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)

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)