Friday, August 29, 2008

In-Kind Gifts 101: Definition, Acknowledgement & the Law

An in-kind donation is a gift of goods and services. In-kind goods and services are typically goods and services that your organization would have to otherwise buy if they hadn't been donated. The value of the donated supplies or services may be recorded as the amount that your organization would have to pay for similar items.

Now, in-kind gifts should be a mirrored in your budget. You should have a line item for "in-kind" in both the income and expense sections of your budget (in-kind income = in-kind expense). For example, if you have in-kind printing worth $1,000. Then you would list "in-kind printing- $1,000" in the income section. And you would list "in-kind printing- $1,000" in the expense section.

When you receive an in-kind gift, the donor will often send you a note or letter placing a value on the gift. For example, when an artist donates an original art piece for your silent auction, they will often tell you that the value is X dollars. Many, many organizations will then send them a thank you/acknowledgement letter saying, Thank you for your generous gift of your original art valued at X dollars." THIS IS WRONG. Never place a value on an in-kind gift. Even if the value is told to you by the donor, and they ask you to send a letter with that value, you still can't. By law, non-profit organizations cannot provide a value of an in-kind gift to a donor. This is very important. Raise-Funds.com has an excellent and easy to understand explanation of this, and includes sample wording for your acknowledgement letters, to read the article click here.

Wednesday, August 27, 2008

Nonprofit Accounting: Cash vs. Accrual

It is very important to make sure you are using the right accounting system for your organization. Using the wrong accounting system can hurt your financial sustainability and cash flow. There are two principal types of accounting systems, cash basis and accrual basis:

Cash: With cash basis of accounting, you only record income when you actually receive it in the door. So, if you receive a pledge letter from a donor or foundation, you only count the money when you actually receive the check. The same thing with expenses. You only record expenses when you actually write the check to the vendor- not when you receive the bill. It sounds like common sense right? Why wouldn't everyone use this method? Well, not all nonprofits use this method because it can distort your revenue and expenses. For example, you may show that you had a hugely successful month but in reality it was a slow month and you just had several donors and foundations pay out their pledges. It also can make it difficult to match income and expenses to get an idea of net revenue. There are some positives though. The cash method shows a better picture of how much cash you have and helps ensure good cash flow (you have enough income coming in to pay the expenses you have at any given time). Most smaller nonprofit organizations use cash basis accounting because of it's simplicity.

Accrual: With the accrual method, you record revenue when you receive the commitment. So, for example, if you receive a letter from a foundation saying that they have awarded you a $50,000 grant, you would count that $50,000 on the day that you received the letter- even if you don't actually receive the money for several months. The same thing for expenses. You record an expense as soon as you receive the bill. For example, if you purchase a new printer on credit in December and you don't have to pay for it until May. You would count that as an expense in December, even though the money isn't leaving your bank account for several months. This method provides you with a clearer picture of the financial status of your organization. Although, it can hurt your cash flow because it is often difficult to tell how much exactly you have in reserves. You make think you have thousands in the bank because you received several commitment letters, but in reality you have no money in the bank because you haven't actually received the checks yet. There are also issues with counting restricted money in one year, when the money was actually intended for another year.

Overall, the accrual method is the preferred standard because it shows the relationship between income and expenses most accurately.

To read more, Beverly Goodman at The Non-profit Times wrote an excellent article about selecting the correct accounting method.

Monday, August 25, 2008

Special Events ROI- Make it worth your while

Although special events have the lowest return-on-investment (ROI) of the top fundraising tactics, over 60% of nonprofit organizations use them to raise funds. For every $1 an organization spends on special events, they raise an average of $3.20. Click here to see the full return-on-investment chart for the top fundraising tactics.

This means that it is especially important to pick the right event to raise the most money that your organization can with the smallest investment. Not every event will work for every organization, and the same event could raise $100,000 for the Red Cross, but only raise $5,000 for a local animal rescue. It’s all about picking what is right for your organization, and what your organization can handle. Here are the top four event types (in no particular order):

1. Auctions
Silent and live auctions are one of the most common forms of special events. Nonprofit organizations secure donated items from businesses and individual donors and auction them off at a silent or live auction, or in an online auction. These are usually held in conjunction with a dinner or gala. Online auctions can help reduce the overhead of an event and increase dollars raised because they often have longer windows for bidding. To see a great example of an event that uses both silent and live auctions, see the Seattle Humane Society’s Tuxes and Tails, which raises over $400,000 every year.

2. Athletic Events
Athletic events include runs, walks, triathlons, bowl-a-thons, golf tournaments, and usually involve the participants raising a minimum amount of money to participate. These highly successful events include the Breast Cancer 3 Day and Relay for Life, which raise millions of dollars each year.

3. Gambling Events
Gambling events can include raffles and casino nights. Raffles raise money through selling raffle tickets for the chance to win a particular prize. Casino nights include all sorts of casino games including slot machines, black jack, and texas hold 'em. Raffles can be a lucrative fundraiser because they have a low cost and can raise a lot. Casino nights can be popular events and raise a lot of money as well. Legal restrictions around gambling vary state by state. Make sure to check your local laws before holding a gambling-related event.

4. Dinners/Galas
Dinners and galas are another popular choice for special events. They don't have to be a "dinner", they can be an event with appetizers, breakfast or lunch. The menu can include anything from filet mignon to hot dogs and cotton candy. The key to having a successful dinner or gala is to have a good program, it can include having a themed event (costume party or murder mystery party), having a musical or theatrical performance, speaker, fashion show or dance. These often also include another component to increase revenue, like a silent auction or a raffle.

Even with their low return-on-investment, special events are still a great fundraising tactic. As long as your organization use the event to not only raise money, but bring past, present, and new volunteers, donors and constituents into the organization they can be highly successful.

Thursday, August 21, 2008

Job Opening: Executive Director...You want it?

So, you want to be a non-profit executive? Now, you just need to figure out how to get there. The position of Executive Director is the most important in an organization; they are ultimately responsible for the day-to-day of the organization and can ensure its success. While this may seem like an impossible feat, and something you won’t be able to accomplish for many years, don’t worry. You can do it. I was able to lead my first organization before I turned 23 and I am not alone. With hundreds, if not thousands, of nonprofit executives retiring every year, strong leadership is needed.

So, how can you get there? Most organizations look for five key things in applications (these are listed in order of importance):

1. Fundraising Experience: In almost all postings for Executive Directors, you will see that a required qualification is something like “Fundraising experience, with demonstrated expertise in personal solicitation of individual gifts” or “Proven fund development experience and the ability to grow an organization’s budget through fundraising initiatives are imperative.” If nonprofit leadership is a career goal, I strongly encourage you to take a position in Development, preferably as Development Director. This will give you extremely beneficial experience working with donors, planning events and writing grants. You can also serve on fundraising committees of nonprofit organizations as well.

2. Financial/Organizational Management Experience: They want to make sure that you can actually run their organization, so you will see something like: “Candidates must have a minimum of 5-7 years of leadership experience as CEO or Director of a non-profit, faith-based, or volunteer-oriented organization”, “Candidate must have a solid understanding of finance, marketing, and organizational development”, or “Managerial skills in planning, budgeting, finance, staffing, and team building.” This can be a hard qualification to meet if you have not had nonprofit leadership in the past. This can be satisfied with continuing education and professional development. There are hundreds of workshops, seminars, and mini-MBA programs that can help bolster your financial and organizational management skills. You can also make the case that any director-lever position you have had translates to this qualification, particularly if you had to develop your own budget and/or manage staff.

3. Communication Skills: Since you will be the public image of the organization, you need to make sure you have excellent communication skills. Qualifications often include: “Excellent oral and written communication skills”, “As the key leader of the organization, this individual must be an effective public speaker and motivational leader”, “Outstanding interpersonal and communication skills are essential.” That means you need to make sure you have strong public speaking and written communication skills. There are a variety of ways to fine tune these skills, you can present at local conferences, sign up for you local Toastmasters group, and/or write articles for your local nonprofit newspaper.

4. Education: Nowadays a Bachelor’s degree is pretty much a given and most organizations will expect that you have them. You will usually see “Minimum qualifications: Undergraduate degree in related field, MA or MBA preferred” or “Requires a college degree in Business, Marketing or related field.” Advanced degrees can be particularly helpful with competitive positions. With the vast array of part-time or online programs, you can complete your degree(s) while working full-time. I also want to note that if you have sufficient experience (over 10 years), many organizations are willing to overlook this qualification.

5. Field Specific Experience: Some organizations want you to know something about their field and will include something along the lines of “Familiarity with the Lutheran community and its values”, “Commitment to our mission and a passion for working to overcome the challenges facing American Indian women and family’s in today’s world are mandatory” or “Experience with dementia preferred” in the posting. This can be a hard qualification to meet. It is not often that there will be an opening at the organization you have volunteered with, served on the board of, etc. So, my advice to help you meet this qualification is to get involved in your community. Volunteer, serve on boards and committees, this can only help you in the end and who knows, maybe that experience will directly relate to the organization you end up leading.

Now, I realize that this may seem like a daunting task. But, gaining all these experiences so that you can become a nonprofit leader can be done. Just believe in yourself and know that you can bring a lot to an organization and will have the opportunity to work on a cause that is important to you.

Monday, August 18, 2008

Reader Question: What should be included in our organization's annual report?

An organization's annual report should include:

  • Description of the organization’s purpose

This should include the organization's mission and vision statements.

  • Description of its program activities, accomplishments and geographic area served

It is a nice touch to also include quotes from program participants or community partners about your programs.

  • Summary of the total cost of each major program (to the extent required in the IRS Form 990)

This includes listing the cost for each major program, and your fundraising and management costs. Most organizations list both income and expenses. Using charts, like a pie chart, can help your constituents visualize your expenses and income.

  • List of the organization’s board of directors

This includes listing their titles (Board Chair, Vice Chair, Treasurer and Secretary). I also recommend including a staff listing if the organization has less than 15 staff.

Final thoughts- make sure to get a PDF of your annual report and put it on your website. Many donors prefer to use your website to receive information and it helps save on paper.

Friday, August 15, 2008

Should nonprofits act more business-like?

Yes. In my opinion, they should. Now, this doesn't mean that I think a nonprofit organization should operate like a for-profit business in every way, but I do think there are some business practices that could help nonprofits:

Making a profit. Pretty much all businesses try to make a profit every year. This is a standard that nonprofits should have as well. Nonprofit organizations should be budgeting for a surplus that should be put into a reserve. There are many numbers that are thrown around about how much a nonprofit should have in its reserves, usually ranging between 6 months to 2 years of operating expenses. Now, once a nonprofit has an appropriate reserve, then they should no longer budget for a surplus, and use the money to fulfill their mission. But, I have seen too many nonprofits that have had a bad year or lost a grant and had to cut or significantly reduce a program.

Succession Planning. This is a term you rarely hear while working at a nonprofit organization. Most do not train their employees to advance, they often look outside their organization to fill senior positions. This is a mistake. One of the top reasons cited for turnover is lack of promotion and career development opportunities. And most people know that turnover is expensive. In fact, turnover is so expensive that studies have calculated the cost to be 150% of that person's salary. That means that if you are paying your Development Director $40,000 per year, it will cost you $60,000 to replace them. Instilling a practice of succession planning will prepare your organization for when your senior management leaves and can help provide continuity. ManagementHelp has some resources for succession planning.

Sarbanes Oxley. Many nonprofits are slowly moving to adopt these practices, but some are not. Since nonprofit organizations receive donated funds, they have a high level of accountability for those funds. Adopting Sarabanes Oxley practices will help further a culture of accountability. Sarbanes Oxley practices include: having a written conflict of interest policy (that is signed every year by both board and staff members), having an external audit and changing auditors every 5 years, forming an independent audit committee, having a whistleblower policy, and having a document destruction and retention policy. These are just a few ways to adopt Sarbanes Oxley practices for your organization. Email me for sample policies.

Nonprofit organizations are not for-profit businesses. They exist to satisfy their mission, but in some ways acting more like a business can help the organization and its constituents.

Thursday, August 14, 2008

Want funding? Show me the outcomes.

In the past decade we continue to see a shift in how a nonprofit measures success. Increasingly, funders are demanding outcomes-based evaluation, and some are even willing to pay for it. Ensuring that programs do what they are supposed to be doing has always been important, but as we move into the future, they will have to show proof of their success. Although, nonprofit organizations should not complete program evaluation only to please their funder, they should complete program evaluation to ensure they their programs are truly effective, and outcome-based evaluation focuses on whether programs are really making a difference for clients.

While some nonprofits may say, "I'm already evaluating my programs!", I am not talking about evaluation in terms of many people you serve, participant satisfaction, or how much money you spent per client. I am talking about the impact your services have for your constituents during and after your programming.

The W. K. Kellogg Foundation has a wealth of resources published online that you can download for free. Their Evaluation Handbook is useful if you would like to learn more about evaluation and provides a blueprint for conducting project-level evaluations. The Foundation believes that nonprofit organizations should be using logic models, which are "a learning and management tool that can be used throughout a program’s life – no matter what your stake in the program. Using evaluation and the logic model results in effective programming and offers greater learning opportunities, better documentation of outcomes, and shared knowledge about what works and why. The logic model is a beneficial evaluation tool that facilitates effective program planning, implementation, and evaluation." You can download the Foundation's free Logic Model Development Guide here.

Tuesday, August 12, 2008

Foundation Highlight: The McKnight Foundation

The McKnight Foundation is a Minnesota-based private philanthropic foundation that makes grants to nonprofits throughout the world, with about 75% of its' grantmaking taking place in Minnesota. The McKnight Foundation grants over $93 million annually to the following program areas: Arts, Children & Families, Environment, International, Neuroscience Research, Region & Communities and Minnesota Initiative Foundations.

Process for applying: The McKnight Foundation has different guidelines for each of its programs. The Foundation requires a letter of inquiry prior to submitted a full proposal. They do not currently have an online submission process. The Foundation does site visits before granting to an organization.

Timeline: Each program has different deadlines, make sure to check their website for detailed instructions and deadlines. Once you send in a letter of inquiry, the Foundation will respond within 60 days. When I sent in a letter of inquiry they responded much quicker, in only a couple weeks to invite a full proposal. Here is the timeline of my application: I sent in the letter of inquiry by August 1st, received a request for a full proposal in mid-August (the full proposal was due by the end of August), and submitted the full proposal by the last day in August. We had a site visit in late-October. I found out that our grant had been approved by the McKnight board late December and received the check within a week (before January 1st). So, the entire process from application to receiving the check took about five months.

Grants: The foundation funds project, planning, operating and capital grants. They also fund multi-year grants. The grant size ranges from millions to tens of thousands depending on the program and program area. It seems most grants fall around $50,000, with 85% of their grants being smaller than $100,000.

A few organizations they have funded: Metro Blooms, Africa 2000 Network-Uganda,
Cambodian Rural Development Team, Center for Effective Philanthropy, Northern Prairie Performing Arts

Side notes: The program officer I worked with was extremely helpful and was able to secure us an additional $10,000 more than we requested for a challenge grant to help increase our individual donations. So, don't forget, the program officer is your advocate and can help get your program funded.

Friday, August 8, 2008

Independent Contractor vs. Employee Part I

For larger nonprofit organizations, the decision to classify someone as an employee vs. as an independent contractor is fairly simple. But, for many smaller nonprofits with few or no staff this decision can be confusing and costly.

While calling a new hire an "Independent Contractor" can save an organization a fair amount of money in taxes, benefits, reimbursements, it can also cost that new hire as much as half of their paycheck and if the organization wrongly classifies them, it can cost the nonprofit organization enormous IRS fines.

How to know? Well, fortunately they are many excellent resources available online right now to determine whether someone can be classified as an independent contractor. The most basic and easy to use, is the IRS's 20 Factor Test. These 20 factors include things like what level of instruction will the person have and will they have a weekly, biweekly or monthly pay schedule. To be classified as an employee, a new hire only needs to meet a few of these 20 factors. The IRS explains that these factors fall into three categories that provide evidence about the degree of control and independence the new hire will have. The three categories are Behavioral, Financial and Type of Relationship.

So, you have reviewed the factors and decided to classify your new hire as an independent contractor. What does this mean for them? First, they will need to determine whether they have to pay self-employment tax and make estimated payments. As long as they are making $400 or more each year, they will have to pay self-employment taxes, which is 15.3%. They will also have to make estimated payments (pre-payment of their taxes), if they will owe $1,000 or more in taxes. Click here to read more about these two tax issues. They also need to keep track of their receipts, mileage, income and expenses for their taxes.

What if you wrongly classify a new hire as an independent contractor? It can be costly. Not only will your organization be possible liable for attorney fees, back pay and overtime, but they also could be responsible for fringe benefits and expenses that person missed out on. On top of that, the IRS can fine the organization for its misclassifcation. So, if you are unsure, then make to consult an attorney.

Click here to see Independent Contractor vs. Employee Part II.

Wednesday, August 6, 2008

High-Tech Society = High-Tech Nonprofits

Just how tech-savy is your organization? Many organizations have been on the technology bandwagon for years. Some are just joining. Here are 5 technology tools (in no particular order) that many nonprofits are using, and all nonprofits should know about:

  1. Email newsletters- Organizations, small and large, can take advantage of email newsletters. With postage rates increasing every year, the savings can be enormous for those with large lists. This coupled with society's shift towards e-mail being the primary form of communication makes e-newsletters a no-brainer. There are multiple reasonably priced e-newsletter providers (myemma, constantcontact).

  2. TechSoup- An extremely resourceful website that all nonprofit organizations should know about and be taking advantage of. The website offers hugely discounted software and hardware, and has forums and resources for tech info.

  3. Blogs- These is an incredibly easy and free way to communicate to your donors, volunteers, and the public. DonorPowerBlog wrote a great article about why nonprofits should blog, to read it click here. Many nonprofits use blogs as communication tools, here are some examples: Sierra Club, NARAL Pro-Choice, and the Minnesota Coalition on Government Information.

  4. Web 2.0- Websites and web designers continue to enhance creativity, collaboration and information sharing through developing tools for web use. These tools include FeedBurner, RSS, and Podcasts.
  5. Online Meeting and Sharing Tools- there are many free and easy to use tools to communicate with others online. This includes instant messaging, and nonprofits can even use the Internet to make free conference calls.

Monday, August 4, 2008

Nonprofits and politics....Do they mix?

The Chronicle of Philanthropy recently reported that "Nearly three-fourths of charities do some kind of advocacy or lobbying, but the vast majority of them devote less than 2 percent of their budgets to such activities, according to results of survey released today." The large percentage of nonprofit organizations doing some form of advocacy or lobbying will be surprising to most. In fact, many nonprofits still believe that they are not allowed to get involved with politics in any way.

While 501(c)(3) nonprofit organizations are not allowed to endorse political candidates, they are allowed to participate in either direct or grassroots lobbying. The Minnesota Council of Nonprofits summarizes these two forms of lobbying well:

Direct lobbying is when you state your position on specific legislation to legislators or other government employees who participate in the formulation of legislation, or urge your members to do so. In order to count as direct lobbying it must refer to specific legislation and express a view on it.

Grassroots lobbying is when you state your position on specific legislation to the general public AND ask the general public to contact legislators or other government employees who participate in the formulation of legislation. If you do not include a call to action in your communication to the general public, it is not lobbying. Urging your members to lobby counts as direct lobbying not grassroots lobbying.

You can read more about this distinction, and nonprofit lobbying and the law at the Center for Lobbying in the Public Interest's website.

So, why should nonprofits lobby? Do they really need to get involved in the political process and educate voters and candidates? The answer is YES. Nonprofits can change laws and work towards solving many of the problems their constituents face. Most of the barriers people face today could removed by simple policy changes. Public policy changes can mean that our schools are fully funded, that everyone has health insurance, and that parents can afford to pay rent and buy food for their children in same month. Look at what Mothers Against Drunk Driving has accomplished. They have convinced dozens of states to toughen their drunk driving laws. Which has resulted in lowering the number of drunk driving deaths nationwide. If you still aren't convinced, read the Minnesota Council of Nonprofits' 10 Reasons why you should lobby for your cause.

In the coming years, we will continue to see this shift with more and more nonprofits advocating for their causes and we will see more foundations like the Arcus Foundation , the Joyce Foundation and the Kirsch Foundation who will fund public policy advocacy.

Saturday, August 2, 2008

The Blind Proposal

What is the best approach to grant writing? Many development professionals and grant writers believe that the best approach to grant writing is to apply to as many foundations as they possibly can each year. Others argue that this is a waste of time and not an effective approach.

This is a common issue in organizations that have new staff or find themselves with a cash deficit. Development staff often feel pressured to get applications out and will skip key steps in grant research. In my experience, the best approach is to send out fewer, targeted proposals to foundations that you have already spoken with and have at least a 50-50 chance of receiving funding. Here is the process I use for grant writing:

Grant Writing Process
1. Identify prospects (similar organization’s annual reports, RFPs, referrals, etc).
2. Review their online guidelines to see if there is a potential fit.
3. Look at their latest 990 on GuideStar to see who they have funded and what size of grants they have given out.
4. Develop an outline of two ideas or programs that you can pitch to a program officer.
5. Call the program officer.

A conversation should go like this:
1) Explain who you are (development person at Nonprofit SOS).
2) Ask if they are familiar with Nonprofit SOS? If yes, great! If not, then take a minute to explain the mission of your organization.
3) Tell them that you have reviewed their guidelines and are interested in submitting a proposal.
4) Ask them if this would be a good time for you to take a few minutes to tell them about the proposal, get their feedback and make sure it is a good fit with the organization.

Make sure to take detailed notes from the conversation. If the program officer is interested and thinks it is a good fit, they often will use the wording you need to use to interest the Board. In most cases, this phone conversation will tell you whether or not it is worth your time to submit a proposal.

Before ending the call, make sure to ask about the proposal amount. You can say something like this: “From what you've said, I think this project might be a good fit for the foundation. I'd like to ask for this amount $--. Would you welcome such a proposal from Nonprofit SOS at this time?

I almost never send blind proposals. If I cannot reach the program officer, then I will send a blind letter of inquiry (LOI) to find out if they are interested. Although, some people do find success sending dozens of blind proposals every year.

What approach do you find works best for you?

You can find some great tips about grant writing here.

Welcome to Nonprofit SOS

Welcome! This mission of this blog is to serve as a resource for all those in the nonprofit community. Feel free to send me questions at any time and I will do my best to either answer them on this blog, or email you with a response.