In some ways, for-profit organizations have it easier. “Profits” are expected, and they go to shareholders that invested capital in creating the organization.
The issue of profitability, sustainability, and the use of “excess margin” (aka profits) is not quite so clear in non-profit organizations. Theoretically, those profits are used to reinvest in the organization and to fund services for community members who are unserved by current sources of public and private funding. But the issues and practices are far from clear. That was the focus of my session, Allocating Your Resources: Governance Issues For Non-Profits, which I co-presented at The 2017 OPEN MINDS Executive Leadership Retreat with Regina Widdows, Chief Executive Officer for SERV Behavioral Health Systems.
In our experience at OPEN MINDS, there are three issues for executives:
- Developing a strategy for long-term sustainability including a margin for growth and reinvestment
- Creating a margin
- Deciding how to spend that margin
Developing a strategy for long-term sustainability including a margin for growth and reinvestment—This demands developing budgeting, investment, financial forecasting, contingency planning, and other business practices that lead to good stewardship of public and private donor dollars. At its most basic, the components of financial sustainability are revenue and capital. Revenue is dollars available from reimbursement received from contracts, grants, and other sources for services delivered. Capital dollars are those dollars necessary for development and operating organizational infrastructure including program support functions-e.g. finance, human resources, and IT (see Need Financing For Your Next Big Service?).
Creating a margin—Contemporary thinking is beginning to shift toward an expectation that providers of services ask for “full reimbursement” of services delivered and that infrastructure costs are necessary for sustainability and quality services, and are legitimate areas for private fund raising support. But it’s important to remember that sustainability not only includes access to sufficient resources, but also the effective utilization of those resources. Ms. Widdows shared the three processes that help to assure appropriate resource utilization (leading to the creation of a margin) that executive teams need to master:
- Service access—Provider organizations need to develop and monitor intake, referral, admissions, and utilization management processes to make sure eligible consumers and payment resources are clearly identified at the point of initial referral.
- Revenue cycle management—Provider organizations need to maximize available funding for services delivered and minimize payment denials. The revenue cycle involves all the steps from intake to termination that detail funder requirements and their relationship to successful payment.
- Data management—All data available that allows an organization to monitor and make corrective action to any processes needed to improve client service and maximize reimbursements must be monitored and managed. Key performance indicators (KPIs) must be established for each activity. Measures should also be established (and management reports designed) to provide the information required to make sound program and business decisions.
There are also “five things non-profit CEOs can do right now” to foster creating (and increasing) margins:
- Know your full costs—What are your day-to-day expenses and how much money do you need to cover those expenses, and for how long?
- Ask for full costs—Develop fundraising pitches to reflect what it truly costs to deliver your interventions and sustain your work over the long term.
- Banish the overhead ratio—Stop using the “Overhead Ratio” as a fund raising pitch, and shift the conversation to “mission supports.”
- Build a competent & supportive board—Board members need to be passionate about and committed to the mission.
- Focus on outcomes—Understanding the critical dynamics of the needs of clients and utilizing evidenced-based interventions to address those needs.
Deciding how to spend that margin—There are three possible uses of “margin” in non-profit organizations. Most similar to for-profit organizations, margins are often reinvested in the organization. The uses are many: equipment for both business and program operations; facility improvements; new technology for administration or services; new or more staff; new service lines; or strategic ventures and innovation investments. Then there is the second issue, using margins to finance unreimbursed services for consumers—a growing mandate for organizations to maintain their tax-exempt status (Michigan State Supreme Court Clarifies Test For Non-Profit Charity Property Tax Exemption, The Kerfuffle About ‘Non-Profit’ Profits, and The Changing Landscape Of Bad Debt & Charity Care). Lastly, there is the often-debated use of margins to subsidize bad rates from payers. Expect to see more on this issue at non-profit board meetings as competition increases and margins continue to be compressed.
The non-profit strategy and governance issues related to sustainability and mission in the health and human service field will grow increasing complicated—and complex. For more on these important functions from the OPEN MINDS Industry Library, check out these resources:
- A Revenue Cycle Management Primer
- How Should Consumers Pay For Your Services?
- Getting Paid For What You Do
- Financial Optimization – Getting Paid For What You Do
- Trickling Cash Flow
- Allocating Your Resources: Governance Issues For Non-Profits
- Mission V. Margin: A Group Discussion On Being A Non-Profit In A Competitive Market
- What Is Sustainability Anyway?
- Diversifying Your Revenue Streams: How To Successfully Launch A New Service Line
- Moving Leadership From Complicated To Complex
For more on managing your performance, join Ken Carr, Chief Financial Officer at Guild Incorporated and OPEN MINDS Advisory Board Member, on February 15 at The 2018 OPEN MINDS Performance Management Institute for his session, “Using KPI To Manage To Improve Performance & Manage To The Market.”