12 Numbers for NonProfit CEOs

Many nonprofit leaders are promoted from Program leadership to agency leadership. That can give your agency tremendous depth in impact while it remains na?ve on the business side. Nothing exposes the lack of an accounting class faster than the Financial Reports.

Financial Reports are hard to read. The expenses are usually presented in no particular order. There is equal attention paid to the tiny postage account and the large overtime expense. And the postage has already been spent on mail that was important. How can you cut back once you know that postage was $76 last month? What does the Board expect you to do? Go to the Post Office and try to reclaim a letter to the bank?

Let’s rewrite the financial reports so that they are for decision support for you, the CEO, instead of the auditor. The new report has twelve numbers, will be easy to read and worth reading too!

1.??????? Revenue Trend – The first number is to chart your revenue over the past three to five years. You are only looking for a negative trend. It is difficult to sustain operations if the multi-year trend is negative in revenue. All agencies that keep receiving less revenue will shrink their operations or cash.

2.?????? Program Supplies – The second number is Program Supplies. I want you to see variable expenses before fixed expenses. What’s the difference? You can control it! You don’t need to itemize because unneeded detail just makes the report harder to read. Do you really care how much was spent on books or bandages? The total of Program Supplies is usually five to ten percent of the total revenue. If your budget is tight, tell the program managers to reduce program supplies and let them decide which supplies to reduce. They are much closer to the program and will make a better decision on expense than you or a Board.

3.?????? Contractors and Trips – The Third Number is again, a variable and controllable expense. Who consults with the program? Are there outside specialists hired? Do clients take trips? If expenses are running high, simply cancel some appointments with consultants.

4.????? Gross Margin – The fourth number is a simple calculation. It’s the gross revenue minus the program supplies and program consultants. ?With just four numbers on the Financial Report, you now have Gross Margin - the easiest number to control if your expenses and revenue don’t match. Raise revenue, lower program supplies, reduce visits of consultants and reduce trips. Don’t leave the Gross Margin too quickly. This was the easiest part of the report to make changes without resistance!

5.?????? The fifth number is Program or Direct Compensation – this is the cost of teachers, counselors, or frontline workers.? This number is important because all your Gross Margin derives from the productive value of your front-line workers. If the frontline workers are pleasant and competent, the public keeps using your programs and goods.

This is again a variable expense with several control levers. If Direct Compensation expense is too high, your levers to control expense are the number of staff, the hours worked, overtime, and rate of compensation. No CEO likes to use these levers which is why I place them further down in the report. The easiest changes are in the report section that you see at the top.

6.?????? The sixth number is Contribution Margin – Most nonprofits can be sustainable as long as the contribution margin is 55% or more of gross revenue. Government contracts can require more labor and materials costs but a program with a contribution margin of less than 40% is usually not sustainable. Social Sector and public companies may be able to increase the contribution margin to 75%.

The Contribution Margin is critical because it reports on the last variables that you can control during the year. And it’s critical because the Contribution Margin must pay for all of the fixed expenses which come next.

7.?????? The seventh number is a Fixed expense report. They are lower on the Management Financial Report because they are hard to change in mid-period.

The seventh number is Building Expense. Nonprofits typically allocate 12- 14% to building and utilities costs. How does your agency compare? These are fixed costs within the period or as long as you own the building. When a college has lower registrations, the closing of a major does not change building expense. With changing demographics, Lebanon Valley PreK decided to hire two fewer teachers. This removed the variable costs of teacher salary and class supplies, but did not change the lease with the landlord.

8.?????? The eighth number is Marketing and possibly your most frustrating number. It is semi-fixed. If you have fee for service programs, marketing expense will be higher. A practical way to test your control of marketing costs is to add one percent more of fee for service revenue to whatever you spend now. Black Rock Sports teaches various sports to youth. They have been spending eight percent of their revenue of $300,000 on marketing and their gross margin is $270,000. CEO Dayana Smith decides to add one percent more or $3,000 to online advertising. The new gross margin is $280,000. It was a wise move since the Black Rock Sports has $7,000 more in gross margin than before the marketing campaign. If you engage a marketing firm, mention that this is the metric that you will use to judge their success.

9.?????? Management Compensation – The ninth number is compensation of all administrative, managerial, custodians, and other support staff. In a nonprofit under $6 million in revenue, management compensation can be about 30% of revenue. These costs are fixed in the short term. A deficit in the agency typically doesn’t change the number of accountants, managers, or custodians. The CEO is the highest paid position but you’re not going to fire yourself if there’s a deficit. You are one of the fixed costs ?? ?

10.??? Payroll Tax and Benefits – The tenth number is another fixed cost category. Changes in the payroll tax and benefits would only change significantly if a program is shut down suddenly.

Pensions, medical benefits, and other benefits are usually unchangeable or considered to be unchangeable. Agency lack of capacity to offer a generous pension does not change the situation in the short term. People expect what they were promised and they may even have a legal right to their expectations.

These benefits vary widely but a number around four percent (of gross revenue) shows that the agency pays required social security, Medicare taxes and little else for pension, health insurance, housing, education, or professional memberships. Any number above ten percent of gross revenue is rare in the nonprofit agency group.

11.???? The eleventh number is Other Expense. These are all of the useless numbers that were confusing you in the old financial statements. This category takes in most office expenses, insurance policies, depreciation and software licenses. These generally cannot be canceled within the period even in a downturn. Your donation software will not be canceled if donations are down. These numbers are needed when you are creating the next annual budget or taking new insurance bids, but fixed expenses can summarized between the moments when they can be renegotiated.

12.??? The twelfth number is surplus. The surplus for most nonprofits is very low in the 2-4% range. While most nonprofits operate on the edge, it’s critical to reexamine numbers 1-4 because you have the most control in those areas to force the agency to remain sustainable. A one-year deficit is understandable. A deficit trend will damage or close the agency.

I saved the best news for last! Any financial software program, including Quickbooks, can be configured to summarize account lines into the twelve numbers. Your auditor can sleep at night and you get the decision support information that you can understand and use.

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References:

Special thanks to Greg Crabtree and Simple Numbers for his work on Management Accounting Reports.

PS I'm setting up Summer Board and Management Retreats now. Check with me on the popular DiSC workshops for team tune-ups, strategic planning, or a financial retreat. Some July dates are taken. [email protected] www.TAConsulting.Live 10xExec.passion.io