Mat's Nonprofit Blog

The Dignity of a Reciprocal Exchange

2011-12-09T06:07:00.000-08:00

Nonprofit accounting is, well, a bit goofy. There are 2 types of money: earned and contributed. Earned revenue is generated from reciprocal exchanges: I give you money, you give me a service or good. Contributed revenue is generated from non-reciprocal exchanges: I give you money, and I don't expect anything in return.

Reciprocal exchanges are easy to follow and understand. If your nonprofit offers a service or good that I value and the price is acceptable, then I will buy it. Non-reciprocal exchanges -as they affect the person receiving the service or good - are more complicated. Donor A gives Nonprofit B money to help Person C. Person C either accepts what Nonprofit B is offering (usually for free because Donor A paid for it already) or they go to another Nonprofit or do without.

The problem with non-reciprocal exchanges is that nonprofits are concerned about making donors happy, not offering something that people who use their services or goods value. Reciprocal exchanges are more dignified because our success in selling something is based on the value assigned to it by the person buying it. As such, the buyer is exercising her or his choice. As we say in social work, their self-determination is maximized.

Of course, the reason why we have non-reciprocal exchanges is that often people in need - such as people who are homeless - don't have the money to pay for goods and services offered by nonprofits. But what if we acted as if they did and made an effort to determine if what we are offering is actually valued by the people we are trying to help?

Board Fix: Capture Self-Interest

2011-06-10T10:40:00.001-07:00

There is no shortage of articles, blog posts, and consulting hours devoted to the topic of improving board performance. The problems of low meeting attendance, a lack of effort and energy in making strategic decisions, and poor fundraising returns are among the complaints about boards.

A suggestion I make to students about boards is that board performance can be enhanced if members were more deeply engaged in learning about the social problem the nonprofit addresses and in exploring solutions. This could be more invigorating than suffering through yet another round of hearing staff reports and reading over poorly understood financial statements.

However, I think I have overlooked something very important: self-interest. Perhaps boards will be more engaged and higher performing when members are self-interested. I don't mean self-interested in the usual "duty of loyalty" (i.e. conflict of interest) manner, but self-interested in the mission of the nonprofit.

Here's an example. Let's say that Westside Community Development Corporation (WCDC) exists to improve the physical and social capital of the Westside neighborhood in Anytown, USA.

If I live in Westside, then I am very interested in whether WCDC is successful or not. My neighborhood quality of life (menacing, unleashed dogs roaming, property values, all night parties) may be at stake or perhaps the value of my home.

If I work for another nonprofit that works closely with and is affected by WCDC's performance, I have a stake.

If I'm the leader of a faith community in the Westside neighborhood, then I have a stake. And so on.

But too often, nonprofit board members don't have a direct stake in the nonprofit. They may be passionate about the mission and hope that the nonprofit will succeed, but at the end of the day, their personal and/or professional life is unaffected if the nonprofit doesn't succeed.

Maybe we need to comprise nonprofit boards with people who have something at stake in the nonprofit's success and figure out other ways that people who are simply passionate, but not self-interested, can play a role.

Mercy Corps vs. Marcie Carr

2011-05-05T08:28:00.000-07:00

Let's say that we're a nonprofit, say Mercy Corps, based in Portland, OR. Part of our mission is "sustainable economic development", so in post-earthquake Haiti, we launch a mobile banking project in partnership with Voila and Unibank.

And you say, boooorrring, who cares, right?

But then along comes Marcie Carr, a well educated, bright, energetic, and very well meaning person from the U.S. She starts an NGO in Topiland, a desperately poor country. Her little NGO does some pretty neat things, but nowhere near the scale of Mercy Corps. Marcie gets some awards for being a "Social Entrepreneur" but then goes to law school. However, before going to law school, she was thoughtful enough to make sure the Topis had assumed control of and responsibility for the NGO. Good for her.

What's the moral of these contrasting scenarios? It seems that Marcie is encouraged and rewarded for starting something new but is wise and kind enough to make sure it has a chance to survive (unfortunately, not all "social entrepreneurs" are as forward thinking), but not encouraged to join Mercy Corps and help them with their efforts.

Why is that? Are nonprofits and NGOs inaccessible to young people who want to do something more than answer the phone? Do we set up young people with visions of quick hit grandeur vs. helping them think through the long, arduous process of facilitating social change?

I don't know. I like Marcie. I like Mercy Corps. I wish the two would meet.

Disentangling Social Entrepreneurship/Enterprise

2011-05-05T08:16:00.001-07:00

It's very common for social entrepreneurship and social enterprise to be referred to as the same thing. But they aren't the same thing. Here is my attempt to offer some simple and useful definitions of these and related terms:

Social entrepreneurship: Designing and testing new ideas to solve tough social problems. Example: Mercy Corps' partnership with Unibank and Voila to bring mobile banking ("T-Cash") to Haiti.
Social enterprise: When a nonprofit engages in commercial activity is aligned with its charitable mission. Example: TROSA in Durham, NC.
Social business: When a for-profit corporation intentionally offers goods or services to address a social problem while accepting low profits and return on investment. Example: Grameen Danone.
Earned income venture: When a nonprofit engages in commercial activity for profit to subsidize its charitable mission, or what a former student called, nonprofits' "side hustle".

In fact, I thank the IRS for these definitions. With #1, it isn't referring to a corporate entity per se. With #2, it is activity that escapes the IRS' "Unrelated Business Income Tax" (UBIT). With #3, it relates to for, not nonprofits, such as Low Profit Limited Liability Corporations (L3Cs) or B-Corps. And #4, you guessed it - a nonprofit that may be subject to UBIT.

Hope this helps!

The Problem with Social Entrepreneurship

2011-05-05T07:57:00.001-07:00

OK, so first of all, let me be clear: the idea of innovation to tackle tough social problems like the lack of clean water in developing countries is a great thing. Yet I have some misgivings about the social entrepreneurial banner, from a nonprofit perspective:

Elevating the individual. Not all of us can be a Geoffrey Canada or Paul Farmer. And besides, as Dr. Farmer is nice to acknowledge, behind every social entrepreneur is a team doing some serious heavy lifting to implement the entrepreneur’s vision. Why not focus on entrepreneurial organizations or communities? After all, to solve tough social problems, we need collective action.
Poor economies of scale. Too often aspiring (and usually young) social entrepreneurs assume they need to start their own organization vs. partner with an existing one. This results in the need to raise unrestricted revenue to build infrastructure - bookkeeping/accounting, information systems, etc. albeit with poor economies of scale. Energy and resources get diverted from problem solving to organization building.
Ignoring current efforts. There is no shortage of nonprofits doing very innovative things that nonetheless fail to be recognized, probably because they lack a charismatic leader and/or partners who champion and market the innovations.
Lack of evidence. Many social entrepreneurial ideas are largely untested. It's great that these ideas represent new approaches to tackling social problems, but promotion of these ideas tends to be far out in advance of sufficient evidence that they merit promotion as “the next big thing”.
The commercial assumption. A strong bias exists in favor of commercial approaches to addressing social problems. It’s great to exploit market opportunities to make innovations more financially sustainable, but sometimes public or private subsidies are needed. Sometimes they are always needed. To paraphrase Paul Farmer again, governments, not markets, confer human rights.

Again, I think the enthusiasm around SE is great. If people are thinking more about achieving greater social and economic inclusion and justice and less about how to exploit others, then that's great. Let's just be honest and humble about what we're doing. Please.

Nonprofits: Nuthin' Special

2010-12-13T11:49:00.001-08:00

There is absolutely nothing special about a nonprofit organization. There, I said it. I feel so much better.

Okay - the obvious question: why would a guy who blogs about nonprofits say something so outlandish, if not ridiculous? The reason is simple. Nonprofits are nothing more than a way to structure activities to achieve some social good.

In other words, there is nothing embodied in state nonprofit laws or federal tax regulations that makes a nonprofit corporation anything more than a way to organize activities that are deemed charitable. Yet, charity is not the only avenue through which social value is created. This is the rallying cry of social entrepreneurs.

Paul Farmer's excellent critique of SE aside, I think there's a point here that's important to understand.

What ought to make nonprofits special is their ability to achieve social value, not just that they are given the 501c3 "charitable" distinction. Let's face it: there are plenty of 501c3 nonprofits out there that are neither particularly charitable (such as a lot of nonprofit health care systems and insurance companies) nor effective.

I think it's best to think of nonprofits in the same way we think of for profits. Some are great, some are good and some are really bad.

Before you start fundraising...

2010-09-22T05:35:00.000-07:00

What nonprofit doesn't want to use the most effective fund raising strategies and tactics? Yet, far too often, nonprofits jump head first into fund raising without doing some soul searching to identify 2 very important things: the nonprofit's value proposition and its cost structure.

Let me start with value proposition. In a nutshell, it's what the nonprofit can say it delivers to the community it serves in outcomes and impact. If you are in the affordable housing business, how many units of affordable housing have you built? Have you positively impacted the rate of home ownership among lower-income people? Are these people getting prime mortgages with payments they can actually afford?

Next, cost structure is incredibly important yet often neglected because it's confusing and kind of boring. First, any nonprofit that is involved in multiple services and activities needs to consider what it's cost centers are. This is like on the Form 990 when the IRS asks you to identify major programs. Second, look at the expenses and revenue of each cost center. Which ones are breaking even? Profitable? Running deficits? Are there ways we can curb costs without compromising services, such as by securing more in-kind services and partnering with other nonprofits and local government? What services or activities might be reimbursable under contracts or subcontracts?

The danger of not doing this kind of soul searching is that you end up fund raising for programs and services of dubious value to the community and to support unsustainable cost structures.

Haiti: How's this for impact?!

2010-02-01T13:06:00.000-08:00

I still have a lot to learn about this organization, but increasingly I'm becoming a big fan of Fonkoze, Haiti's largest microfinance institution (MFI), which also has a Washington, DC office. Check out this story on an airlift of cash to enable Fonkoze to provide cash transfers (remittances) to customers in Haiti.

What I like about this story is that Fonkoze understands the importance of remittances from the Diaspora to Haiti's economy and that helping Haitians is not just about the work of large aid groups like Save the Children.

Haiti: Someone, please help me understand this!

2010-01-28T18:19:00.000-08:00

OK, I admit it. I just don't get it. I was corresponding yesterday by email with my Haitian friend, a director of an NGO 20 mi east of PaP. They are being asked by the Haitian government to take in orphans and vulnerable children affected by the Jan. 12 earthquake. The problem is, they aren't a large, US-based NGO that has received an outpouring of financial support from donors.

So my question is, how do we help connect small Haitian-led NGOs with the big NGOs like World Vision and CARE?

Haiti: Stay Home & Hire a Haitian

2010-01-26T12:25:00.000-08:00

It's understandable why so many people want to board a plane, fly to Haiti and start helping out. Even before the earthquake, scores of volunteers from the U.S. were traveling to and from Haiti on mission trips and volunteer stints to work in schools, orphanages and clinics.

However, consider the following costs of going to Haiti to volunteer:

$621 round trip ticket
$315 week's food, gas and modest lodging (no hot water, 2 hours of generator electricity at night)

Total - $936

Now consider the fact that for less than this amount ($720), you could make a donation to Zanmie Lasante (Partners in Health's sister organization in Haiti) which would pay for the monthly salary of an accompagnateur (community health worker) for an entire year.

Don't get me wrong - there are good reasons to go to Haiti to volunteer. Thank God we have so many well trained disaster relief, search and rescue and health professionals on the ground there now.

The point here is to consider different ways to support the people of Haiti and to consider how our desire to help can have the unintentional consequence of promoting dependency.

Haiti: International Donor Conference

2010-01-26T05:42:00.001-08:00

Secretary of State Hillary Clinton pointed out at a meeting in Montreal that it is important for the Haitian government to get back on track with various reform and development initiatives that were tragically interrupted by the January 12 earthquake. She also indicated that the U.S. and other donor countries will be looking for the best ways to support rebuilding efforts. A major international donor conference in New York at UN headquarters is planned for March where rebuilding strategies presumably will be identified and financial commitments made.

Here are some important principles guidelines I hope will come out of this conference that relate to the role of NGOs in Haiti:

1) Don't just think big. Don't immediately turn to the large relief NGOs. Identify smaller, Haitian and Haitian-American led NGOs to engage in rebuilding efforts.

2) Pick up with existing efforts. Recognize that many NGOs were engaged in significant, innovative and evidence-based development efforts before the earthquake. Boston-based Partners in Health's sister organization in Haiti, Zanmie Lasante easily comes to mind as does Fonkoze, Haiti's largest microfinance institution, which also has a Washington, DC office.

3) Not all ideas come from the U.S. BRAC, started in Bangladesh in 1972, is partnering with groups in Haiti regarding microenterprise, microfinance and other poverty alleviation strategies. They have a pretty decent track record of fighting poverty in their homeland. Nobel Peace Prize winner Muhammad Yunus' Grameen Foundation has a presence in Haiti as well, providing financing to Fonkoze.

4) Hire Haitians. Make rebuilding efforts an opportunity for economic development and job creation. Turn to Haitian doctors, nurses, teachers, social workers, farmers, merchants and construction workers. If donor nations want more bang for the buck, they'd make sure lead agencies hire Haitians rather than Americans with their comparatively huge salaries. Former Haitian Prime Minister Michele Pierre-Louis explains some ideas for putting Haitians to work in a recent Huffington Post article.

5) Collaborate. Tracy Kidder, author of "Mountains Beyond Mountains" recently stated that there are an estimated 10,000 NGOs in Haiti. It is critical that rebuilding efforts not get bogged down in territoriality and that NGOs share resources and expertise.

6) Think holistically. Development in Haiti, like other developing countries, is not just about clean water or road construction or microenterprise. It's about all of these things. An example of holistic efforts combining health care with microenterprise strategies in the central plateau was recently announced.

7) Act democratically. NGOs should ensure that rebuilding decisions are participatory and that Haitians state what they want and need for their future. This starts with supporting the continued reform efforts of the Haitian government and includes supporting decision making and leadership development at the local level, such as the work of FOKAL through support from the Open Society Institute.

Helping Haiti

2010-01-25T04:26:00.000-08:00

The mainstream press have well covered the relief efforts of large, U.S.-based nonprofit organizations. Yet we're not hearing much about Haitian and Haitian-American led NGOs, except for musician and former Fugees member Wyclef Jean's Yele Haiti (see a forthcoming post about the controversy surrounding Yele).

I was in the process of helping one such organization, Fondation Enfant Jesus (FEJ) and its sister nonprofit in the U.S., Village of Vision for Haiti Foundation with a health clinic proposal when the earthquake hit. FEJ was started by a Haitian family, which began donating parcels of land in a rural farming village 20 miles east of Port-Au-Prince to build schools, a church and a creche.

FEJ also started a microenterprise program for women, vocational programs focused on local agriculture, and a young men's association to engage in community development projects like clean water distribution and road clearing. These additional projects reflect FEJ's commitment to grassroots development.

FEJ's Director, Gina Duncan, left Haiti to receive undergraduate and graduate degrees in Canada. However, she returned to Haiti and to Lamardelle where she continues to start new projects through FEJ.

Estimates are that remittances from the Haitian diaspora accounts for 16 to 33% of the Haitian GDP. Haitians living abroad are deeply about their country and will play an important role in its rebuilding. We should devote more of our energy to supporting their efforts.

Nonprofits: Just 2 Questions to Answer

2009-11-14T05:52:00.000-08:00

No one can argue with the idea that nonprofits should strive to achieve their stated missions. A good mission statement says something about the impact the nonprofit wants to make, to answer the question "How will quality of life be improved for the people we serve?".

And, of course, nonprofits need to be concerned about developing the resources needed to achieve their missions. Beyond that, there's not much more to discuss. Thus, we can look at nonprofit effectiveness through two simple questions:

1) How can we achieve positive impact in the world?
2) How can we sustain our efforts in doing so?

I contend that everything a nonprofit does should be an answer to one of these two questions. This helps us put all of those things nonprofits are supposed to do - recruit a good board, institute good human resource systems, comply with funder requirements - in the proper perspective.

Thus, instead of spending lots of time constructing thorough personnel policies for their own sake the question should be "How will developing these policies help us achieve impact/sustain efforts?"

Nonprofits: Size DOES matter!

2009-08-21T06:37:00.000-07:00

Staying with my theme of ways to differentiate and better understand the nonprofit market, let's look at important differences in size, specifically revenue and assets. A surprising percentage of nonprofits in the U.S. are actually quite small.

As an illustration, Duke University Health System in Durham, NC has net assets of $1.7 billion while Senior PharmAssist, also in Durham, has a little over $450,000 in net assets.

So what are some key differences between these two organizations that helps account for these huge differences? Duke is like any other health system - its primarily source of revenue is earned income - third party payments (private insurance, HMOs, Medicare, Medicaid) and patient fees (copayments, coinsurance and deductible amounts). It is operationally very similar to any other health care system, non OR for profit, except that its profit margins are a tad less than for profits (but not much).

Conversely, Senior PharmAssist meets a more "classic" definition of a nonprofit as an entity doing something thoroughly charitable - helping lower income older adults with their prescription medication needs - and raising contributed income to help fund it (donations, grants).

I would argue that Duke is only "partially" charitable in the truest sense of the word. The part of their business that involves a range of community health programs fits what most of us think when we say "charitable" as does their charity care program (which it doesn't like to advertise too broadly) and of course their role as an academic health care entity. Otherwise, it looks and acts like a for profit health care corporation, particularly wiht executive compensation.

Conversely, Senior PharmAssist has no for profit counterpart because it is meeting "needs", not market "demands".

Why does this matter? When we talk about the financial challenges confronting nonprofits, certain nonprofits like Duke have far greater economic resilience than nonprofits like Senior PharmAssist. From a public policy standpoint, we should really be looking out for the Senior PharmAssists out there, unless they happen not to be making impact (which is definitely not the case with Senior PharmAssist).

Also, in public policy discourse, we need to talk about gradations of "charitable" purpose. Duke and Senior PharmAssist both fit in the same IRS category of "public charities", but clearly only one of these acts thoroughly charitable.

In fact, this is an impending discussion on the Senate Finance Committee - re-examining legislative intent under Section 501c of the Internal Revenue Code, which hasn't been done in about 40 years! Of course, SFC has their hands full right now with fixing (or not) our health care system, so don't hold your breath...

The Caring & Change Nonprofit Subsectors

2009-08-21T06:13:00.000-07:00

I've often said to students that the nonprofit market is insufficiently differentiated, meaning that we tend to talk about "nonprofits" as if they were characteristically very similar. We generally don't talk about for profits in the same vein; we will at least make a distinction between large multinational corporations like ExxonMobil and the new Brazilian restaurant that opened up down the street.

The National Taxonomy of Exempt Entities (NTEE) certainly gives us a rich array of nonprofit functional classifications. But I think an important, yet easy distinction to draw among nonprofits is between "caring" and "change" nonprofits.

Here's what I mean. In any community, there are nonprofits that meet important human needs on an ongoing basis. Think community kitchens, food pantries and homeless shelters. There isn't anything particularly fancy about what they do but the community would be worse off if they stopped operating. These are what I would call "caring" nonprofits.

Conversely, there are nonprofits that are committed to social change. A good example is the Community Reinvestment Association of North Carolina (CRANC). They have been fighting predatory lending for years and have made real progress on policy issues like banning payday lending in the Tar Heel state. You guessed it - I would call these "change" nonprofits.

Of course, there are plenty of examples of nonprofits that fall somewhere in between and I don't mean to oversimplify the issue with a false dichotomy. However, this distinction mirrors what Heather McLeod Grant and Leslie Crutchfield talk about in their book, "Forces for Good: The Six Practices of High Impact Nonprofits". Actually, if I delved into the book deeply, I like others would probably take issue with their research methdology and conclusions and I think including the Heritage Foundation is a blatant means of bone tossing to sell books.

Nonetheless, I think they are on to something that can help us understand the different between nonprofits that meet important ongoing needs and those that shake things up and (hopefully) help us change, innovate and evolve into a more socially just world.

The Nonprofit Industrial Complex: Where's the Beef?

2009-08-10T07:22:00.000-07:00

I'm increasingly struck by how much of an industry exists to help build the capacity of nonprofit organizations. There's even an academic term for it - "Management Support Organization". Don't get me wrong - I think state nonprofit associations do a fine job as do most consultants I've met.

However, I think capacity building for its own sake is wrong headed. As writers like Clara Miller with the Nonprofit Finance Fund remark, nonprofits spend far too much time chasing after money and accounting for contributed revenue. So the NIC gears itself around coaching nonprofits on revenue diversification strategies, how to engage board members in fundraising, etc. I've done it myself.

The problem with such capacity building efforts is when they are done with a nonprofit that isn't making any impact or doesn't know whether it is or not. And let's be honest - the nonprofit market works very poorly in this regard. We all know of a nonprofit out there that gets by on lots of social and political capital despite doing shoddy or irrelevant work.

Nonprofit Mergers & Acquisitions: Sign of things to come?

2009-04-16T05:46:00.000-07:00

Lois Lerner with the IRS (exempt organizations division, with Stephen Miller) spoke to Georgetown Law last week on nonprofits and the economic downturn. What really caught my eye were her comments about growing interest in mergers and acquisitions.

First, it seems that there is not a ton of legal practice in this area. I wonder how difficult it is to execute a merger of two nonprofits within the same state, or even across state lines.

Second, collectively, we need to acknowledge that we simply have too many nonprofits on paper, never getting out of the starting gate. We need better avenues for people with good ideas to connect with existing nonprofits vs. trying to start their own nonprofit.

Third, we need for private foundations to start spending down more of their hundreds of billions in assets. But we in the nonprofit sector need to give them strong models and evidence to justify this.

Fourth, nonprofits need to think in clearer terms of scale. 8 separate nonprofits in the same community with the same mission each of which has a group health plan that has high premiums because they are not in larger risk pools just doesn't make sense and is a poor use of philanthropic resources. The same could be said for mission impact. Those 8 nonprofits need to more meaningfully be compelled to work together to achieve impact, yet they need to do so with funding arrangements that provide some modicum of security.

A tall order.

Financial Terms for Nonprofits

2009-03-17T11:46:00.000-07:00

If you have a strong interest in nonprofits, chances are, you have little if any formal training in bookkeeping or accounting. If there is one key barrier to non-accounting types to understanding nonprofit accounting stuff, it is probably language.

Here are my picks for some really good websites that help explain key financial and accounting terms, from:

Nonprofit Finance Fund
Guidestar
Nonprofits Assistance Fund
King Foundation

Starting a nonprofit organization, Part 2 (hard)

2009-03-04T13:20:00.000-08:00

So my "part 1" post illustrated how relatively easy it is to start a nonprofit on paper. This post is dedicated to the hard part of starting a nonprofit: developing a viable business plan.

Let's start with why I'm saying it's hard. I don't have the specific figure handy (but you can go to http://nccs.urban.org/ to find out yourself), but there are tens of thousands of 501c3 public charities registered with the IRS that do not file Form 990 because their revenue has not exceed the minimum threshold of $25,000 (threshold figures and filing requirements are changing this year; see a discussion about the new 990 requirements for more info). This simply means that they never got off the ground in a meaningful way by pulling in at least $25,000 in operating revenue.

The basic problem is that it is relatively easy to start a nonprofit and no one - not the IRS, not your Secretary of State, your local Chamber of Commerce, etc. - will say you can't start your nonprofit (unless you are a health care enterprise and fall under your state's certificate of need regulations) if you don't have a good business plan. So, you begin operating and wait for all of those donations and grants to pour in because you have a great mission and great ideas. And, in most cases, the donations and grants don't pour in like you expected.

So, what is a business plan and what makes a good one for a new nonprofit? In essence, a business plan details two essential things: 1) the nonprofits social value (clear need, market and its purported impact and evidence-based plan for achieving it) and 2) viable funding plan. New nonprofits tend to make key mistakes in both areas:

- Not doing sufficient market research, i.e. to see how the need is already being met by other nonprofits

- Not planning programs and services that have an evidence base or represent some recognized best practice or are so compelling in terms of innovation that they attract start-up funding

- Making wild assumptions about grants and donations, not assessing the competition for such forms of revenue (i.e. understanding the growth in giving in their community, the success rate of grant applications for particular foundations)

- If forecasting operating revenue based on third party reimbursements (e.g. Medicaid) and contracts, not realizing the working capital that is needed to a) develop service infrastructure and b) pay staff until earned income starts arriving.

- Obtaining a 2-3 year start-up grant from a foundation yet not having a viable plan to sustain funding after the grant expires (foundations are typically not in the business of providing ongoing operating support)

- Grossly underestimating the amount of time it takes to do good fundraising and not realizing how hard it is to divert charitable giving away from well established nonprofits (think Boys and Girls Clubs, the YMCA, Art Museums, faith communities, hospitals, etc.)

- Assuming that "honeymoon" effect start-up fundraising efforts portend ongoing support.

Those are just a few of the mistakes.

Now, I'm not dismissing the idea of starting a nonprofit altogether. Here are some reasons why starting a nonprofit might be an OK idea:

- The nonprofit is going to be primarily volunteer-driven. The relatively modest amount of funding you may need will be well leveraged with the value of in-kind services.

- There really is not an existing nonprofit meeting the need which your nonprofit will meet AND this need is considered a high priority by key decision makers in your community (i.e. local elected officials, foundation officials, United Way)

- You are able to offer a professional service that will form the basis of competition for contracts (job training, mental health services, etc.) AND the contracting agency is actively seeking agencies to bid.

- You are able to offer a professional service for which there is a stable source of operating revenue that covers a significant amount of your operating costs (e.g. charter schools that receive public subsidies per enrolled pupil, health or mental health providers that will bill for third party reimbursements via Medicaid, Medicare and other sources).

The essential point here is that you 1) need to meet a clear need and 2) are reasonably assured of securing steady revenue streams that cover a large part of your operating costs.

Lastly, if you think you want to start a nonprofit, ask yourself, "Is there an existing nonprofit in our community that is financially stable, enjoys broad public support and has a mission well aligned with our intentions?" If the answer is yes, consider meeting with the CEO and Board Chair of this nonprofit to initiate conversation around starting a new program or project.

In fact, far too often, when I hear people say "I want to start a nonprofit", they typically have a particular program in mind, not an entire organization. It is far easier to fit a new program in an existing nonprofit than to construct and sustain an entire new organization around an innovative program idea. The reasons are myriad: poor economies of scale for nonprofits, immense competition for grants and donations, difficulty recruiting talented and engaged board members, etc.

Nonprofits' Impact

2008-11-12T11:31:00.000-08:00

Okay. So nonprofits' missions are important, right? What about their impact? And by impact, I mean results that extend beyond their immediate stakeholders to have broader social impact.

Heather McLeod Grant & Leslie R. Crutchfield wrote about "high impact" nonprofits in the Stanford Social Innovation Review. This article is a executive summary of sorts concerning their book "Forces for Good" which examines well regarded nonprofits like Teach for America and one of my all-time favorite organizations, Durham's own Self-Help Credit Union.

What McLeod Grant and Crutchfield point to as evidence of the broader impact of Self-Help include the voice they have established for responsible lending practices through their affiliate, you guessed it, the Center for Responsible Lending. Those of you following the sub-prime meltdown through national media like the Wall Street Journal and New York Times may have noticed CRL staff frequently quoted. They seem to be the go-to folks for understanding subprime from the perspective of all of those homeowners with "upside down" and other precarious subprime mortgages.

So what comes across my virtual desk from a student this past week? Yet another great illustration of nonprofit impact, this time focusing on the world of check cashing joints and money stores (what scholars in this area like Michael Barr at Michigan call "alternative financial services"). Seems that there's a nonprofit credit union out in California (I think - forgive me - it's a long article) that's buying up these "money stores", which tend to be favored by lower-income customers who eschew the perceived and real costs of mainstream checking accounts.

I love it. Talk about impact. Use your deposits to impact a market in dire need of reform which mainstream banks (who by the way have their hands full with de-leveraging, right?) have shown little interest.

For me, I'd love the gaudy neon lights announcing "Mr. Money Man" or "Checks Cashed Here!!!" next to the Food Lions and H&R Blocks (hey folks, I'm in the South) replaced by the staid and rather boring awnings of a good ol' fashioned, Bailey Savings & Loan-esque credit union!

Okay, so they fall under a different subsection of Internal Revenue Code Section 501c than organizations we commonly call "nonprofit" because they are "not for profit "cooperative institutions", but heck, good enough for me to include in McLeod Grant and Crutchfield's book!

Go Chuck, Go!

2008-09-24T06:27:00.000-07:00

Very good article in the September 4, 2008 Chronicle of Philanthropy which outlines growing concern in Congress - House Ways and Means, Senate Finance Committee - about the $44 billion in government spending in form of charitable deductions. The article highlights what I and others familiar with the nonprofit sector have know for years - that a huge amount of tax deductible charitable giving goes to hospitals and universities.

The article raises questions like, should non-profit health care organizations retain 501c3 public charity status when they are miserly about providing charity care or should universities retain this status while amassing huge endowments and raising tuition, making higher education less and less affordable?

So my reaction, is go get 'em Chuck Grassley and colleagues on the Senate Finance Committee. It is time that we recognize that there is tremendous diversity within the 501c3 public charity universe with respect to the social value of the $44 billion in tax expenditures. The Chronicle rightly points out that the poor, the uninsured, victims of domestic violence, the homeless, etc. receive little benefit in the form of services and assistance from this $44 billion, which conceivably could be spent in other ways, such as providing health coverage for at least some of the nation's 50 million uninsured.

The issue with hospitals is a particularly sore spot for me. Nonprofit health systems are quick to point to the amount of charity or uncompensated care they provide each year to justify their continued 501c3 public charity status, yet this care is mostly a product of legal compliance with EMTALA - the federal law that says that hospitals that receive Medicare payments must treat and stabilize anyone coming in for emergency care, regardless of insurance status or ability to pay.

Sorry guys, not impressed and neither is Chuck!

IRS, Avatars & Exempt Organizations: Let's Have Some Fun!

2008-09-23T05:08:00.000-07:00

Reviewing my IRS exempt organization email update this morning, something caught my eye: free online mini-courses for nonprofits on issues like retaining 501c3 public charity status. I was caught a little off guard by the website though. What I first thought were dorky clip art characters are actually "characters", such as "Coach" the "brilliant and straight-talking" IRS agent to answer your questions.

Let's see, what's next? How about exempt organization second life? Here's what would be really fun: I'd design an Avatar named "Jud" who would run around causing all sorts of exempt organization ruckus, like creating for-profit subsidiaries that would escape corporate income tax by absorbing a portion of its nonprofit parent's operating expenses to create losses or maybe launching some sort of televangelist media empire using my church's tax exempt status, you know, a "Grassley 6" scenario. Then, we'd see "Coach" launch into action to nab my butt and parade me in front of the Senate Finance Committee to be tongue lashed by a not-so-impressed Chuck Grassley.

Now, THAT would be fun. How about IRS? A exempt organization second life? C'mon!

United Way: How Many Times Can a Tiger Change Its Stripes?

2008-09-18T06:46:00.000-07:00

As Yogi Berra once quipped, it's like deja vu all over again. That was my reaction when reading a recent copy of the Chronicle of Philanthropy and coming across yet another "United Way reinvents itself" article. Led by CEO Brian Ghallagher, United Way of America is promoting a new approach for its local affiliates (not chapters, mind you) that involves funding focused on programs that help young people, increase financial stability for poor families, and prevent domestic abuse.

If you go to the UWA website on this new agenda, some additional clarification is offered. UWA is focusing its movement on education, income and health, which is almost akin to a politician's platform that promises rainbows, puppies and full bellies. Okay, so you've noted my skepticism.

First, some important disclosures. Once upon a time, I worked for a local United Way in Virginia as its Vice President of Community Building and for a brief yet highly educational stint as its Interim CEO (no, I didn't want the regular gig). I've also done consulting for UWA and with local United Ways on its "Success By 6" early childhood development initiative, which is being sustained by at least some local United Ways. In my United Way time, I met some great people and I met some real hucksters who, if they pulled me aside at a conference to talk to me about some sort of pyramid-scheme investment opportunity, would not have shocked me.

I actually applaud UWA for what appears to be a good measure of focus on important quality of life matters (who can argue against such an agenda?). But my skepticism stems from a "here we go again" reaction based on what appears as a litany of various reform agendas dating back to the Bill Aramony scandal of the early 1990s:

1) The Outcome Measurement movement. This one wasn't so bad. It helped funded programs ask fundamental questions like, "Are we really making a difference in the quality of life for the people we serve". I liked this agenda because really smart, non-huckster people at UWA and in local United Ways got to make important contributions and marketing took more of a back seat. This movement had significant traction and even seemed to help state and federal funding agencies adopt a better investment and contracting framework focused on results.

2) The Community Building Movement. I'll never forget being in a session with John McKnight of the ABCD Institute and getting genuiely excited about the potential for local United Ways to leverage financial resources and relationships to shift power away from deficit-focused social service agencies to citizen groups. A great example of this movement comes from the United Way of Atlanta whose 1996 initiative set a fine example for other United Ways. Not sure how alive this agenda still is. Smart and creative people like Chuck Shannon with Denver's Mile High United Way introduced a series of innovative initiatives like Individual Development Accounts (IDAs) under this agenda.

I don't think this movement ever really took off among United Ways. I suspect that most local United Ways couldn't quite stomach the idea of shifting dollars away from such stalwarts and fund-raising name brands as the American Red Cross and Salvation Army.

3) The Focused Investment Movement. This is the movement that came on the heels of the outcome measurement agenda, seeking to shift thinking away from supporting and sustaining organizations to investing in efforts (not always programs of agencies) that have demonstrated impact. Unfortunately, I think it has been dumbed down into a "buy an outcome" sort of mentality that takes the "investment"concepts too literally and attempts to force basic, common sense business principles onto complex social problems. Yet this movement seems to be where United Way has landed, at least for now.

So, reviewing what I've identified above as the key characteristics of United Way agendas following the Aramony dust-up of the early 1990s, it doesn't seem distasteful at all. Again, who doesn't like rainbows, puppies and full bellies?

I suppose my skepticism comes more from my insider knowledge of just how much United Way is absolutely, 24/7 obsessed (did I say obsessed?) about its public image. On the one hand, this may be borne of the necessity of defining value amidst a dramatic shift in the technological landscape of fund-raising, changing donor demographics and attitudes and the relative explosion of nonprotis clamoring for financial support,but I wonder how much Aramony's ghost lingers in the offices and conference rooms of United Ways where new branding initiatives get hatched.

And let's face it, United Way does some really slick stuff. You might knock them for their ambiguous value proposition, but who else makes you feel as good about emptying your wallet to do good work? I mean heck, watch United Way commercials this time of year and you'd think it was the United Way, staffed by a legion of hulking yet cuddly linebackers who is raking up trash in your neighborhood. Great stuff. Kudos.

So, in the end, with this next iteration of institutional navel gazing, where is the substance? What does this really mean for communities in which United Way has a presence. In the language of results-focused social engineers, will this new focused agenda really "move the needle" on social problems? I think the billions lost in investment and retirement assets with the latest round of financial institution nosedives stemming from shady subprime lending and an overheated housing market suggest not.

IRS: No more 'dump-n-deduct'

2008-09-15T05:15:00.000-07:00

Hey, what's better than loading up a trash bag full of unwanted clothes, dropping them off at the local Goodwill and walking away with a tidy little tax deduction? May not be as easy as before, thanks to the Pension Protection Act of 2006.

Among a range of new policies affecting nonprofit organizations, donors cannot claim a deduction for clothing and household items unless they are in "good used condition or better" (see IRS guidance). In a blog round-up piece in 2007, The Chronicle of Philanthropy cited a Washington Post story concerning a Wall Street investment banker who claimed almost $49,000 in deductions for donated clothing. Maybe this banker was simply heeding the advice of Bankrate.com which has a 2004 online article promising "big" savings from donating used stuff.

To be honest, as someone who itemizes deductions, I too have been taken in by the lure of the used clothing donation deduction. Fortunately, my wife has better sense and before heading out with my trash bag of stuff would ask, "Okay - would you be willing to wear anything that you have in that bag?". That sort of prompt helped me root out the old t-shirts that are better suited for the workshop rag pile.

While I'm sure a certain amount of concern by nonprofits about dwindling donations is warranted, I can't help to think that this new rule must be making their lives a little easier. I mean, have you been to a Goodwill donation drop site on a Saturday afternoon? Wow - total chaos in terms of the sheer amount of donated items that have to be sorted (in contrast to the retail stores themselves, which seem to be very well run).

When I was with a local United Way, I took an in-depth tour of our regional Goodwill headquarters and learned that clothing items that cannot be sold or did not sell on the retail floor are baled and shipped to companies that recycle the material. This makes me wonder just how profitable this activity has been for Goodwill and others or whether this activity was break even or even a operating loss.

And perhaps the "good or better" admonishment from the IRS is changing donors' behavior - making them re-think what they donate. Is the quality of donated items getting better? What's been the net impact on nonprofits?

IRS' Steven Miller: Friend or Foe?

2008-09-11T08:41:00.000-07:00

Wow. IRS Exempt Organization Commissioner Steven T. Miller and his colleagues sure have been busy. If they aren't re-designing the Form 990 to make it more user-friendly then they are preparing testimony for Chuck Grassley and his colleagues on the Senate Finance Committee to tackle issues like preachers living high off the hog using the "prosperity theology" to justify profit-looking activities in nonprofit religious organizations.

Or perhaps Mr. Miller is making a speech about conservation easements or donor advised fund abuse. Miller's public comments serve as a good barometer of the general direction of the IRS concerning nonprofit organizations, particularly an October 2007 speech before Independent Sector. Essentially he says, if you are a traditional nonprofit that keeps its nose clean (i.e. solicits donations and grants to fund its homeless shelter), then you have nothing to worry about. In fact, we're trying to make your job easier to do by streamlining the Form 990.

However, if you are involved in "blurring of lines between the for-profits and non-profits" or you allow donors to exert private foundation-like control of donor advised funds (DAF) through your nonprofit, then you should worry.

The "blurring" comments worry me more than the DAF comments. Arguably, U.S. tax law is ill-equipped to regulate social enterprises because of traditional for/non profit dichotomies. Doing things like more tightly regulating how nonprofits report commercial operating losses on their Form 990Ts (Unrelated Business Income Tax) while probably necessary in the short-term seems insufficient.

I'm very sympathetic to the IRS' desire to crack down on "blurring" offenses, especially in the health care sector (don't get me started about all of the backroom dealing and financial shenanigans that takes place between so-called nonprofit health systems and their for-profit professional group affiliates), but perhaps it's time that the feds look at the new Vermont low profit limited liability corporation law as a possible new direction to accommodate and support social enterprises and related for/non-profit convergence phenomena.

Of course the thought of the work to make this happen makes my head hurt, but that's why I'm not a lawyer or policy wonk.

The incredible diversity of the nonprofit sector: Ignored?

2008-09-10T12:12:00.000-07:00

Here's something fun I like to do in my nonprofit classes: contrast a small, community-based nonprofit organization such as the Downtown Music Lab in Roanoke, VA and a large nonprofit health care system like Duke University Health System in Durham, NC in terms of asset holdings (hint: one of these has assets reaching into the billions). The point is usually well understood: it's no more useful to talk about the "nonprofit sector" than it is to talk about the "for profit" sector. What sense does it make to talk about Microsoft and the local record store in the same breath?

Yet, the diversity of the nonprofit sector ought not to be understood just in obvious terms, such as revenue and asset amounts or perhaps the rich array of missions and activities (inner-city squash, anyone?). First, the lines between "for" and "non" profit are increasingly blurred. Check out the Stanford Social Innovation Review for some interesting thoughts related to this, read up on "Third Way" politics through Grameen Bank founder Dr. Muhammad Yunus, or simply visit your local social enterprise, perhaps a moving company run by people in recovery from substance addiction or Vermont's new "low profit" corporation law.

Next, the various nonprofit sub-sectors are very different from one another. There are important differences between arts and cultural organizations and say, Boys and Girls Clubs. Community Housing Development Organizations operate in distinctly different worlds than say inner-city squash organizations. Necessarily, organizational structure and culture, resource development strategy and board-staff relations will look very different among different types of nonprofits.

A great example of this came from a student, who focused his class project on an organization that seeks to sustain the work of social justice activists. Traditional notions of "donors", "clients" and even "volunteers" simply didn't fit.

Yet, just about everywhere you look - sites like Boardsource and publications like the Chronicle of Philanthropy whose tag line is "The Newspaper of the Nonprofit World" apply a very traditional nonprofit world view that roughly might be labeled corporatist:

- Hire well qualified staff with good "business" sense and skills
- Position your organization well within the market by adopting and presenting clear value propositions
- Evaluate your results to demonstrate impact and return on investment for donors
...etc.

But here's the thing - I believe in such tenets and promote them in my classes, so I'm not saying that they are incorrect or unuseful.

However, I wonder what assumptions and models of organizational effectiveness might better fit non-traditional nonprofits...

Starting a Nonprofit Organization - Part 1 (Easy)

2008-09-09T11:01:00.000-07:00

Try this out: Google the exact phrase "Start a nonprofit organization". See how many hits (hint: in the thousands). If you look at the search results, you'll notice helpful and insightful articles from state nonprofit associations, like the North Carolina Center for Nonprofits. You'll also get hits for more profit-minded endeavors, like legal help and "how to" guides. So, just how easy or advisable is it to start a nonprofit? That's the topic of part 1 of this post - enjoy.

Starting a new nonprofit consists of a few fairly simple tasks:

1) Pick a name and form a nonprofit corporation by filing Articles of Incorporation with your the corporations division of your state Secretary of State's office (North Carolina instructions). Vermont even gives you an online form to complete to establish your Articles. Articles are important because they state the name of your nonprofit, its purpose, the fact that it is a nonprofit and describe what happens to its assets if the corporation goes away (dissolution clause). At least one individual (hey, why not you?) must sign the Articles as the incorporator. You may also name additional individuals who you anticipate will comprise all or part of your Board of Directors (see below).

2) Apply for an Employer Identification Number (EIN) so your nonprofit can do things like open a bank account.

3) Form By-Laws, which are different than Articles of Incorporation in that officers, directors, members, how decisions are made, standing committees, etc. are described. Again, Vermont is a helpful state that offers sample bylaws.

4) Form a Board of Directors, have a first meeting and elect officers in accordance with the By-Laws. Directors and officers may be the same people named as incorporators in the Articles of Incorporation. Finding people to serve on your Board can be as easy as asking friends, neighbors, and colleagues and unfortunately, this is how some nonprofits start their Boards, because it is so easy to do. Seldom do people who join the Boards of new nonprofits fully understand their legal responsibilities. Moreover, if anyone you select to be on your Board has any type of business relationship or potential conflict of interest, tread carefully. This will have important ramifications for securing and maintaining tax-exempt status under the Internal Revenue Code.

5) Complete IRS Form 1023 if you want to be classified as a tax-exempt nonprofit organization under Section 501c3 of the Internal Revenue Code, though this is not necessary for your nonprofit to begin operating. The process of review and approval takes a few to several months. The IRS just eliminated its "advanced ruling" process in favor of what appears to be a simpler process of granting nonprofit applicants presumptive 501c3 public charity status and a five year window during which the organization has a chance to prove that it is in fact, a 501c3 public charity based on the level of public support (donations, grants, etc.) it receives (vs. being financed primarily by a few sources, in which case the organization maybe classified as a private foundation or private operating foundation). The essential benefit of 501c3 public charity status is that your nonprofit will not pay federal corporate income tax (but, oh, there are other taxes you will pay like employer's share of FICA) AND that donations to your nonprofit are eligible for a tax-deduction for the donor. Of course, there are many other types of nonprofits under section 501c that do not pay federal corporate income tax (for example, the National Football League), so depending on the nature of your nonprofit's mission and activities, 501c3 public charity status may not be applicable.

That's it! Those are the essential steps to starting a nonprofit. While it takes a little time (I recommend getting help with Form 1023 from a nonprofit-savvy person who does NOT need to be a lawyer), the paper process of starting a nonprofit isn't that hard.

In my next post, I'll explain the pitfalls of the relatively easy paper-based process of starting a nonprofit.