Non-Profit Board Members’ Guide to Financial Statements

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You may have experience with financial statements especially if you have accounting classes, but nonprofits have unique financial statements. The wording and the terminology that is involved in the for-profit world don’t always translate to the nonprofit world. Different terminology is just the beginning. Well-intended citizens with no nonprofit financial management experience who join a board of directors of a nonprofit organization may be overwhelmed and fail to oversee their organization’s financial performance.

So, I’d like to write a bit about how nonprofit financial statements are different and what you need to do to analyze them as a member of the Board of Directors or a person on a committee staff person.

FINANCIAL POSITION

Let’s start with what the nonprofit world calls the statement of financial position. If it was a for-profit corporation, we’d call it a balance sheet. It’s really not all that different. In some ways, it is different, but essentially a picture in time of what the assets of the organization were at that particular point in time both the assets and the liabilities. Those assets and liabilities should be equal. That’s why they call it a balance sheet, but in a nonprofit world, we call it a statement of financial position.

STATEMENT OF ACTIVITIES

In a for-profit world, the next financial statement you might see would be the income statement. It shows the income and the expenses. Some people call it the profit and loss statement. In a non-profit world, it’s called the statement of activities. Again, it’s pretty much the same thing as you would have in a for-profit world, except some of those activities are generating income.

This is going to have a restriction of one type or another. Those restrictions may be temporary restrictions. They may be permanent restrictions. In other words, you might do a fundraiser, and that fundraising activity might be to generate money for a specific project and so the funds that are generated are restricted to be spent on that specific project. Once the project is complete the restriction may be lifted.

A restriction could be permanent or a restriction can be temporary. The statement of activities is essentially the income statement. The profit and loss statement that an organization would have if it was a for-profit organization.

CASH FLOW

Another financial statement for a non-profit would be the statement of cash flow. Now, this is not necessarily income and expenses. It’s more akin to what a for-profit organization would call the source and use of funds. Some of these funds may not be from income or may not be spent on expenses. They might be from some other source of financing the sale of assets. Borrowing of money. Repayment of loans, gifts. Thus, the source and use of funds in a for-profit world become the statement of cash flows. In the nonprofit world, you often have what we call the statement of functional expenses that don’t really break down into the profit world.

It is unique to the nonprofit world where you may show various activities of the organization. The income from those activities and the expenses can identify what activity of the organization for positive or negative cash flow. You know a negative cash flow is not necessarily a bad thing for an activity within a program. I know of a lot of not-for-profits that’ll run five or six activities during the year. One or two of them will produce nice positive results. Maybe fundraising results and three or four of them might produce negative results because profit is not always measured in dollars. Sometimes it’s measured by the services provided.

Some say I want to work for a not-for-profit organization. I don’t want to worry about trying to balance my balance sheet and trying to come out with more money at the end of the year than I started with. That’s going to be a very short-lived assignment because a not-for-profit is a tax status, not a business plan. Organizations that don’t pay attention to having profits or in the not-for-profit world what we call a positive cash flow those organizations are going to go out of business. You have to find some way to fund your activities either by fundraising or by programs that have positive cash flows. Nonprofit organizations are not exempt from the rules of economics.

NOTES

The last part of financial statements that you need to pay attention to is what’s called the notes. Interestingly, this is the part that people ignore the most. It’s the part that is the most important. I like to tell people all the really good stuff is hidden in the notes.

I will write about the note and how you analyze financial statements. I’ll take each financial statement and talk about what you want to look at when you look at those statements what you want to find what kind of things tell you whether or not your organization is in good shape or bad shape.

Fundraising Guide for Executive Directors

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In this article, I am going to write about fundraising or as you probably think of it the other “F” word. If you want to change the world you have to know how to pay for it. I’m not talking about being a good person. You can do that for free. I’m talking about if you want to create something, start something galvanize a community, improve the lives of others run for office. Every day great ideas die on the vine because they don’t have the capital to get off the ground and all of the work, the thought, the vision that goes into the idea isn’t worth much if you can’t pay your bills and while most of the greatest social movements in history were powered purely by an idea and people’s belief in that idea real change in impact require resources. Real people do this work, they need real change, real impact, and resources to actually make it happen. The people that believe in this work have to have the support and the resources to do it. That’s where I come in. I get essential resources into the hands of people and visionaries on the front lines doing work that matters.

We spend the majority of our waking hours working. We spend more time working than we do with our loved ones. So, I decided early on that I have to love my work and it has to add value and while I would love to be one of these people who spearhead the social change from the ground up and the thing I realized early on in my nonprofit career is that the thing I’m good at the thing I’m really good at is raising money and I love it. I think it is a privilege to work alongside bold ambitious optimistic leaders and organizations. They serve so I teach people how to do the thing I’m good at because the more people that learn how to be good at my end of this work the more work will get done. I teach everyone. I teach CEOs and presidents and boards of directors. I teach development directors and all sorts of teams and nonprofit newbies, social change agents, and candidates. I teach anyone that wants to do something extraordinary. How to fund their dream. My dream is that there will be more people like me doing this work.

I think this article is a good first step to get people to think about fundraising more as an opportunity and less as a dirty word if you want to change the world. You have to know how to pay for it. To do that, well you have to understand three big things. Your feelings about wealth and money, the importance of building relationships, and how to ask for what you want.

Let’s start at the top. Your feelings about wealth and money. What is your relationship to money? Money is complicated. It makes everyone squeamish. It makes everyone act kind of weird. Anyone who’s ever had to split the check after dinner with friends can tell you this. Imagine what it was like you know before Venmo to help people learn how to raise money. You have to help them understand their deal with money because everybody has baggage. Grow up poor. Baggage. Grow up rich. Baggage. Mad or envious that other people have more money than you. Baggage. I think people with money are smarter than you. baggage. Feel guilty that you have more money than other people that’s some first-class baggage, still “baggage.” So, whatever your deal is with your baggage, you have to reconcile it. If you’re going to ask for money, here’s a little tip about asking people for money. The only difference between really wealthy people and us is that they have more money than us. That’s it. Don’t overcomplicate it. They come with their own baggage.

When you think about how to do this work it’s important to remember that money makes the world go around. You hear that all the time but it’s true whether you’re a non-profit for a profit or you pay your own bills we often feel like talking about it is this icky, embarrassing, ugly thing, but it’s just money, and it’s a fact of life. So, how you feel about it directly affects how you approach it.

When I work on fundraising, I have to examine and understand my own feelings about wealth and money, and I have to learn how to separate them from how I feel about raising money for important causes. How I feel about asking for money to help people do good work in the world is not the same as how I feel about asking for money for myself. This is an important distinction when I go and talk to someone I’m not asking them to pay my mortgage. I’m giving them an opportunity to invest in an idea that’s going to change the world for the better. Why should I feel bad about that? The answer is that I shouldn’t. I wouldn’t feel bad about giving them the inside tip on a hot stock and I’m not going to feel bad about giving them the inside tip on empowering social change.

If you want to be good at raising money you have to be able to reframe the ask both for yourself and for other people as an opportunity. Next, you have to get prepared to build some relationships. People give to people. They don’t just give ideas. If they don’t believe in the person running the place, you’re already dead in the water. This is true whether you’re in stocks or venture capital politics or nonprofits.

Building a relationship with people takes work. You have to care about more than just what you want or need. You have to also value what someone else wants or need. I know it’s a shocking, terrible idea, but oftentimes closing gifts is understanding the person. It’s important to know the product and if you think building a relationship with people takes work building a relationship with someone, you’re asking for money from takes work and it takes homework. Have you done any research? Do you have any idea what they care about? Do you know why they should invest in your work? Can you answer that question in less than 30 seconds? If you can’t, the meeting is going to be pretty rough, because they’re super-rich and they live in zip code when you talk to people and understand what they care about it has to be in-person fundraising. It is relational. It’s not transactional and you have to ask them questions. When I sit down with the donor it goes something like this.

“Hi, thanks so much for seeing me. How have you been? Did you guys go anywhere fun over the holiday? Nice, I love Mexico. Do you always go to the same place? Oh, that’s awesome. Are those your kids? They’re so cute. How old are they? Where are they in school? That’s a great school. Are you guys very involved there? Your spouse is on the board! How’s that? I bet it’s a ton of work. How do you guys meet? Oh, it’s Santa Clara. That’s awesome. Are you super involved in the alumni network? Oh, that’s so interesting? Where do you guys live again? Oh, that’s great. Is that your boat?”

I literally go through all of these things. Do you know why? Because I know now that they’re out a hundred and twenty grand a year in schooling for the next 12 years. The spouse is on the board of the kids’ school. I know they’re out 100k probably, that’s a six-figure. They’re both involved in their school alumni. That’s probably 25k. They told me they live on the Upper East Side. I could look up their apartment online and I can find out what their mortgages are. I know they own a second home in Mexico. Oh, and they own a boat, which is like funny money right? So, what I now understand is true. What I now understand is their thousand-dollar gift is probably more of a starter gift and I should be thinking about ways to help them partner with us and invest in a more meaningful way. I know this sounds a tad mercenary. I’m not confused about how it sounds, but here’s what I want to tell you because this is the part that all my clients, always want to skip because they think it’s the fluff and it’s not important. If you don’t understand what they care about and what they value, how are you going to be able to tell them about your work?

I want them to fund our work. I do, but I also want them to have a really meaningful experience as a donor so that they feel like we’re partners, not an ATM. So, it’s important to ask the questions because the more you know about them and you know what they value the more, you can steer the conversation in a direction about your work that will resonate for them. Once you get past the get-to-know part, you get into the fun stuff like why are you philanthropic at all right? Why do you invest in new ideas? Do you want giving back to be a value you pass on to your children? Can we help you do that? It’s really awesome! It’s meaningful and remembers it’s a conversation it’s not a cross-examination.

It’s not an interview. Don’t walk in there and tell them everything you already know about them, because you did your research. You don’t get extra points for knowing how to use Google. It’s 75% them talking 25% you listening. It’s better to be a good listener than a good showman and once you understand what they care about you can talk to them. What you care about. You can tell them about when you do this. Don’t get too deep into the weeds or you’ll lose them. It’s a lot like when I sit down with guys in finance and I say you know how’s works. I’m looking for a thumbs-up thumbs-down, but what I get sometimes is a long description of how the markets are trending and my brain leaves my body and starts to think about what I am going to have for dinner. I don’t have the capacity for that and donors don’t have the capacity for that level of detail of our work. If they want it, they’ll ask you the questions. It’s this thing that happens over and over.

Here is an example, I worked with a CEO once. I was hired to teach him how to talk to human people like a human person. It was a very difficult job. He kept getting great donor meetings, but he wasn’t closing any gifts. I could not figure out what the problem was so I decided to go with him to the meetings What would happen was he was getting into such detail with the donors that their eyes were glazing over. Then after he was done with his 15-minute pitch donors literally would say sounds great, congratulations, keep up the good work and that was the meeting. Obviously not the outcome we were looking for. He couldn’t understand what I was trying to say to him. I finally, in an act of sheer desperation told him that I think it is unbelievably amazing we have figured out how to get a person to the moon. I think it’s awesome, I think the idea of getting someone to the moon and they walk on the moon and God I love rocket ships. Rocket ships are amazing but if you start to tell me about the rocket ship and how it gets to the moon and the math and the science equations on how the rocket ship gets to the moon, I promise you I will hang myself with my own shirt.

It is not how you tell people about your work. What is the need? What’s the point? How do you address the need? Why are you better at it than anybody else and what can they do to be what can you do to make it about them. Can they help you get to the moon? That’s the good stuff. If you’re able to do that, you’re probably ready to make the ask.

Now, I don’t expect everyone to be super excited to ask people for money. That’s why development is an actual profession and not an awkward hobby. Naturally, great fundraisers love people. They can and will talk to anyone. They can find common ground with anyone. They’re your friends that talk to people in the elevator or at the grocery store. They believe in the work required to both build relationships and keep them.  They naturally have a high tolerance for rejection. I don’t expect everyone to be a natural and you don’t have to be natural to raise money. You just have to respect the people in the process and do the work. Will you reconcile your “baggage”? Will you commit to building relationships? If you will, you’re ready to make the ask and the ask is oftentimes as simple as using the phrase:

“Would you consider becoming a monthly donor?”

“Would you consider increasing your support to $100?”  

“Would you consider investing in our work at the $1,000,000 level?” “Would you consider” does a couple of awesome things? One it gives the donor an easy way out. They can say no. Without it being yes now gives you a second ask.

“Well, what would you consider?”

It’s good. When you do this remember you’re not asking for yourself. You’re asking on behalf of all of the people you serve or are touched by. This isn’t a personal favor. Feel proud of the ask. It’s incredible that you do this work. Don’t try to be someone you’re not. You’re going to go to these meetings and think you need to bigshot it. Be yourself. Authenticity matters. Nobody likes a phony. Just be yourself and please, please, don’t walk into the meeting and say I had an IDI that did this all the time. I stopped inviting him. He’d say we’re not here today to ask you for money. Yes, we are. That’s exactly why we’re literally. That’s why we’re here today. Don’t do that. Don’t say whatever you can do to help that is hands down the fastest way to get the smallest possible gift someone thinks they can give you and get away with not kidding. Don’t take it back.

Once you’ve made the ask would you consider supporting us at the $10,000 level or the five or the two or one? What takes the year off, you’re the best. Thanks don’t do that ask. The question waits till ten counts to ten before you speak again. They are grown-ups. They have all the power in this situation. They can answer the question. Don’t take it back which brings me to my favorite. Don’t ask. Don’t get it. If you don’t make an actual ask no one will give you actual money and if no one gives you actual money you actually can’t do anything with it. It’s very simple. Don’t ask.

I would love to live in a world where we didn’t have to ask people for money to do important work that will change people’s lives. I would love to not have to teach people how to make a case for the importance of feeding and housing and educating people, but this is the world we live in, and if we’re committed to doing this work and doing it well.

We have to be as committed to the art of funding this work as we are to the art of executing it. I’m going to repeat that because I think it’s really important. We have to be as committed to the art of funding our work as we are to the art of executing it. At its core, the art of funding the work means that we have to truly believe that the purpose and the privilege of our work are to provide people with an extraordinary way to use their wealth that will change people’s lives. It’s an opportunity because at its core that’s what it is how great is that. 

The Refugee Crisis Needs More Attention

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The Refugee Crisis Needs More Attention. More people have been forcibly displaced from their homes than at any time since World War ll. https://twitter.com/SharamKohan

There are now 82 million forcibly displaced people around the world—more than at any time in modern history. These are people who have fled extreme dangers, whether to escape the relentless bombing, an invading army, gang violence, or other life-threatening circumstances.

Who is a refugee?

“A refugee is someone who has been forced to flee his or her country because of persecution, war, or violence. A refugee has a well-founded fear of persecution for reasons of race, religion, nationality, political opinion, or membership in a particular social group. Most likely, they cannot return home or are afraid to do so. War and ethnic, tribal, and religious violence are leading causes of refugees fleeing their countries.”

https://www.unrefugees.org/refugee-facts/what-is-a-refugee

Sharam Kohan: World Soil Day: December 5th

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Soil salinization: a threat to our global pantry

Have you ever seen white crusts on soil? Yes, it is what you think. Soils can be salty. Salts are present naturally in soils and water, and they move freely through the soil. Naturally saline soils may support rich ecosystems, but natural processes such as droughts and human activities, especially improper irrigation, can increase how many salts are in soils, a process that is called salinization. Soil salinization breaks down our soils and reduces their ability to help our food grow.

Soil salinization and sodification are major soil degradation processes threatening ecosystem and are recognized as being among the most important problems at a global level for agricultural production, food security, and sustainability in arid and semi-arid regions.

Salt-affected soils have serious impacts on soil functions, such as in the decrease in agricultural productivity, water quality, soil biodiversity, and soil erosion. Salt-affected soils have a decreased ability to act as a buffer and filter against pollutants. Salt-affected soils reduce both the ability of crops to take up water and the availability of micronutrients. They also concentrate ions that are toxic to plants and may degrade the soil structure.

World Soil Day 2021 (#WorldSoilDay) and its campaign “Halt soil salinization, boost soil productivity” aims to raise awareness of the importance of maintaining healthy ecosystems and human well-being by addressing the growing challenges in soil management, fighting soil salinization, increasing soil awareness and encouraging societies to improve soil health.

Sharam Kohan

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Mind is a Beautiful Space. Be kind to yourself. You are amazing. You are good enough. You are worth it. “Some people think that cultivating compassion is good for others but not necessarily for themselves, but this is wrong. You are the one who benefits most directly since compassion immediately instills in you a sense of calm (nowadays medical researchers have shown in scientific studies that a calm mind is essential for good health), inner strength, and deep confidence and satisfaction, whereas it is not certain that the object of your feeling of compassion will benefit. Love and compassion open our own inner life, reducing stress, distrust, and loneliness.” ― Dalai Lama XIV, How to See Yourself As You Really Are.

https://twitter.com/SharamKohan

Sharam Kohan