Financial Literacy For Your C-Suite & Board

Tony MartignettiHello and welcome to Tony Martignetti Nonprofit Radio, big nonprofit ideas for the other 95%. I'm your aptly named host and the podfather of your favorite hebdomadal podcast. And don't I sound much better than even just last week? 99% back to normal. And I'm glad you're with us. I'd bear the pain of lenticulitis if I saw that you missed this week's show. Here's our associate producer Kate with what's coming.

Kate MartignettiHey Tony, we have financial literacy for your C-suite and board. Leadership that understands your numbers protects not only your nonprofit, it also protects the people filling those roles. 2 finance and audit pros walk us through 6 key metrics that anyone can understand and that reveal the true state of your financial standing. Dean Dalzell and Jerry Frick are from Veracity Pros on Tony's Take Two.

Tony MartignettiOklahoma City, anyone?

Kate MartignettiWe're sponsored by DonorBox. Outdated donation forms blocking your supporters' generosity? DonorBox. Fast, flexible, and friendly fundraising forms for your nonprofit. donorbox.org. And by Keela. Grow revenue, engage donors, and increase efficiency with Keela, the fundraiser's CRM. Visit keela.co to join the thousands of fundraisers using Keela to exceed their goals. Here is Financial Literacy for Your C-Suite and Board.

Tony MartignettiIt's a pleasure to welcome Dean Dalzell and Jerry Frick to Nonprofit Radio. Dean has almost 30 years of leadership in administration, accounting, and finance across nonprofits and for-profits. He is also an outsourced CFO at Veracity Pros. Jerry Frick is a finance professional with extensive experience in financial reporting, analysis, forecasting, budgeting, cash management, grant administration, and we may as well throw in auditing and internal controls. Jerry is also an outsourced CFO at Veracity Pros. The firm is at veracitypros.com. And Dean and Jerry are both on LinkedIn. Dean Dalzell, Jerry Frick, welcome to Nonprofit Radio.

Jerry FrickThank you. Glad to be here.

Dean DalzellThank you, Tony. Glad to be here.

Tony MartignettiI'm glad you are. Uh, the first thing I think of is Dean and Jerry, uh, Dean Martin, Jerry— you got to take this show on the road, the Martin and Lewis Show, change your last names and start doing movies together.

Dean DalzellDuly noted. I'm

Jerry Frickready. Where's, where's the casting call?

Tony MartignettiAbsolutely. Martin and Lewis, they did dozens of movies together, whatever. I don't know how many, but they were theaters. You should take this show on the road as Martin and Lewis.

Dean DalzellWe'll just have to figure out who the straight man is.

Tony MartignettiYes. Well, Dean, you'll have to make that sacrifice. That's got to be you. You're going to stay true to the original team. All right. So let's talk about some fiscal literacy, financial literacy. Maybe for board members specifically, but, you know, not necessarily. Could be for uninitiated or maybe unindoctrinated. I don't know. Other C-suite folks besides CFOs. You are both outsourced CFOs, so you're seeing a broad swath of nonprofits. Why do we all just— why do we all just get hung up on numbers? Why do we gloss over Financial, uh, financial statements, even simple balance sheets, audits. Why, why do we, why do we all get scared and frozen by these?

Dean DalzellI think that's a great question, Tony. I, and it's a lot that we're trying to help in what we've seen in working with different organizations, especially C-suites and leadership and boards of different nonprofit organizations, is they see the numbers, they gloss over, and they are happy that they got numbers, but they don't necessarily know what they mean.

Tony MartignettiSo they should— they hopefully they're happy, but they don't even know if they ought to be happy.

Dean DalzellExactly. And so it really gets down to their fiduciary responsibilities as a board, you know, duty of loyalty, the duty of care, the duty of obedience, but making sure they're fulfilling those fiduciary duties. And what we've seen both working with Veracity Pros and in our prior life is that there's really an opportunity to help The boards, and I'll— and Jerry can talk about this much more deeply than I can, but really help the boards assess what's going on, address what's going on, act, and then when necessary, applaud. And that's really what we try to help leadership folks and organizations do is how do you take those numbers? How do you understand those numbers, understand what they're telling us about where we are, where we're going, and how do we do that in an effective way instead of giving them Reams and reams of 6-point font with tiny numbers and decimal points.

Tony MartignettiYeah. And, you know, my fear is that when it comes time to review financials, you know, it's sort of done like 5 minutes before the meeting starts. People are flipping through, flipping through pages and, you know, that don't make any sense. They're definitely abrogating their duties to the organization, to your point, Dean. And to themselves. I mean, they need to protect themselves as board members as well as the organization. And then, but it's also, as you mentioned, it's also other C-suite leaders. I mean, we can't just all rely on the CFO to— we got to have some literacy amongst ourselves. No? Is that true, Jerry?

Jerry FrickIt's absolutely true what you're saying, Tony. And unfortunately, it's all too common in nonprofit organizations that the, you know, the financial reporting is done by the CFO and quite often only understood by the CFO. And that's really the broken link. And it's really not, you know, when you think of board compositions, of nonprofit organizations, they go out and recruit board members who are gonna identify with their mission and maybe have some specialties in the mission area. A nonprofit is lucky if they get one board member who can understand financials. And so you're right about, you know, just how quickly they get glossed over. Mm-hmm. And, you know, the board claps if they get a report, even though they don't understand it. They don't have any idea what it's saying. And that's really, The dilemma that, that we are trying to overcome with our clients is, is we want to get them reports that are not just jumbles of numbers that make no sense. We want them to see something that they can connect to and, and really understand the financial health of the organization. And also, how do those numbers connect to the mission delivery that, that organization is trying to fulfill? Right.

Tony MartignettiAll right, so, so let's dive in. So how do we start to make this, these statements, these numbers, uh, you know, less abstruse to people, more comprehensible, connect with them? Jerry, as you said, you know, how, how do we, how do we start to break this down so that it's not just one person or maybe 2 in the entire organization, including the board, that, that can make sense of these things?

Jerry FrickSo I think you use the term that I would use too. It's break it down.

Dean DalzellYep.

Jerry FrickWe've got to get away from thinking, you know, more data is better. Yeah. The data is there. The CFO is required to understand the data. And what everybody else needs to understand is what is the story that this data is telling us? So you have to break it down into the components that are really important. And, you know, when it comes to reporting those components to the board, less is more, in my opinion, you know. So don't— my experience, and I know Dean has had this experience too, if you provide a board financial reports that just have columns and columns of numbers, you're inviting them individually or collectively to go down rabbit trails that are just gonna waste time and accomplish nothing. So what you want to do is you want to summarize this information in, in a much more readable fashion.

Tony MartignettiLike a dashboard?

Jerry FrickA dashboard is perfect. We focus on dashboards and, and taking a balance sheet, as you said, and taking the income statement and, and summarize the numbers down to, you know, something much more readable. But then you, you can't just stop there. You've got to provide— and this is what the CFO's job and probably the executive director or CEO's job is— you've got to provide some analysis of what this is telling you. So that could involve narrative, it could involve charts and graphs, something more visual. And Dean, you want to speak to that a little bit too?

Tony MartignettiAll right, so We can go to the visual, but let's get to some key metrics because, and maybe visualizations may help. I'm not dismissing that. But, and this is perfect because you two are talking to the guy who took accounting for poets in college. So, I mean, all I can remember is assets equal liabilities plus owner's equity. I never understood how the 2 columns could come out to be equal. It just seemed like magic to me. It seemed like a bunch of lies and magic. I don't know how the 2 numbers The 2 columns were supposed to always equal, come out to be the same. To me, they sound opposite, assets and liabilities. But you don't have to explain that. You don't have to help me pass my college accounting course. But let's get to some like basic metrics. What are some, I don't know, 4 or 5 key numbers or key trends? There's not a specific number that leaders and board members Well,

Dean Dalzellthat's a, it's a great question. And I think, and you, you hit the nail on the head, Tony, is sometimes with some boards it's even an educational process on what a balance sheet is. What are assets? What are liabilities? What are net assets?

Tony MartignettiYeah.

Dean DalzellWhat are unrestricted net assets versus temporary restricted net assets? And then statement of activities and statement of cash flows. So we've even found before we even get to the ratios of doing an education and have it be a continuing education process for the boards just to help them read a financial statement. At a very basic level, mind you. But, but this helping them understand, you know, assets is what, what you own, and liabilities is what you owe, and net assets is what you're worth. And sometimes just the principles of that. And then once they have that base education, we'll start looking at things of like their current ratio, which is a pretty common— you take a look at your current assets against your current liabilities and assess where you're at. And typically we like to recommend to most organizations That, that current ratio be, be at least 2, that you have at least $2 of current assets to every dollar of current liabilities. That should give you at least some cushion, not a whole lot, mind you, but at least some cushion to weather any changes on a period-to-period basis is a great one.

Tony MartignettiOkay. Okay. So that's what'd you call it? The current ratio?

Dean DalzellCurrent ratio. Yep.

Tony MartignettiAssets to assets over liabilities, a ratio of assets to liabilities.

Dean DalzellCurrent assets, current liabilities. And when I say current assets, any assets that aren't held up like in buildings or any long-term investments or that type of thing, things that can be easily converted in the next—

Tony MartignettiLiquid. Have some, you know, like you can liquidate them within 2 weeks or a month or something like that.

Dean DalzellYeah, in a time of need.

Tony MartignettiNot a building, but, you know, I don't know, I can't think of an example, but okay. Something that you could— so that if your liabilities got worse, then— because you like to see a 2-to-1 assets, liquid assets to liabilities as a minimum.

Dean DalzellAs a

Jerry Frickminimum. Okay.

Dean DalzellAnd the current liabilities would be anything you have due in the next year. So that would be any typically in your accounts payable, any bills you have due immediately. And then also if you have a mortgage, any liabilities that you have over the next 12 months, or if you have a loan or other obligations that you have to others outside of your organization.

Jerry FrickAnd it's really important for the board to understand, if you don't have a good current ratio, if you don't have at least that 2 to 1, you know, what if it's 1 to 1?

Dean DalzellYeah.

Jerry FrickYou know, really what that is saying or what a board should interpret that to mean is we have no flexibility. You know, all of our assets are now spoken for Because of our liabilities. How do we operate this organization going forward? And how do we deliver any mission when we have no capability of investing any additional assets in programs?

Tony MartignettiYeah, yeah. 1 to 1 sounds treacherous.

Jerry FrickIt is treacherous.

Tony MartignettiOr less. I mean, it could, could be less than 1 too.

Jerry FrickOh, we've, we've absolutely had experiences with organizations who are less than 1. And it really can handcuff that organization from being able to sometimes even being able to operate for, for the long term. I mean, that's when we start to get into have the conversation about, can you sustain this? How long can you sustain this organization with this kind of financial picture?

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Tony MartignettiAll right, so that's great. The current ratio sounds critical. What's a— what's another valuable benchmark for, for, for leaders, leadership to, to be tracking?

Dean DalzellI think another timely one is days of calculating how many days of cash that you have on hand. And the reason I say timely is just in the matter of last week, Nonprofits who received federal funding were staring down the barrel of a federal government shutdown. And so some nonprofits, either whether if they're government funded or even not government funded, if you lose a major funder or your pipeline of funds is stopped because Congress is failing to act and approve a budget or approve continuing resolution, how many days of cash do you have on hand to continue those operations, to make payrolls, to pay your immediate bills? So that's again, taking a look at your liquid cash or things that could be easily converted to cash, and then taking a look at your expenses that you have and try and calculating an average daily expense.

Tony MartignettiAverage daily expense, right?

Dean DalzellYeah. And so you take a look at your total cash, you take a look at your average daily expense, uh, and then you come up with a number. And typically, depending on the organization, for most government-funded nonprofit organizations, we typically like to see 30 to 90 days of cash on hand. Meaning if there's all of a sudden a sudden stoppage, they can continue for another 1 to 3 months. For other nonprofit organizations, we typically like to see up to 180 days, so up to a 6-month. It can sometimes be difficult for government-funded because a lot of government-funded organizations are reimbursement-based. The government asks to spend the money and then you get the money back.

Tony MartignettiBut then What instance would it be where you wanted it to be more like 180 versus 30?

Jerry FrickWell, again, I think that then again, this is a great opportunity for the board to really think about what are our sources of revenue? What are the risks of losing some source of revenue? And therefore, you know, if the risks of a source of revenue either drying up or needing to change are high, then you would want to set a benchmark or a target for a greater number of days of cash on hand.

Tony MartignettiOkay.

Jerry FrickOr some, you know, some boards who want to, you know, just be more prudent and look to an unknown future, they, they may just want to say, hey, we want to set aside 6 months of operating cash in a reserve fund. So that if something does happen, we already have it. We don't have to worry. We, we can go on business as usual because we've created a rainy day fund if something has happened. But one thing I want to mention on this as well, Tony, is there are organizations, there are nonprofit organizations we've encountered who have too much cash. Mm-hmm. And the risk there is if you are going out to donors, private foundations, corporations, individuals, and continuing to solicit contributions from them, and they want to look at your financial performance before they make a decision, if they see that the organization is sitting on a whole lot of cash, the obvious question they're going to ask is, why do you need my money? You got all this cash in the bank. Why should I give you anything? You know, so there's a danger on the flip side too.

Tony MartignettiOkay. Okay, good. All right. So risk management, but operational management as well. All right. What a current ratio, days of cash. I love these, you know, let's identify like half a dozen or something. What's another— I'm not— it doesn't have to be 6, but, you know, Some decent numbers so that, so that people know, you know, all right, here's, here's the numbers that, that this board wants to track on a quarterly basis.

Jerry FrickAbsolutely.

Tony MartignettiAnd we, so we want to see not just the current but the trend also. So if we identify a problem with days of cash in, uh, in Q1 of, of '24, do we see a difference by Q2 or 3? You know, are we improving? So what else, what else besides these 2 metrics?

Jerry FrickSo another one that, um, Seldom gets looked at, but it needs to be looked at a lot more, is what we would call fundraising efficiency. So really what that is looking at, it's, it's taking the total amount, you know, choose a period of time and how much money did you raise through contributions, you know, etc., in that period of time, and what did it cost you internally to raise that? So if you raised $1 million in the last 6 months, that's great. What did you spend? If you spent $1 million to raise $1 million, you're not very efficient in your fundraising methods. So you really need to start to break that down and start finding out what are the different, you know, what are the different sources of revenue you're raising? How are you going about it? And, and break it down to what does it cost us to raise $1 of revenue? If it's, it's, if it's a dollar to dollar, something's not efficient. You know, you— Yeah. And there are different metrics that you can measure against, you know, and it depends. You know, if you're doing a fundraising event, for example, that's one of the most costly types of fundraising that nonprofits engage in. You're— the organization is lucky if it, if it makes 15 cents on the dollar. In other words, it may cost $0.85 for every dollar raised in a fundraising event. Whereas though it takes longer, it takes a longer period of time to solicit grants from private foundations, the return on the time spent is far greater. It may only be, you know, maybe $0.10 of expense for every dollar that you can be awarded in private foundation grants. So again, you've got to break it down and figure out, you know, the organization needs to understand where does it want to put its— the resources that it is committing to fundraising activities.

Tony MartignettiAnd this is commonly referred to, as you mentioned it in passing, Dean, as cost to raise a dollar. What does it cost us to raise a dollar? The, you know, there's a lot of confusion about, or uncertainty about what to include in the costs. So, you know, you mentioned grants, Jerry. So, you know, you have a grants researcher and writer. So his, her, or their, you know, direct cash compensation, all their benefits. Right. You know, that, that's fair to lump in. Absolutely. If I would say, you know, on individual fundraising, all the, all the major gift officers that you have, all their direct cash, all their comp usually is another 25%, 30%, maybe 35%, depending how generous you might be. So you include their cash and their compensation, their benefits. But then beyond that, you know, what's What, what's, what's fair game to include? That seems to be a lot of— it seems to be a lot of open discussion about what belongs in there.

Jerry FrickWhat— well, uh, I would be asking the organization, what are you spending on marketing and advertising, and where are you spending it? You know, are you doing direct solicitations via either the old traditional mailing solicitations, or are you using social media for doing solicitations? Are you meeting, you know, do you have gift officers who are meeting one-on-one with potential contributors? And what does that cost? You know, are you, are you buying meals? Are you, you know, do you have, are you spending any kind of money on donor relations, you know, gifts or any, any other, you know, what do you spend to acknowledge gifts and that sort of thing?

Tony MartignettiMm-hmm.

Jerry FrickAll of that needs to be considered. Yes, you're right.

Dean DalzellAnd a piece that I've seen excluded that I would recommend not excluded is just the administration, administrative infrastructure, because that fundraising department is gonna use the finance and accounting team, is gonna use the HR team, is gonna use the IT team. So I don't, although I don't like the term overhead, it's overhead, is making sure that your fundraising area, all the people that you mentioned, Tony, are also being attributed They can't exist in a vacuum. They use the organizational resources in order to get their job done as well. So while you have all the direct costs that Jerry had mentioned and the staffing costs, there's also an infrastructure cost just to be a part of the organization that should be attributed to that fundraising as well.

Tony MartignettiOkay, right. Proportionally?

Dean DalzellProportionally, absolutely.

Tony MartignettiRight. So, you know, finance, 20% of finance's time may be booking gifts. Let's say finance books it and there's not a data processor, you know, a data processing function in the fundraising team, but finance attributes 15% or 20% of its work to the work of fundraising. So 15% of that financial overhead, that finance team, like that. Is that right? Is that—

Dean DalzellYou're absolutely right. And that ensures, especially if you receive Grants, and even more specifically government grants, that ensures that you're not charging those finance costs, that 20%, to a grant that, that would, would absolutely be— it'd be a contract violation if you were charging some of those fundraising costs to a funding source that says, you know what, that's not allowable, you can't do that. So it's making sure that those costs are identified appropriately and proportionately. I like that term that you used. to each of the areas that finance or HR department serves.

Tony MartignettiOkay.

Jerry FrickAnd I think we can't forget some of those easily forgettable costs. You know, think about how does money move these days? It's moving electronically and through credit card transactions, and all of those have a cost. And again, those are often overlooked as part of your fundraising expense. You know, the cost to process all of those credit card gifts.

Tony MartignettiOkay. Yeah, fair, right? All the backend, whatever apps you subscribe to or platforms that are supporting you, whether it's Mailchimp on the mail side or, you know, GiveButter on the donation processing side or, you know, whatever. All right. All right. All right. So we got 3. Any— what other critical metrics?

Dean DalzellManagement and fundraising expense is another one we take a look at. This one can be sometimes controversial because I think there's different ways on assessing what— pardon me— what is appropriate and what's not appropriate. But that's really how much is the organization spending on management and administration? And we typically include fundraising in that overall versus how much is it spending on programs, spending on direct mission? And that really has a wide range, and it really depends on where the organization is at. So when I say wide range, at the low end, I would say 7 to 9%, the very low end. So that means out of every dollar, 7 to 9 cents is going to support finance or going to support management and administration and fundraising. Anything lower than that would indicate to that, you're probably not spending enough on your infrastructure. You might operate a little bit like that, but, but, but you— it's— it would be rickety.

Jerry FrickIt's not sustainable.

Dean DalzellYeah, absolutely. And, and then that can range all the way up to 40%. And depending on where the organization at, could be higher, especially if it's a new organization where you are spending on infrastructure to get it up and running. But once you approach 40% or 50%, then all of a sudden you're spending more or approaching to spend more on your management and administration than you're actually spending on the reason you're there is to achieve your mission and fulfill your vision. And the reason why I say it's a little bit controversial is some funders still today see the lower number, the better. That's not always the case for the reason I just spoke about. Yeah. But part of it, whether the number is right or not, it's more making sure the organization and its leadership know what their number is and where it's tracking. Worked with a client the other week where theirs is in the 30, which is fine for their organization, but it's been tracking up over the last 3 years. And so I said, I don't know if I would put a red, you know, to use a color code, I wouldn't have your indicator, your dashboard light blinking red yet, But it might be starting to glow a little bit yellow, is saying, you know, keep an eye on this and understand what those costs are and if there's an opportunity that needs to be addressed or a challenge that needs to be addressed at some point in the future.

Tony MartignettiYeah. Are these management and fundraising costs just creeping up, you know, unwittingly? Or, you know, on the flip side, there may be a conscious investment. Maybe we're investing in some administration and infrastructure for launch of a new program in 18 months. So we're investing for the future. So it's intentional. But, you know, what's going on? What is the reason?

Jerry FrickAnd Tony, what you just said, that's the question board members need to ask. So if they're seeing these indicators creep up like we've talked about, A responsive board needs to say why. And then it's the duty of management to know the story, to be able to explain why. And then the board can say, okay, we get it, we understand, we're backing it, we're behind you. Or it can also be the duty of the board to say, hey, stop one second here. We need to discuss this further because we're not necessarily certain that what's happening in practice that we're okay with.

Tony MartignettiSo, so this one is a ratio, management and fundraising expense to program expenses.

Jerry FrickYeah, well, to total expenses. You want to take it as a percentage of your total.

Tony MartignettiOh, to total. Oh, okay. Oh, to total. All right. Oh, because then, because then what's left is devoted to program, presumably, right? Okay. Okay. Okay.

Jerry FrickYeah. So another—

Tony Martignettiso that I just want to make sure, you know, again, accounting for poets. So the denominator there is that's your annual budget total, your total expenses is everything. Is everything that's your annual budget, right?

Jerry FrickRight. It's your annual budget. Yeah. Your operating, your total operating budget, including all your program expenses. Absolutely

Tony Martignettiright. Of course. Program. Yeah. All right.

Kate MartignettiIt's time for a break. Keela. Increase donations and foster collaborative teamwork with Keela, the fundraiser's CRM. Maximize your team's productivity and spend more time building strong connections with donors through features that were built specifically for fundraisers. A fundraiser CRM goes beyond a data management platform. It's designed with the unique needs of fundraisers in mind and aims to unify fundraising, communications, and donor management tools into one single source of truth. Visit keela.co to sign up for a coming group demo and explore how to exceed your fundraising goals like never before. It's time for Tony's Take Two.

Tony MartignettiThank you, Kate. Oklahoma City, if you are near there, I'm going to be there in November. From November 5th to the 8th, I'm speaking at the Sarkis Foundation conference. If you're in Oklahoma, you may very well know the Sarkis Foundation. So if you're in the area, if you would like to get together, I don't know. Yeah. Coffee, lunch, drinks. Let me know again November fifth to eighth. Staying right in downtown. You can get in touch. Well, you could just use a simple email is the best way. Tony at Tony Martignetti dot com. If you forgot my name, then you'll forget my email. So that's not going to work. Well, I guess you have to remember my name too to go to my site. If you want to use the contact page at the site, you'll have to remember my name again. It's Tony Martignetti and the site is tonymartignetti.com. So I guess one way or the other, well, if we're going to get together, it would be nice if you could remember who I am. I would— I'd be grateful. You know, I'd be grateful. I promise to remember who you are. So one way or the other, get in touch. Love to get together with you if you are in the Oklahoma City area. And that is Tony's Take Two. Okay.

Kate MartignettiCan you imagine, like, going out to meet with someone for coffee and they're just like, who are you again?

Tony MartignettiYeah.

Kate MartignettiJust give me the free coffee. Who are you?

Tony MartignettiI know I've heard your name. I know I've heard your name, but right. And you're buying the coffee, right? What's your name? You're picking up the tab, right? Okay.

Kate MartignettiNo, I'm sure that's not—

Tony MartignettiI'm sure that's not gonna happen.

Kate MartignettiGiving people free coffee.

Tony MartignettiOh no, I'll pick up the check. Yeah. That part, that part will happen. Yeah.

Kate MartignettiSounds good.

Tony MartignettiIf you're a listener, I'll buy you coffee. Sure.

Kate MartignettiWe've got beaucoup, buttloads more time. Let's go back to financial literacy for your C-suite and board.

Tony MartignettiAre there any other key metrics? Yeah.

Jerry FrickYeah. And I don't know if I would define this as a metric, but it is certainly something that should be paid attention to, and it's called the composition of your net assets.

Dean DalzellMm-hmm.

Jerry FrickSo in nonprofit organizations, net assets have to be divided in 2 buckets. One bucket is what you call your unrestricted or without donor restriction, and then you have a bucket that is with donor restriction. And it's really important to be certain that you understand what's in each of those buckets in total. So again, a risky situation for a nonprofit organization is if they, if they see that a very large percentage of their net assets are in the bucket with donor restriction, that means they have some— they are limited in what they can do with those net assets.

Tony MartignettiJerry, is that essentially your endowment?

Jerry FrickIt could. Yeah, endowments would be with donor restriction, right? Or we have the other category where, you know, a donor places some kind of what we call a temporary restriction on a contribution. So either it has to be used for a specific program that the donor has identified they want it used for, or there can be a time restriction where they say, I'm going to give you $300,000, but you— that's to be used over the next 3 years. So now they've placed a time restriction on that contribution. So those have to be really carefully monitored. And this is one of the areas that we see so many nonprofits misunderstanding how to do that, because what happens when you get money in the door, many nonprofits just deposit it all in the same bank account. Yeah. So now you have one bank account that is, that has your restricted and your unrestricted dollars commingled.

Tony MartignettiYeah, yeah, yeah.

Jerry FrickAnd if you're not tracking that, the risk of spending those restricted dollars outside of what the donor's intent was is very high.

Tony MartignettiNow you're getting into potentially illegal territory because so many of the states, maybe it's all, but many, many states have adopted the Uniform Management, Uniform Prudent Funds Management Act. UPMIFA, Uniform Prudent Management of Institutional Funds Act, or they've adopted either the recommended unified statute or something similar to it. And there are state laws around only spending the way donors have told you that they want it spent.

Jerry FrickThat's absolutely correct. And that's what— that is an enormous risk. The other part that I find risky, I just was speaking with a group of board members and executive directors a couple weeks ago, and I had an example that I wanted them to see if they could interact with it. And the example that I gave them was fictitious, but that fictitious nonprofit had 90% of their net assets were donor restricted, were in that donor restricted bucket, and only 10% unrestricted. And so my question was how do you operate this organization on only 10% of your net assets? How can you operate? And, you know, that's again something that, that is not clearly understood, and so many mistakes are made in those areas, and nonprofits potentially get themselves into very hot water, as you just described.

Tony MartignettiI mean, that's going to show up too in another metric like days of cash.

Jerry FrickIt will.

Tony MartignettiDays of cash might be like 4.

Jerry FrickThat's absolutely right. And again, a mistake that many nonprofits make when they are calculating their days of cash, they're calculating all of the cash, not just the unrestricted. And we, we emphasize this with our clients over and over again. Let us help you calculate the days of cash, but we're just looking at the unrestricted.

Tony MartignettiYeah, because, right, because there's a restriction on all the rest, right?

Jerry FrickOne other thing in terms, you know, why this is important, and, and I have a client that relies heavily, heavily, heavily on, um, private foundation funding. That's great, and they've been very successful at Getting those sources of revenue, but they mostly come with restrictions. And so if a, if a nonprofit is putting an overemphasis on getting that kind of revenue and it's always restricted, they, they are handcuffing themselves because that they're only allowed to spend that money on certain things.

Dean DalzellMm-hmm.

Jerry FrickAnd then you have nothing left to pay for infrastructure or administrative or fundraising costs. You've got to, you know, you've got to balance out your unrestricted contributions in that as well, or you're not going to be able to operate.

Dean DalzellIt gets to be a strategic issue. It gets back to that duty of care. They're making a strategic miscalculation how they're pursuing funds.

Jerry FrickYeah.

Tony MartignettiAs valuable as the restricted funds are, you know, it's not like we're not discouraging Oh yeah. Restricted fund. I do planned giving fundraising. Some of those dollars are in trusts and those trusts or even the wills, you know, occasionally, not usually, but occasionally come with restrictions. It's devoted to, you know, palliative care. It's devoted to the children's program, etc. So, but those, so those are valuable, but I understand the point of being very conscious of the composition Of your net assets. The, the, what, what you're, what, again, it's a ratio, what your, what your unrestricted to restricted net assets look like. And, and are you hamstringing yourself?

Dean DalzellYeah. And another ratio, uh, just to tag on to it, once you figure it out, that composition,

Tony Martignettiyeah,

Dean Dalzellyou take a look at your liquid unrestricted net assets and you look at that number against your total debt. So not only your current liabilities, but your total debt. And really gives the board and the executive director— so it's often referred to as LUNA, so liquid unrestricted net assets to debt. And it really takes a look at how much do we have, how much we're relying on ourselves versus how much are we relying on others to fund our operations. And again, it's— there's not necessarily— well, I mean, there's a bad number. You don't want to be insolvent. And have more debt than unrestricted net assets. But you— it's a number that should be known within the organization if you are. And that should— that number should be 2 or greater, so similar to the current ratio.

Tony MartignettiAll right. This is the liquid unrestricted net assets.

Dean DalzellAll

Tony Martignettiright. Let's break that down. All right. Liquid. All right. We can— it's cash or we can get it to cash easily. Unrestricted. Jerry and I were just talking about that, the restricted versus unrestricted, the composition of your net assets. Net assets. All right. So it's not just liquid unrestricted net assets. So what's a non-cash net asset? To me, that just sounds like cash, but it must not be.

Jerry FrickAgain, it isn't always just cash because—

Tony MartignettiYeah. What else could it be?

Jerry FrickAgain, if we remember the basic formula, That your assets are what you own, the liabilities are what you owe, and the difference are your net assets. Well, in the group of assets, you can have all your fixed assets. If you have a building that has a— you've got that as a value in your assets. So, so that's an asset that could be flowing down into your unrestricted net assets, but it's not liquid.

Tony MartignettiIt's not liquid, right? Right.

Jerry FrickSo you can only look at the liquid portion.

Dean DalzellYep. Another great example would be—

Tony Martignettiwait, wait, wait. I got to hold you off, Dean. Hold on. Hold that thought. Don't— I don't want to hold the thought. Write it down if you need. I don't want to miss your point, but I don't understand what, aside from cash, what else could be a liquid unrestricted net asset aside from cash?

Jerry FrickIf you've got— if you have any kind of investment funds that can be converted, If you are carrying any receivables, those are actually fairly liquid.

Tony MartignettiYeah, right. You're expecting, yeah, you're expecting, right? You're expecting some grant or a receivable, right? We all know what receivables are.

Jerry FrickOkay. Yeah, those are your basic liquid items. Yeah.

Tony MartignettiOkay. All right. Thank you. Examples help. Again, accounting for poets. Okay. Go ahead, Dean. You were gonna make a point.

Dean DalzellOh, and then another thing that you should exclude on the current asset side are any prepaid expenses that the organization might have. And depending on the organization, That, that might be significant. And prepaid expenses would be if you paid your insurance a year ahead of time, or if you had your website costs or other costs where—

Jerry FrickSoftware license fees.

Dean DalzellSoftware license fees are a great one where you pay for a year or 2 or 3 and you write the check all at once. You've committed the check, but GAAP says you have to record that as a prepaid expense and you only recognize The— let's say it's over a year time, you only recognize 1/12 of that expense over the year. So if there's a prepaid expense on your, on your balance sheet, you want to be— you'll want to exclude that from that calculation because that money is already out the door even though it's—

Tony MartignettiOkay, we're getting a little into the weeds now.

Dean DalzellAll right, we are.

Jerry FrickYeah, a little bit.

Tony MartignettiThat's about— you mentioned GAAP. I, I know, remind listeners what, what GAAP is, otherwise I got to put you in jargon jail.

Dean DalzellGenerally accepted accounting principles.

Tony MartignettiYes, GAAP. And all your audits and all your statements are done under GAAP, under generally accepted accounting principles. They're signed to by the firm that does the audit or the financial statement or whatever, all under GAAP. All right. Careful.

Dean DalzellThank you for keeping me honest, Tony.

Tony MartignettiAll right. Yeah. All right. Parole comes easy, but you got to serve some time. It's not probation. It's parole.

Dean DalzellAll right. All right.

Tony MartignettiFair enough. Okay, we've identified 5.

Jerry FrickOkay, I'm gonna give you another.

Tony MartignettiWe got another one? Yeah, yeah.

Jerry FrickAbsolutely have another one. So I'm gonna start this out by saying that there is still misconception in many people's minds, whether they work in nonprofits or they contribute to nonprofits, that the term nonprofit means the organization can't make any money. So I just want to start this out by saying that designation of nonprofit, that's a tax status. That's all it is. It's a tax status. It's not a business model.

Tony MartignettiIs this misunderstanding still out there?

Jerry FrickOh,

Dean Dalzelloh,

Jerry Frickgreatly out there. It's still out there. So the ratio that we, we want to communicate is we want to measure Are you making any profit? You know, do you have a surplus? We don't, we don't necessarily use the term profit. We'll call it surplus. And we want especially boards to be concerned whether or not the organization is planning for, through their budgeting process, are you planning for a surplus? And in your actuals, are you actually making it? Are you getting there? And if you're not, there's a problem that needs to be addressed because this is all about sustainability. If the organization is not making a surplus, they can't sustain themselves or grow. And so we really look for a ratio of about, you know, a safe ratio is about 5%. I think that's what we're looking at now. Yeah, 5%. 5% surplus on your net revenues, you know. So if you, if you bring in $1 million in revenue, we feel a safe place is, is to be showing a $50,000 surplus on that. And if that's not happening, there needs to be a discussion why, why isn't that happening? Now, I have worked with clients who have over many, many years accumulated a lot of unrestricted net assets, and they may have a year where they are planning to have a deficit, and there's a reason that they're planning. They're going to invest in something new, and so they're going to commit some of their accumulated unrestricted net assets as an investment. That's okay. We're not saying that can't be done. Right. But you can't live that way forever.

Tony MartignettiOkay. Surplus profit.

Jerry FrickYeah, it has to be there and it needs to be measured.

Tony MartignettiThat sounds like your investment capital.

Jerry FrickAbsolutely.

Tony MartignettiInvestment in new ventures, maybe a new whatever, maybe a new staff position or 2. I mean, that's your growth. Isn't that your growth money?

Jerry FrickIt's your growth money. You're exactly right. And if nonprofits are not planning for that, there really is no standing still. If you're not planning for growth, you're actually planning for contraction.

Tony MartignettiYeah, because inflation is gonna erode your— erode you every year, 3 to 5 to 8%, or, you know, however bad it might be.

Jerry FrickRight.

Tony MartignettiYeah. Okay. Right. So it's just bad business to say, We, we, we need a— we— it costs us half a million dollars to run this organization each year, so we need to raise half a million dollars, right? We need to have half a million dollars of revenue of some, some sort, right? No, $550,000 or $600,000 or $650,000,

Jerry Frickright? That's exactly right. Yeah, I mean, it seems so, um, intuitive, you know, like it should come simple, but again, in, in I think Dean and I would both attest that in our experience with nonprofit clients is that is often overlooked. It's, it's not discussed. So when we're presenting financial information, again, we don't have to give all, we don't have to go into the weeds and give the recipe for the soup of how we got there, but we better be showing and the board better be looking for, is there a surplus? Yeah. Are we performing?

Tony MartignettiOkay, and sometimes you're pushed back on because people say that we shouldn't have a surplus. We should be spending everything we earn to help to help our community. We've got we've got children going hungry. Everything we earn has to go to those kids.

Jerry FrickRight, and the and and and it's not as prevalent as it used to be. But you know that that fear that if we Have an audit that shows a surplus, or we file a 990 tax return that shows a surplus, and the public is viewing that, that they're gonna go nuts over it. Now, again, it's all relative. If, if you brought in $2 million and you have a million-dollar surplus, well, yeah, I'd probably be a little bit nuts about that. You know, why do you have a 50% Surplus.

Tony MartignettiYeah. All right. You'd like to see at least 5%.

Jerry FrickWe, we feel 5% is a safe target.

Tony Martignetti5% of the net revenues for the, from the year, for the year.

Jerry FrickYeah. Yeah. We feel that's a safe, safe starting place.

Tony MartignettiOkay. You know, the irony of some of this is that, um, people look at these, I, I guess I'm, I'm gonna lump board members. I mean, you know, board members look at some, some of these numbers and they would run their business the same way. Those of those who are in business or have their own businesses, they would do the exact same thing. But they don't, but they apply a different set of rules to the nonprofit. No, it shouldn't have any growth capital. No, it shouldn't be able to invest. It should be spending every, we should be spending every dime we earn. But they wouldn't do that to their own family business.

Dean DalzellCorrect.

Jerry FrickYeah. That's so true. What you say is so true, Tony. And sometimes You know, again, I think as an outsourced CFO, we find ourselves delivering that very message to the board, challenging them on that business model that they are purporting that the business model should be a zero bottom line. And we just push back and challenge that and try to help educate why That's not a good business model. You may be able to feed the kids this—

Tony Martignettipardon me? Yeah, right.

Jerry FrickYou wouldn't do that in your own business.

Tony MartignettiYou may be able to feed the kids this year and maybe next year, but wouldn't you like to be able to feed them 5 years from now?

Jerry FrickCorrect.

Tony MartignettiYou're on a trajectory that's gonna make that very, very, very difficult.

Jerry FrickRight.

Dean DalzellYeah. And to add on to that, and you alluded to this earlier, Tony, we were talking about tracking it over time. Are we— is this metric or this ratio improving? Not approving and— or not improving. And where boards and leadership can really take it to the next level, where I'm going, is establishing targets. What's important to your organization? And as a board saying, you know, we're at only at 20 days of cash on hand, let's establish a target of 50 days of cash on hand. And I'm making those numbers up. And then reporting progress to your target. So similarly, on a budget, on a financial budget, you put together your operating budget, you're evaluating how you're operating during a year or a month, but establishing targets for each of those ratios. And maybe it's all— maybe it's all 6 that we talked about. Maybe it's 2 or 3 that are most important. But having that conversation and putting longer-term plans, because you're not going to solve all the world's problems in a year, but having longer-term plan and establishing a target and then measuring against that target. And are we achieving that? Are we not achieving that? What adjustments? And why is that target is what it is and having that conversation and really tracking, almost having like a budget for the ratio or, you know, or a target for the ratio.

Tony MartignettiWell, that's how these can become management tools.

Dean DalzellYou're absolutely right.

Tony MartignettiManagement and oversight.

Dean DalzellYep.

Jerry FrickYes, that, that's exactly right. Um, and I agree with what Dean is saying, you know, really the kind of the next step is besides reporting these on a regular cadence, whether that's monthly or quarterly, Start to look at the trend. You know, you need to build out trends. So where, where were we 2 or 3 years ago compared to where we are today? Have we made the progress that we said we wanted to make? And if not, why not? You know, do we need to change something about the style of how we operate the organization? You know, all of that becomes part of the conversation, and I think That it's possible for board members to get there with that part of the conversation if they are being provided financial reports that they understand, that give them these snapshots, these dashboards that we've talked about, so that they're not looking at pages and pages of numbers that make no sense. Give them something that, that they can make these assessments. Mm-hmm. Very easily, and then have the discussion and decide what actions need to be taken.

Tony MartignettiAll right, so it sounds like we're comfortable with these 6 metrics.

Jerry FrickYeah, I mean, and there's, you know, there are, there are all kinds of other metrics, but these are, you know, when you talk about some of the common ones that really what we try to focus on, get boards to focus on, get executive directors to focus on is How can we help you measure the current financial condition and whether or not it's going to be sustainable? Is your organization— do you have the capability to be— to sustain 3, 5 years down the road?

Tony MartignettiOkay, so we're confident in these 6. We're not— we haven't left out anything critical, have we?

Dean DalzellI think we covered a lot of great bases, and one of the reasons why we record— why we And like Jerry said, there are more. But all of these ratios, all of these data points, the beauty of these is these are publicly available from other organizations via their Form 990. 990 is informational return that all nonprofit organizations of a certain size are required to file, and it's publicly available information. So if you're ABC Nonprofits and they're trying to set those targets or trying to understand understand where they're at or how they're doing. It's like, hey, XYZ nonprofit across the street, let's see what they're doing. You can look at their 990 and calculate their ratios as well, and you can sort of evaluate and start to benchmark. Like, are, are we doing good in our sector? Are we not doing good in our sector? So while I would recommend, and I'm sure Jerry would recommend, is, is understand where you're at, understanding where your brother and sister nonprofits are at is also a great bellwether to say, hey, are are we doing well? Are we not doing well with our peers in the organization? And it's all publicly available information, uh, for other nonprofits as well.

Tony MartignettiAll right. Okay, leaving it there then. Dean?

Dean DalzellYeah.

Tony MartignettiJerry? All right. Martin and Lewis. Dean Dalzell, you'll find him on LinkedIn. Jerry Frick, also on LinkedIn. Their firm is at Veracity Pros. Dean, Jerry, thank you. Thank you very much.

Dean DalzellThank you. You're welcome.

Jerry FrickThank you, Tony. It's really a pleasure.

Tony MartignettiOh, thank you. I'm glad. Listeners, I would like you to know that we had another show where we, we talked about a book devoted to board member financial literacy, and that was the May 31st, 2021 show. With Andy Robinson and Nancy Wasserman. Their book is The Board Member's Easier Than You Think Guide to Nonprofit Finances. So if you want to dive deeper into this, maybe buy a copy for each of your board members. That's a, just a further resource beyond this excellent conversation that Dean and Jerry and I just had.

Kate MartignettiNext week, The Surprising Gift of Doubt from the archive with Marc Pitman. If you missed any part of this week's show,

Tony MartignettiI beseech you, find it at tonymartignetti.com. Don't forget that name, Tony Martignetti.

Kate MartignettiOr no coffee for you. We're sponsored by DonorBox. Outdated donation forms blocking your supporters' generosity? DonorBox, fast, flexible, and friendly fundraising forms for your nonprofit. donorbox.org.

Tony MartignettiI still love that alliteration. Fast, flexible, friendly fundraising forms. All right, sorry.

Kate MartignettiAnd by Keela. Grow revenue, engage donors, and increase efficiency with Keela, the fundraiser's CRM. Visit keela.co to join the thousands of fundraisers using Keela to exceed their goals. Our creative producer is Claire Meyerhoff. I'm your associate producer, Kate Martignetti. This show's social media is by Susan Chavez. Marc Silverman is our web guy. And this music is by Scott Stein.

Tony MartignettiThank you for that affirmation, Scotty. Be with us next week for Nonprofit Radio, Big Nonprofit Ideas For the other 95%. Please go out and be great.