21 st Century Development Team

1. 21st Century Development Team Part 1 Connecting Development to Finance Gregg Davis – Impact Consults

2. Finance Theory for Nonprofits Liquidity Adaptability Durability (sustainability) Build (capital) and Buy (revenue) Types of capital Infrastructure Business model and mission

3. Nonprofit Finance Liquidity – cash & unrestricted liquid net assets to pay the bills

4. Nonprofit Finance Adaptability – sufficient reserves to cover risks, opportunities & the unexpected

5. Nonprofit Finance Durability – does reliable revenue cover expenses

6. Build and Buy: Imagine an Ice Cream Shop

7. Build and Buy Ice Cream Shop Capital (build – episodic $$) Long before initial revenue from operations you need to spend capital. Real estate, kitchen equipment, hire and train servers. After opening: it takes time to develop loyal customers, a perfect menu, reach breakeven Revenue (buy – regular $$) Paying “customers” or 3rd party payers): Purchases of ice cream and lattes Credit to George Overholser

8. Types of Capital Working Capital Change Capital Growth Capital Risk & Opportunity Capital Facilities Capital Debt Endowment

9. Working Capital Tides an organization over during predictable lows in its operating cycle, covering costs until revenue comes in.

10. Change Capital Funds improvements in efficiency or quality of program or operations and/or adjustments to the size and scope of the organization. The infusion of funds is extraordinary and of limited duration The capital is flexible, what is achieved is more important than what it is spent on. Supports risk taking on way to desired change. May cover temporary deficits. After capital is spent org should be able to more fully cover its costs with reliable revenue sources (until next period of major change/growth)

11. Growth Capital Money that builds the organization so that it can deliver significantly more services. It can support investments in infrastructure, staffing, technology, systems. If your nonprofit solution could significantly expand to more people, your organization could benefit from a plan for growth capital. Ex: The ice cream shop (expand the firm)

12. Risk & Opportunity; Facilities & Equipment Risk and Opportunity Capital Funds to weather the unexpected and support experimentation or course correction. Facilities and Equipment Capital Organizations can raise funds for specific acquisitions or upgrades, or accumulate reserves to meet future needs as they arise.

13. Loans Nonprofits have been shy about loans because they are so unsure of future cash flows. However, program-related investments (PRIs), an under used tool that foundations possess, are loans to nonprofits at low or no interest rates that can be forgiven at the end of the loan period.Lower interest rates and the potential for forgiveness makes PRIs an opportunity for nonprofits. You may need to encourage your foundation donors to explore this potential.

14. Endowments Raised capital that is often permanently restricted and generates investment income to support the organization. Investment income can be used as revenue or re-directed towards any of the types of capital above.

15. What is Infrastructure? Funding for critical organizational capacity building (infrastructure) is given the (demonized) name ‘overhead’ in the nonprofit sector. Growth is unsustainable without these. Technology (usually IT) Financial systems Staffing for development, finance, administration Planning Facilities

16. Business model vs. Mission/Program Several organization share the mission of reducing poverty for children in the rural south. Their business models may be very diverse: One advocates in Washington for better policies to combat poverty A second provides Meals on Wheels type food deliveries A third provides job training and placement to at parents in at risk families A fourth operates a program which collects left over food from restaurants and supermarkets

17. Business Model vs. Mission/Program Organizations can have varying missions but very similar core businesses – consider a theater, a school and an airline. They have widely divergent missions but share the common business model of “filling seats”. Ticket sales or tuition buy the right to sit in a seat. They must figure out how to pay for those seats, maintain them, expand or contract them and sell more of them. They must adequately pay artists, pilots and teachers. The core business model drives capital structure. These businesses will all tend to have high plant & equipment, low receivables, and intermediate cash and investments. Credit Clara Miller

18. Practice: Growth Capital Campaign Goal: build the organization so that it can deliver significantly more services Impact vs. Compliance perspective: what is important is the impact expanded – not what the funds are spent on Craft a pitch that connects new infrastructure elements to increased ability to create impact Year Up – Initial Investment Offering Practices Calculate net revenue for planned activities Create financial model: multi – year including earned income, service revenue, government contracts, PRI loans, donation-investments

19. (Example) Year Up: Initial Investment Offering YEAR UP GROWTH PLAN AND CAPITAL REQUIREMENTS CONTENTS I. EXECUTIVE SUMMARY .............................................................................................................2 II. SUMMARY CONSOLIDATED FINANCIAL DATA ..................................................................3 III. THE CHALLENGE: DISCONNECTED YOUNG ADULTS.......................................................4 IV. OUR RESPONSE: THE YEAR UP SOLUTION ..........................................................................6 SERVING STUDENTS SERVING CORPORATE PARTNERS V. YEAR UP RESULTS AND IMPACT ............................................................................................9 VI. COMPETITION ............................................................................................................................12 VII. GROWTH PLAN...........................................................................................................................13 VIII. GROWTH CAPITAL REQUIREMENTS ....................................................................................20 APPENDIX....................................................................................................................................23 A – WHAT PEOPLE ARE SAYING ABOUT YEAR UP B – YEAR UP MANAGEMENT TEAM C – BOARD OF DIRECTORS AND ADVISORY BOARDS D – PRO-FORMA FINANCIALS: 2007 – 2011 E – YEAR UP COST STRUCTURE

20. Year Up!

21. Practice: Change Capital Campaign Goal: the organization increases it’s ability to reliably, sustainably cover its full costs and generate operational surpluses Impact vs. compliance perspective: what is important is achieving the goal Pitch that connects new business practices, infrastructure and programs that realigns revenue with the full costs of operations and ability to generate reliable surpluses going forward Jacobs Pillow and BDT Practices Calculate net revenue for planned activities Create financial model: multi – year including earned income, service revenue, government contracts, PRI loans, donation-investments

22. (Example): Jacob’s Pillow Dance Goal: Build ‘Virtual Pillow’ for e-audience and new donor base, strengthening visibility and organizations capacity to generate reliable revenue. Plan Conduct research to understand leading practices in digital engagement Develop internal capacities in this space Launching online programs including curated collection of video clips, branded video channels and mobile social media Strengthen fundraising staff and systems through a redesign of development department and staff recruitment

23. Jacobs Pillow!

24. Nonprofit Finance: Endowment Funds Think carefully about opportunity cost of tying up as principle, 20x the annual 5% disbursement Consider the nature of your work: Could meeting current needs more intensively create positive ripple effects and ongoing impact greater than small impacts forever. What is more critical in your work: game changers or permanence? Climate change example: If you could give a donation that would slice greenhouse gas emissions by 50% globally over 3 years (and hope that your gift would stimulate others to join) would you do this or choose to take 5% of emissions each year forever?

25. (Example) Restricted matching gift to theater • 1M cash for permanent restricted endowment fund – matching gift 1:1 • Restricted to new program for “living theatre” • Theater: 1M annual budget, 60% earned (between Oct and March) • Cash reserve 200k pre-funds production costs for shows • 12 staff, 8 on program and production, 4 raise money and administer • Living theater will extend the mission of artistically cutting edge and socially relevant material Credit to Clara Miller

26. Restricted Endowment Gift Impact: A Change in Capitalization • $1M match means immediate demand for fundraising effort – match is also restricted • Means a draw on unrestricted cash to pay for increased fundraising, but will diminish free cash because $1M will be restricted • Program restriction: artistic staff expected to develop new works and present them – which will draw on existing cash reserve(now used to front 600k annual in revenues from shows) • If calendar of shows expands cash reserve will need to be permanently expanded to cover cash flow, receivables, etc. – this means more fundraising and mgt capacity required

27. Theater: A Change in Capitalization (2) • New shows will be risky regards revenue (they’re new) – once again creating pressure on cash reserve • How about endowment income!! Immediate projected income of 50k (optimistic) – will enable staff to expand by 50%-67% of one FTE. This may be inadequate for development of new programs AND program admin • It is clearly inadequate to fund ongoing cost to increase and maintain reserves, and beef up fundraising and its admin support • Even eventual 100k annual income with matched (now $2M endowment) will be restricted to new works and requires more unrestricted cash rather than filling the need for it

28. Lying to Donors • We can do the same program with less money: no you can’t • We can grow without additional staff or new resources: no you can’t • XX% of your donation goes to program: the mythical distinction • We can start a new program outside our mission, strategy, or core competence to get the donation: don’t take that pill Neo!! • Thanks we really need that endowment gift: but what I would really like to say is… Credit to Nell Edgington

29. Resources Nonprofit Finance Fund resources (www.nonprofitfinancefund.org ) NPFF: What are the core issues small nonprofits face? NPFF: Financial SCAN – Financial Health Dashboard NPFF: Case for Capital – Financial Reporting Done Right NPFF Finance Glossary Year Up: Initial Investment Offering Articles Clara Miller: Hidden in Plain Sight – Understanding Nonprofit Capital Structure George Overholser: Nonprofit Growth Capital-Building is not Buying