Financial Health Matters!

Financial health is about more than spreadsheets, bank statements, headaches and heart aches. It extends beyond the CFO’s or bookkeeper’s office and includes honest, direct conversations about money that build trust. Carol Cantwell, founder of Fun with Financials believes financial health is attainable – even in these times – and she believes organizations can have fun while pursuing financial sustainability.

Wanting to provide our readers with new insights into financial health and management we asked her questions that we hope will help you in your role as a board member, finance officer, executive director or donor.

Saad & Shaw:  Carol, what do you look for as indicators of organizational health when you review the financials of a non-profit organization?

Cantwell:  The main thing I look at is the amount of Unrestricted Net Assets on the balance sheet. Unrestricted Net Assets is just the technical name for reserves. A lot of nonprofits will set up a separate bank account and call that their “reserve fund” or “board reserves.” But, if you owe money from taking out a loan, for example, then some of the funds in those bank accounts may have a claim on them. Looking at Unrestricted Net Assets takes that into account so gives a better picture of financial health. Unrestricted Net Assets also excludes grant funds that are meant to be spent in a future time period [also called Temporarily Restricted Net Assets] so it really is an indicator of how much cushion you have if your budget doesn’t work out as planned. At this point in the economic cycle, I’d say any group that has Unrestricted Net Assets equal to between 2-3 months worth of their expenses has been managing their funds well.

Saad & Shaw:  Based on your experience, what are the biggest challenges currently facing non-profits?

Cantwell:  The biggest challenges are funding squeeze, funding squeeze, and funding squeeze. Endowed foundations are still seeing decreases in their payout levels because of the stock market downturn in 2008-2009. Government funding at all levels is being cut. So even groups that started out with very healthy reserves 3 years ago have had to use them to maintain their budgets. And those that didn’t have reserves have had to make very painful cut backs in salaries and staffing.

Saad & Shaw:  What suggestions would you share with our readers regarding how to best address these challenges, or at least minimize their impact?

Cantwell:  In the short-term, individual donors, despite the tough economy, are still holding up well. That’s not to say there haven’t been decreases but individual donors tend to be loyal. This is definitely a time when you want to make sure that you are saying thank you for that loyalty and staying in regular touch with your donors. For those organizations that still have 3 months or more of reserves, I’d say this is the time to be using those funds to maintain your staffing and programs. Being effective during this downturn will leave you in a strong position when funding recovers in the future.

For the long-term, and by that I mean post-2013, I’d advise organizations to try to rebuild their reserves or build them for the first time. That way, you’ll have more stability and flexibility when the next downturn comes.

Saad & Shaw:  What are the top three things board members should focus on to help ensure the financial health of the organizations they serve?Cantwell:  At Fun with Financials, I focus on 3 Keys to Financial Health. The first is: don’t borrow from your future. What I mean by that is make sure you plan to spend your grant funds over their full time period. Even if you get a general operating grant that you can spend in one or two months, if it’s a one year grant, try to plan to spend it over a year’s time.

The second key is: build reserves in good times so you can use them in hard times. By good times, I mean periods when funding is increasing. During 2004-2008, many private foundation payouts were growing so for organizations that are primarily foundation funded that was the time to build up reserves. Then you are able to absorb deficits during downturns in funding like we’re in now.

The third key is that your budget is your plan for not borrowing from your future and managing your reserves. Many organizations just think of their budget as a one-year spending plan. But board members especially need to think of the annual budget as part of a larger plan to build financial health. If you need to grow your reserves, then you need to plan for a surplus in your budget. If you’ve got reserves to use, then you can plan for a deficit budget. Obviously, you can’t run a deficit budget every year so you need to plan carefully.

There are downloadable files on my website that helps board members project their reserves and think about their budgets. On this page there is a spreadsheet called “Cashflow Spreadsheet” that can be downloaded, and there is a pdf file called “Monthly General Ledger Review.” Your readers can link to these and download for their use.

Saad & Shaw:  What is your definition of “financial health” or a “financial health framework” for non-profit organizations and institutions?

Cantwell:  Most nonprofits are trying to create some sort of change in society or respond to a need. Most times the change or need is going to take a long time to address. So we have these big visions that will take many years but then when it comes to finances we often only think in a one-year time frame when we do an annual budget. I want organizations to be around for the long haul. That means thinking and planning with a longer horizon.

So in addition to the Three Keys to Financial Health, which is the “how” of financial health, I’d say that the “why” of a financial health framework is to build more stability to ride out the ups and downs of funding effectively. And most importantly, financial health also brings the flexibility and independence to fund the work that’s most important to your mission and not just what’s most important to funders at the moment. So it really allows organizations to move from a place of fear and crisis to a more powerful position of strength and rootedness in your core values.

Saad & Shaw:  Funders and donors are encouraging non-profit organizations and institutions to increase their collaborations and to “work collaboratively.” What guidance can you offer our readers in the area of collaborations and fundraising? How is financial information shared within collaboration? Are their things to look out for when budgeting for collaboration?

Cantwell:  My first response is that the collaborations should be genuine and organic. If they are just about pleasing a funder or getting access to money, that’s usually a recipe for disaster. But if it is a collaboration that you would do anyway, then I’d say to make sure you have an open culture around finances within your organization first. Does everyone on your own board and staff understand your financial reports and budget?

Once you have your house in order, then you want to work with partners that also have an open culture. You don’t necessarily need to share your financial reports with each other [although it’s not a bad idea either], but you do need to understand what each partner needs financially from the collaboration. For one partner this might be a very high priority for their funding strategy and another may be willing to walk away if there are too many funder hoops. So you want to be clear about that up front.

Also, if one organization will be the lead in terms of accepting the funds and then re-granting to the other partners, then you need to discuss up front how that role will be compensated since they are taking on additional administrative work and legal liability. Finally, make sure to budget enough to compensate everyone for the time it takes to really build communication in the collaboration. You don’t want to skimp on face-to-face meeting time, which is so important so building a lasting relationship.

Saad & Shaw:  What guidance can you offer our readers regarding budgeting and their financials and how these tie to (and often impact) fundraising in general?

Cantwell:  In many organizations, the budget process begins with the staff essentially deciding how much they want to spend. Then, they plug in an income figure to match that level of spending and at the end of the process ask the board to sign off on that balanced budget. I think the process should be flipped on its head.

The board should have their budget discussion early in the last quarter of the year. They should be talking about the current level of reserves and whether the upcoming budget should plan for a surplus to grow reserves or a deficit because you have enough reserves to spend some. Then the staff needs to figure out what a realistic plan is for revenue. Once you know how much revenue you can realistically bring in and you know how much of a surplus you need to generate or a deficit you can handle, you know how much you can spend. That’s a good budget process.

The difference between a budget and a fundraising plan is that the fundraising plan should have a lot more revenue in it than the budget. You want your budget to be what you can mostly count on. That doesn’t mean that there are no unknowns in your budget but you do want to be conservative with your assumptions. The fundraising plan is the place to push and stretch yourselves to do more so you can not only make the budget but beat it!

Saad & Shaw:  What about proposals? What should our readers think about when creating budgets for inclusion in funding proposals?

Cantwell:  In terms of budgeting for proposals, I wish funders would stop asking for budgets in the first place. I know that’s a radical thing to say but I really believe it. But given that funders do ask for budgets, most times you do need to give them a balanced budget because that’s what they’re used to seeing. So you will have to make some adjustments to your internal budget’s revenue assumptions to reflect that.

Your readers should know that I just wrote a blog post about this, so they can learn more about my thoughts on why funders should stop asking for budgets.

Saad & Shaw:  FUN with Financials. That’s a great name for your business. Please share with our readers your perspective on “fun.” Tell us a little about yourself, what motivates your work, and one fun thing from your career.

Cantwell:  I can’t take credit for the name Fun with Financials. I was actually named by one of my clients, Jobs with Justice. They said I really did make it Fun with Financials and the name stuck. I think fun is essential especially for those of us who are doing social change work. It’s often hard work and the change can be slow in coming. I see fun as a way of combating the fatigue that can set in. So I do take my fun very seriously!

I have a very clear vision of the kind of just and equitable world I’d like to live in. And nonprofits are often leading in creating that world. So it’s very motivating for me to support organizations that I care about get to a place of financial health where their work can be more effective with less stress and more fun.

Aside from the many baseball games that I get my clients to go to with me, the most fun thing from my career is seeing organizations that I’ve helped using these tools with their partners and allies. It’s great to see Fun with Financials become a community effort.

Saad & Shaw:  Thank you Carol! Continue to have Fun with Financials!