Turnabout

An extreme makeover for ministry finances.

Ron Mattocks | posted 12/04/2009

During the past 30 years I have observed and participated in a seemingly endless parade of budget expansions and contractions in dozens of ministries and nonprofits. Not unlike my personal weight control challenges, they are always gaining or losing but rarely stable. The expansions are heady stuff, followed by contractions that deplete net gains, destroy morale, and cause misery for employees who find themselves unemployed as a result of retrenchments.

Is financial instability inevitable for nonprofits? Must we accept the endless parade of budget expansions and contractions as essential to nonprofit ministry? Or is there another way, a higher ground that reduces budget volatility and builds long-term financial sustainability?

If you have ever purchased a house, you no doubt remember signing an onerous stack of papers at the sale's close. Buried in that stack was information assessing the flood plane for the property. You may remember that your house is in a 40-year flood plane, or better yet, in a 100-year flood plane. If you are in the 100-year flood plane, you are likely to experience flooding only once in 100 years during the rarest of storms. This does not mean you should play the odds and totally ignore the possibility of flooding, because that flood could happen this year, or perhaps not for another 99 years. Statistics have no memory, so there is no guarantee that these catastrophic storms will be evenly spaced every 100 years. If, however, your house is in a 20-year flood plane, you should be much more concerned about flooding.

The same concept should apply to budgeting. Budgeting is a risk management tool that prepares your ministry to survive all storms, including that big storm, like Hurricane Katrina, that may hit only once in 100 years. The obvious case in point is the current recession, which is far greater in magnitude than any recession since the Great Depression. Rare is the organization that anticipated the severe drops in investment values, real estate values, and donor contributions we have seen. Perhaps your ministry was conservative and planned for the 40-year storm but not for the 80-year storm.

Unfortunately, too few ministries prepare even for the 20-year storm. The endless parade of budget contractions and expansions is the result of short-term planning. In fact, prior to the current recession, one in three nonprofits operated in perpetual financial distress, a pattern that had been stable for over two decades. Their expansions showed great zeal to invest every last dollar in current ministry with little regard for building long-term sustainability, leaving them lurching from one financial crisis to another. For some, budgeting for the 100-year storm is seen as a lack of faith that misappropriates funds that could be spent on today's ministry. While the zeal to meet current needs is admirable, if not tempered, it will destabilize the ministry in the long run.

If your ministry has experienced its own endless parade of budget expansions and contractions, perhaps it is time for a turnabout. While budgets are typically managed on an annual cycle, with expansions and contractions focused on short-term survival, the turnabout is an extreme makeover that builds a new foundation for long-term financial sustainability.

The Financial Turnabout Plan

Review and modify or affirm your ministry's value proposition.

What is the primary value that your ministry delivers to constituents? How has the value proposition changed over time? Do your constituents articulate the value proposition the same way you do, or do they have different perceptions of value? The value proposition must be articulated in a way that resonates with donors and constituents. Confusion in this regard will negatively impact constituent loyalty and donor contributions.

Deal with the sacred cows that inhibit sustainability.

Rare is the organization that has not developed work-around alternatives to dealing with problematic sacred cows. Management and boards can readily identify the sacred cows but avoid the discomfort of dealing with them directly. A turnabout cannot succeed without a commitment to identify and deal with sacred cows for the ministry's long-term good.

Analyze patterns of behavior that have landed your organization in financial distress.

Every ministry exhibits a unique organizational culture, reinforced by patterns of behavior, some of them constructive, others destructive. Ministries that operate in perpetual financial distress typically exhibit destructive behaviors that perpetuate problems. The key to a successful turnabout is analyzing organizational behaviors that perpetuate financial distress, with a commitment to change.

Conduct an environmental assessment.

Sometimes financial distress is related to environmental changes. A ministry may have been successful for 100 years but struggles today because the demographics of its primary service market have changed significantly, resulting in increased or decreased demand for services. Anticipating environmental changes and adapting to meet new needs is essential to ministry viability and long-term sustainability.

Identify financial risk factors for the 20-year, 40-year, 60-year, and 80-year storms.

The endless parade of budget expansions and contractions is the result of short-term planning focused on the perceived downside risks for the next 12 months. The turnabout model identifies downside risks and, much like flood plane analysis, evaluates their likelihood in 20-year increments. For instance, in the current recession, we learned that charitable giving can drop by a much larger percentage than previously anticipated, most likely an 80-year economic storm. Armed with this knowledge, we can adjust reserve ratio requirements and annual net operating-budget requirements to reduce downside risks.

Evaluate your ability to survive an 80-year storm if it were to hit today.

We know that it will take years to prepare New Orleans for another Katrina. In the meantime, the city is vulnerable, but the Army Corps of Engineers is working quickly to remedy the situation. If your ministry does not have the reserves to weather the economic storm that may occur just once every 80 years, identify vulnerabilities and begin working toward a solution.

Determine the properly balanced revenue mix for long-term sustainability.

Donor largesse is a blessing, but fundraising is not the appropriate solution to every organizational challenge. Balance the mix of fee-for-service revenue with donor contributions for long-term sustainability.

Develop board policies defining key operational ratios for liquidity, reserves, and operating efficiencies.

If your ministry was using key operational ratios, they are most likely upside-down and in need of repair as a result of the recession. If you were not using such ratios, start now. Bring the board and management team together and develop agreement on key ratios, with the board establishing the policy and delegating implementation and management.

Develop a new 5-year business plan that rightly sizes the organization, positions it for long-term sustainability, and minimizes short-term budget expansions and contractions.

The turnabout plan is in essence an extreme makeover of a business plan with 5-year horizons in detail, and high-level goals for the 10-year horizon. Include 5- and 10-year financial pro forma with the plan that demonstrates the move toward stable long-term growth and sustainability.

Your new turnabout plan is a 5-year business plan that shifts the operating paradigm from survival-based annual budget expansions and contractions to a more stable pattern of sustainability and growth. For many, this will mean realigning board and management perspective, and reducing current expenditures to build long-term sustainability.

As Ecclesiastes 3 reminds us, "There is a time for everything, and a season for every activity under heaven … a time to plant and a time to uproot … a time to tear down and a time to build … a time to scatter stones and a time to gather them … a time to tear and a time to mend …."

Is this the time for your ministry to consider a turnabout?

Ron Mattocks is a management and governance consultant focused on helping nonprofits escape financial distress and build financial strength. He is author of The Zone of Insolvency: How Nonprofits Avoid Hidden Liabilities and Build Financial Strength. Visit MattocksConsulting.com/cla for additional resources, or contact him at Ron@MattocksConsulting.com.

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