Information useful to people starting a nonprofit organization.

Need to Research a Nonprofit? Here’s How

If you hope to start a sustainable nonprofit organization there are many questions you’ll need to answer. For example:

  • Would the IRS approve of our mission statement or should it be tweaked before I submit my paperwork?
  • How much will it cost to run our programs?
  • How many people will we need to hire?
  • How many volunteers might we expect to have?
  • What kind of people should be on our board of directors?

Wouldn’t it be nice if you could find example nonprofits that have already navigated these issues successfully? Isn’t that better than trying to figure it out on your own?

The good news is that nonprofit organizations are usually required to file an annual return with the IRS, and much of what you’re looking for is right there. The bad news is these forms can be complicated, dry, or incomplete, but with some diligence you can learn a lot by using them as a research tool. Let’s work through an exercise together to illustrate what you can find out.

Finding the 990 for Research

Finding these forms is often very easy. There a few organizations that collect and review information on nonprofit organizations. I find the most useful of these to be GuideStar. You can also contact the nonprofit directly and ask how to get a copy of their latest 990. This is a public form they must make available, and sometimes they are even downloadable from the organization’s website, but it’s usually easier to just start with GuideStar.

GuideStar makes it easy to research existing nonprofits before starting one of your own. Click To Tweet

Let’s say you’re going to start a puppy rescue nonprofit.Just type in the word “puppies” on GuideStar’s search box and then click on the search button. This will bring you to a list of organizations that have something to do with puppies. From here you can thin the results by city or state. (You can search in more ways if you pay for a premium account, but I find using the service anonymously or signing up for the free account to be adequate for these purposes.)

You may want to poke around a bit and look at a few organizations to find one that matches your interests.

Listed along with the name of the nonprofit are a few words about the organization, and a couple of dollar amounts. You can get an idea of how much money they bring in and  how much they have in assets. For this exercise, select an organization that has gross receipts of more than $200,000. I picked one that brings in just over $500,000 per year.

This brings you to a page where more information may be listed. It shows a “ruling year”, which is the year the IRS determined they were an official tax-exempt nonprofit organization, giving you an idea of how old the organization is. It may also list their mission statement and some other useful information right there. But the most useful piece is probably the drop down widget off to the right labeled “Forms 990”. Depending on how long the organization has been around and how big it is, you will find up to three years of forms listed there. Pick the most recent one and it will display the form for you.

 

Some smaller or newer organizations won’t have any forms. This is likely because they weren’t required to file. Organizations that bring in less that $50,000 file a simpler online form 990-N that doesn’t tell you much (but even with just that you can get some contact information). Larger organizations (more than $200,000 in revenue) file a form 990, and in-between groups file a simplified form called the 990-EZ. Both the 990 and the 990-EZ are quite useful for research projects, but this example uses the full 990, so try to find one that brings up a full 990 for this exercise. When you’ve got that, let’s proceed.

What can you learn?

On the very first page there are several items that can prove useful. I’m looking at a 990 form from 2015, but the IRS changes the form occasionally, so if you’re looking at a different year, the line numbers might be slightly different.

  • The top section shows contact information including a phone number, website, and postal address.
  • Line 1 shows the mission of the organization. Finding a mission that similar to the one you’re considering is a sign you’re on the right track.
  • Line 3 & 4 tell how many people are on the board, line 5 shows the number of paid employees, and line 6 shows an estimated number of volunteers. These give you an idea of how large the organization needs to be in order to conduct its business.
  • Line 12 shows the total amount of revenue for this and the preceding year and line 18 shows the total amount of expenses for this and the preceding year. This will help you draft a budget.
  • Line 19 shows how much profit they made (or what they lost). If they’re losing money it will show up here, and you’ll want to figure out what they are doing wrong and how to avoid it.

There’s a lot more here, and that’s just the first page. You can even guess something about the average pay in the organization. Line 15 shows salaries. Divide that by line 5 to get a very rough number. (Keep in mind that some employees may have left, new ones hired, some may be part time, etc. All that can affect the number.)

On the second page there are spots for program accomplishments. This includes descriptions of what benefit each program did, along with how much it cost to do that and how much income it generated. Sometimes some of this information is missing, but it’s worth taking a look.

A few pages later, in Part VII, there’s a list of board members. This page also often includes the executive director and/or other top leadership in the organization. You can see how much these folks were paid, and an estimate of how many hours they volunteered or worked in an average week. If the number of board members listed here is longer than what we saw on lines 3 & 4 of page one, you know that some board members have stepped down during the year. Finding the people listed here on LinkedIn can tell you what skillsets this organization currently has on its board of directors.

Part VIII shows a more comprehensive breakdown of income, helping you understand where the organization gets the money to pay for its services. With the help of a calculator, I can figure that the organization I’m looking at brings in 69% of its revenue from contributions of some sort and 31% from adoption fees. That information would help you determine a business model that brings in enough money to keep your organization afloat.

Part IX shows expenses in more detail, or where the money went. In my puppy example 37% of the expenses went to paying staff and 44% went to paying veterinarians. I needed to use a little basic math to figure this out, but it’s the kind of thing that’s useful when figuring out your own organization’s budget needs.

After the main form there are several schedules that are required. Some of them are quite useful.

Schedule A shows a snapshot of the last five year’s income year by year. This section’s purpose is to show how much public support the organization gets, but it also give you an idea if the organization is growing or shrinking. The one I’m looking at grew from $40,000 in 2011 to $370,000 in 2015.

Schedule O often contains useful information. This section is just a blank form used for listing notes about the rest of the form. It might help explain mysterious numbers or answers elsewhere in the form.

How do you learn more?

Of course, in addition to examining the organization’s 990, it’s also a good idea to review the organization’s website and do a basic Google search for related press releases and news articles about the group. Sometimes the review of the 990 or this other work doesn’t directly tell you what you want to know, or maybe it even raises questions you hadn’t considered.

I looked at a few of these forms (for a different organization) and noticed that they lost money on a fundraising event for two years in a row. This made me wonder if they were bad at fundraising, unlucky, or something else was going on? To find out more I’d probably need to talk to someone within the organization. Along with the list of the board and officers on page 7, I could use LinkedIn or Facebook to see if anyone I know has a connection with these people, and if so I could work my network to get an introduction. Alternatively, I could visit the website or just call the phone number from page 1 and ask to talk to their executive director.

In the end, it’s really important to actually meet with people in existing organizations before you start your nonprofit. This will give you key insights that you will need to know sooner rather than later. Taking a peek under the hood by scanning their 990s is a great start to this process, and reading a few of them will make you more knowledgeable and help you win points with these community leaders before you sit down with them one on one.

 

 


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Common Sense Fundraising Fundamentals for Nonprofit Newbies

If you’re starting a nonprofit organization you probably have some ideas about how you’ll raise enough money to stay afloat. That’s good because you’ll need to work these into your business model and budget early on. As often as not, newbies to the nonprofit world make assumptions about how money is made that don’t quite match reality.

Many people assume they’ll spend their time writing grants, sending out fundraising mailings, or putting on big fundraising events, and in the nonprofit world all these are activities you are likely to become familiar with, but the story doesn’t end there.

There are several other ways to raise money, and these are prevalent in the nonprofit realm. Some organizations have a built in source of revenue. For example, Goodwill has a chain of Thrift Stores as do many smaller nonprofits. Museums and arts organization often have ticket fees, and there are a number of other models where the activity your organization is engaged in has a natural source of cash tied to it. But very often these earned incomes are unavailable or at least need to be supplemented by contributions of some sort. That is people or organizations need to give you money outright. Let’s differentiate then between generating revenue (broadly speaking) and fundraising specifically.

Across all nonprofits as a whole, less than a quarter of the money comes from fundraising. Most of the rest comes in the form of fees for services which could be individuals paying for those admission tickets or buying or services items from you, or it could come from government contracts to do your work. Of the fundraising money, 73% came from individuals, 42% from foundations, and under 5% from corporations. (Bequests made up the balance.*)

Each nonprofit is different though. Religious organization skew toward individual giving. Medical nonprofit skew toward fees for services. You nonprofit will have its own unique recipe for staying afloat financially, and it’s a good exercise to figure out what other nonprofits working similarly to yours are doing to make ends meet. In a lot of cases this will involve some component of fundraising.

So are we talking about grant writing, raffles, galas, and that sort of thing?

I am not a fundraising expert, but I’ve spent more than four decades in nonprofits, so I’ve learned a few things by osmosis. I’ve noticed that a lot of people jump right to the fundraising event type of solutions and in doing so they skip over a very basic and fundamental fact. In its simplest form, fundraising in a nonprofit goes like this:

  1. Do something people want to support
  2. Tell them about it
  3. Ask them for money
The easiest way to raise money for your nonprofit organization is to just ask for it. Click To Tweet

There’s more to it than that, of course. It’s important to have thought through why people support your idea and be able to talk about it persuasively. For example, you need to be able to demonstrate a need and also how your organization is addressing that need. You need to be able to talk about this both logically and emotionally. You need to demonstrate that you’re competent at doing the work needed and that you’ve thought everything through. You also need to think about cultivating an ongoing relationship with your supporters and finding ways to increase their commitment through your relationship with them. This involves psychology and salesmanship and finding appropriate ways to express your gratitude for their contribution.

But at its heart, fundraising is really that three step process (do something good, talk about it, ask for support). In my experience, nonprofiteers have little trouble committing to the first two points.

Many people are uncomfortable asking people for money directly. In fact, I think a lot of folks just don’t like to talk about money at all. (I know I’d rather get it and spend it than talk about it.)

We need to get over that.

It’s usually  people’s awkwardness with money that makes them avoid asking others for it, and that’s probably what leads them to prioritize grant writing, events, and direct mail. These strategies avoid the direct ask and so avoid the awkwardness. But if you want these more comfortable approaches to succeed, you will likely need to demonstrate that you have supporters, and the direct ask is how you build that evidence.

So you gotta ask people for money. After you’ve done this a few times (and been rejected a few times) you’ll see some success. Do it enough and you’ll be in a position to demonstrate your community’s support for your work. This helps in countless other ways. For example, those grants you want will be a little closer to reality. Getting prime donations for a silent auction will be easier. And you’ll have a list of supporters that can help you sell tickets to that gala.

Who knows, one of those donors might not be afraid to ask their friends for contributions. If so, pay special attention to that one. She’ll be a big help.

Footnotes

See the Grantspace Knowledge Base (2014) numbers, and this document.


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Nonprofit Bookkeeping: What to Look For

If you’re starting a nonprofit organization one person you’ll need in your group of co-founders is someone who can handle the financial aspects of your organization. Now, keeping track of expenses and income sources is almost not certainly what brought you together. You came together to feed the puppies, or shelter the hungry, or cure that disease, or whatever. Nobody starts a nonprofit to keep track of money. But it’s needed, and figuring out who can do it can be frustrating, so many founders look around at their initial group and pick whoever can balance a checkbook to handle all the money matters.

Bad idea!

Try finding a volunteer who actually understands the issues involved. Ideally, you have a volunteer CPA who is well-versed in the principles of Nonprofit Accounting. (In your dreams!) A more realistic scenario is that there is someone who’s good at balancing their checkbook and also took an accounting class at some point and maybe has a slightly unnatural interest in this sort of thing. (There are a few of us out there.) In this kind of situation you could be presented with a particular problem.

How do you know your bookkeeper knows what they need to know when you don’t know what that is? Click To Tweet

I asked my colleague, Erin Zollenkopf about this. Erin works at a local company that specializes in nonprofit bookkeeping, and she knows her stuff. She immediately brought up a slightly awkward memory.

Back when I had learned a lot about accounting but not enough about nonprofit accounting principles, I applied for a job and was given this test. The truth is I didn’t distinguish myself, mostly because I lacked some of the terminology. That led me to study up on the principles of nonprofit accounting, and I did get better (but not in time to land that job). But I did learn about that test, and that’s a good thing. I suggest you ask any bookkeeping or accounting volunteer to take that same test.  If they pass the test, you’re solid. If they know accounting but fall short on the test, that may mean you can take them on the condition they bone up a little about nonprofit accounting concepts. Otherwise, keep looking.

If they do know accounting but are weak in the nonprofit-specific concepts, there are only a few crucial things they’ll need to get into the groove of things.

  • The terminology is different. Frankly this is the least important difference, because a lot of software won’t use the nonprofit terms anyway, but nonprofit accountants do call certain reports by different names, so it’s good to know what those differences are.
  • It’s important to track restricted funds. In nonprofit accounting donors sometimes attach strings to their donations and this is rare in for-profit accounting, so  for-profit accountants may be unfamiliar with this concept.
  • They need to know about functional accounting as it applies to nonprofit organizations. They will need to track program expenses separate from fundraising expenses and both separate from other overhead (a.k.a. management and general) expenses. Here a good for-profit accountant has probably been exposed to something similar, so learning the nonprofit specifics shouldn’t be too hard for them.

That’s it. Three things that are simple enough for a good beancounting volunteer to learn. Aim for this level when you get a volunteer to help with your accounting or bookkeeping.

When you get that lined up there are three important things that you should understand (and your beancounting volunteer should be able to help educate you about these). Erin’s top three items are as follows (paraphrased, so blame me for any confusing words). I think of these as the “Three Bs” of financial oversight.

  • You need to understand all the numbers on the balance sheet (a.k.a. statement of financial position). Most nonprofiteers seem to grasp the importance of an income statement (a.k.a. profit and loss report/statement of activities), but far fewer seem to get the importance of this report.
  • You should develop and follow a budget. By “follow” I don’t mean constrain every last dime you spend based on what’s in the budget, but when you do overspend, under-earn, etc., understand why and be able to explain it to anyone.
  • Learn how to read the bank statement. Someone who doesn’t handle the money day to day should be to reconciling this each month. Specifically this person needs to ensure that the only uncleared items are checks you’ve written that haven’t been cashed (and an occasional end of the month deposit). This is a simple enough job (and is a lot like reconciling your own checkbook). But the failure to do this one task allowed financial mismanagement to continue in one organization I’ve worked with. Five years in, the organization is under investigation and audit, and the group is spiraling downward.

Nonprofits will often start a bit haphazardly, but keeping an eye on these few financial things can lay the groundwork for some sound fiduciary practices. Eventually you can grow and outsource some of your bookkeeping and accounting functions, or you can bring a paid person onto your staff. But don’t wait until then in order to get things started off on the right foot.

 


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How Your Membership Rules Can Complicate Your Nonprofit

When you start a nonprofit organization you will find yourself staring at paperwork filled with questions you may not understand. The first few times I did this, I confess I needed to guess at some answers, but it’s really worth understanding the concepts before proceeding or you will get into trouble. Some answers are harder to undo if you make a mistake. One of these key questions concerns membership in your organization. This pops up when you’re incorporating, when you’re drafting your bylaws, and when you’re filing for tax-exempt status. It must be important, but what are the implications?

This membership issue can be confusing, since membership means different things in different contexts. When starting a nonprofit organization, it’s most important to think about who elects your board of directors. In this context a membership organization is an one that has members defined in their bylaws or other founding documents who elect the board and often have a say in motions that could change the bylaws, etc.

Now a lot of nonprofit organization have “members” that don’t get to vote. Maybe they get a newsletter or some other benefit from your organization in exchange for giving you a little money periodically or for volunteering. These people are not members in the sense that matters when you are establishing your organization’s legal form. You can call those folks members if you like, but to keep things straight it might make more sense to think of them as “supporters” or “sustainers” instead.

Your state probably defines membership more specifically, so it’s worth looking up what your state’s laws say. But in general, someone who can vote for a board seat is a member of your organization, and votes are generally taken of the whole membership.

So think primarily about how the board is selected. Is it via a democratic vote of all your members, or does the board itself make the final decision? In the first case your have a member-selected board. The other option is to called a self-perpetuating board, that is one where the current board selects any new members on its own. These days most 501(c)(3) organizations are set up as self-perpetuating.

But why?

On the surface, the membership option is appealing since it seems more democratic, but there are some “gotchas” to consider.

Is establishing a democratically-run nonprofit organization worth the effort? Click To Tweet
  • You need to define a specific membership group in your founding documents. Many organizations that value community input and democratic institutions have a tendency to create fuzzy definitions here. Depending on state law, there are requirements about keeping track of these folks. Oregon, for example, requires that you have a list of all members, and this makes sense if you need to use that to determine a quorum for voting purposes. This is one aspect of a membership organization that can eat up some administrative time.
  • You need to spell out what rights these members have, and what they do not. This includes establishing quorums and election procedures, but you also need to delineate which types of decisions are voted on by the whole membership and which by the elected board. If there are contentious issues and heated factions, not getting this right can lead the organization into legal strife.
  • Anyone who fits the definition of a member will have a say, including people that might surprise you. These folks can take your organization in an unexpected direction. For example, the Sierra Club, one of the nation’s oldest environmental organizations found itself embroiled in a struggle around the issue of immigration. Anti-immigrant activists and white supremacists organized their supporters to sign up and attempted to elect board members who could have taken the organization in a very unexpected direction.
  • Electing your board can become complicated and expensive since your organization will need to administer an election process of some sort. The membership will need to be informed about the candidates or issues they are allowed to vote on. This requires extra administrative work.
  • A disengaged membership may not participate in the process anyway. Often when an organization is founded, the co-founders are very committed to its mission, but they often overestimate how involved the membership will be a few years down the road. When the membership doesn’t participate, the organization ceases to be as democratic as the founders originally intended.
  • Elections can turn into popularity contests rather than a way to select the most qualified board member. If your organization needs board members with specific skill sets, it’s likely that your membership may not understand those requirements with the same level of sophistication as your current board members do. Rather, candidates with large political following (and often large egos) can end up dominating the board.
  • If you want to change forms, it’s a lot harder to turn a membership board into a self-perpetuating board than it is to go the other way. Because the process of changing the bylaws will require a membership vote, in situations where the membership is divided or disengaged this can be difficult to pull off. On the other hand, if a self-perpetuating board wants to convert to a membership board, only the board members need to decide to act on the matter.

It’s clear that implementing and living with a membership organization can be a tangled mess, but isn’t the fundamental principle of democracy worth the extra effort?

Perhaps, and in some types of organizations such as trade associations and neighborhood groups, this value of democracy is so important that it carries the day. In fact, most of these types of organizations are founded as membership based ones. A good rule of thumb might be that if your members have competing interests (such as a business association whose members compete for customers) it probably makes sense to organize as a membership group (and carefully anticipate the above “gotchas” when setting things up).

For many other organizations it might make sense to consider alternative democratic structures. For example, a self-perpetuating board could define various groups of stakeholders including program participants, sustainers, and so on, and these groups could be consulted before the board makes certain types of decisions. One example is an annual “town hall” style meeting that could be held before a strategic planning process. The board could also have a goal of including representatives of such groups in its own makeup. These types of solutions are numerous and are limited only by your imagination. (However, do check with state law and a legal advisor so you don’t accidentally create a membership class without realizing it.)

Also, note that any of these systems can be gamed, and there is no foolproof way to prevent politicking and faction fights (or lackluster disengagement) within your organization. This is true whether or not you choose a membership or self-perpetuating form. As Winston Churchill was fond of saying. “Democracy is the worst form of government except for all those other forms that have been tried from time to time.”


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Three Alternatives to Starting a Nonprofit

Don’t start a nonprofit organization because it’s easier than starting a for-profit business.

Don’t start a nonprofit organization because you want to avoid paying taxes.

Don’t start a nonprofit organization because you think you can do this better than anyone else who’s ever tried.

Start nonprofit organization

  • when you see a gap in the community that needs filling,
  • when you have a realistic way to address that gap,
  • when you’ve figured out a solid business plan for making the organization sustainable,
  • when you’ve begun to attract the resources needed to pull off this endeavor, and
  • when you’ve attracted others who will complement your skill set and are equally committed to making a shared vision into a reality.

Getting to that point can be a lot of work, and it’s not for everyone.

The process for starting a nonprofit organization is legally complicated, and it also requires a fair measure of collaboration with others, some good business sense, and the ability to measure your impact and relate that to your community as a compelling story. It’s a lot of work!

Yes, an incorporated tax-exempt nonprofit organization offers some protection for you and your co-founders. It has some great tax advantages for your organization and your donors. It helps you when applying for foundation grants. It helps get your recognized by other businesses in your community. And there are a lot of other advantages as well.

So it’s worth doing, at least sometimes.

But there are disadvantages as well, and in some cases these outweigh the positives. Here are three alternatives to starting your own nonprofit organization.

(I should note here that when I say “nonprofit organization” I mean an incorporated organization that is applying for or has received a tax-exempt status from the IRS).

Option One: Just Do It

One alternative to incorporating and filing for tax-exempt status is to just do your work without all that bother.  If you work as a group and haven’t incorporated then the IRS will probably consider you an “unincorporated association,” and you might want to stay that way.

Think about the advantages of a nonprofit organization. There are several types of projects that come to mind where those advantages don’t matter very much. For example, if you want to provide tax-deduction receipts for donors, you should first make sure your donors actually need those tax deductions. Many small donors don’t itemize their taxes and can’t really use the deduction come tax time. If this describes your donor base, the tax advantage is irrelevant.

Or let’s say your idea is to run a neighborhood yard sale once a year and send the money earned off to fund a school in the developing world. The risk in such an activity is fairly low, especially if the amount of money collected is nominal. There’s a good argument here to skip the bureaucratic steps associated with starting a nonprofit organization. Instead, you can just do the work.

You will need to use individual resources to do things. For instance, you won’t be able to get a bank account or some other business services as an organization. Those activities will need to go through individuals, so your group will need to be made up of people who are trustworthy and accountable. But this is the easiest way to start your work.

Option Two: Less Bureaucracy, More Control

If your main motivation is that you don’t want to work for “the man” you might want to skip starting a nonprofit corporation and create a for-profit business such as a sole proprietorship or an LLC.

If you think dealing with a board is like working in a straight jacket, don't start a nonprofit. Click To Tweet

Some founders want to go it alone, or they want a lot of control over how things are done. Establishing a nonprofit corporation requires that you form a board of directors and that board has ultimate control over the organization. For some personalities, dealing with these extra people feels like working in a straight jacket. If that describes you, an option is to form a for-profit business of some sort. You get much more say in how things go, and the paperwork is easier to deal with. On the downside, you have no access to tax-exempt donations and foundation grants, and you will need to pay taxes on any profit. But you are your own boss. You get to run the show.

There’s no rule that for-profit businesses must try to make millions. You will need a positive cash flow, but that’s true for incorporated nonprofit organizations as well as for-profit enterprises.

Option Three: Outsource Your Bureaucracy

An existing nonprofit can act as a sort of intermediary between your organization and the IRS. This nonprofit would be called a fiscal sponsor, and becoming a program of a fiscal sponsor cuts out a fair amount of the day-to-day paperwork for you, letting you get down to business. The fiscal sponsor takes a negotiated cut of any income, but this is likely less than what a for-profit would pay in taxes, and in return for this, the sponsor deals with your bookkeeping, banking, and accounting. They file the IRS forms, and you get to work on your programs. It’s like outsourcing that work.

Think of it like the decision to buy or rent a home. In one case you give up some control but month to month you don’t need to deal with the leaky roofs and broken windows. That’s a landlord’s job. Alternatively you can buy the house and take on the risk and work associated with owning. Having a fiscal sponsor is a lot like renting. The sponsor owns your programs, but they take on a lot of that bureaucratic work. There are situations that this is a great option.

You do want to be careful, and shop for a fiscal sponsor that knows what they are doing and whose mission and style are compatible with your own.

This is a great option for people wanting to try the nonprofit idea out before formally setting up shop. If the project doesn’t work out, it’s way easier to abandon a project like this than it is to properly wind down an incorporated nonprofit organization.

It’s also a good option for ongoing nonprofits that operate at a low level once in a while but need the ability to apply for grants or for those who solicit tax-deductible contributions.

Or Start a Nonprofit Organization

Those are only three of many alternatives to starting a nonprofit organization. After considering these options it may be that a tax-exempt nonprofit corporation is the most appropriate option after all. In that case, be certain to take the time and effort to do it right. There’s a lot of work involved in doing this. Several online resources focus on the legal form, but before starting that work, be sure to thoroughly vet your idea. Understand how it benefits society and what programs you intend to offer. Also, develop a business model that will keep it sustainable, attract a few people to your cause, and consider what systems you need to have in place before establishing your legal structure. This upfront work will help you whatever legal form you decide to go with.


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Use This Tool for Your Nonprofit’s Decision-Making System

Drafting a clear decision-making policy can seem like a low priority when you are starting a nonprofit organization, but that’s exactly the best time to do it. A good decision-making policy can be the difference between an organization that survives and one that fails in a time of crisis, but waiting until that happens would be a big mistake.

I worked with an organization that used an informal form of consensus decision-making in its board meetings. If they had been taking votes most decisions would have been unanimous, so with just a bit of discussion there was little controversy, and the formalities of consensus were never spelled out because the system seemed to be working.

But when a new member of the board was installed she began to block every decision, forcing the group to discuss even small issues in tedious detail, stretching out conversations for months. At a time when the board was recruiting new members this person prevented the approval of a well qualified candidate from taking a seat, and also stalled many other important decisions. The remaining board members grew frustrated with this “obstructionist,” and after one difficult meeting several were ready to quit. That would have led to a full on board meltdown.

After some cajoling, the board rallied and decided to remove the obstructionist. But how? If they operated by consensus, was the obstructionist allowed a say? What kind of notice did they need to give this person? Did the remaining members of the board need unanimity to do this? None of these answers were clear, and discussing this when the situation was “hot” began to polarize the organization.

Figure out your decision-making system before you need to use it to figure out how you make decisions. Click To Tweet

All this underscores the need for a clear and well-understood process for making decisions, but figuring out how to draft such a policy at the outset bewilders many a founder. First, there are different systems of decision making to choose from. Second, all sorts of decisions need to be made, and a system that’s appropriate for one may be wrong for another. Finally, there are many stakeholders that could be involved in any given decision, and their assumptions about who should vote and how much say they should have is all over the place.

Let’s start by looking at three common systems.

  • If you’ve ever worked in a large bureaucracy, you know that there’s a chain of command. The folks higher up make decisions that affect those below, and information is supposed to travel up the chain so the muckamucks will know what’s best for the whole organization. In practice, these higher-ups often delegate decisions down the chain or at least solicit some measure of input from people closer to the ground. Let’s call this style of decision making hierarchical.
  • Of course, many decisions are made in a group, for example your board of directors. Oten majority rule is used in this context. There’s usually a proposal, some discussion, and a vote. Very formal versions of this system can be based on Robert’s Rules of Order, but in many smaller organizations the process is simplified and substantially less rigid.
  • Another group-based system is call formal consensus. This system deemphasizes voting and focus instead on discussing and modifying proposals until everyone is happy enough to support a common “sense of the group.” When there’s conflict it’s worked out through a process designed to give everyone input and provide options for supporting, standing aside, or blocking a decision. This process can be long and drawn out, but properly used can also arrive at better decisions that have more support.

No one actually uses any of these systems in its purest form all the time and in all cases. Usually there are multiple decision-making process at play within an organization and most of them have elements of all the above jumbled together in some way. For example, the decision about where to hold a board meeting might have been made by the board chair (hierarchical), a vote may be taken about whether or not to accept the conditions of a grant (majority rule), and what goes on the pizza that will be eaten during the discussion might be made by an informal consensus. That is, decision-making systems are not a one-size-fits-all affair.

This is likely because some decisions don’t seem worth the bother while others are so crucial that the group wants everyone’s buy-in. In my experience, people have very different expectations around how much time should be spent in discussion versus in the decision making itself. In a new organization it’s crucial to understand what different stakeholders’ expectations are. Use this information to help determine what types of decision-making systems your organization will use.

In your nonprofit, there will be a board of directors, perhaps a staff, possibly volunteers, maybe some committees, and so forth. One part of a good decision-making system is identifying who these groups are. Make a list of them now since it will be useful shortly.

There are also several different roles that someone might play in any given decision. One model I like breaks this down into four roles with the acronym of DICE:

  • D refers to decider. Who is actually making the decision? That is, this person gets a vote in the decision.
  • E stands for executer. Who will be carrying out this results of this decision? Once it’s made, someone needs to do it or the decision is pointless.
  • C is for consulted. Who should be asked for input even if they don’t get a “vote.” That is, these are the people who are given a say in the decision. A decision will not be made until their voice is heard, but the decision itself will be made by others.
  • I refers to informed. Who needs to know about the decision? These are the people who should be aware but are given neither vote nor voice.

I know, that really spells DECI not DICE, but it’s easier to remember DICE, and I think there’s an implied order to DECI. (If you’re an executor then you should also be consulted. If you’re an consulted you also need to be informed.)

We can use this, along with your list of stakeholders and the types of decisions you’ll be making to create a grid that helps clarify decision-making in your nonprofit organization. This grid looks something like this:

  • D = Decider
  • C = Consulted
  • E = Executor
  • I = Informed
Decision Type Board ED Staff Volunteers
Approve new board member D C I I
Accept a grant D D I I
… add a line for each decision type
Hire new staff I D I I

Think about all the types of decisions you might need to make in your organization. Will you start or stop programs or tweak them? Will you rent office space? How do you expel a board member? A volunteer? Will you need to add policies to your HR manual? Brainstorm a lot of these and then fashion them into a series of types of decisions for first column in the grid.

Developing a tool like this can take some thoughtful work to complete, but  it’s worth spending the time early on to prevent situations like the one I mentioned above. Do this before any major hot button issues have come to the forefront, and make sure it works well when there’s a lot of controversy as well as when things are running smoothly.

It’s also important to actually follow your decision-making policy. It seems silly to have to say that, but it shouldn’t just exist on paper (or in your paperless archives). Review it annually, so it’s fresh in people’s minds whenever it might be needed.

As for that organization I started this post with, they sought legal advice which required some extra time and expense, and then they successfully removed the problem member from their board. This person’s obstructionism actually provided an important (but hard) lesson for the organization, because it helped the board nail down how they deal with difficult issues, and I’m pleased to report the board is not collapsing. Rather it’s larger and stronger than ever.


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The Vision Thing: Do You Know Where Your Organization is Heading?

Why invest any energy in drafting a vision statement for the nonprofit organization you are starting? Most consultants and nonprofit leaders seem to want them, but for many it seems like another “touchy feely” document that just isn’t necessary. Isn’t your idea about the nonprofit strong enough to stand on its own?

Well, if you have a group of people working together to start a nonprofit organization people will hold different assumptions about all sorts of things. It’s natural to want to ignore these differences, but these small conflicts can actually be a great strength in a young organization, and working out a common vision can really help out.

One mark of a good visioning exercise is that it elicits a new and improved way of understanding your organization. Getting input from people with even slightly different perspectives can deepen your organization and help you communicate to a wider audience. Conversely, organizations without a coherent vision can find themselves working at cross purposes, wasting time and resources.

So, what exactly is an organizational vision anyway?

I’ve dealt with two types of visioning exercises, external and internal. The first produces a statement that focuses your organization’s activities. It communicates a picture of what impact your organization wants to have on the world, and it can help you decide whether or not to engage in a specific activity. For example, The Nature Conservancy’s statement is “To leave a sustainable world for future generations.” Anytime they think about establishing a new program they can think “will this move us closer to that ideal or away from it?” These types of vision statements are best if they are brief, descriptive, and inspiring. They’re often very broad in scope.

The other sort of vision statement is internal — that is, it’s about your organization more than the community. This sort of exercise can help identify obstacles you need to overcome and strengths you can put to use. It can help prioritize how to do the work more effectively. These tend to be longer and more detailed. At Free Geek (a Portland-based nonprofit I helped found in 2000) we drafted one that spelled out what the organization would look like in two years through several different lenses — looking at our financial base and our relationships with institutions, as well as considering a few different program areas, how we hoped to adapt to technological trends, and so forth. It was a few pages long.

Both of these types of visions can be helpful, but they’re different tools. The external exercise describes how the world will be better. The internal exercise asks what it is you need to be doing. I’m beginning to think that a good overall exercise takes into account both the external and internal perspectives and produces something short and inspiring for public consumption, but also deepens your internal communities understanding of what work needs to be done.

But where do you start when working out your organization’s vision?

There are a lot of exercises and tools that can help you flesh out your vision, and many can be picked up pretty easily. Here’s one of my favorites*. You can do it alone, but it’s better to do as a group.  

Imagine that three years from now your organization has become so successful that a reporter has written a major article about a recent success. Now, get a large piece of paper and a sharpie. You’re going to create a mockup of the newspaper that features the article. (Yeah, I know newspapers are dying off, but I’ve found that this exercise works in spite of that fact.) Here are the elements of the article you should include.

  1. The date. This will give you context later on.
  2. A headline. That is, what words grab the reader’s attention?
  3. An image. Draw a simple picture of a photo or other image that accompanies the article. (Stick figures are fine here. No need to get fancy.)
  4. A caption. Write down a sentence or phrase to accompany that image.
  5. An outline. There’s no need to write the whole article out, and in most cases there isn’t enough time anyway. So list 3-5 items that are covered in the article.
  6. A quote. In a breakout sidebar, write down something that someone said to illustrate a point that would be in the article.
  7. A citation. Write down the name of the person who made that quote (or the person’s role).

If you have a group, each person can do this on their own (or in smaller groups). After you’ve done this part of the exercise, post all the newspaper articles on the wall. Have everyone roam past them, reading each headline, looking at each picture, etc. Then ask each person or group to present their article. This is the basis for a discussion about what you want your organization to look like three years from now. (When possible leave the articles on the wall where people can see them for several days.) In your discussion pay attention to these points:

  • Try to identify common themes.
  • Also try to discover any contradictions. Do people have completely opposite ideas about where the organization should go?
  • Do some of the ideas from one story build on others?
  • Can you construct a common narrative about where the organization wants to be in a few years time?

I don’t usually do this exercise entirely on its own. If the organization is likely to produce unrealistic scenarios I ask first for a discussion of upcoming challenges.

When the exercise is over, it’s time for the next step — a discussion of what obstacles might exist that could hamper you in making this a reality. What can you do to address those issues? What strengths does your organization have that can help you move in this direction? How can you best use those strengths?

This type of activity can go a long way toward getting your team onto the same page when starting your nonprofit organization. It also will help you see things from a variety of perspectives. This can be a good starting point for sussing out the values your group holds, and can lay the foundation for a solid mission statement which is also essential to a new nonprofit organization.

Footnote

* I didn’t invent this tool. I learned about it from other consultants, and later found a similar exercise in Gamestorming by Gray, Brown, and Macanufo, who modeled their version on The Grove Consultants International.


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This Boring Accounting Rule Will Trip You Up

Many who want to start a nonprofit organization know very little about nonprofit accounting, and there are some real traps you can fall into if you don’t understand the basics. I’m going to explain one important concept, and I’ll try to make it interesting by including references to donuts and ale.

To make it simpler, I need to start with the most basic for-profit accounting principle, after which I can tweak it to explain the nonprofit part.

Let’s say you want to start a simple business making and selling donuts. A friend loans you $100 to buy some ingredients. You now have $100 and you owe $100. Accountants would say you have assets of $100 and liabilities of $100. What you have minus what you owe is what your business is worth (in this case zero). Accountants call this amount “equity”. (That’s the accounting term, not the “let’s be fair, inclusive, and respectful to underrepresented communities” term currently playing a major role in many organizations.)

So, we could say H is what you have, O is what you owe, and W is what your donut business is worth. Let’s say it using algebra:

H - O = W

Or we could say your assets minus your liabilities is the equity:

A - L = E

I can remember this by saying “HOW do you make ALE?” That’s concept is called the accounting equation, and it’s the most fundamental rule of accounting. It tells you how much your for-profit business is worth.

Ok, let’s go from dollars back to donuts. At this point, we have:

H - O = W

A - L = E

$100 - $100 = $0

Your business is worth zero at this point, so you go to the store, buy $50 worth of ingredients, whip up a batch of donuts using your own equipment in your own kitchen, and sell them to a neighbor  for $100. Now you have:

H - O = W

A - L = E

$150 - $100 = $50

That is, your business is now worth $50! Keep buying ingredients, selling donuts, and you’re on your way to paying your friend back. Your equity (or worth) will go up and up, and you’ll become a zillionaire. Whatever you do, don’t let your equity go below zero. That would be bad!

That, my friends, is for-profit accounting in a nutshell.

Let’s move on to nonprofit accounting, and I’m sorry to say it’s weirder, less intuitive, and perhaps more boring than what I’ve covered so far.

We have the same story, except now your friend donated $100 to your organization instead of loaning it to you, so you owe nothing. That is you start with:

H - O = W

A - L = E

$100 - $0 = $100

After you buy your ingredients, make and sell your donuts for $50, and you have this:

H - O = W

A - L = E

$150 - $0 = $150

From a capitalist’s point of view, this looks way better than the for-profit scenario above. But now, I need to introduce a change or two to better reflect the nonprofit reality.

Terms like “worth” and “equity” imply that the business has an owner, but a nonprofit doesn’t have owners, so we have to throw these terms away. Instead, nonprofit accountants use the term “Net Assets”, so the nonprofit accounting equation looks like this:

A - L = NA

See how boring that got? No ale. Not even any words that make it easier to remember. Fortunately, we’re still in the donut business.

Oh, and one other thing. When the donor gave you the money they said “Here’s $100. Use it to buy yourself a new deep fat fryer.” Nonprofit accounting rules call this a “restricted donation,” and you are now required to either buy the deep fat fryer, or refuse to take the money. That is, the donor had some “strings” attached to the donation. So, if you take the money, you need to track it as “Restricted Net Assets” (and separate it from any “Unrestricted Net Assets”).

Now you have $100 in restricted net assets, so this is what things look like:

A - L = RNA + UNA

$100 - $0 = $100 + $0

Unfortunately, you cannot go buy any ingredients for your first batch of donuts since all your money is committed to the purchase of a deep fat fryer. So you spend $100 on that piece of equipment instead, and now you get this*:

A - L = RNA + UNA

$0 - $0 = $0 + $0

Yep. You’ve used up your restricted money, but now you have no cash to buy the ingredients with, so you need to go back out and raise more money in order to start up your activities. Of course, you now have a deep fat fryer, which is good, but that may not have been your first priority.

Restricted donations can cause a lot of “hoop jumping” when starting a nonprofit organization. Click To Tweet

Essentially, it’s important to try to get as much restriction-free money in the door as possible, so you have the leeway to do whatever is necessary to run your operations.

When it comes to foundation and corporate grants, this can be a major issue, since many of them comes with “strings attached,” and finding unrestricted grants can feel like searching for the Golden Fleece.

It’s also important to understand how promising to do something specific with donated funds can make donations of cash restricted when they don’t need to be. Saying “Please help us by donating money to buy new office furniture” can create a restriction on the donation, but saying “We have lots of needs, like office furniture. Please help with a donation” will not.

It’s also important to understand all the costs involved in delivering your services, including things that may seem tangential or unrelated to your main work from the perspective of prospective donors. This helps you create a compelling story that can help you pitch your idea to potential funders, a story that will let them be excited about giving you unrestricted funds, or at least restricting those funds to things you actually need.

Hopefully, this is a story that isn’t as boring as these nonprofit accounting rules. I suggest grabbing a donut and a pint of ale and thinking about how these things are made while crafting that story.

Footnote

* Real accountants know there’s more to it than this, since the equipment you bought could still be an asset, but let’s forget that for now and keep it simple.


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It’s Way Too Easy to Start a Nonprofit Organization that will Fail

“There are too many nonprofits out there.”

Statements like this should give people who want to start a nonprofit organization some pause. Indeed, the National Center for Charitable Statistics estimates there are 1.5 million of them in the United States, and here in my home state of Oregon there are over 18,000. That does seem like a lot — maybe too many — but taking this approach glosses over a key point. 1.5 million well-functioning organizations would be a wonderful thing. The problem is that so many of these nonprofits are unsustainable or poorly functioning.

How did we get here? There are many answers to this question, and there are several root causes. Perhaps one important factor is to consider that all-important bureaucratic entity new nonprofit organizations face when they start up, the Internal Revenue Service.

In the mid 2010s the IRS was facing a massive backlog of applications for tax-exempt status. It could take months to get a letter of recognition, and the waiting list was getting longer. The reason was that when the IRS receives the 30-page application its staff gets busy reviewing the collected information to determine if the organization is truly worthy of tax-exemption. This process takes time. The form requires a lot of supplementary documentation, and IRS agents rigorously pour over this information to ensure that all tax-exempt statuses are properly awarded. The amount of time required for this, multiplied by the sheer number of applications they were receiving, produced the long waiting time for new organizations.

So in 2014 they introduced a slimmed down version of their application aimed at smaller organizations, and this form required much less documentation. The new IRS form (called a 1023-EZ) made it easier than ever to legally start a small nonprofit. The price of filing this form was set at $400, less than half of the $850 required for the longer form (called a form 1023), and the price was later dropped to $275. The waiting time for confirmation is now measured in weeks for this simpler form, rather than the months nonprofit founders had been experiencing. The floodgates were opened.

It’s easier than ever to haphazardly establish a fundamentally flawed nonprofit. Click To Tweet

Many articles have pointed out how this cheaper and simpler process can lead to an abuse of the system, how a large number of tax dodgers can take advantage of the lowered amount of scrutiny and establish a fake nonprofit. That is a problem, but I’d like to focus on something else, because in my experience most people are actually trying to do some good in the world, and this new system tempts them to take some unwise shortcuts.

If your ambitions are modest (under $50,000/year), it’s easier than ever to haphazardly establish a fundamentally flawed nonprofit organization. All those hoops the IRS made you jump through on the long form, it seems, had a purpose.

First, the IRS wants to ensure that money and other resources contributed to your organization will stay in the nonprofit realm no matter what. That means you must have certain legal language included in your articles of incorporation and bylaws. The longer form 1023 requires you to submit these documents, and an IRS agent reviews them to be sure you got the language right. The simpler form 1023-EZ just asks you to check a box saying the proper language is there and it’s up to snuff. It’s easy to check that box even if you didn’t get the language right, and this can put your organization in danger.

More fundamentally, the longer form requires a number of narrative explanations of your purpose, how you do business, a solid budget, and detailed descriptions of your intended activities. In brief, you need to be detailed and coherent about some important things:

  • Your purpose (or mission statement) explains why your organization exists and how it will benefit society.
  • This gives rise to your program activities that deliver that benefit. These need to be spelled out in terms of who you serve, how that service is delivered and by whom.
  • Looking at all that, you also discover your supporting activities — what else you need to do (like fundraising) in order to make this organization viable.
  • This big picture implies costs which you need to understand, both in terms of what they are and how the revenue will be raised, in short a realistic budget.

The longer form 1023 requires you work through all these important factors early on, because you can’t move forward without spelling all that out. The shorter 1023-EZ simply asks you on good faith to state if you’ve done that legwork. It’s almost an invitation to gloss over these aspects and just check the boxes you think they want you to check.

But you know you need to figure out all that stuff up front anyway, right? It can’t afford to be glossed over. Even if there were no IRS requirements for nonprofits, these basic pieces are essential for your organization’s sustainability.

Failing to solidly think through this stuff will scatter several potential landmines along your path. So, if you’re starting a small nonprofit organization, take the time to read through and complete the full form 1023 even if it’s just an exercise and you have no intent to actually file that form. That is, do the hard work up front even if you want to take the shortcut to save the money and simplify the process.


NOTE: It has come to my attention recently that many people filing the full 1023 (long form) are no longer experiencing the long waits for approval that were once par for the course. One firm I spoke with estimated that approval could come in a matter of a few weeks. So I made a minor change to this post on September 30, 2017 in order to remove any confusion about that.


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Why Do Things Go Wrong?

Last week, I mentioned five types of work people need to do when establishing a new nonprofit. This week, I wanted to mention a couple of things I see go wrong often enough that it helps me understand why these foundational pieces are so important.

When I think about what are the biggest problems that torpedo new nonprofits there are two that pop to the top of my list, and they both relate to the founder:

  • The founder simply doesn’t understand the full amount and type of work entailed so they become overwhelmed and are unable to establish a sustainable organization.
  • The founder is resistant to others having control over their “baby,” and they take more or less complete control over the organization once it’s established.

What are the two biggest problems that torpedo new nonprofit organizations? Click To TweetIn my work, I’m trying to address both these problems. The first can be addressed by providing a reality check to would-be founders. The five phases I mentioned last week are a framework for the wide variety of the work that needs to be accomplished, and the forty-odd individual steps they contain help the new nonprofiteer understand the scope of the work. My ebook and board game help address that problem through education.

The second issue is more problematic.

I’m currently working with an organization where the founder seemed to have a need to control every aspect of the organization. This contributed to disengaged volunteers (including the board), a lack of transparency overall (including nobody even keeping track of the organization’s expenses), a massive board turnover, an IRS audit, and an investigation by the state. When the founder left in the wake of all this, she took most of the social contacts away, leaving the organization with a bad reputation and no way to rebuild it. The organization in question has done a lot of good while it was functional, but if the founder had shared control with some others then it would have had a fair shot at surviving her departure.

Paraphrasing an article from the Nonprofit Quarterly, if the founder of an organization truly is the organization then it’s not actually an organization. One of the foundational phases is the Growth Phase, a period when it’s crucial to reach out to potential volunteers and co-founders. Too often, founders take the easy road and recruit a few friends and family to rubber stamp their decisions. But this is when finding ways to share leadership and responsibility is paramount. Laying this foundation in the beginning makes the nonprofit a real organization, not someone’s baby.

That’s it for this week. If you want to learn more about my work, visit the about section on my revamped website. See you next week.