nonprofit finance fund philanthropy california full cost ... cost workshop_2 hr... · most full...

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nff.org ©2017 Nonprofit Finance Fund®

Nonprofit Finance Fund®

Philanthropy California Full Cost Project:Understanding Full Cost

Presented by

Claire KnowltonDirector

San Diego | 213 623 7001November 3, 2017

1nff.org ©2017 Nonprofit Finance Fund®

Nonprofit Finance Fund: Where Money Meets Mission

We unlock the potential of mission-driven organizations through

• Tailored investments

• Strategic advice

• Accessible insights

Guided by our Core Values

NFF envisions a world where capital and expertise come together to create a more just and vibrant society.

NFF’s Values

Responsive-ness

Leading By Doing

Generosity of Spirit

Rigor Without Attitude

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The Theory Behind Today’s Workshops

Technical Cultural

Nonprofits and funders share the same goals, but our

funding system is broken

Philanthropy, nonprofits and government have roles to

play in the solution

Real, lasting change requires meaningful shifts in both

technical and cultural practices


Today’s Goals

Define the problem

Understand how a full cost funding approach makes

better use of limited philanthropic resource

Identify our role in the solution

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In the for-profit world:

“Rules” of FOR-PROFIT Finance

Customer buys the product►

Price includes the full cost of doing business

►

Overhead and profits are seen as necessary and regular part of the business

►

Direct

Cost

26%

(77¢)

Overhead

& Profit

74%

12-ounce latte = $3.00

Source: Matt Milletto, Vice President of the American Barista & Coffee School

► Investors prioritize return (outcomes) over expense allocation (inputs)

In other words…


Transactions in the Nonprofit World

Nonprofits fill a market gap to meet needs

without financial return

Transactions are more complex

Recipient can’t pay full price; third parties must

pay the difference leading to two challenges:

Nonprofits must work to secure third party

funding to deliver programs

Third parties have no direct feedback loop to

assess value and quality of nonprofit programs

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There is No Direct Feedback Loop for Donors and Funders

Customer buys the service

Business provides

the service

Customer uses the service

Customer evaluates experience

For-profit transactions are easily assessed

Nonprofit transactions do not connect payer and service

Nonprofit provides

the service

Donor pays for

the service

Recipient uses the service

Nonprofit / Funder interactions try to make up for absent feedback loop


Reorient the Sector From Compliance to Impact

Nature of nonprofit transactions create inherent lack of

trust creating a broken funding system

Overhead myth

Wasteful compliance demands

Solution: Interrupt and intervene. Outcome/ impact of

services provided is a better accountability measure

Recognize we aren’t there yet. Without adequate

resources, most nonprofits haven’t been able to invest in

the systems and people that measure outcomes

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Nonprofits Need Profits:Understanding Full Cost

Nonprofits need to cover the full cost of delivering mission

Nonprofits have heard “no” for

so long, many don’t calculate or

ask for full cost needs

Failure to fund full costs

undermines health of the sector

and ability to deliver outcomes

Most full cost needs are met by

generating year-over-year

surpluses


About Expenses

Expenses

Found on the income statement

Include:

Operating and non-operating expenses

Depreciation

Ongoing cost of impact measurement and

some upfront costs of impact measurement

‘Direct’ program expenses

‘Indirect’ / ‘overhead’ expenses

Unfunded expenses

Total Expenses are NOT

Any purchase that is capitalized

Repaying debt

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Defining ‘Unfunded Expenses’

Unfunded Expenses = Expenses that are not currently incurred, but, if covered, would allow the organization to work at their current level in a way that is reasonable and fair.

‘Sweat equity’ – overworking and underpaying staff – is the

most common example, such as:

The gap between current wages and fair wages for the

exact same amount of work.

The cost to hire a 20hr/week assistant that would allow

the ED to reduce her time from 60hr/week to 40hr/week.

Other examples: sub-par supplies, slow internet

Unfunded expenses are NOT

Expenses to expand or do more.


About Working Capital

Working Capital

Dollars to cover predictable timing of cash

ebbs and flows

Dollars to continue business operations if

receivables are late or bills must be paid

early

Needed by all organizations

Amount needed varies by organization

Easily accessible to management (i.e. in the

checking account, not restricted or strictly

designated)

Connected to cash flow planning/projections

Working Capital is NOT

Dollars to cover lost revenue, unplanned

expenses, or deficits

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About Reserves

Reserves

Dollars used and eventually replenished

Often board designated

Example of intended uses

Operating reserve to protect the organization

from risk by covering short-term deficits

– Lost funding, unexpected expense,

leadership transition

Facilities reserve to maintain building and

equipment, pay for repairs/replacement

R&D reserve to allow for trial and error

– Artistic risk; test new program approach

Investment reserve to generate revenue


About Reserves (continued)

Reserves

Reserves are need by all, but size and purpose

varies by organization

Accessible to management under certain

conditions

May require board approval to spend

May be held as cash in savings account, or as

investments that can be liquidated in a

reasonable timeframe

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About Debt Principal Repayment

Debt Principal Repayment

Dollars to pay down debt

Debt can be

Line of credit

Mortgage

Loans from board members

Other forms of borrowing

Debt can be a valuable financing tool, but there

must be a plan to repay it

Repayment is commonly financed through year-

to-year surpluses


About Fixed Asset Additions

Fixed Asset Additions

Purchase of new equipment, buildings,

furniture, land, leaseholder improvements,

etc.

Fixed Asset Additions are NOT

Replacement or simple maintenance of

existing fixed assets

Save for replacement in reserves

Small equipment purchases that won’t be

depreciated

Small purchases are expensed

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About Change Capital

Change Capital

Periodic reinvestment in organization to change

its business model (how it makes and spends

money in service of mission)

Covers up-front costs of change and deficits

until new business model revenue exceeds new

business model expenses

Includes launch/scale of subsidy businesses

to sustain the organization

Typically large, flexible, multi-year funding

from an external source

Change Capital is NOT

Self-funded, organic growth


How Change Capital Supports Business Repositioning

Start-Up Proof of

Concept

Expansion Sustainable

Operations

$

Recurring Revenue

Expense

Start-Up ExpansionProof of Concept

Fully Funded Operations

Business Model Revenue

Expense

Goal: Generate surpluses for current capital needs, future change and resiliency

Business Model Deficits: Incurred on route to new business model, paid for with change capital

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Defining Two Different Types of Money: Capital & Revenue

There are two flavors of funder money:Capital and Revenue

They play different roles in an enterprise

Capital is for Change (adaptation, growth)

Revenue funds Regular operations

(routine)

Both Capital and Revenue are necessary for mission success


Revenue

Funds to do what the organization already does

Pays for day-to-day operating expenses and margin to

contribute to other full costs (i.e. working capital, reserves,

debt repayment)

Recurring in nature

Capital

Funds to change what the organization does

Growth (launch or scale a program, expand to new places)

Improving or launching a subsidy business

Buying/renovating space

Significant investment in IT, HR, fiscal, etc.

Retrenchment/downsizing/merger

Episodic in nature

Revenue and Capital Pay for Different Needs

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Builders and Buyers

Buyers provide REVENUE Builders provide CAPITAL

RoleI’m supporting a program that seeks to improve high school graduation rates in the inner city.

I’m providing the funds you need to replicate your program in two more schools.

ExchangeHere’s $25,000. How many after-school sessions will that support next year?

Here’s $2 million. How long until your revenue is able to cover operating expenses in those schools?

SuccessGraduation rates were on target and I’d like to support the same program next year.

Congratulations! You don’t need my money again for a while.

Accountability

StraightforwardDid you do what I paid you to do?

ComplexThis is a journey together, adjusting strategy along the way, to build a enterprise that prompts other people to participate in the buyer role.


Total ExpensesOperating, non-operating, and unfunded expenses

Working CapitalAccess to cash for day-to-day needs

ReservesSavings, a “rainy day” fund

Debt Principal RepaymentMortgage, line of credit, etc.

Fixed Asset AdditionsMoney to purchase a new building, or computers

Change CapitalResources to adapt, grow, and/or expand

‘Must haves’ for all organizations

Full Cost Needs Vary; Three ‘Must Haves’ Apply to Every Organization

Sometimesneeded by someorganizations

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Common Concerns and Objections

Does this mean I pay more and get less?

We fund programs.

Full cost doesn’t apply

to us.

My foundation has policies

against funding certain things.

Does this mean I give fewer grants?

How am I supposed to calculate the full

cost of my grantees?

What about bad actors?

How will I know our funds are being used as

intended?My grantees don’t measure

outcomes.

23nff.org payforsuccess.org ©2017 Nonprofit Finance Fund®

How to Be a Good Buyer

Due Diligence

Ask for routine documents already produced by the organization: standard plans, reports, budgets, and data/evidence on the organization’s standard schedule

Costs Funded

Fair share of full cost

Fund average price per outcome or output rather than ‘direct expenses + % of indirect expenses’

If your systems require an indirect rate, improve your definition of indirect to other components of full cost

Measuring Success

Measure value to the community served: outcomes are best, outputs can be used if outcomes are not yet measured

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24nff.org payforsuccess.org ©2017 Nonprofit Finance Fund®

How to Be a Good Builder

Due Diligence

Ask for plans for change, who are the other builders, and negotiate upfront on data collection and reporting schedules

Costs Funded

Highest priority full cost needs to achieve agreed upon goals

Measuring Success

Extent to which organization met the agreed upon goals (i.e. expansion, change in programs, ability to generate buy revenue)


11%

9%

19%

20%

32%

53%

0% 20% 40% 60% 80% 100%

Working capital (cash flow needs)

Felxible capital for change/growth

Acquiring or renovating a facility

Multiyear funding

General operating support

Expanding programs

What Do Nonprofits Feel They Can Discuss With Funders?

Asking Nonprofit Leaders: My NPO can have open dialogue with funders about...

Source: NFF 2014 State of the Sector Survey

Flexible

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40%

47%

51%

65%

70%

85%

11%

9%

19%

20%

32%

53%

0% 20% 40% 60% 80% 100%

Working capital (cash flow needs)

Felxible capital for change/growth

Acquiring or renovating a facility

Multiyear funding

General operating support

Expanding programs

Funders Report More Openness Than Nonprofits Perceive

Asking Nonprofit Leaders: My NPO can have open dialogue with funders about...

Asking Funders: Overall, are you willing to engage in an open dialogue with nonprofits on funding for these purposes?

Source: NFF 2014 State of the Sector SurveySource: Grantmakers for Effective Organizations 2014 Survey

Flexible


And stay connected: nff.org/socialmedia

nff.org ©2017 Nonprofit Finance Fund® 27

Claire KnowltonDirector, Advisory [email protected]

Thank you

To learn more about NFF, visit us at nff.org

Nonprofit Finance Fund®

For more information and resources on full costs, visit fullcostproject.org

http://fullcostproject.org/

nonprofit finance fund philanthropy california full cost ... cost workshop_2 hr... · most full...

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