Financial Challenge Advice A Conversation with a Management Adviser

Susan Kenny Stevens is a consultant and author specializing in financial management and organizational development. A GrantCraft interviewer spoke with her recently about the financial challenges typically faced by new organizations.

Q: You've seen a lot of new organizations struggle in the early years to establish a strong financial foundation. Where, in your experience, do start-ups usually need assistance, and what can funders to do help?

A: From a funder's perspective there are two kinds of start-ups: new organizations that come to the funder for money, and organizations that funders start themselves. They have very different financial profiles, and they need different things.

Nonprofits that start under their own steam tend to be very lean in terms of staff. They're usually led by a charismatic person, someone who's pretty much a Jack- or Jill-of-all-trades. That person just wants to get a service out to the community or the marketplace, and they create an organization around them to get the job done. The last thing on their minds is spending money to get organized financially. They learn how to do fundraising from the get-go, but their financial management systems are often weak. I have literally seen people operate organizations out of their own checkbooks.

On the other hand, an organization that starts with a funder as progenitor usually has enough funding to hire two or three people in differentiated roles. One of my funder clients calls those projects "start-ups on steroids," a fantastic term, because they start all bulked up. They tend to be more financially mature right out of the gate, except in the area of fundraising. They haven't had to go through the hoops of getting people to invest in them.

Q: Are there basic financial characteristics or capabilities that a funder should encourage in a start-up?

A: First, a new organization should have a clear expectation of what service they're going to provide on a daily basis, what size they will attempt to be initially, and what resources they need to do that. I believe it's healthier for an organization to do what it does on a stable basis, especially at the beginning, than to have a budget that fluctuates from year to year.

Second, they need to understand how to manage cash flow, how to project the timing of income and match it to the timing of expenses. Cash flow is the name of the game. Every nonprofit has cash flow problems, particularly in the early days. If you have control of that, you have control of your destiny.

Third, and as simple as this may seem, it's not spending more money than they have. If you have a $50,000 budget, don't spend $51,000. If you have a $500,000 budget, don't spend $550,000. It's also important to get in the habit of spending on the basis of income, not budget. Many nonprofits think that if they have money in their budget, they can spend it. If money doesn't come in like you think it's going to, you don't have it to spend. If you spend more money than you have, you get mired down in debt, you're always looking over your shoulder, and you can't look forward.

Q: How can a grantmaker check for those things in a helpful way?

A: A big part of the job of a start-up organization is trying to piece funding together. One of the challenges is accounting for that money. A critical question a funder can ask is, "How do you account for your funds?" Some people will show you their check register. Others will be able to show a financial statement. The point is not to judge but to ask yourself, "Okay, if I were going to give them an extra $10,000, how might they use it to upgrade their financial knowledge or information management?"

Another option might be to help them outsource their back-office services through another nonprofit group or a management support organization, or MSO. In Minneapolis, I'm working with a group of mature organizations that are considering combining their information technology, finance, human resources, and building management services into one organization. In Denver, there's a group that provides bookkeeping, accounting, financial management and record keeping, including payroll, for nonprofits in the area. These groups are growing up in other places, as well. The assistance they provide is really valuable for management and compliance. And next year, when it's time to apply for another grant, the information is all there.

Q: Do you know of a grantmaker whose involvement made a real difference to a new organization?

A: Here's an example from my own life. Almost 25 years ago, when I was the administrator of a new nonprofit, I was putting together a proposal for a grant toward a capital campaign. As part of the request, I had to show the budget for the campaign. The program officer came back to me and said, "Great, but show me three years of income and expenses for your entire operations, too." And I thought, "What does this have to do with anything? There's absolutely no way I could come up with a three-year budget." And she said, "I'll help you. Bring this year's budget to me, and if you've got last year's budget, bring it, too." So I did. This was before we were using computers or spreadsheets. We laid out last year, this year, and then we just built the budget for three years. It seemed so simple, but I never would have thought of doing that. In fact, it was one of the most important professional experiences of my life.

What it did for me was get me out of short-term thinking and force me to create a financial plan for myself. I realized, "We're actually going to make it. We're here, and we're going to make it." That was a real gift. It wasn't even financial advice as much as a reshaping of my mindset about living hand to mouth.

Q: Did that grantmaker have special skills? Could anybody do that?

A: Anybody can do that. That grantmaker was no expert in finance, not at all. But she understood that our organization was ready to move to a new stage. If the foundation was going to invest in us, they wanted us to start looking at the next stage of life. She could have said the same thing to me at an earlier point, but I wouldn't have been ready to hear it.

To receive assistance, a group needs to be ready, willing, and able. Ready is one thing. Willing means being willing to change, to take the knowledge you gain from technical assistance and change your habits, systems, practices, whatever the issue is. Able means having the ability to take the advice and do something with it. I've seen groups that are ready, they're even willing, but they have a hundred things to worry about, and the financial side is still on the back burner.

Q: In your book Nonprofit Lifecycles: Stage-Based Wisdom for Nonprofit Capacity, you talk about organizations that shift from what you call the "start-up" stage to a more developed "growth" stage. What about organizations that don't make it? What goes wrong?

A: Some groups can't get organized financially. Others don't want to. A mindset takes hold that we don't have money and we never will. We rationalize why we don't have money, why no one will give us anything. This is a self-defeating attitude that can slip into our normal mindset.

The truth is, the more financially healthy and sound your organization is, the more likely you are to be able to focus on your mission. If you're deep in debt and you can't meet payroll and you don't know where the next nickel is coming from, it's pretty hard to be thinking about the next step in doing something wonderful for society. Some groups are plagued by practices that are not sound, and even self-defeating. They just can't get ahead.

Q: What about strategic planning? Should a funder help a start-up with that?

A: I don't believe in strategic plans in the start-up years. Strategic planning is about focus, and the last thing you want to do is focus a start-up. People buy into a plan, board members in particular. People who like routine like plans, but start-ups need something different. Start-ups need entrepreneurs who can think big and take advantage of opportunities.

The task of a start-up is to cast the net widely, get lots of people interested, and let it evolve with other people's input. I'm not saying there isn't a skeleton of a plan, but you want to put the flesh on the bone during the start-up phase. Ideally, a funder will let a start-up be a start-up. Let them make mistakes. Let them kind of stumble a little bit, because the fall isn't so great if they stumble, and they're learning as they go. Start-ups learn from experience. That's how they gain capacity.

Takeaways are critical, bite-sized resources either excerpted from our guides or written by Candid Learning for Funders using the guide's research data or themes post-publication. Attribution is given if the takeaway is a quotation.

This takeaway was derived from Working with Start-Ups.