Chapter 2
Mission: Managing Your Two Bottom Lines
It has become popular to refer to the bottom line in contexts far beyond the merely financial. The phrase has a certain ring to it, a suggestion of a no-nonsense philosophy that many find attractive. But the fact of the matter is that the bottom line isn't really, well, the bottom line. At least it isn't a bottom line in the sense of a definitive, live-or-die standard; any organization can lose money during any given year and still escape with relatively little damage. It can even do it several years in a row. For any kind of business entity, the real bottom line is the inability to get capital into the organization. For nonprofit corporations, that happens when no bank will loan any more money and no philanthropist will donate any more funds. For for-profits, it means no more credit and no one willing to buy the stock anymore. Large nonprofit groups rarely go out of business because it is usually possible to persuade one more source of capital to contribute.
Profit is the organizing principle in the for-profit world. It is the only commonly shared arbiter of conflicts and the enduring benchmark of all activity. It forces the recognition that a particular course of action should be chosen because it is in everyone's best financial interests. At the same time, profit alone is a weak organizing principle because the economics affecting it can change so easily. Athletic teams win the championship one year and explode the next, their players and coaches picked over by rival teams willing to offer individuals more money. Professional service firms constantly lose professionals who discover that they can make the same or greater profit offering the service on their own. Profit as a source of organizational discipline is the common strategy. Let's consider what alternatives serve when profit as the number one motivator is missing.
The Role of a Value System
Without profit as a factor, nonprofits must find another way to move the organization forward. Typically, they find it in a shared value system. Formed properly, a shared set of values provides the kind of organizational discipline that the pursuit of profit would otherwise provide. For a variety of reasons, it's not a perfect substitute, but as a lasting factor, it is definitely superior. Incidentally, the very best for-profit corporations know the power of a coherent value system, and they know that it is stronger than the ups and downs of simple profit.
The role of shared values explains why certain nonprofit organizations can be contentious groups filled with infighting and rivalries. In a for-profit organization without a shared value system, sheer economics can carry things as long as times are good. But a nonprofit that loses its value system—such as through a change in the CEO—has no such backup. Strategic direction then becomes a matter of pitting one value system against another.
What does all of this have to do with managing the finances of a nonprofit corporation? The connection is simple, yet powerful. Problems with finances mean problems accomplishing the mission. Missed payrolls mean dispirited, demoralized staff who cannot and will not give their service's consumers their full attention. A weak capital structure magnifies operational problems. Sluggish, inefficient systems retard growth, and so on. The very brightest of program service people cannot overcome poor financial performance, and, after a while, they will leave. The opposite, however, is not as reliable. Poor program performance can exist indefinitely in spite of good quality financial performance. Good financial health can actually prop up a programmatically bankrupt administration. Mediocre program results carry little financial penalty even when they cause reduced income because managers can always ratchet spending down to adjust. Failure in service delivery, except in intensively competitive arenas, usually implies less for finances than failure in finances implies for service delivery.
It is easy to see why. Financial failure is measurable and clearly understood by outsiders. Many outsiders pay attention to the finances, which have to be drawn up in a standardized way to permit comparisons. Bankers holding a nonprofit's mortgage are motivated to monitor fiscal performance. Funding sources regularly demand reports that can spotlight a financial prBut who will demand to see measurable outcomes of program services in most fields? And does anyone really know what success would look like if it were achieved? The truth of the matter for some nonprofit services is that, from society's perspective, it is enough simply that the services exist and not that they be of some particular level of quality. Halfway houses for former offenders are a good example. The average compassionate citizen cares mostly about whether the program exists.
A former colleague once spent a few years in the highest-ranking administration and finance position in state government. Having come from a health care background, he was pleasantly surprised by the state highway construction and repair department's approach to its budget review. For their yearly budget, they would request x amount of dollars in order to pave y number of miles of roads according to z specifications that could be expected to last a certain number of years. The output and the cost might vary due to blips in the economy, but, for the most part, their projections were reliable. Budget decisions were a simple yes or no that would result in a predictable amount of work getting done.
Because there is no comparable measurement for most nonprofit programming, program failure goes unrecognized. Worse, it goes unpunished. In for-profit environments, the market rewards entities with profit and survival. With financial profit relegated to a lower priority, and with the exit door effectively blocked by a combination of legal, political, and cultural factors, there is no equivalent judgment tool for nonprofits.
The Nonprofit's Dilemma and How to Solve It
These facts in combination with nonprofits' typical reasons for creation lead to nonprofits' central dilemma and suggest the way that good financial management can help resolve it. To begin, consider the following stories:
Around the turn of the century, the leaders of a medium-sized factory town acknowledge a major social problem deriving from the very success that their town's many factories enjoy. The factories, working at full production with early industrial methods, are so unsafe that they routinely injure or kill employees. In turn, this creates a growing population of orphans that the town's social systems are unable to support. In need of a solution, the leaders reach out to a religious order hundreds of miles away and ask that they establish an orphanage in town. The order agrees. Eighty years later, the orphanage that the nuns created has grown into a health care system that includes three hospitals, two nursing homes, a home health care agency, and the original orphanage, which has now become a school for children with special needs.
During the nineteenth century, state governments across the country began building large institutions for the mentally ill and developmentally disabled. Over a hundred years later, for a variety of reasons, including the institutions' high cost and inflexibility, they began to be replaced by networks of much smaller programs called community residences, or group homes. Often operated by private nonprofit groups, these programs took as a cornerstone of their philosophy that care for their clients should be provided in the least restrictive setting possible, a direct criticism of the institutions the homes replaced.
Each of these vignettes illustrates in its own way a core truth of nonprofit organizations: Those that deal with the poor, the sick, or the disabled very often come into being due to a dysfunction in some other part of society. Orphanages were needed due to a combination of factors, such as workplace hazards, social conventions, and economic pressures. When forces as diverse as federal laws, labor unions, governmental workplace regulation, and birth control came into play, the demand for what we had called orphanages diminished. Ironically, many of those original orphanages have found a new role as educators of children with special needs. Yet even here there is consistency. What are “special needs” students except those for whom the conventional education system cannot or will not provide an education?
In these stories, we get a glimpse of the dilemma of nonprofit management: Organizations originally created to change society themselves become resistant to change unless managed otherwise—unless, in other words, managers pay attention to their two bottom lines. And it is hard for most managers to meet one bottom line, let alone two. The result, in part, is the mild irony that nonprofit workers are often far readier to hold liberal views of the need for change in the external society than they are ready to accept changes in their own organization.
This resistance to change takes many forms, not all of them immediately recognizable as such. Some varieties masquerade as a commitment to “the community” or a fierce dedication to the client. This tendency to focus so narrowly makes the financial manager's job less complicated and therefore easier—a seductive prospect—but, in the end, it sells the mission short. Visiting Nurse Associations (VNAs), for example, could have and should have dominated the home care field for much longer than they did, but when they became stuck in turf battles with similar groups, it allowed proprietaries to seize new markets and eventually gain a permanent strategic advantage.
The VNA example also illustrates the way society must deal with whole industries that are unresponsive to change in either of their bottom lines. Society will demand services, and if any group of agencies is unmoved by the demands of either of its own bottom lines, society will create new organizations. Unfortunately, because the existing organizations rarely go out of business, the new and the old must exist together, in some cases sharing resources that are too lean to be shared. The lesson is that discipline must come from the financial bottom line, although not necessarily from the financial types.
The alternative is for program services to carve an unusually tough bottom line of its own, a very difficult task. One way to do this is through a philosophy of entrepreneurial management. The essence of entrepreneurial management in the nonprofit sector is a commitment to creating opportunity for everyone associated with the organization and a willingness to disregard conventional wisdom. A chief executive can accomplish the same thing through sheer force of will. But under normal circumstances, the likeliest source of influence over the organization is financial.
Nonprofit financial management carries a burden with a twist. It is neither the sole nor even the most important reason for the organization's existence. If it stumbles over a sustained period of time, there is little hope that the organization will truly fulfill its mission. On the other hand, the corporation's success depends on its ability to steer program services away from fiscal irrelevance, and for this job, it has to achieve and maintain internal clout. There really are two bottom lines in the nonprofit corporation, and finance owns the first one.