Berkeley Board Fellows & Social Sector Solutions Professional Development Workshop

The Intersection of Finance and Strategy:
Using Financial Data to Inform Strategic Decisions
By
Brent Copen

Why do so many
nonprofits endure
ongoing financial
challenges, even in
good economic
times?

Chapter 1:
An
Introduction
To The
Nonprofit
Business
Model

Components of the Business Model
Who we
are
& what
we do
How we
do it
How we
finance it
Business
Model
4
Source: The Nonprofit Strategy Revolution

The Business Model
How we
do it
How we
finance it
Who we
are & What
we do
5
Source: The Nonprofit Strategy Revolution
Where we
work
Our competitive
advantage

A Question for the group
Are nonprofits allowed to
generate profits?
6

Surpluses Reinvested in The Business
7
 New opportunities
 Facility
 Rainy day
 Investment

A Question For The Group
Who is the nonprofit’s
“customer”?
8

Customer
fee $
Third
party
payer
funding
$$$
Service cost
$$$$
Defining Service Cost & Customer Fee
Customer
fee $$$$
Service cost
$$$$
Traditional Model Nonprofit Model
9

Must Customer Fee +
Third Party Payer =
Service Cost for
nonprofits?
10

For Profit:
Service Cost = Customer Fee
11
Item Cost Fee
Ingredients
Coffee $0.12
Dairy $0.05
Cup + lid + sleeve $0.25
Overhead
Labor $0.90
Rent $0.25
Marketing $0.12
G & A $0.50
Operating profit $0.30
Service cost $2.49
Customer fee $2.49

Non Profit:
Service Cost ≠ Customer Fee
12
Item Cost Fee
Ingredients
Coffee $0.12
Dairy $0.05
Cup + lid + sleeve $0.25
Overhead
Labor $0.90
Rent $0.25
Marketing $0.12
G & A $0.50
Operating profit $0.30
Service cost $2.49
Customer fee $2.00

Program to Overhead Ratio
 The IRS requires charities to allocate their expenses into three
categories: Program, Management/General, and Fundraising.
 Ratings show givers how efficiently a charity will use your $
13
?
81%
19%
Program
Overhead

Is cash always fungible
in the nonprofit sector?
14

Rules of Nonprofit Accounting
15
Unrestricted
Temporarily
Restricted
Permanently
Restricted
Three categories of contributions and net assets

The Bottom Line for Nonprofits
16
Income Statement or Statement of Activities
Total Change in Net Assets (surplus/Deficit): $450,000
Temporarily restricted Change $400,000 Receipts in excess of releases
Unrestricted Change in Net Assets $50,000
Non-operating Revenues $100,000 e.g. campaign revenues for capital
Unrestricted Operating Change in Net Assets ($50,000)
Balance Sheet or Statement of Financial Position
Total Net Assets (Equity): $15M
Permanently Restricted $10M e.g. endowment
Temporarily Restricted $4M e.g. multi-year funding
Unrestricted Net Assets $1M
Unrestricted Plant and Equipment Net Assets $1.5M
Unrestricted Liquid Net Assets ($500k)
Cash and Cash Equivalents $2M
Temporarily Restricted $1.8M Prepaid for future uses
Unrestricted $200k

Chapter 2:
A Look at
The
Numbers

Analyzing the Statement of Activities
 Go to the unrestricted column first
 Segregate operating revenues/expenses from non-
operating
 Analyze results
 Look for amazement numbers
19

Budgeting
 A budget is a plan for how an organization will get and use money
over a period of time to achieve specific goals
 A declaration of priorities and how limited resources are allocated
 A budget, as a planning tool, is only as good as your assumptions
 Be explicit about your assumptions
 Monitoring the budget is critical to reaching your goals
20

Troubleshooting Budgets
21
 Lack of attention
 Asking for more than you need
 Rosy projections
 Accrual vs cash
 Plugging with “New Grants”
 Variance reports are explained as a “timing issue”.

Program Profitability
22
Program Direct Indirect
$ in Thousands School Afterschool Fitness Residential Camp
Subtotal
Program General Total Budget
Revenue Earned
Tuition/fees 972 207 826 217 2,222 2,222
Rental income 1,145 1,145 1,145
Other 42 42 42
Revenue Contributed
Individual 25 1 26 67 93
Grants 5 14 19 19
Net assets released 97 97 97
0
Total revenue 1,044 222 826 1,242 217 3,551 67 3,618
Expenses
Total expenses 1,258 208 731 988 180 3,365 421 3,786
Surplus/Deficit -214 14 95 254 37 186 -354 -168
Allocation 157 26 91 124 23
Total surplus/deficit -371 -12 4 130 14

From Jeanne Bell Peters and Elizabeth Schaffer, Financial Leadership for Nonprofit Executives: Guiding Your Organization to
Long-term Success, Fieldstone Alliance, 2002. Adapted from Boston Consulting Group’s Growth-Share Matrix.
Dual-Bottom Line Matrix
23
High Mission Impact
Low Sustainability
High Mission Impact
High Sustainability
Low Mission Impact
Low Sustainability
Low Mission Impact
High Sustainability
Financial Sustainability
MissionImpact

Dual Bottom Line – Sample Questions
 Program aligns with Theory of Change (i.e. to realize the
impact we want to have in our community.
 Program demonstrates excellent execution (e.g. as
demonstrated by excellent client feedback, measurable
impact in our community, focused and enthusiastic staff,
etc.)
 Program fills an important gap (based on cultural
competence, geographic access, and other factors, we
are the best agency to offer this program.)
 Program has leverage potential (e.g. as a feeder to
other programs).
24

Matrix Map
<#>
School
After School
Fitness
Residential
Summer Camp
0.00
1.00
2.00
3.00
4.00
($300,000) ($200,000) ($100,000) $0 $100,000 $200,000 $300,000 $400,000
Impact
Profitability
Matrix Map

Budget Forecasting
26
 Major changes in funding environment will require the ability to
respond quickly
 Forecasting sets up process to revisit assumptions regularly, make
changes to attain financial goal (original budget), or change the goal
$ in Thousands Total Budget Comments Forecast 1 Comments Forecast 2
Revenue Earned
Tuition/fees 2,222
Rental income 1,145
Other 42
Revenue Contributed
Individual 93
Grants 19
Net assets released 97
0
Total revenue 3,618
Expenses
Total expenses 3,786
Surplus/Deficit -168
Allocation
Total surplus/deficit

Budget Scenario Planning
27
 Examine revenues, expense
and impact on bottom line
(ideally by program)
 Consider, from a financial
perspective, how future may
unfold (be honest about critical
uncertainties)
 Clarify challenges, engage
multiple perspectives to
generate new ideas and inform
decisions ( determine what
must be done)
Tool to manage uncertainty and prepare for the future
$ in Thousands Total Budget Scenario A Scenario B
Revenue Earned
Tuition/fees 2,222 1,485 1,485
Rental income 1,145 1,654 1,145
Other 42 23 23
Revenue Contributed
Individual 93 131 131
Grants 19 292 247
Net assets released 97 127 127
0
Total revenue 3,618 3,712 3,158
Expenses
Total expenses 3,786 3,683 3501
Surplus/Deficit -168 29 -343

Strategic vs. Business Planning?
 Strategic planning is, at its best, the process of
considering and making strategic decisions.
- Periodic examination of organizational, programmatic
and/or operational strategies
 Business planning is the process of determining the
parameters of an economically and operationally
successful undertaking
- Business planning is most powerful when the strategy calls
for some major change that must be tested.
- The value of the business plan is directly related to the
rigor of the planning process.
28
Source: La Piana Consulting

Business Planning: What Makes
Nonprofits Different?
 Market failure. Nonprofits must make up the market
shortfall by attracting other sources of revenue –
including from third party payers.
 Third party payers. A nonprofit organization’s
“customers” are not just the individuals and groups
availing themselves of a particular product or service.
 Difficulty accessing growth capital. Venture capital,
long a fixture of the for-profit sector, has only recently
become a viable option for some nonprofits.
29
Source: La Piana Consulting

The Financials
 “As every seasoned investor knows, financial projections for a new
company are an act of imagination. An entrepreneurial venture
faces far too many unknowns…Don’t misunderstand me: business
plans should include numbers. But those numbers should
appear mainly in the form of a business model that shows the
entrepreneurial team has thought through the key drivers of
the venture’s success or failure.”
- by William A Sahlman, How to Write a Great Business Plan
31

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