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)

Once again, the Israeli nonprofit organization Magan David Adom (MDA) and it’s American supporting charity, American Friends of Magen David Adom (AFMDA), are in the news after all five members of AFMDA’s executive board resigned, stating that they “refuse to abdicate or compromise in any way our fiduciary duty to AFMDA and its donors.”

Second, which side is right or wrong is of secondary importance.  Regardless how the situation plays out in the near or distant future, organizations can learn RIGHT NOW from the very public debates raging between the American and Israeli arms.

Specifically, the core issues — defining roles, trust, and independence — are the same faced by all international organizations, and, as such, can provide a constructive case-study for nonprofits, their board members, and their donors.

(While I generally refrain from talking about specific groups so as to avoid accidentally tarnishing an organization’s reputation, in this case, after articles in the Forward, The Jewish Week and eJewish Philanthropy, I think it’s safe to say that the cat is out of the bag.)

1. DEFINING ROLES

The resigning board members argue that Israel’s MDA views AFMDA as purely a fundraising arm. – Forward

Let’s be very clear: establishing a “Friends of” Charity is not just about creating a PO Box in the United States. Rather, a “Friends of” Organization is about finding like-minded individuals that share a similar passion for a charity’s mission and believe that Charity X is the best way to address this particular issue.

Said somewhat differently, creating a supporting charity abroad is about empowering individuals outside of the organizational framework and arming them with the appropriate tools so they can promote your cause; hopefully, raising a heck-of-a-lot of money in the process.

The relationship a foreign charity has with its American Friends is similar to the relationship any nonprofit has with its Board Members.  This point is addressed most excellently in an articleby Hildy Gottlieb. The following short excerpt doesn’t do it justice:

Board Members and FriendRaising:

The point of engaging the community (which is really what FriendRaising is all about) is an engaged community…Friends will not let anything bad happen to your work. They will help in ways you never dreamed possible. They will want to see good things happen, and will work like the devil to be sure nothing bad happens.

Friends share all their gifts with the organization, and are thrilled that the organization sees value in those gifts! They give what they have, whatever that is – and yes, quite often, it is even money. But it is not only money. It is usually far more.

The only road to sustainability is to engage the community in your work, to turn that community into an army of friends achieving something amazing together, spreading the roots of ownership of your mission and vision throughout the community, so the community would not dream of letting that mission die.

When two sides do not agree on their particular roles there will undoubtedly be tension. It is best to address these issues early on so as to avoid them becoming a much larger issue in the future.

2. TRUST

The Israeli group has argued that AFMDA is holding a huge cache of money that donors believe is going directly and immediately to Israel, while in actuality is it waiting — at times, for years — for approval by the American body…Another factor contributing to the mistrust that some AFMDA officials harbored toward their Israeli counterparts is an ongoing criminal investigation in Israel against the CEO of MDA. – Forward

And, of course, a cornerstone for a good friendship is trust.  And the trust should flow in two directions:

• The American Friends should trust that the beneficiary (a.k.a. the foreign charity) is using the money wisely and responsibly to forward the common mission in the best way possible.
• The Foreign Charity should trust that its American Friends are supporting it — especially monetarily — in the best way possible.  This means that the foreign nonprofit trusts the methods used by the American charity to fundraise, hire staff, and publicize/market the organization etc.

If either of these trusts breakdown, a situation like what MDA is experiencing now is the inevitable result.

3. INDEPENDENCE (AND COMPLIANCE)

But on January 19, all five members of AFMDA’s executive committee resigned, warning that the renewed partnership could come at the heavy price of lost independence and possible abdication of the American group’s legal responsibilities as a charity certified in the United States. - Forward

…The leadership of Magen David Adom (MDA), and some of the members of AFMDA’s Board of Directors, do not appear to share our commitment to our roles as responsible and independent fiduciaries, exercising sound judgment in full compliance with the letter and spirit of American laws and donor expectations. – eJewishPhilanthropy

An American nonprofit’s need to be independent stems primarily from the I.R.S..

As such, foreign organizations looking to establish an American Friends of Organization in the States need to understand that the American charity must demonstrate control and financial accountability. If the U.S. nonprofit is thought to be a simple puppet of the foreign organization, the I.R.S. can remove tax-exempt status and/or levy fines.

Two key points from a previous post exemplify the level of control the U.S. Government is expecting:

• Grants should be reduced to a written agreement signed by both the charity and the grantee. In addition to requiring periodic reports, charities should perform routine, on-site audits of grantees.
• The I.R.S. insists that charities must demonstrate that it exercised an independent decision about the use of its donations and that the funds sent abroad further the charities’ own purposes.

It is important to note that the due diligence done by a “Friends Of” is not a reflection of distrust as mentioned above, rather its inherent responsibility to the government scrutinizing the charity and to its donors.

A foreign nonprofit looking to establish a “Friends of” charity in America must realize that it is not opening a branch or satellite, rather a separate entity.  If the parent organization cannot appreciate this distinction, a “Friends of” Organization  might not be the best solution for the charity; there are, after all, other types of entities that can help transfer donations abroad.

IN CONCLUSION

Let us not be naive and think that Magen David Adom is the only organization to have problems of control, independence, and fiduciary responsibility. Just the opposite, many international nonprofits have similar issues but will continue to avoid addressing them because they are “fortunate” enough not to be in the limelight. (And this, by the way, is the real danger, though, not the subject of this post.)

As I mentioned above, this piece isn’t about blame or deciding which side is right. As far as I’m concerned, both sides — and especially the charity’s beneficiaries — come out behind.

I heard Martin Brookes, CEO of New Philanthropy Capital in the UK, explain at a recent conference that he can only offer people the lessons he’s learned from the mistakes he has made.  It is my sincere hope — and perhaps the only silver lining in this whole mess — that other organizations take note of MDA’s recent struggles and learn from them.  (From my mouth to God’s ears.)

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, please refer all questions to qualified and licensed professionals. Read the full disclaimer.

Chana Mason was born in Colombia and grew up in South Florida. She has a degree in Theatrical Directing and Engineering from Dartmouth College. She has worked in management consulting, high school education, and high-tech. Since moving to Israel in 2003, she has been involved in a number of Israeli non-profits.

Recently, within a matter of months, I opened and then proceeded to close a amutah [Hebrew referring to a registered charity in Israel] here in Israel.  I wanted to open up a seminary [school focusing on religious studies] and, with the advisement of experts in the field, decided it would be best for the seminary to run under its own administrative body.  Unfortunately, we did not come to this understanding until late into the process of developing the seminary, which meant that we were rushed to register the amutah, file in the tax authorities, and open a bank account.  I learned many things in this process that perhaps can help others looking to start their own non-profit organizations.

1.  Work Through a Fiscal Sponsor

Though it can be an administrative hassle, I recommend working under the auspices of another charity until you have your organization strongly in order.  Opening up an amutah and all it comes with can cost up to 2000 shekels (around $550) and takes a lot of your energies away from creating a strong organization and getting to know how the various government bureaucracies work.

2.  Foundations for Success: A Good Lawyer & Accountant

Having a great accountant and lawyer make a huge difference.  They can explain the process along the way.  A smart accountant will prepare you ahead of time for tax issues you could have never imagined in your wildest dreams.  My accountant wanted to read every contract I signed and wanted to know about every person I had an interaction with in regards to the amutah.  He is incredibly sharp and honest and let me know what was legal and what was illegal but unnoticeable.  A good lawyer wont charge you for every little thing and will charge an honest fee for his work.  When opening a charity in Israel, a lawyer in mainly just a notary, so getting a notary you know for a small amount of money is a great place to save.

3.  Never Underestimate the Importance of Your Banker

I never thought that in Israel my bank would be my greatest ally and asset, but it truly has been.   In a process where the learning curve is steep, having good advisement and support means a great deal.

While having staff that is pleasure and helpful is a definite plus (maybe even a must), there were other aspects of the bank’s service that were important to my small non-profit: (1) explained the types of accounts available; (2) provided a minimal-hassle process for opening and closing the amutah’s bank account; (3) worked openly with my accountant; (4) negotiated an appropriate fee structure; and (5) agreed to meet at a convenient location (outside the bank) for the charity’s signatories to sign the paperwork.

4. Budgeting: Reduce Costs and Seek Advice

Make sure you have squeezed every shekel you can out of your budget.  Fundraising in this economic climate, especially for a novice like me, can turn out to be a disappointment.  Reducing costs to an absolute minimum can make a huge difference.  This is where getting advice from people in the know and having lots of people analyse and churn through your budget is also useful.  For my non-profit it is clear looking back that my fundraising expectations were too high and my budget was also too high.  We relied quite heavily on one main donor, who in the end could not afford to support the institution and we also budgeted to offer the best to our students.  It would have been better to offer lower salaries, smaller spaces and a smaller scale program at the beginning to create a safer budget.

5. Make the Tough Decisions Earlier Rather Than Later

We also saw that though many people were to be disappointed by our closing the amutah, it was better to close the organization as early as possible.  Otherwise higher debts would have been incurred over the long run.  Looking back, we are incredibly happy with our decision.  Accruing debt is no small matter and is counter to the mitzvah of tzedakah [charity] that we are aiming for when creating a non-profit institution.

Wishing all of us much success in working to improve the lives of people everywhere!

Chana Mason