I met Sally Petersen about a year ago to discuss our common interest in nonprofit risk management. She brought great insight to the discussion, leveraging her obvious, deep experience in accounting and finance. I only learned later I was talking to powerhouse in the nonprofit financial management sector.
During her 12 year tenure as CFO for Second Harvest Food Bank of Silicon Valley, she helped the organization maintain an average 9% revenue growth and delivered a balanced budget every year—unheard of in the sector. It was these accomplishments and many more that made her a finalist at the Bay Area CFO Awards. I was eager to pick her brain on what made her successful, with focus on how nonprofit financial management leaders can maintain robust financials to keep the organization on track. On October 23, Sally met with an audience of nonprofit executives at Thrive Alliance for the Social Impact Advisory Group to share best practices.
What follows is a summary of that discussion.
Maya: Sally, your work with Feeding America guided much of your strategy as CFO of SHFB. Tell us a bit about Feeding America and what lessons you came away with.
Sally: The Feeding America network consists of over 200 food banks committed to delivery food
safely. I was on a CFO Steering Committee that promoted best practices across the network. I also served on two national committees. One committee began the important work of discussing how to cooperate across the network with shared technology. The other committee laid the foundation to increase the distribution of produce. I co-authored a paper on accounting and tax treatment of produce and also drafted a white paper on best practices for reserves. Both papers are currently in use by Feeding America as standards for food banks.
Maya: You managed Second Harvest’s budget in the black every year in your 12 years with the organization. What’s the secret?
Sally: Leaders need to craft a compelling message because donors get a particular perception of the organization based on that message. To use a food bank example, if the message to prospective donors is “$1 provides two meals”, the donor could be left with the impression the organization is a small pantry handing out bags of food. As a result, the donor may give $50 or $100. In contrast, consider the message, “End hunger in this neighborhood.” This message creates a vision of impact and transformation. The same donor may be moved to give $1,000 or $10,000. One way to encourage this transformational way of thinking is to ask your organization what it would do if it received 10 times the usual annual revenue. This typically elicits aspirations and identifies long term compelling impact.
Maya: Typically when the budget is first drafted, it’s in the red. That is, the strategic plan will cost more than the funds available. How do you close the gap?
Sally: To close the gap, you need to consider various changes to both revenue and expenses. For example, on the revenue side, I’d work with Development to brainstorm ideas. Perhaps you would like $300,000 more on the bottom line. Maybe a headcount increase of $100,000 a year could bring in $400,000 of revenue, for a net of $300,000 to the bottom line. Or maybe they add a direct mail campaign—whatever works for them. If Development has a history of always exceeding goals, but is perennially cautious, dollars can be added without any other changes.
Maya: What if Development is tapped out? What’s the strategy on the Expenses side?
Sally: The most effective strategy is to manage the timing of the various strategic plans.
For example, a program manager budgeted dollars for a particular program completed in FY2021. Will it really be completed in that time frame? Is execution dependent on hiring staff for open positions or are there other problems that might cause a delay, like a lack of bandwidth? Leaders may then decide to postpone—not cancel—the program start to much later in the year to defer costs.
Also communicate internally that you while want a really accurate budget, you do not want every conceivable expense that might possibly occur to be included in the budget. Let budget managers know that ending in the red 1% or 2% will not be a cause for criticism. Too much fluff will raise some concerns.
Maya: Major donors often question increases in operating expenses or even why a nonprofit requires cash reserves to support operations. What advice do you have for nonprofit executives to address that scrutiny?
Sally: It’s a matter of educating donors that all nonprofits are businesses with a mission to enrich the lives of clients. No organization can operate in the red endlessly and it’s foolish for any organization not to have savings to smoothly manage the unexpected.
One way to justify cash on hand is to ask the Board to designate it for a specific purpose. First, there is the operating reserve that will need to be maintained per the policy approved by the Board, commonly approved as a 6-month reserve. Then there may also need to be cash to fund a 10-year capital replacement plan, for example vehicles, building maintenance and repair, expensive equipment, etc.
Maybe the nonprofit needs to earmark funds for other special purposes appropriate to the nature of the organization.
Donors understand, after careful messaging and education, that funds for a particular purpose may need to be built up over several years. When the Board designates funds toward that purpose, donors understand there is a plan.
Maya: In conclusion, how would you summarize the top tactics for a robust budget?
Sally:
- Craft a compelling, transformational message.
- Ensure Development analyzes donors, segments them and then develops a strategy for each segment.
- Develop a revenue target independent of strategic goals.
- Ensure key initiatives are measured to determine progress against those initiatives.
- Ensure infrastructure, such as HR, IT, and Finance is properly resourced, as these areas are typically undervalued.
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