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Nonprofit Radio for October 16, 2023: Financial Literacy For Your C-Suite & Board


Dean Dalzell & Jerry Frick: Financial Literacy For Your C-Suite & Board

Leadership that understands your numbers protects not only your nonprofit. It also protects the people filling those roles. Two finance and audit pros walk us through six 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.





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[00:00:34.12] spk_0:
And welcome to tony-martignetti Nonprofit radio. Big nonprofit ideas for the other 95%. I’m your aptly named host and the pod father of your favorite abdominal 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 Lenticonus if I saw that you missed this week’s show. Here’s our associate producer, Kate with what’s coming?

[00:01:15.04] spk_1:
Hey, 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 to finance and audit pros. Walk us through six key metrics that anyone can understand and that reveal the true state of your financial standing. Dean Dell and Jerry Frick are from veracity pros an Tonys take two

[00:01:17.45] spk_0:
Oklahoma City. Anyone

[00:01:50.79] spk_1:
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[00:02:49.78] spk_0:
It’s a pleasure to welcome Dean Dasell and Jerry Frick to non profit 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 veracity pros dot com. And Dean and Jerry are both on linkedin Dean gel. Jerry Frick. Welcome to non profit radio.

[00:02:53.85] spk_2:
Thank you. Glad to be

[00:02:54.79] spk_3:
here. Thank you, tony. Glad to be here. I’m

[00:02:56.80] spk_0:
glad you are. Uh the first thing I think of is Dean and Jerry. Uh Dean Martin and Jerry. You gotta take this show on the road, the Martin and Lewis show, change your last names and start doing movies together. Duly

[00:03:09.07] spk_3:

[00:03:10.91] spk_2:
I’m ready. Where’s, where’s the casting goal?

[00:03:13.77] spk_0:
Absol Martin and Lewis, they did, they did dozens of movies together, whatever. I don’t know how many but uh there were theaters, you know, you should take this show on the road as Martin and Lewis.

[00:03:22.72] spk_3:
We’ll just have to figure out who the Straight Man is.

[00:04:01.86] spk_0:
Yes. Well, well, Dean, you’ll have to, you’ll have to make that sacrifice. That’s gotta be you, you stay, you’re gonna stay true to the, to the, uh, to the original team. Um All right. So let’s talk about some fiscal literacy, financial literacy, maybe for board members specifically, but, you know, not necessarily it could be for uninitiated or maybe un indoctrinated. I don’t know, uh, other c suite folks besides CFO S you, you are both outsource CFO S. So you’re, you’re seeing a, a broad swath of nonprofits. Why do we all just, why do we all just get hung up on numbers? Why, why do we gloss over financial, uh, financial statements? Even simple balance sheets, audits. What, why, why do we, why do we all get scared and frozen by these?

[00:04:17.14] spk_3:
I 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 suite and leadership and boards of different organ 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.

[00:04:37.75] spk_0:
So they should, they, hopefully they’re happy but they don’t even know if they ought to be happy.

[00:05:21.40] spk_3:
Exactly. And so it really gets down to the fiduciary responsibilities as a board, uh, you know, duty of loyalty, the duty of care, the, the duty of obedience, but making sure they’re fulfilling those uh, fiduciary duties and, and what we’ve seen both working with pros and in our prior life is, is that there’s really an opportunity to help the boards. Uh And I, and I jer know I can talk about this much more deeply than I can but really help the boards, uh assess what’s going on, uh, address what’s going on Act and then when necessary applaud. And that’s really what we try to help leadership, uh, folks and organizations do is how do you, how do you take those numbers? How do you understand those numbers understand what they’re telling us where we are, where we’re going. Um And how we do that in an effective way instead of giving them reams and reams of uh six point fonts with tiny numbers and dot

[00:06:12.65] spk_0:
points. Yeah. And you know, and, and my, my fear is that when it comes time to review financials, um, you know, it’s sort of done like five minutes before the meeting starts, people are flipping through, flipping through pages and, you know, that they don’t make any sense. They’re, they’re, they’re definitely abrogating their duties to the organization, to your, to your points dean, you know, they, they, and, and to themselves, I mean, they, they need to protect themselves as board members um as well as the organization and then, but it’s also, as you mentioned, you know, it’s also other, other c street leaders. I mean, they, it, it doesn’t, we, we can’t just all rely on the CFO to, to, we, we gotta have some literacy amongst ourselves. No. Is that is that, is that true, Jane Jerry?

[00:07:33.54] spk_2:
It’s absolutely true what you’re saying, tony and, and uh unfortunately, it’s all too common in nonprofit organizations that the, you know, the, the financial reporting is done by the CFO and quite often only understood by the CFO and that’s really the broken link. Um And, and it’s really not, you know, when, when you think of, 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, in the mission area. A non profit 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 and you know, the, the board collapse 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. Um 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?

[00:08:15.99] spk_0:
All 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 two in the entire organization, including the board that, that can make sense of these things.

[00:09:31.11] spk_2:
So I think you, you use the term that I would use to, it’s break it down. Um We’ve got to get away from thinking, you know, more data is better. Um 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, into the components that are really important and you know, when it comes to reporting those components to the board, uh less is more in my opinion, you know, so don’t I 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 wanna do is you wanna summarize this information in, in a much more readable fashion.

[00:09:34.18] spk_0:
A dashboard uh uh uh A dashboard is

[00:10:14.24] spk_2:
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 so

[00:10:59.20] spk_0:
we can go to the visual. But, but let’s get to some key metrics because uh and, and maybe visualizations may help. I’m not dismissing that but and this is perfect because you, you two are uh talking to the guy who took uh accounting for poets in in college. I mean, I mean, all I can remember is assets, equal liabilities plus owners’ equity. I never understood how the two 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 two numbers that the columns were supposed to always equal to come out to be the same to me. They sound opposite assets and my abilities. But you don’t have to explain. You don’t, you don’t have to help me pass my college, my college accounting course. But let let’s get to some like basic metrics. What, what, what are some, I don’t know, four or five key numbers or key trends there, there’s not a specific number that, that leaders and board members need to track.

[00:12:22.98] spk_3:
Well, that’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 our liabilities? What are net assets? What are unrestricted, net assets versus temporary restricted net assets and then the statement of activities and the 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, 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 uh that that current ratio be uh be at least two that you have at least $2 of current assets to, 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 whether uh any changes on a period to period basis is a great one.

[00:12:32.92] spk_0:
Ok, so that’s what you call it, the current current ratio, assets to assets over liabilities of assets to liabilities,

[00:12:48.88] spk_3:
current assets, current liabilities and when I say current assets, any assets that, um, that aren’t held like in buildings or, or any long term investments or that type of thing, things that can be easily converted,

[00:13:21.60] spk_0:
liquid have some, you know, you can liquidate them within two weeks or a month or something like that. Not a building. But, but, you know, I don’t know, I can’t think of an example but, uh, ok, something that you could, so that if your liabilities got worse then because you, you like to see a 2 to 1, uh, uh, assets, liquid assets to, to liabilities as a minimum as a, as a minimum

[00:13:23.38] spk_3:
and the current liabilities would be anything you have due in the next year. So that would be any typically in your accounts payable and bills you have to immediately. And then also if you have a mortgage, any, 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 the organization.

[00:14:02.26] spk_2:
And it’s really 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, um, you know, really what, what that is saying, or what abort should interpret that to mean is we have no flexibility. You know, we all of our assets are now spoken for because of our liabilities. How do we operate this organization going forward? How do we deliver any mission when we have no capability of investing any additional assets and programs?

[00:14:25.24] spk_0:
1 to 1 sounds treacherous. It is treacherous or less. I mean, it could, could be less than one too.

[00:14:50.15] spk_2:
We’ve absolutely had experiences with organizations who are less than one 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 in to have the conversation about, can you sustain this? How long can you sustain this organization with this kind of financial picture?

[00:15:27.96] spk_1:
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[00:15:33.82] spk_0:
All 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?

[00:16:25.01] spk_3:
I think another time they one is days of, 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, uh, nonprofits who received federal funding were staring down the barrel of a federal government shutdown. Um And so some nonprofits either whether they’re government funded or even not government funded. If you lose a ma major funder or your, your pipeline of funds is stopped because congress uh is failing to act and improve 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,

[00:16:36.16] spk_0:
average daily.

[00:16:57.36] spk_3:
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 sudden stoppage, uh they can continue for another 1 to 3 months for other non profit organizations. Uh We typically like to see up to 100 and 80 days. So up to a six month, it can sometimes be difficult for government funded because a lot of government funded organizations are reimbursement based. The government asked to spend the money and then you get the money from

[00:17:16.38] spk_0:
that. But what instance would it be where you want it to be more like 100 and 80 versus 30?

[00:19:11.62] spk_2:
Well, 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, 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 uh of cash on hand or 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 six 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 wanna mention on this as well, tony is there are organizations, there are non profit organizations we’ve encountered who have too much cash. 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 wanna 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 gonna 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?

[00:19:41.99] spk_0:
Ok. Ok, good. All right. So risk management, uh but operational management as well. All right. What a current ratio, days of cash? I love these, you know, let, let’s identify like half a dozen or something. What, what’s another, I’m not, it doesn’t have to be six 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 and 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 Q one of, of 24 do we see a difference by Q two or three? You know, are we improving? So what else, what else besides these two metrics?

[00:22:05.35] spk_2:
So 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, but that is looking at it, 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, et cetera in that period of time. And what did it cost you internally to raise that? So, if you raised a million dollars in the last six months, that’s great. What did you spend, if you spent a million dollars to raise a million dollars, you’re not very efficient in your fundraising methods. So you really need to start to break that down and, and start finding out what are the diff, 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, 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. The organization is lucky if it, if it makes 15 cents on the dollar. In other words, it may cost 85 cents 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 10 cents of expense for every dollar that you can be awarded in private foundation grants. So again, you gotta 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 um uh activities.

[00:23:11.89] spk_0:
And this is, this is commonly referred to, as you mentioned it in passing cost to raise a dollar. What does it cost us to raise, to raise a dollar? Um The, the, you know, there’s a, there’s a lot of uh our confusion about or uncertainty about what to 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. Uh if I would say, you know, an individual fundraising, all the, all the major gift officers that you have all their direct cash, all their co comp usually is another 25 30 maybe 35% depending how generous you might be. Uh So you can include their cash and their compensation, um their benefits. Um 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.

[00:23:56.44] spk_2:
What? 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 using social media for doing solicitations. Are you meeting, you know, do you have gift officers who are meeting one on one with uh 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? All of that needs to be considered. Yes, you’re right.

[00:24:26.63] spk_3:
And a piece that’s that I’ve seen excluded that, that I would recommend not excluded is, is just the administration, administrative instru infrastructure because that fundraising department is gonna use the finance and accounting team is gonna use the hr team is gonna use the, 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 people that you had mentioned, tony are also being attributed that they can’t exist in a vacuum. They use the organizational resources in order to get their job done as well. So you have all the direct costs that Jerry had mentioned and the staffing costs, there’s also uh an infrastructure cost just to be a part of the organization that should be attributed to that fundraising

[00:25:01.56] spk_0:
as well. Right, proportionally proportionally. Absolutely. Right. So, you know, finance 20% of finances time maybe uh booking gifts, let’s say, let’s say finance books it and there’s not a, there’s not a uh uh AAA data processor, you know, a data processing function in the fundraising team that finance attributes to 15 or 20% of its work to, to the work of fundraising. So 15% of that financial overhead that, that finance team like, like like that, is that right? Is that

[00:25:31.27] spk_3:
you 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 would 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, that, that finance or hr department serves.

[00:25:59.24] spk_2:
I think we, we, 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.

[00:26:32.15] spk_0:
Ok. Yeah, fair. Right. All the, all the back end whatever apps you subscribe to or platforms that are supporting you, whether it’s mailchimp on the male side or, you know, give butter on the, on the, uh, on the donation processing side or, you know, whatever. All right. All right. All right. So we got three. Any uh what other, other critical metrics for leadership

[00:29:00.57] spk_3:
management and fundraising expense is another one. We take a look at this one can be some controversial. Uh, because I think there’s different uh uh ways on 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, uh, in that overall versus how much is it spending on programs spending on, on direct mission. Uh, and that really has a wide range and it really depends on where the organization is at. So when I say right, wide range at the, 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, uh, fin or going to support management administration, fundraising. Um, anything lower than that would indicate to that you’re probably not spending enough on your infrastructure. You might be operate a little bit like that. But, but, but it’s, it would be rickety, it’s not sustained, sustained. Yeah, absolutely. And, uh, and then that can range all the way up to 40%. Uh, and depending on where the organization that could be higher. Um Especially if it’s a new organization uh 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 that you’re actually spending on. The reason you’re there is to, is to achieve your mission and fulfill your vision. Um And, and the reason why I say it’s a little bit controversial is, is um some funders still today, see the lower number, the better. That’s not always the case for the reason I just spoke about. Uh, 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, uh work with a client the other week where um theirs is in the 30 which is fine for their organization, but it’s been tracking up over the last three years. And so I said, I don’t know if I would put a, uh a red, you know, to use a color code. I wouldn’t, I wouldn’t have your indicator or your dashboard like blinking red yet, but it might be starting to glow a little bit yellow saying, you know, keep an eye on this. Uh and, and understand what those costs are. Um And if there’s an opportunity uh that, that needs to be addressed uh or a challenge that needs to be addressed at some point in the future?

[00:29:16.96] spk_0:
Yeah. Are these, 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 may maybe we’re investing in some administration and infrastructure for launch of a new program in 18 months. So we’re, we’re investing for the future. So it’s intentional but uh uh you know what’s going on? What is the reason?

[00:30:04.27] spk_2:
And 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, ok, 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. Um we need to discuss this further because we’re not necessarily um certain that what’s happening in practice that we’re ok with

[00:30:28.45] spk_0:
so so this one is a ratio management and fundraising expense to program expenses

[00:30:34.48] spk_2:
to total expenses. You want to take it as a percentage of your total? Oh

[00:30:49.14] spk_0:
to total. Oh ok. Oh to total. All right. Oh because then because then what’s left is devoted to presumably. Ok. Ok. Ok. Yeah so that I just want to make sure, you know, again, accounting for poets. So the, so the denominator there is, that’s your, your annual, your annual budget total, your total expenses is everything, is everything. That’s your, that’s your annual, your annual budget, right? It’s your

[00:31:07.23] spk_2:
annual, it’s your budget. You’re operating your total budget, including all your program expenses. Absolutely.

[00:31:14.44] spk_0:
Of course. Program. Yeah. All right.

[00:32:02.84] spk_1:
It’s time for a break. Kila increase donations and foster collaborative teamwork with Kila. The fundraisers. 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 bila dot 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.

[00:33:26.24] spk_0:
Thank you, Kate Oklahoma City. If you are near there, I’m gonna be there in uh November from November 5th to the eighth. I’m speaking at the Sarky Foundation conference. If you’re in Oklahoma, you may very well know the Sarkies Foundation. Uh So if you’re in the area, if you would like to get together, I don’t know, coffee, lunch, drinks. Let me know again, November 5th to eighth. Um 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. Uh, if you forgot my name, then you’ll, you’ll forget my email. So that’s not gonna work. Um, 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. Uh, it’s tony-martignetti and the site is tony-martignetti dot com. So, I guess one way or the other, well, if we’re gonna get together, it would be nice if you could remember who I am that I would, I’d, I’d be grateful, you know, I’d be grateful. I promised 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 K.

[00:33:34.82] spk_1:
Can you imagine, like going out to meet with someone for coffee and they’re just like, who are you again? Yeah. Just give me the free coffee. Who are you? I

[00:33:38.01] spk_0:
know, I’ve heard your name. I know, I’ve heard your name but, right. And you’re buying the coffee, right? What’s, what’s your name? You, you’re picking up the tab, right? Ok. No, I’m sure that’s not. I’m sure that’s not gonna happen.

[00:33:49.59] spk_1:
Giving people free coffee.

[00:33:51.76] spk_0:
Oh, no, I’ll pick up the check. Yeah. No, I, that part, that part will happen. Yeah,

[00:33:57.33] spk_1:
that sounds good. If you’re a

[00:33:58.71] spk_0:
listener, I’ll buy you coffee. Sure.

[00:34:02.36] spk_1:
We’ve got Buku but loads more time. Let’s go back to financial literacy for your c suite and board.

[00:34:12.46] spk_0:
Are there any other key metrics? Yeah.

[00:35:04.22] spk_2:
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. So in non profit organizations, net assets have to be divided in two 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 non profit 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.

[00:35:10.43] spk_0:
Jerry. Is that essentially your endowment? It

[00:36:08.29] spk_2:
could be, yeah, endowments would be with donor restriction 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 gonna give you $300,000 but you, that’s to be used over the next three 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 non profits misunderstanding, um 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. So now you have one bank account that is, that has your restricted and your unrestricted dollars commingled. And if you’re not tracking that the risk of spending those restricted dollars outside of what the donor’s intent was, is very high.

[00:36:56.81] spk_0:
Now, now you’re getting into potentially illegal territory because so many of the states, maybe it’s all, but many, many of the states have the uni have adopted the uniform, uh management, uniform prudent Funds Management Act, for instance, a mi a uniform prudent management of Institutional Funds Act or they’ve ident they’ve adopted either the, the, the recommended uh unified statute or, or something similar to it. And there are, there are state laws around how around only spending the way donors have told you that they want to spend.

[00:37:58.13] spk_2:
That’s absolutely correct. And that’s what that is an enorm, an enormous risk. The other part that I find risky, I just, um, was speaking with a group of, of board members and executive directors a couple of weeks ago and I had an example that I wanted them to, to see if they could interact with it in the, in the example that I gave them was fictitious, but that fictitious nonprofit had 90% of their net assets were donor restricted or 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.

[00:38:07.12] spk_0:
I mean, that’s gonna show up too in, in another metric like days of cash,

[00:38:11.67] spk_2:
it will days of cash

[00:38:13.12] spk_0:
might be like four.

[00:38:15.02] spk_2:
That’s absolutely right. Um And again, a mistake that many non profits 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.

[00:38:38.61] spk_0:
Yeah, because, right, because there’s a restriction on all the rest, right?

[00:39:33.06] spk_2:
One 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 non profit 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 and 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. You’re not gonna be, is to

[00:39:36.08] spk_3:
be a strategic issue. There. There, it gets back to that duty of care. They’re making a strategic miscalculation, how they’re pursuing funds as,

[00:40:14.14] spk_0:
as valuable as the restricted funds are. You know, it’s not like we’re, we’re not discouraging, seeking restricted fund. I do plan to giving fundraising, some of those dollars are in trusts and, and those trusts or even the wills, you know, occasionally, not, not usually, but occasionally come with restrictions. It’s devoted to, you know, palliative care. It’s devoted to the, the children’s program, et cetera. Uh So, but those, so those are valuable, but I understand the point of being very conscious of the, the composition of your net assets. The, the what, what, what you, what again, it’s a ratio, what your, what your unrestricted to restricted net assets look like and, and are you ham hamstringing yourself?

[00:41:06.14] spk_3:
Yeah, and another ratio uh just to tag on to it, once you figure it out that composition, you 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 uh to debt. And it really takes a look at how much do we have, how much are we relying on ourselves versus how much are we relying on others to fund our operations? Um And again, it’s, there’s not necessary. Well, I mean, there’s a bad number you don’t want to be insolvent, um, and have more debt than, than, than unrestricted net assets. But you, it’s a number that, that should be known within the organization if you’re, uh, and that should, that number should be two or greater sort of similar to the current

[00:42:00.51] spk_0:
ratio, the liquid, liquid unrestricted net assets. All right, let’s break that down. Liquid, we can, it’s cash or we can get it to cash easily, unrestricted Jerry and I were just talking about that the restrictive versus unrestricted, the composition of your net assets, uh, net assets. All right. So it’s, it’s not just liquid unrestricted net assets. So, what, what’s, what’s a non, what’s a non cash net asset? Isn’t to me that just sounds like cash. Well, it must not be,

[00:42:22.41] spk_2:
again, it isn’t always just cash because what else could it be again if we, 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, 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. So you can only look at the liquid portion.

[00:42:39.65] spk_3:
Another great example would be

[00:42:51.53] spk_0:
wait, I gotta, I gotta hold you off. Dean, hold on, hold that thought. Don’t, I don’t wanna hold the thought, write it down if you, I don’t want to miss your point, but I don’t understand what, aside from cash, what, what else could be a liquid, unrestricted net asset aside from cash.

[00:42:58.64] spk_2:
Um, if you’ve got, if you have any kind of investment funds that can be converted, if you’re carrying any receivables, those

[00:43:07.37] spk_0:
fairly liquid, right? You’re expecting you, you’re expecting, right? You’re expecting some grant or receivable. We all know what receivables are. Ok? Ok. All right. Thank you. Examples. Help again. Accounting for poets. Ok. Um, go ahead, Dean. You were gonna make a point.

[00:44:11.50] spk_3:
Oh, and then another thing that you should exclude on the current asset side or 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, um, uh, uh, costs or other costs for software license fees are a great one where you pay for a year or two or three and you write the check all at once, you’ve committed the check. But a, a gap 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 wanna be, you will want to exclude that from that calculation because that money is already out the door even though it’s,

[00:44:17.58] spk_0:
we’re getting a little into the weeds now a little bit. That’s about you mentioned gap. I, I know remind listeners what, what gap is otherwise I gotta put you in jargon jail.

[00:44:29.22] spk_3:
Generally accepted accounting principles.

[00:44:59.21] spk_0:
Gap and all, all your audits and all your statements are done under, under gap under generally accepted accounting principles they’re signed to by the, the, the firm that does the audit or the financial statement or whatever. All under gap. All right. Careful honest, tony. All right. Yeah. All right. Parole, parole is parole comes easy. Um, but you got to serve some time. It’s not probation, it’s parole. Um, ok. We, we’ve identified five. Ok, we got another one.

[00:45:24.80] spk_2:
We 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’re, they contribute to nonprofits that the term non profit means the organization can’t make any money. So I just wanna start this out by saying that, um, designation of non profit, that’s a tax status. That’s all it is. It’s a tax status. It’s not a business model. Is this

[00:45:38.75] spk_0:
misunderstanding still out there? Oh,

[00:47:40.65] spk_2:
oh, greatly 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. Um And, and we want, uh 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, 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. 5% 5% surplus on your net revenues. You know, so if you, if you bring in a million dollars in revenue, we feel a safe place is, is to be showing a, 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 gonna invest in something new. And so they’re going to commit some of their accumulated unrestricted net assets as an investment. That’s ok. We’re not saying that can’t be done, but you can’t live that way forever.

[00:47:44.09] spk_0:
Ok. Surplus profit.

[00:47:47.23] spk_2:
It has to be, it needs to be measured.

[00:47:50.54] spk_0:
That sounds like that sounds like your investment capital investment in new ventures, maybe, uh a new whatever, maybe a new staff position or two. I mean, that, that’s, that’s your growth, isn’t that your growth money? It’s

[00:48:12.37] spk_2:
your growth money. You’re, you’re exactly right. And if nonprofits are not planning for that, yeah, there really is no standing still. If you’re not planning for growth, you’re actually planning for contraction.

[00:48:40.55] spk_0:
Yeah, because inflation is going to erode your erode you every year, 3 to 5 to 8% or, you know, however bad it might be. Uh, yeah. Ok. Right. So it’s, it’s just, it’s just bad business to say we, we, we, we need a, we, it costs us a half a million dollars to run this organization each year. So we need to raise a half a million dollars. We need to have a half million dollars of revenue of some of some sort. Right. No, 5 50 or 600 or 6 50.

[00:49:08.37] spk_2:
Right. 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? Are we performing?

[00:49:28.78] spk_0:
Ok. And sometimes you’re, 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, we’ve got, we’ve got Children going hungry. Everything we earn has to go to those kids

[00:49:53.35] spk_2:
and, and, and, and, and it’s not as prevalent as it used to be. But, you know, that, that fear that if we, we have an audit that shows a surplus or we file a 9 90 tax return that shows a surplus and the public is viewing that, that they’re gonna go nuts over it. Um, 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.

[00:50:21.64] spk_0:
All right, you’d like to see at least 5%.

[00:50:24.30] spk_2:
We, we feel 5% is a safe target.

[00:50:27.62] spk_0:
5% of the net revenues for the, from the year for the year.

[00:50:31.54] spk_2:
We feel that’s a safe, safe starting place.

[00:50:48.64] spk_0:
Ok. You know, the irony of some of this is that, um, people look at these, I, I guess I’m, I’m, I’m gonna lump board members. I mean, you know, board members look at some, some of these numbers and they, 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, 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.

[00:51:29.81] spk_2:
Correct. Yeah, that’s so true. What you say is so true, tony. And, and sometimes, you know, again, I think as a, an outsourced CFO we find ourselves delivering that very message to the board, challenging them on that, that business model that they’re, that, that they are purporting that the business model should be a zero bottom line and be, we just push back and challenge that and, and try to help educate why that’s not a good business model. They be able to feed the

[00:51:49.12] spk_0:
kids. Pardon me? Yeah. And you know, you wouldn’t do that in your own business. You may be able to feed the kids this year and maybe next year. But wouldn’t you like to be able to feed them five years from now? You’re on a trajectory that’s gonna make that very, very, very difficult.

[00:53:09.46] spk_3:
Yeah. And to add on to that and you alluded to this earlier, tony, you were talking about tracking it over time, you say, are we, are we, is this metric or this uh ratio improving, not improving 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, you’re operating a budget, you’re evaluating how you’re operating uh during a year or a month, but establishing targets for each of those ratios and maybe it’s all, maybe it’s all six that we talked about, maybe it’s two or three 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 the target? And are we achieving that we’re 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

[00:53:16.31] spk_0:
ratio. Well, that’s how these can become management tools. You’re absolutely right. Management and oversight.

[00:54:31.86] spk_2:
Yep. Yes, 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. Um So where, where were we two or three 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 very easily and then have the discussion and decide what actions need to be taken.

[00:54:38.35] spk_0:
All right. So it sounds like we’re, we’re comfortable with these six metrics.

[00:55:01.51] spk_2:
Yeah, 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 w 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 35 years down the road?

[00:55:15.46] spk_0:
Ok. So we’re, we’re confident we’re in these six, we’re not, we haven’t left out anything critical, have we?

[00:56:07.83] spk_3:
I 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 9 99 90 is informational return that all non non profit organizations of a certain size are required to file and it’s publicly available information. So if your ABC nonprofits and they’re trying to set those targets or trying to understand and understand where they’re at or how they’re doing it. Like, hey XYZ nonprofit across the street, let’s see what they’re doing. You can look at their 9 90 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 would recommend is, is understand where you’re at. Um understanding where your brother and sister non profits 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 non profits as well?

[00:56:48.41] spk_0:
All right. Ok. Leaving it there. Then, Dean. All right, Martin and Lewis, Dean, Dean Del, you’ll find him on linkedin. Jerry Frick. Also on linkedin, their firm is at veracity pros dot com. Dean Jerry. Thank you. Thank you very much. Thank you.

[00:56:51.68] spk_2:
Thank you, tony. It was

[00:57:26.93] spk_0:
really a pleasure. Oh, 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 members 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. Uh That’s a uh just a AAA further resource beyond this excellent conversation that Dean and Jerry and I just had

[00:57:45.73] spk_1:
next week, the surprising gift of doubt from the archive with Mark Pittman. If you missed any part of this weeks show,

[00:57:48.66] spk_0:
I beseech you find it at tony-martignetti dot com. Don’t forget that name tony-martignetti

[00:57:55.82] spk_1:
or no coffee for you. We’re sponsored by donor box. Outdated donation forms blocking your supporters, generosity. Donor box. Fast, flexible and friendly fundraising forms for your nonprofit donor box dot org.

[00:58:13.67] spk_0:
I still love that alliteration, fast flexible, friendly fundraising forms. All right, sorry.

[00:58:35.12] spk_1:
And by Kela, grow revenue, engage donors and increase efficiency with Kila. The fundraisers CRM visit Kila dot co to join the thousands of fundraisers using Kila to exceed their goals. Our creative producer is Claire Meyerhoff. I’m your associate producer, Kate martignetti. The show’s social media is by Susan Chavez. Mark Silverman is our web guide. This music is by Scott Stein.

[00:59:02.18] spk_0:
Thank 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.