing, please refer all questions to qualified and licensed professionals.  Read the full disclaimer.

Photo courtesy of Ijiwaru Jimbo (Flickr)

“Numbers” by Grand Maitre

A new study reported that higher nonprofit overhead can lead to greater efficiency,  a direct contradiction to a common critique on the charitable sector.  Unfortunately, the actual details of the study aren’t impressive and leave me questioning the value of these surveys.  

Firstly, only 265 charities participated in the study. A small pool, indeed.

Secondly, even less profound is the difference between higher and lower overhead, a whopping 0.7% (11.5% vs. 10.8).

Are these the numbers that are going to persuade cynics that charities can invest in infrastructure?

More convincing than third-party studies are the internal measurements and financial narratives conducted by the organizations themselves.

Tizku Lemitzvot,

Shuey

EXPRESSDEPOSIT’s are a new feature to the site, offering 100 WORDS OR LESS on funding, finance, trends, and best practices relating to Israel’s global nonprofit sector.

Two recent articles by Stephen Donshik have crystallized why board members need to stay objective.

1. Bylaws sometimes allow for board members to receive remuneration for attending meetings.  Payments of any amount, however, erase the status of “volunteer,” essentially, destroying what the organization was hoping to achieve when it recruited this individual.  
2. Additionally, a board member can potentially win contracts from the organization in which he serves. However, this person is then tasked with critiquing his own work, a near-impossibility.

Even with the best of intentions, losing objectivity weakens the board’s ability to accomplish its primary task of governance.

Tizku Lemitzvot,

Shuey

EXPRESSDEPOSIT’s are a new feature to the site, offering 100 WORDS OR LESS on funding, finance, trends, and best practices relating to Israel’s global nonprofit sector.

Photo courtesy of Huskyte77 (Flickr)

The following is a “nice” story.  An example of a charity’s CEO showing fiscal responsibility and financial leadership.  It is the kind of story we all-to-often don’t hear about as the media chooses to focus more on misleading reports about the lack of financial know-how in nonprofit organizations rather than on organizations that “get it.”

Recently, I had the pleasure of getting together with the aforementioned strategic CEO for coffee.

Two year ago, this female colleague applied for an Executive Director (ED) position at a particular charity knowing that the organization was facing a 500 thousand shekel (approximately $130 thousand) deficit. After about nine months on the job, the nonprofit was back on track and on the road to a surplus for the following year.

What was this ED’s technique and how could other nonprofits benefit from her experience?  

To put things in perspective, the organization’s budget was 1.5m shekel or $385k. This means that the impending deficit stood at approximately 30% of the charity’s budget. Yikes.

This ED’s financial challenge was twofold:

1. Entering the position at the beginning of the fourth quarter, she first had to make sure the organization finished the year without a deficit.
2. In the slightly longer term, she needed to return the charity to sustainability.

I asked this ED to delineate on some of the key decisions that helped get the organization back on track and that might be of assistance  to nonprofits facing a similar budget crisis:

1) A Deficit Isn’t a Temporary Problem

Credit of any sort is only a band-aid that doesn’t address the source of the budget problem. Budget problems require budget solutions – expenditures must be adjusted for reduced income.   Even meeting next year’s budget does not solve a current year’s cash crunch.  Expenses need to be cut, even if only temporarily.

2) Cutting Staff is Sometimes the Hardest but Quickest Solution

There was no avoiding the fact that more than a third of the 1.5m shekel budget was comprised of salaries. With only four months left until the end of the fiscal year and facing a 500k shekel deficit, drastic action was required. The quickest way to address the organization’s insolvency problem was to reduce the staff, which it did,shrinking to a staff of two from a staff of five.  The hope was that the reduction would be temporary until the charity once again stabilized the budget.

3) Get the Board on Board

The director was quite explicit that she couldn’t have pulled off the recovery by herself; the board of director’s support was critical. The board was very aware of the precarious financial state of the charity and was looking for a CEO that was just as self-aware, willing to make the hard choices.  The board then supported the director 100% during the recovery period.

4) Be Patient When Re-Hiring Staff

The director made the decision to rehire back the staff to their original jobs only after (1) all debts were covered (2) funds for the reinstated budget were promised and (3) there were no cashflow problems in the horizon. (And in case you’re wondering, it has been seven months since the re-hiring and there have been no additional cashflow glitches.)

5) Government Grants Might Be Good for the Budget but are Bad for Cashflow

As of my coffee conversation, this charity had yet to accept any government grants. While secure in their funding (when an organization is accepted, of course), Israeli government grants arrive only after expenditures have been made and can wreak havoc for cashflow (see previous post, Israeli Government Grants: The Broken Promised Land). The CEO made the decision that having a more stable cashflow was better than extra padding for the budget. A serious consideration for charities with budgets below the 2 million shekel mark.

6) Understand the Benefits and Limitations of Funding Sources

To prevent future budget and cashflow problems, this director rethought the organization’s funding sources.  Specifically, in the future to rely more on smaller local (Israeli) funders and less on restricted funds.   While this approach diversified the sheer number of donors, making the organization less in danger should a supporter choose to pull out, the fundraising process was more labor intensive.  On the other hand, a more local approach allowed the organization to consider — and secure — in-kind donations, a source that had yet to be utilized.  It should be noted that the charity is a grassroots organization and this local-donor-approach appealed very much to its inherent character.

7) Prestige Can be Just as Important as Cash

The organization didn’t drop foreign grants altogether.  It was more strategic about whom it approached and secured a very well-known foundation grant.  More important that the money was the prestige associated with getting a grant from this particular foundation.  Simply receiving the grant opened doors with local foundations.  For this charity it was a double-win (money and connections) that made the pursuit of this foreign grant worth the effort.

While the next two items weren’t used to help this organization climb out of the hole, the director did tell me that these tips are critical to helping the charity stay on-track:

8) Create Two Budgets

Hope for the best but plan for the worst, or more accurately, the less-than-best.  The first plan reflects a fully funded budget and the full execution of the nonprofit’s activities.  The second plan reflects more modest expenditure should promised funds not materialize.  Essentially, this director was putting into practice what the Nonprofit Assistance Fund refers to as a Rolling Financial Projection (Paragraph 1.2).

9) Prepare Early

At the time of this meeting in early November, this CEO had more than 70% of the following year’s budget promised.  While this is a tad early, this is certainly the right thinking.  No organization wants to be caught fundraising to cover the current year’s expenses, ideally  not past the first quarter and most definitely not passed the second quarter.  Otherwise, the charity is forced to focus on immediate needs and incapable of developing a more long-term financial strategy.

While there is certainly no one-size-fits-all solution for financial management, these tips certainly strike me as a skeleton key capable of opening most doors.

Tizku Lemitzvot,

Shuey

Disclaimer:  This blog houses my personal opinions and is for informational purposes only — not advice. As charity laws can be quite complex and ever-changing, please refer all questions to qualified and licensed professionals.  Read the full disclaimer.

Photo courtesy of OneCog2Many (Flickr)

In mid-October of this year, Israel’s Registrar of Charities issued “10 Golden Rules for Donors” (Hebrew).  While the document is meant as a guideline for  individuals, it holds immense value for the Israel’s charities, as well.

Here’s why:

Governments equate the tax-deductible rebate on donations to a donation by the government (via the tax authority) to the nonprofit sector as a whole.  In essence, the government views itself as a donor.  Israeli Charities, or amutot, can be sure that Israel’s Rasham Ha’amutot (Registrar of Charities), as an extension of the government, will be heeding its own advice when it vets charities for compliance.

Below are The 10 Golden Rules (in English) and its implications for nonprofits operating in Israel.  

THE 10 GOLDEN RULES FOR DONORS

1) Check the status of the amutah

“Visit the Rasham‘s site (Hebrew) to see if the charity actually exists and it’s current status (current, erased, or in the process of involvement).”

Charities:

The above site lists the charity’s name, status, registered address, and status of Nihul Takin for current and upcoming year. The site also allows people to search by name.

So…

Check the page from time to time to ensure that what appears is accurate; what you see, the donors see.  This is otherwise known as Reputation Management 101.  (More about this in rule #3.)

Additionally, it is advisable to test-search your organization by inputting its partial name or nickname.  This is a great way to observe the competition or help choose a unique name when registering your charity.

2) Confirm that the charity has a Nihul Takin [Certificate of Proper Management]

“The Nihul Takin is a certification issued by the Rasham every year to charities that fulfill the reporting requirements as dictated by the Registrar. Please note that in years when a charity was audited by the Registrar, the Nihul Takin is also a good judge that the organization’s activities are sound. As this is not the case in most years, donors are recommended to carry out their own investigations.”

Charities:

Withholding an organization’s Nihul Takin status is the Registrar’s most powerful and effective tool in its arsenal.   Organizations seeking a government grant or contract must have this status.  Additionally, many foreign funders will also only give to nonprofits that have a Nihul Takin.  (See previous post, Defining an Amutah.)

In simpler terms, having a Nihul Takin lets donors know that an objective third party — in this case  the Registrar and/or its sub-contractors — has reviewed a nonprofit’s activities.

Furthermore, the above website lists the date that the Nihul Takin was granted, meaning that viewers will know if an organization submitted their forms on time or were delinquent.

It is important to note that only charities that have two years of financial reports are eligible for the Nihul Takin.  The above site, however, will not list “not eligible” rather “none.”  Young organizations should proactively warn their constituents so current and potential donors aren’t left wondering why “their” organization is lacking this important certificate.

3) Check the charity on the site Guidestar Israel

“Guidestar Israel contains information from the Rasham [official] and other sources [less official]. The site contains financial and narrative reports, certifications, summaries of activities, and other relevant information on a charity.”

Charities

Moving onto Reputation Management 201.

Has your organization verified that the material listed on Guidestar Israel is accurate and up-to-date?  Organizations can obtain a login password to update and supplement the material that appears on the Guidestar site, including adding text in English.

It is also possible to upload a link to a fundraising site so that impressed individuals can donate directly from Guidestar.  Has your organization availed itself of this function?

Has your organization uploaded its logo for brand recognition?

4) Ask the amutah for details about the purpose and destination of your donation

“Do not hesitate to ask the receiving charity for details or for documentation regarding the intended purpose of the donation. Some of this information can be found in the yearly Narritive Report that the charity submits to the Registrar or in the Board protocols [meeting minutes] pertaining to the charity’s goals for that year.”

Charity:

Does your organization make it easy for donors to navigate its website?  Perhaps, creating a unique “landing” page for the specific drive; don’t make it hard for your donors to find the answers to the questions you know they are asking.

In general, what was considered good practice a few years ago is now the norm. Organizations should expect that would-be funders will conduct their own investigations and act accordingly.

5) When receiving a request for a donation by telephone, clarify before giving

“In the case of receiving a request by telephone, you can certainly ask the caller to either wait or to call back later so that you can properly check the request via the organization’s website or other  means.”

Charities:

Continuing on the previous point: Has your organization equipped its telephone staff with the proper background information to make the ask seem legitimate and answer basic questions?

6) Avoid donating to temporary kupot tzedekah [donation boxes or pushkas]

“It is best to avoid putting donations in these boxes, unless it is in a permanent location or well kept and connected to a organization you know well. Donation boxes are likely targets for theft or fraud. Regardless of familiarity with a particular organization or donation-box locale, it is best never to give large gifts via these pushkas.”

Charities:

The Registrar is essentially telling donors that those nonprofits that have temporary collection plates are not as careful with their funds — or else they wouldn’t collect money in ways susceptible to theft or fraud!

After all, these boxes are not monitored 24/7.  Certainly in today’s day and age, organizations can think of more efficient and safer ways to collect funds.

7) Request a receipt from the recipient for your donation

“A receipt is an essential tool for internal and external monitoring of the integrity of the organization. By law, a charity must offer a receipt for any donation. The receipt should minimally include the name of the amutah, the amutah’s registration number, and amount of the donation.”

Charities:

This is really ABCs of Israel charity management. If your organization isn’t providing receipts for every type of donation, I strongly suggest the manageent of the charity read the Nihul Takin, Israel’s guide for proper management of nonprofits. [Click for Hebrew & English versions of the Nihul Takin.]

8) Plan your donations

“If you donate regularly, once a year, at least, you should plan out your donations. This planning should include the total amount you plan on donation for the upcoming year, including the purposes of said donations so you can come to an informed decision on where you might want to give. If you have personal information about the activities of a favorite charity, or you were and have been pleasantly impressed by this nonprofit’s activities, there is preference for a contribution to this organization after the aforementioned tests have been executed.”

Charities:

Listen up and listen well: Nonprofits that help their donors create such a plan — even one that includes donations to other charities — are providing a much-needed service and proving added value.  Such an organization is engaging and connecting to its donors in a much more intrinsic and personal manner than by simply receiving a check.  This type organization will be remembered by the donor for a long time to come.

On a more basic level, this is why a nonprofit organization must invest in its branding. Does your charity clearly state its goal and how it plans to accomplish said goals? Do you make it easy for donors to understand how you fit into the social-service stratosphere?  Has your organization focused on causation to prove it is worthiness?

9) When necessary, view the charity’s file at the Registrar or request a copy of it on CD

“When necessary you can request to view an organization’s file at the office of the Registrar or to request a CD copy to be mailed to you, for a fee.”

Charities:

There is always a paper-trail.  Almost everything filed is available.  The exceptions are  documents or sections-of-documents that relate to board members or staff on a personal level.  Nuff said.

10) Report an organization’s improper or illegal activity

“If you notice something that seems wrong or illegal about the organization, please contact the offices of the Registrar of Charities by email at: RashamA@justice.gov.il. It is important to note that public inquiries are an integral ingredient used by the Rasham Ha’amutot to monitor the conduct of nonprofits and, thus, to ensure that donations are used for their intended purposes.”

Charities:

Scoff at constituents at your own risk.  Moreover, recent scandals have shown that wrongdoing was first noticed by Friends Of charities, those tasked with financially supporting the organization!

The above point includes staff, as well.  A recent lecture quoted an international report that the primary source of fraud detection in charities are internal tips.

To quote popular culture: you can run but you can’t hide.

I join Israel’s Registrar of Charities in wishing that a smarter donor and a more transparent sector will hopefully lead to greater participation and support of Israel’s charities.

What do you think: Good Rules to Live By or Too Oppressive?

Tizku Lemitzvot,

Shuey

Disclaimer:  This blog houses my personal opinions and is for informational purposes only — not advice. As charity laws can be quite complex and ever-changing, please refer all questions to qualified and licensed professionals. Read the full disclaimer.

Photo: Courtesy of Timo Studios (Flickr)

The word fashla is Hebrew colloquial for “screw-up”. And yes, even your accountant, an Israeli charity’s best friend, can make a few.

As a banker I see this particular slip-up more often than you think. Here are two ways to avoid your accountant inadvertently putting your organization’s bank account in the red. 

PRELUDE

In Israel, the accountant fulfills a crucial role for the amutah [Israeli Charity].

It is your accountant who will point out pitfalls to avoid and best-practices to follow. Assuming you follow your accountant’s advice, s/he will defend your tax-deductible status from less-than-cooperative regulatory bodies. Additionally, many accounting firms also offer bookkeeping services, making them a one-stop-shop for all a charity’s needs.

For these reasons and more, many nonprofits in Israel will leave with their accountant a signed check book so that the s/he can pay relevant bills without having to “bother” the nonprofit.

While efficient in theory — and assuming that an organization is aware of the risks and has obtained the agreement of all relevant stakeholders — there needs to be some ground rules before deciding to put this plan into action.

1. NOTIFY THE NONPROFIT BEFORE ANY PAYMENT

Generally, the accountant’s checkbook is used for payments to Mas Hachnasah [Tax Authority] and/or Bituach Leumi [National Insurance - think Social Security], payments that potentially differ each month and whose computations are done by the accountant. The idea is to take out the middle man — the organization — and just have the accountant pay the relevant government bodies directly. Like I said, efficient.

It can happen that a nonprofit will forget to incorporate the accountant’s checkbook into its cashflow management. The age old saying of “Out of sight, out of mind” comes to mind (no pun intended) when thinking of this scenario.

Letting an organization know of any upcoming payments can avoid these “unexpected” withdrawals. Government payments, in particular, are generally not a last-minute item and can be planned in advance. It probably isn’t a bad idea to have a working agreement regarding minimum “notify” times.

2. TO THINE OWN SELF BE TRUE

The other instance where accountants tend to write their own check is when they…[wait for it]…pay themselves.

Yep.

Similar to the government agencies above, monthly payments to the accountant are not always the same. Additionally, there is the added benefit of convenience for the accountant; after all, the checks are already signed and sitting in his office.

This scenario mimics the first in terms of “Out of sight, out of mind” but has the additional element of Conflict of Interest.

While I wouldn’t say that an accountant who writes him or herself a check without first notifying the client has immediately crossed any red lines, it might be indicative that this s/he isn’t a stickler for details — and a propensity for details is severely required by an accountant.

In addition to a general Conflict of Interest policy for the nonprofit, there should be an prearranged agreement of which beneficiaries will be paid from the accountant’s checkbook and which will be paid from the organization’s checkbook.

CONCLUSION

The ultimate fiscal responsibility lies with the organization. At the same time, accountants are too important to Israeli charities for there to be doubts or misgivings.

The relationship between accountant/bookkeeper and nonprofit organization is as much about expertise as it is about personalities. If these fashlas happen more than just a few times it might be a sign that this accountant is not a good match for the organization (or vice versa).

Tizku Lemitzvot,

Shuey

Disclaimer:  This blog houses my personal opinions and is for informational purposes only — not advice. As charity laws can be quite complex and ever-changing, please refer all questions to qualified and licensed professionals. Read the full disclaimer.

Photo Credit: “Empty Pockets” by Dan Moyle (Flickr)

This post is the second installment of a series on Financial Transparency, inspired by a lecture I gave on “Successfully Transmitting Financial Transparency.” 

The message being thrust at today’s charities is the need for transparency.  In conversations with organizations, however, I still sometimes hear doubts about the need for openness.  For decades, financial data has always been a closely guarded secret , available only to a charity’s priviledged inner circle – why change now?

In this post we will examine the reasons — both selfish and altruistic — why organizations should proactively pursue Financial Transparency and post relevant Financial Reports on their websites.

1. THE PRIMARY REASON FOR FINANCIAL TRANSPARENCY

Why be transparent? Why freely share your organization’s financial data?

Because your financial reports are already out there!

It’s the law.  Most modern countries have declared a minimum requirement of data that a nonprofit organizations must make accessible to the public.

Third party websites like Guidestar, exist in almost every modern country and post on the internet copies of financial reports that charities have submitted to the various government agencies.  For example, Guidestar-USA posts the 990 and Guidestar-Israel posts the audited Financial & Narrative Reports (דוחות כספיים ודוח מילולי) that Israeli charities need to submit.

In short, there is no sense in withholding that which is already divulged.

2. CONTROL THE ENVIRONMENT

In my experience, the best advocate of an organization is the charity itself.  Nonprofits shouldn’t let third-parties like Guidestar or Charity Navigator control the conversation about their financial health.

Nor should a charity post information only after an issue becomes public – in today’s social media age, after-the-fact is already too late.

A nonprofit expert, lawyer Gene Takagi, expressed as much in a recent phone conversation. He mentioned that the main interest of many organizations in Financial Transparency is to “mitigate against public criticism.”

So too, The Charities Review Council of Minnesota in their best practices for Financial Transparency writes that a charity should never give the public a chance to pass judgment; narratives should be posted along with Financial Reports.

By proactively posting Financial Reports and Narratives, the nonprofit has the opportunity to frame the information in both a truthful and positive way.  Furthermore, because the data is on the organization’s own site, it can add media, such as videos and graphs, to enrich its explanations, making Financial Transparency that much more digestible to its constituents.

Of course, if goes without saying, that the goal is then to have these “seekers of truth” become stakeholders of the organization.

Keeping your donors within your site is key to keeping them engaged with your organization. – First Giving

When a charity is proactively Financially Transparent, a donor isn’t forced to visit other websites.  Moreover, a strategically placed “donate now” or “subscribe to our newsletter” button(s) among financial data — which is limited if not impossible on third-party sites — allows would-be donors to convert their new-found trust into dollars for the nonprofit.

3. THE SECTOR MUST POLICE ITSELF

The previous two points looked at Financial Transparency as a tool for individual charities. In contrast, this next point sees Financial Transparency as integral for the nonprofit sector as a whole.

As stewards of public charity and as beneficiaries of government tax-breaks, the nonprofit sector is always under scrutiny.  More-so in today’s climate of changing business models and governments desperate to shrink their deficits, charities need to demonstrate that their budgets are being well-spent.

The key ingredient for proving that nonprofit organizations are worthy recipients of the public’s trust and money, is the Financial Transparency that radiates from an individual nonprofit.  A thriving sector brimming with healthy, efficient, and open organizations creates a stronger nonprofit sector, one in which all charities benefit.

So much so, that should a scandal erupt, the public will see it as the exception it is and not as the norm.

Unfortunately, we are not yet at this level, as author and researcher Professor Joel Fleishman succinctly notes:

“The greatest threat to the not-for-profit sector is the betrayal of public trust, the disappointment of public confidence. Virtually all knowledgeable observers of the not-for-profit scene believe that an overwhelming proportion of not-for-profits are honorably run…that admirable context, however, does not provide much protection to the sector when a sequence of highly publicized disgraceful not-for-profit misdeeds occurs.”

Advocate Alon Bachar, Director of Israel’s Corporations Authority, which oversees the Registrar of Charities, indirectly answered Professor Fleishman’s concerns in a speech he made at June’s Guidestar Israel conference.  In a previous post, I summarized Bachar’s words:

“Bachar, was quick to declare that transparency is the foundation of Israel’s nonprofit sector. Scandals, he continued, harm the sector as a whole. Thus, he concluded self interest dictates that the nonprofit sector should police itself.”

Thus, it falls to the members of the nonprofit sector themselves, those that have the most to lose and gain, to rise to the challenge and lay the foundations for trust.

While this Financial Transparency evolution will not be easy, the current trends point to one inevitable Darwinian conclusion: adapt or else.

Tizku Lemitzvot,

Shuey

The lecture was part of a seminar for Israeli nonprofits entitled, “Adjusting to the New Normal: Putting Transparency into Practice.” (Click here for a list of all the great content from the seminar, including slides and video clips.)

Disclaimer:  This blog houses my personal opinions and is for informational purposes only — not advice. As charity laws can be quite complex and ever-changing, please refer all questions to qualified and licensed professionals. Read the full disclaimer.

Photo Credit: “British Money & Magnifying Glass” by Images_of_Money (Flickr)

This past Thursday, June 14th, I had the privilege to co-organize (along with The EHL Consulting Group) a seminar for Israeli nonprofits entitled, “Adjusting to the New Normal: Putting Transparency into Practice.”

Even better, I had the opportunity to present on the topic, “Successfully Transmitting Financial Transparency.”  As always, I enjoy speaking as it provides me with an opportunity to research today’s hottest topics affecting the nonprofit sector.  Last week’s occasion to demystify the buzz words “Financial Transparency” was no exception.  (You can see a list of all the great content here.)

In practical terms, Financial Transparency is an organization’s ability to demonstrate from a monetary perspective (1) WHAT the charity is doing and (2) WHY the charity is doing it.  Moreover, the ability to clearly answer the above two questions is extremely relevant in today’s environment of increased competition and the need for organizations to differentiate themselves.

But somehow, the train has derailed.

• Today’s Transparency “norm” is for organizations to post some/all of its Financial Reports on its website and for Government-required reports to be available on third party websites.
• However, in the search for openness, we the supporters and professionals in the nonprofit sector have resigned ourselves to settling for “less.”
• In our pursuit for clarity and fairness, we have allowed ourselves to be bombarded by official financial reports – reports that Boards rarely understand, let alone donors.
• And ironically, these relentlessly scanned financial documents that are populating charity and watchdog sites promote openness but fail to advance comprehension.

We need a new tool to equip the masses with Financial Transparency. 

THE THREE “MUST-HAVE” REPORTS

Leaving aside the necessary filing required by the IRS or other relevant tax authorities, there are generally three types of Financial Reports:

• Annual Budget
• Income Statement
• Balance Statement

Annual Budget

The Annual Budget is prepared ahead of time and is, thus, not relevant for our discussion. It tells us what and how the organization will fund its mission in the upcoming year.

Income Statement

The Income Statement provides an income and expense report for the previous year. One of its key functions is to be compared to the Annual Budget.

Balance Statement

The Balance Statement provides a financial snapshot of the previous fiscal year and includes three sections that are best summed up as:

• ASSETS – What the organization HAS
  What are the assets? Are they liquid? Are there any restrictions?
• LIABILITIES – What the organization OWES
  What are the liabilities? When are they due? Long term or short term?
• NET ASSETS – What the organization is WORTH
  Are assets greater than liabilities? Are there surpluses? Are there restrictions in its use?

THE CHALLENGE – WATCHING OUT FOR FLAGS

There are two types of flags to watch out for, Yellow Flags, which signal short-term problems, and Red Flags, which signal long-term problems.

The Nonprofit Assistance (NA) Fund believes that most Boards miss the Red Flags because they are not trained to read the relevant data.

The Income Statement can show Yellow Flags. This report is more familiar with people and more easily understood. In essence, it is only a slightly more complex version of the same analysis that a household executes on its own monthly spending. However, because it only contains financial information from the previous year, it is incapable of signalling potentially larger problems that have been brewing over time nor the overall fiscal health of the nonprofit.

The Balance Sheet is where Boards can spot the Red Flags because this report contains both short-term and long-term data. But as the NA Fund points out, the Balance Sheet is harder to understand because it is based on accounting terminology and standards.

I would extrapolate that if it is difficult for a Board to understand Financial Reports, than for the “regular” donor all the more-so.

Thus, the documents that are readily available on websites, do not actually contribute to understanding the financial health of a charity.  In essence, today’s Financial Transparency is mostly superficial.

THE SOLUTION

It is therefore crucial for organizations that are looking to promote both internal and external Financial Transparency to provide their stakeholders with NARRATIVE EXPLANATIONS in conjunction with Financial Reports.

Readers need to understand the significance of the two financial reports and not just see the numbers.

When discussing the Income Statement, a narrative will:

• Relate to tracking progress and expense controls
• Alert the stakeholders of big variances
• Analyze deficits

It goes without saying that examining the Income Statement without access to the Annual Budget handicaps the reader, robbing him or her of a crucial point-of-reference.

When discussing the Balance Sheet, a narrative will:

• Demonstrate the “cumulative effect of the financial activity over time” (NA Fund)
• Signal financial health or problems by relating to either
  • Cash reserves vs.diminishing cash
  • Built-up assets vs. insufficient working capital
  • Unrestricted net assets vs. diversion of or too much restricted funds
  • Reasonable debt vs. creeping debt

CONCLUSION

In an age of “Venture Philanthropy” and “Philanthropic Equity,” it is helpful to equate nonprofit and for-profit corporations. Donors, much like their for-profit investor counterparts, require accurate financial data to adequately analyze the merit of financing a project. They need to understand the financial health and stability of the charities they support in order to balance current impact with long-term effectiveness; thereby, simultaneously answering the elephant in the room, “Will the organization I support now still exist in five years?”

Even Annual Reports (not to be confused with the Annual Budget) that are successful in demonstrating impact and mission, generally neglect to address the implications of the relevant Financial Reports — Programmatic Transparency is not Financial Transparency.

While organizations must decide for themselves the material that it appropriate to disseminate, limiting access to this information shouldn’t translate into avoiding the topic altogether.  Ignoring the need of stakeholders is a risk nonprofits can ill afford in today’s climate.

Similarly, while a strategy of financial secrecy and mystery might have been sufficient for the external and internal stakeholders of old, this limited transparency will fail to engage, retain, or recruit today’s supporters.

Tizku Lemitzvot,

Shuey

To be continued in my next post: 3 Reasons Why Nonprofits Should Proactively Pursue Financial Transparency

Disclaimer:  This blog houses my personal opinions and is for informational purposes only — not advice. As charity laws can be quite complex and ever-changing, please refer all questions to qualified and licensed professionals. Read the full disclaimer.

Photo Credit: “Look at All These Papers!” by Sonrisa Electrica

On August 2nd, the Jerusalem Web Professionals (JWP) hosted a lecture by appSTUDIO entitled, “Making Your Website Mobile in 2011.”  The lecture was rich in theory, strategy, and practical information for the designer and layman, alike.

The trends are clear: both current and potential donors are increasingly looking at the internet from their mobile devices.

• A recent report states that 25% of Americans say their doing most of the internet surfing on their mobile phones instead of a computer.
• Another poll shows that nearly 50% of mobile web users are unlikely to return to a website that they had trouble accessing from their phone & 57% are unlikely to recommend the site.

With the above in mind, at the event I interviewed some of the consultants there to hear the concerns of their nonprofit clients, as well as, the experts from appSTUDIO to learn the 5 questions every nonprofit should ask when considering a Mobile App:

1. What’s better for nonprofits: mobile site or App?
2. How should a nonprofit properly use an App?
3. How can a nonprofit receive donations through an App?
4. How much does developing an App cost?
5. What prep-work should a nonprofit do before approaching an App developer?

Problems viewing the embedded video? Click here to see it on YouTube.

Image courtesy of Little_Karen.

I spoke recently at the Kishor conference to Women Professionals on Raising Capital.  I really enjoyed the challenge of preparing for the talk as the subject was a business term not often used when working in the nonprofit sector.

When priming the presentation for the expected for-profit audience, I was surprised – though in retrospect I shouldn’t have been – by how much holds true when raising funds for either a nonprofit organization or a for-profit venture.

Moreover, after going over the slides I was amazed how easily I could replace “investor” with “donor” in most of the examples.  The fact that the session was attended by professionals from both sectors reinforced this belief.

(The most notable exception to the above is the definition of traction, which is not shared by for-profit and not-for-profit companies.)

Upon further analysis, I was able to gleam three live-or-die principles that span the charitable and capitalist sectors.  What follows are my presentation slides and these three takeaways.

CREATE A GOOD BUSINESS

When discussing how to raise capital in his book The Art of the Start, Guy Kawasaki quotes Arthur Rock, founder of Intel:

At a presentation I gave recently, the audience’s questions were all along the same lines: “How do I get in touch with venture capitalists?” “What percentage of the equity do I have to give them?” No one asked me how to build a business!

The success of every social and for-profit venture stems from the above quote — are you building a good business?  Questions that can steer a potential entrepreneur to the right path include:

• Are you building something worthwhile?
• Are you providing a worthwhile service? Is your product based on user’s needs or on your own?  Are you contributing to making the world a better place?
• If the answer to these questions is yes then the other building blocks must also be in place.
• What is the goal/purpose of the initiative?
• How will success be judged/measured?
• Is there a revenue model in place? (And yes, this is relevant for nonprofits, as well.)
• Have the right people been recruited to bring the project to fruition?

HONESTY TRULY IS THE BEST POLICY

Whether to donors, investors, oversight bodies, or to itself, organizations must maintain and promote honesty.  If you still doubt your mother’s advice, here’s another three that might convince you that honesty truly is the best policy:

• People interesting in supporting the project have been around and have heard most of the lies out there.  Don’t ever fool yourself into thinking you’ve found a “new” one.
• Never try to cover up lack of experience: all the great companies and entrepreneurs started at zero, just like you.
• By facing the tough questions, organizations can make the brave decisions to evolve and improve.

PURPOSEFUL DECISION MAKING

Ideas are easy to come by, but it’s the implementation that is difficult.

• Purposeful decision making is what gives tangible direction to intangible ideas.
• Additionally, donors, and the even government will have questions about decisions that a corporation has taken. When actions are deliberate, explaining oneself isn’t merely a chore but a chance to convert doubters into evangelists.
• With so many paths to choose — whether in marketing, raising funds, adopting technology, and a million other things  – intention and forethought allows us to navigate the myriad of choices available.

Incorporate these three principles and you have  the ingredients for making Guy Kawasaki’s words come true:

If you do succeed in building a business, either investors will be fighting to give you money or you won’t need their money.  Both are good problems to have.

Tizku Lemitzvot,

Shuey

Photo Credit:”Pile of Money” by Jody Klopp