Episode 123: Internal Financial Stress and Decisions
Welcome to another edition of "Around with Randall" your weekly podcast for making your nonprofit more effective for your community. And here is your host, the CEO and founder of Hallett Philanthropy, Randall Hallett. It's a fabulous day here on "Around with Randall" and of course I'm Randall.
Today we venture into the conversation that is rife with troubling issues, challenges, relationship possibly ending consequences at least in the short term. And that is what a lot of nonprofits are going through regarding budgeting and financial challenges within the organization as a whole. In many cases this is not exclusive to one or two sectors of our nonprofit world. In healthcare we're seeing daily announcements about healthcare systems, healthcare in terms of hospitals, announcing layoffs as they are reckoning with the financial challenges that have been kind of brought to bear in this moment with with higher labor costs, with reduced payments coming out of COVID. But it's not exclusive to healthcare. We have a number of universities that are concerned as they see a dwindling number of students coming to the institutions. A number of universities have denounced cuts in their programs which means layoffs for professors, for departments. Social services are seeing dramatic increases in their costs and as a result they are are having to make big financial decisions every day. If you're watching you see the different announcements that come regarding the financial situation of nonprofits and what that's meaning for the philanthropy, fundraising area is immense pressure to make changes. And today I want to spend a few minutes talking about some anonymous client experiences who are going through this, and some of the things that we talk about regarding ways in which they can work with their Finance leaders to better understand what cuts actually mean, different from the Enterprise. Different than providing the education, or providing the healthcare, or providing the social service. When you cut philanthropy that is actually exponentially worse. This is not the first time we've dealt with this.
So way back in my career if I go back and look and think back in the, just after the turn of the century, I was with an organization that went through what they called a 15-3 program. The goal was to cut 15 percent of our expenses - at least that's what they said - in three years. And we're going to come to this in the Tactical piece what can you do, but what I realized was, is they really weren't talking about just cutting expenses. The term I always used for it was the delta. What they wanted was a stronger margin and that was something that was not discussed because the way Finance positioned it, it was all about we have to cut expenses. What I realized in this process is that's the only thing that they really understood. And actually only really controlled, and so the first part of this conversation for the, for us today, is understanding perspectives and the difference between finance. And maybe we put the CFO title on finance to make it simple and philanthropy in the chief development officer because that's driving a lot of the acrimony, and once you understand the perspective then you can turn to come up with five potential ways in which to have a conversation that looks, feels, and sounds different than where you started.
When Finance showed up and says hey you got to cut three people, or your span of control is too big, or you were going across the board and everyone's got to find cuts, so let's start with perspective on this. So number one, when you think of Finance we think of the Chief Financial Officer. They deal first and foremost with the here and now. They have to make payroll. My father owned his own company and there was always this underlying thought process of cash flow. If you're not a business person it's okay, don't turn it off, not going to go into the details. But what you do need to know is that if you are writing checks out even though if the business is healthy money's going out but payments don't come in as quickly. So in my business here at Hallett Philanthropy it's the same thing. It may take, even though I invoice on the first of the month or close to it, it may take 30 to 60 days for me to get payments. For a lot of unknown reasons which we're not going to get into here in this moment, but I'm trying to write my bills, my checks out to the people I owe money to as fast as possible. Well that creates this disconnect of cash flow meaning do we have, even though the business is healthy, do we have enough money to just operate day-to-day. Finance lives with this. They're concerned about the here and now, and they're really about figuring out how to maintain or enhance financial statements as they go along pretty much in the short term.
Every once in a while you'll hear someone talk about the long term. CFOs and high level or Finance people, excuse me, also by nature are incredibly conservative, highly detailed. They also are skeptical by nature. They've been burned a lot by people early on in their careers who said oh we can do acts and the next didn't happen so they become cynical almost in some ways. All the CFOs I have dealt with from my own experiences as a professional and a practitioner to being a professional, and now a consultant, and now working with my client, CFOs, they all have a very similar mentality, training experience along the way is very consistent. It's not bad. It's just different. They have a job to do and it's an important job. The most important thing is they deal with today, here and now. The challenge we have in philanthropy is we don't deal as much in today. We're visionaries. We're thinking about the future. We're thinking about new revenue streams. Just think about the way in which we talk about revenue. We talk about pledges and planned giving. Those are are deferred. Those are not instant gratification things. And we become, if you're good at it, accustomed to being okay with that because that's how we maximize gift opportunities. We live in the future. What's possible? Case statements. What are we going to be? How is it going to affect people even though it's not built or executed or installed today?
Our world is about being romantic, and optimistic, and aggressive, and we trust. And so if you start with the premise of understanding that Finance are not bad people, they just look at the same set of circumstances from literally the other side of the 180 degree circle, they are more likely to worry about what's coming in the short term, they are going to be less trusting and they're worried about now payroll and cash flow and things of that nature. And here we are as fundraisers. We're the romantic people. We're thinking, think about what we could do if we had this kind of revenue to make a difference in our community. It doesn't mean the CFOs in this, Finance officers don't want those things. It's just not first on their mindset and so we meet in this middle where we have a conflict. And sometimes that conflict can be acrimonious.
I talk at the top about relationships. If you are an executive or you, there's a small group of people reporting to a CEO, it doesn't make difference what kind of nonprofits you are. And finance is over here and you're over here, you start butting heads and that has and can have detrimental effect to relationships. So if you're looking for some details on how to avoid that, go back a couple episodes in looking at the podcast that I did on disagreeing without being disagreeable because there's a lot of principles in there about that conflict where you can utilize some of those tactics to actually get through the scenarios without damaging relationships. But this is a trying time and I've got a lot of clients who are dealing with this. I've got one client who has a CFO that just is absolutely bent on cutting their size of their staff because of the span of control, you have too many people at the top. We'll talk about that in a minute. I've got another one who, the system is contemplating immense layoffs and in healthcare they can't cut the nurses and the doctors, they're in short supply. So we're talking about management, and back-office, and philanthropy seems to fit into that. I've got a client in a university who has seen a drop in the number of students coming in from an admissions standpoint, which puts a great deal of strain on the budget and so everyone's going through a conversation about what to cut, and they're pushing on advancement to make some pretty radical changes.
All of this gets us to the Tactical. What are the things that you can do to help the discussion about what's going on and the implications of immense cuts? So the first is just kind of this global thought, it's not even a tactic, but I come into this conversation and I've had this discussion not pleasantly a couple times. I'm not talking about clients but just in my career, is it the CFO is not the CEO. And part of the acrimony is the power dynamic that seems to come when this, when the organization says we're going to make adjustments, changes, whatever that is. And the CFO just all of a sudden has unlimited power, and I have to have some, and have had some hard conversation to say we both report to the CEO. I don't work for you, and at the end of the day, and we're going to talk about this as one of the Tactical things, the CEO makes the final determination, not you. And that doesn't go over very well, yeah, but it's true philanthropy. If done correctly inside an organization is a co-equal branch of the organization.
In many ways this is true of healthcare, education, social service, that higher ed. It doesn't make any difference and so we'll come to that tactic in a moment, but the first thing I always start with is power and there's power grab. You have to cut. I've already made my budget this year. I am meeting my expectations and all of a sudden you're being talking up. We don't care. We're telling you. But I don't work for you, I work for the CEO. Now if the CEO directs me to do these things that's what we have to do. They're the boss. First thing is to realize that you have an avenue to have a conversation because if seen and done correctly, philanthropy is not subservient to finance. And by the way, Finance is not subservient to philanthropy or fundraising, but equal partners in the journey, and the mission trying to execute that mission of the nonprofit.
So what are the tactics? Let's start with that. Number one is if you're in philanthropy you've got to talk numbers because Finance doesn't understand anything else. If you walk in the door and say things like well this doesn't seem fair or I don't like this, you might as well have not walked in the door. Let me give you some examples. So two to consider, number one is particularly in healthcare I'm spending more and more conversation talking about the value of philanthropy and the same would apply in higher ed, or service, or anywhere else. You can do the math and the same mechanism, but if an organization, a healthcare organization, a hospital wants to increase its bottom line, its profit, it's net revenue by $10 million and they have a one to three percent margin, meaning that's their normal profit, it will take anywhere from $300 to $900 million to increase the bottom line by $10 million more profit, more net revenue. But but in philanthropy we know that if we use the average of 25 cents on the dollar you give us $2.5 million we'll give you $10 million back it's also done more quickly. We can do it in a year or two. It may take them four, five, six years of investment to get that much new revenue, and that's that $300 to $900 million. That's patient revenue. How many patients do you have to find to generate that amount of revenue? And by the way, do that every year if you want to continue to grow. The same is true in education. How many more students would you have to find? Any place you have an alternative revenue stream, meaning non-philanthropic, you can use this conversation and say we are the cheapest, easiest, most effective, fastest way to increase our bottom line and let me show you the numbers. Most CFOs don't think about it that way but the numbers will make sense. s
So the first is kind of an industry-wide perspective of net revenue. The time to get to that net revenue and how it is a vested interest in the organization to invest in the places that are the most profitable and there is no place in the entire organization that is more profitable. And I know we're nonprofits but just for the sake of terminology then in philanthropy and fundraising, not more tuition, not more patient revenues, not more surgeries, not bigger classes. We are the cheap element to get more money. And really that's what we're talking about when we talk about these cuts and challenges in expenses.
The second thing is to use data from industry-wide standards. So there's AHP Association for Healthcare Philanthropy, there's Case Council for advancement in support of education, there's AFP the Association for Fundraising Professionals. There's a myriad of associations and almost all of them collect data in one way, shape, or form. Nonprofit Times has a phenomenal report on a whole lot of it. Get that data and be able to do comparisons. You're a community-based hospital, as an example, and you have a staff of three and you're generating four million dollars and here's yours. Well go look at the comparisons of the average community-based hospitals to find out staff size and income levels, or revenue numbers or expenses, because what you can say is it gives you leverage to say we're understaffed and over delivering. Why are you bothering us? We're not the problem.
The other thing that you might want to do is push back on their data. I've got a client as I mentioned earlier that's dealing with a span of control issue, and what we figured out was, is, they kept saying we have too many managers and there needs to be more people underneath the control of these particular, let's call them directors. What we figured out was, is, they're using Healthcare data to justify that for nurses. We're not nurses, so using data and figuring out what data they're using to show the picture a little bit differently might be highly advantageous in the conversation.
Number two, really, and we had an A and A B so there's five, but one has number one in terms of talking numbers is one A and B now number two is explaining consequences. Unlike the clinical enterprise and unlike an educational unit, we're funding positions. So you might be doing some type of fundraising effort that's funding a whole department so if you cut philanthropy, you're not just cutting philanthropy, you're actually cutting a whole lot of connected jobs. Give an example. Got another client who is going through this conversation and there's cuts being discussed and all of a sudden it was realized that a revenue stream they deal with funds the entire Child Life Department, 10 positions, and finance was like well let's just get rid of that. It's like yeah that funds these 10 positions, and by the way these 10 positions do these functions. Who's going to do them, which by the way are critical to Pediatrics. Well Finance hadn't thought about that. That only comes with connecting the dots. Another way is if you've made announcements, we're going to raise X number of dollars inside a campaign, a goal, and that then leads into well if we don't have the people we can't meet the goal and we've already announced this to the community, and the political implications won't fall on the CFO, they'll fall on the CEO and the board. They're the ones they're gonna have to answer to the community as to what the heck happened. Why aren't we getting what was promised? And that's important for a CEO to know, and a board to know, which we're going to come to in a second, to understand what will happen if we make these determinations.
Number three then is really, three is to find allies. Again your CEO needs to be a part of these conversations because the decisions that are made have implications and you may need the foundation board. If it's separate than the clinical board or the governing board or educational it might be the Board of Regents or whomever, who else needs to be aware of these conversations because they're the ones that are going to be on the hook. Find allies to have conversations with so they understand your perspective.
And the last one is look for alternatives. I mentioned the 15 and 3 initiative that was set up when I was a practitioner leading a large office, and I finally figured out what we were really talking about wasn't reduction expenses. It was that delta. So I went back to my boss, the CEO, and said aren't we really looking at increasing profitability net revenue? He says yes. I said then instead of trying to cut me five percent per year, add five percent to my revenue projections. I'll take the hit for it, but don't take my staff away because that's the revenue production, and he looked at me kind of with a kind of an odd tilt to his head and said absolutely. You actually have something that almost nobody else in the organization has and that's some limited control of revenue, and that is an anomaly in a higher ed or or in social service or certainly in healthcare. And if you can increase let's say they, once you get rid of two people why not and that those two people are a $100,000 a piece. Why not just increase your Revenue goal by $200,000 for the year and if your goal was $4M that's only five percent. Is it possible? Think about the delta. Don't think about just the expense. How do we Inc if you want me to reduce by this much all right then, fine, maybe I can increase the revenue so I don't lose the infrastructure that I've built to generate the revenue that we are enjoying philanthropically. I also think I've got another client who's had a couple people leave the office. It's kind of a crazy you know they're great resignation, great reshuffling, and they're in the middle of this and my conversation was well can you outsource one of those positions, and in this case it was a grants position, and they're actually going to get I think more productivity at about eighty percent of the cost or 75 of the cost that they had put into the other person. It doesn't mean the other person wants to know a nice job but they can outsource it. And by the way don't forget benefits. If you're in California's example the calculation for benefits is 40 percent of their salary. In the midwest is probably closer to 25 percent. So when you don't have an employee do the work but you can outsource, outsource it to a third party and see success the same level or greater success you might be increasing that delta.
All of those things allow you to have a different conversation with finance using data and numbers, both as an ROI and how it portrays to the rest of the organization as well as comparison to other places. Explaining the consequences, the political implications, finding allies, realizing that there are more people in this conversation than just the CFO, and looking for alternatives, and being a partner in the solution process are all critical elements to your success in navigating this trying time. And the more you do this the better off you're going to be.
Appreciate always your willingness to listen to "Around with Randall". Don't forget about the blogs, 90-second reads on the website at Hallettphilanthropy.com. Just things I pick up as I go through my week, write about just something to think about and realize, maybe contemplate as it applies to your professional life. And if you'd like to reach out to me it's podcast@hallettphilanthropy.com. Interesting, trying, contemplative times that we're going through where a lot of things are happening all at once. Don't forget, even though a lot of the minutia may be a little bit of topsy-turvy, what you're doing is important. It's making a difference for people and things that are important. And most of the people you're dealing you're taking care of or your organization's Mission drives you to help are people who are really not able to handle or struggling to handle what's going on in their own lives. Or it's protecting somebody in the community that's incredibly valuable. Don't forget my favorite saying some people make things happen, some people watch things happen, then there are those who wondered what happened. We are people who make things happen for the people and things that are wondering what happened, and I can't think of a better professional journey for anyone. I'll look forward to seeing you right back here next time on "Around with Randall". And don't forget, make it a great day.