Tuesday, March 24, 2009

Should You Manage a Non-profit Like a For-Profit Business?

An article in the April 2009 Entrepreneur Magazine highlights a charitable organization that takes pride in its for-profit traits. In my years as a consultant for and employee of non-profit organizations, I encountered plenty of groups with the opposite mentality.

Even though nonprofit revenue is not generated based on hours billed or widgets produced, one might think that years--even decades--of financial struggles would motivate nonprofit leaders to adopt more entrepreneurial attitudes about expenses and accountability. Yet there are still a number of non-profit managers who resent accountability in any form.

I remember the first time I asked a non-profit's CFO for a departmental expense report. I was shocked that no one tracked how much paper, copier toner, or other supplies were consumed by the various units or even remote offices. Instead, he practiced “fund accounting,” where the income and expenses are attributed to one or more sources of funding, often using some magical formula to allocate a portion of the TOTAL expenses to each. (This particular person was very proud of his formulas, too!) He did not have the time, he said, or see any reason to break expenses down any other way.

If you do not know what activities cost your organization (except by some gross division process), how can you know whether you can accomplish your work with less expense? If your organization does not have a benchmark for basic expenses down to the operational unit or even work group level, how can you determine where operational costs can be trimmed or whether a piece of equipment should be replaced with a more efficient model rather than simply repaired? Or which practices make better use of your resources?

Funders may soon awaken to the lack of interest among their grant recipients in fiscal accountability. Why should they continue to fund an organization that cannot explain—or prove during audit—what the costs of one unit are for postage or long-distance versus another? Some oversight boards are charged with ensuring that charitable organizations do not mismanage their funds. How long before “waste” falls into the category of “mismanagement?”

Benchmarking is nothing new in nonprofits. They have done it for decades in terms of plotting needs and delivery of services. It is rather new in terms of expenses in the nonprofit world. Why not start now? Figure out where your overhead is really going.

Here are some costs that for-profit operations typically track, either by department or project, to ensure they are operating efficiently:

 Postage
 Copy paper
 Long distance phone charges
 Printing services
 Travel expenses
 Copier consumption (either lease expense or depreciation)
 Office supplies
 Beverages
 Library & Research Expenses

Perfection is not necessary. Use existing workgroup divisions and geographical clustering where possible at this stage. Track the expenses for copy paper, for example, by the copier where it is used, rather than trying to break the total down too far. You can do this by storing the paper separately at each copier and counting the boxes of paper delivered to each copier over a 2-3 month period. That will give you a good baseline for usage.

Once the data is in, take a look at it. Anything catch your attention? Does one copier cost more serving 5 people than another serving 10? Are you really saving paper using double-sided printing, or do people “forget” to select that option most of the time? You may even find those who still print a majority of their emails!

Here are some areas where you may find surprising data:

 Costs of in-house color printing vs. outsourced (be sure to include staff time, copier wear and tear and downtime due to repairs)
 Costs of leasing a large networked copier vs. buying (with and without a maintenance contract)
 Costs of office supplies when ordered by one central office or staff person vs. distributed ordering in each department
 Costs of self-booking travel expenses vs. using a reliable travel service that works for the best rates for the organization
 Costs of computer software that you “rent” online as you use it vs. purchasing (be sure to factor in training, maintenance and upgrades)

In the end, your organization will be better off for this exercise. At the very least, you will actually know the answers to some of these cost questions. Most likely, you will spot opportunities for doing better. Every dollar shaved off costs is another dollar your fund raisers do not have to find in this tight economy to deliver important services to your community.

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