The Financial Accounting Standards Board (FASB) issued ASU 2018-08 to clarify the accounting guidance related to contributions made or received. This guidance primarily affects not-for-profit (NFP) entities, although it also applies to businesses to the extent that they make or receive contributions, including grants. The ASU will likely result in more grants and contracts being accounted for as unconditional or conditional contributions rather than exchange transactions compared to current guidance. The new ASU is available here and has various effective dates beginning after June 15, 2018, with specific transition guidance. Early adoption is permitted.Read on….
Not-for-profits face many challenges in recognizing their revenue. One of the primary challenges relates to assessing whether certain not-for-profit revenue transactions are actually contributions or exchange transactions. Furthermore, when evaluating transactions that meet the definition of a contribution, there may be a variety of other considerations including whether a contribution is conditional, an agency transaction, or a promise to give, and if it is a promise to give, whether the promise is legally enforceable. These judgments often drive the decision on whether to record revenue at a point in time or over time. Confusion over these challenges may be compounded by the fact that not-for-profits are implementing FASB's new revenue recognition standard as well as a new FASB standard on not-for-profit financial reporting. Nonetheless, following best practices can help not-for-profit preparers and their auditors avoid common mistakes. Read on.…
[post_title] => Revenue Recognition - Resources List
[post_excerpt] => Each type of nonprofit revenue must be recorded. However, the rules and timing can be complicated. Here are some of the implications.
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Organizations gauging their need for a line of credit should start with a cash flow projection. This tool from Propel Nonprofits guides you as you measure what cash you may need and when—and how—you will be able to repay and refresh it.
The Paycheck Protection Program, available to nonprofits and for-profits alike, provided yet another window into the discriminatory practices and patterns of many lenders. (Rachel Atkins, Lisa Cook, and Robert Seamans. Discrimination in lending? Evidence from the Paycheck Protection Program. Small Bus Econ58, 843–865 (2022). https://doi.org/10.1007/s11187-021-00533-1)
A supplement to the above that names lender types for PPP loans where giving was less inequitable:
Which lenders had the highest minority share among their Payment Protection Program (PPP) loans?
Overall, we find that, relative to other lenders, MDIs, nonprofits, and fintech lenders make a substantially larger share of their loans to minority borrowers, particularly Black- and Hispanic-owned businesses. While nonprofits made a high share of their loans to minorities, they made a very small number of total PPP loans (13,000). Fintech lenders, therefore, appear to have played an important role in extending PPP loans to Black- and Hispanic-owned businesses.
[post_title] => Nonprofits and Debt Capital: Embrace the Strategic Use of Borrowing
[post_excerpt] => This is an online romp through the landscape of the nonprofit lending landscape, including lines of credit, facilities loans, capacity-building loans, and more, along with the types of lenders and loan terms you may encounter for each category.
Kate Barr, of Propel Nonprofits and Dana Liberman of IFF are the hosts of this session with decades of nonprofit lending between them.
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This is the first of five articles that will cover business model considerations of five major revenue sources: earned income, government, foundation, individual donor, and membership funded. It was produced as a part of the Nonprofit Financial Commons Course, The Five Nonprofit Business Models Revealed. We are indebted to Hilda Polanco, John Summers, and Ruth McCambridge for their thoughtful observations and contributions to this piece. This unique series is designed to discuss business model considerations including required infrastructure, inherent risks, and capitalization needs. The whole collection accompanies a series of seminars also available on this site.
It’s Not A Side Gig
Of all the sources of revenue supporting nonprofit activity, private fees for service constitute the largest percentage by far at more than a trillion dollars1 annually, or half of all revenue coming into the sector. The bulk of this type of revenue, however, flows to larger nonprofits like hospitals and universities, whereas this article is written for small and midsize nonprofits that may or may not have earned income (which includes money earned from some government and other contracts) as a significant part of their current revenue mix. Those that already have a strong earned income component likely recognize it as a traditional source of revenue for their field as a whole, because among nonprofits, there are generally revenue types dominating each field.
But whether your organization already incorporates an earned income revenue stream or is considering adding one, you will want to keep in mind several strategic and operational considerations relevant to selling goods or services directly to your market rather than to a third-party payer (like the government or a foundation).
A Myth and A Trap to Avoid
The “myth” is the longstanding prescription that nonprofits should always be working toward a revenue base that’s broadly diversified. This isn’t about earned income specifically; the reason we bring it up is that many nonprofits at least entertain the possibility of an earned income project in their bid to create revenue diversity. Indeed, the idea of a diversified revenue base sounds right—we imagine that it is a necessary factor for growth, or justify it as bringing an equilibrium that can help withstand disruptions to one or more of our regular revenue streams. Neither notion proves out in practice2 without being attached to far more specific strategic intentions. Beyond that general caution, remember that many for-profit businesses fail within their first ten years, some without having ever turned a profit. Think deficit.
The “trap” is specific to earned income: Many nonprofits cling to the hope that an uncomplicated cash cow business could be attached to their organization in a way that fills those pesky annual budget gaps with unrestricted money. This is an achingly familiar vision that often does not pan out financially and can be costly to your parent nonprofit in more ways than you ever imagined.
The First Consideration
Ask yourself this question: Is there an earned income-producing activity that is a particularly good and natural fit for our nonprofit’s mission? This question appears to be a core driver to success or failure in earned income projects, so it is a good place to start. Recent research indicates that there are at least two major factors here: how core the activity you are considering is core to mission achievement, “embeddedness,” and the overlap in what some refer to as “organizational technology”3 but we will call organizational infrastructure.
THE EMBEDDEDNESS TEST
Embeddedness the refers to the degree to which an earned income activity is central to mission accomplishment in ways other than simple income generation—in other words, how related it is to the nonprofit’s core purpose. An example of this might be Goodwill Industries. Substantial research on this issue indicates that an earned income venture that’s more embedded produces not only better revenue results, but better program outcomes.4 And this makes good sense: Establishing a business requires levels of intense focus, sweat equity, and capital beyond what we can anticipate. An unrelated business endeavor runs the risk of actually detracting from mission, and in the worst case, it can sink not just the revenue production scheme and related costs, but the parent organization itself. When this occurs, it’s often because the nonprofit saw the earned income activity primarily as a revenue generator—a “cash cow.” The likelihood of failure for any business startup is high, and running up costs unrelated to accomplishment of mission is a high-risk endeavor for an organization with ambitious mission goals and tight margins.
Embeddedness must also be considered when it comes to taxation. Many nonprofit leaders are aware of the federal Unrelated Business Income Tax (UBIT) on organizations whose business ventures stray too far from their mission, but recent years have also brought challenges to organizations’ property tax exemptions. Many of these challenges have been levied against larger “eds and meds,” but they have also surfaced elsewhere, as in the case of a Nebraska-based Goodwill organization.5
By the way, part of the reasoning behind UBIT was the potential for nonprofits to undercut for-profit business by virtue of reduced taxation and other subsidies. This can complicate development if for-profit providers in the field challenge a nonprofit on “restraint of trade” principles.
ORGANIZATIONAL INFRASTRUCTURE FIT
Organizational infrastructure can encompass managerial expertise and “core competence,” technological systems, and even networks and markets.6 These components of an organizational system are foundational building blocks that allow for effective innovation, and the degree to which these capacities overlap between parent nonprofit and income-producing endeavor is helpful to maintaining focus, alignment and synergy.
ReStores: An Illustration of One Mission-Infrastructure Match
“[T]he nonprofit Habitat for Humanity International strives to tackle the global housing crisis through building and rehabilitating housing for families in need around the world. One of the organizations primary fundraising sources is the Habitat for Humanity ReStores. With 825 stores across the United States and Canada Habitat accepts donations of new and used home appliances and construction materials from consumers and corporations, selling the goods at discounted prices and applying the proceeds to its charitable construction projects (Habitat for Humanity 2012). In order to support its social enterprise function non-profit ReStores partner with for-profit home improvement giants in the building industry including Home Depot, Lowe’s, and 380 A. W. Montgomery et al. 123 Rona. While Habitat is able to fund its primary activity of building homes through such alliances the corporations likewise receive numerous benefits. These include environmentally responsible ‘disposal’ services for unneeded product which would otherwise go to landfill, tax exemptions for in-kind charitable donations, and reputational benefits and publicity for participating in Habitat’s housing mission (Habitat for Humanity 2012).”7
What Does an Earned Income Enterprise Take in Practical Terms?
The important work of gauging the market
Nonprofit business endeavors, like for-profits, must understand the market in which they operate. Who can be seen as competitors or partners (as with supply chains)? What cultural notes should be considered? What models of fee-for-service provision exist elsewhere that might transfer well to your effort? What special conditions exist if your market is rural that would not be present in an urban or suburban setting? What regulations do you need to observe, and will there be costs associated with them? These questions and many more must be considered to meet the market efficiently, effectively, and with the right impact.
The pricing of services is contingent on a variety of factors, some of which involve comparable costs and quality (i.e., what the market can bear). This is a marketing function, true, but it is also a function of accurate projection of costs—and, yes, values and quality proposition choices. For this last set, consider the fields of nursing homes and hospices.8
Identifying and monitoring full costs in an expanded way
When considering any revenue-generating activity, it is crucial for nonprofit leaders to consider the full costs of the activity, including taxes, equipment and materials, and staff time, which includes but is not limited to administration and marketing. For example, if you’re selling branded clothing, that can require design and production, storage space, shipping costs, staff time to manage inventory and sales, and accounting processes to accommodate those transactions. Providing space rental means using staff time to negotiate contracts and to envision and structure the endeavor with the market—not to mention potential increases in liabilities and the costs of utilities and insurance. Further, while nonprofits are allowed to use volunteers in most areas of their mission-related work, commercial businesses that serve the public (like a gift shop or thrift store) may be subject to the Fair Labor Standards Act (FLSA) and require that certain activities be performed by paid staff.
Creating a business plan
Business planning is a disciplined activity that lets you recognize lapses in your internal logic or gaps between your expectations and the market’s realities. The scenarios you produce project both expenses and income, and the space between the two will offer a sense of your capitalization needs.
A business plan is a working document
Some of the assumptions in a business plan may be in alpha-test or hypothetical form. The plan should be treated as a “living document” and revisited often as markets change. A good business plan should result in a dashboard that allows the board and staff to measure efforts according to agreed-upon goals and standards and with a shared understanding of when and how to take action to limit potential losses.
You can find a format for business plans here,9 and learn more about dashboards here.10
Where to find benchmarks
“Industry” benchmarks can be invaluable if accompanied by the proper contextual considerations. This kind of information can, in the best of cases, be found in research issued by intermediaries such as the Institute for Nonprofit News or Habitat for Humanity.
In the arts, for instance, the average percentages of revenue type (according to a recent study by Americans for the Arts) are:
60% earned,
30% contributed, and
10% government sourced.
But within that “standard” one finds many variations that stem from size, geography, capitalization, and identity/niche choices. Drilling down into what a choice like the provenance of art presented, or the possibility of facilities ownership, might mean for your finances is part of developing a business plan that is best suited to mission.
See our business model grid for a quick look at the risks and requirements of earned income.
When Government Subsidies for Service Are a Must
Many earned income endeavors are paired with other types of revenue streams, but in direct care models that depend upon government entitlements/benefits, a co-pay of sorts may be required to make a service accessible and affordable to the population being served. This complicates the model with money that is indeed earned but in large part involves payment from a third party like Medicaid. This model adds administrative cost and complexity to every transaction.
Organizational Infrastructure Considerations for Earned Income
Leadership and Staffing
First and foremost, an organization that brings in earned revenue will need to ensure compliance with all IRS rules, which may call upon finance staff to enhance their expertise in this area. As noted above, nonprofit leaders must pay attention to the Unrelated Business Income Tax rules of the IRS—put simply, nonprofits may be responsible for taxes on revenue that derives from activities insufficiently related to their mission. The team will then need a thorough understanding of the business model of its revenue-generating activities and how their budgeting, monitoring, and operations may differ from other nonprofit practices. For all intents and purposes, these activities represent their own small (or large) businesses and require management and accounting expertise specific to that business. The finance staff will need individuals with strong data entry skills at the transactional level to manage billing and accounts receivable for the earned revenue stream.
Additional Staff Roles
Earned revenue requires additional leadership across finance and program, and often staff with specific authority over the revenue.
Staff Member
Roles and Responsibilities
Executive Director (ED)
The ED leads the decision-making process around pursuing earned revenue, with an eye toward the potential revenue benefits and risks to the organization as well as fitness between earned revenue strategies and organizational mission.
Development Director (DD)
The DD may be charged with soliciting capital to support earned revenue endeavors, particularly in the startup phase. The DD will also need to have a clear picture of how this revenue stream fits with the overall business model, budget, and needs of the organization so that they can pursue contributed revenue at appropriate levels.
Program Director (PD) or Manager
Should a program director be in charge of revenue-generating activities, this individual will need budget oversight, planning ability, and a vision for how to create/expand the potential of a revenue source. The PD may need to make investments in infrastructure or supplies, work with marketing staff to attract the attention of consumers, and work closely with finance on accounting matters.
Board of Directors
The Board of Directors may be called upon to approve a nonprofit’s forays into earned revenue and will likely have influence on how this activity is presented/developed at a strategic level to protect the nonprofit’s reputation and core service areas.
Other Roles: Rentals Manager, Artistic Director, Designer, External Relations & Marketing / Communications, Director of Licensing, Box Office
Depending upon the specific revenue model, the nonprofit may need additional staff who are responsible for managing that area of the business. For instance, a nonprofit that rents part of its property for weddings and galas might employ someone to manage that aspect. An organization that grows and sells produce through a CSA will need staff to pack and distribute food boxes. A nonprofit that wants to sell branded merchandise may need to hire someone to manage production of those items. Sales endeavors often require the support of marketing/communications staff, and licensing may require professionals in that area as well.
Accounting and Software Considerations
Nonprofits can manage their earned revenue in the same accounting software systems they use for other forms of revenue, with a few caveats. Unlike contributed revenue, finance should recognize earned revenue only upon delivery of the item or service to the customer (known as an “exchange transaction”). For example, if a customer (e.g., a local corporation) contracts with a nonprofit on a year-long project (say, providing volunteerism training and opportunities to corporate staff), the nonprofit cannot recognize all the contract revenue at once, but only as services are delivered over the life of the contract. Finance leaders should make sure to update and distribute policies and procedures that reflect these differences in revenue recognition. Note that some arrangements may require judgment and expertise as to whether a transaction is a “contribution” or an “exchange” (think memberships, subscriptions, sponsorships, conferences—even some federal and state grants and contracts). And some transactions that include both contributed and earned revenue components may need to be bifurcated for revenue recognition purposes.11
With policies and procedures in place, the finance team can track earned revenue as they would any other program in the accounting system by attributing them to an activity or cost center. And just as nonprofits benefit from an understanding of the true costs of their programs, they should look at the true cost of any earned revenue activity to understand pricing and net profits. In for-profit accounting, we more frequently see the concept of Cost of Goods Sold (COGS), which is the direct cost of an item sold. For nonprofits, this accounting structure may only be necessary if producing goods for sale. No matter the budget structure, leadership should keep a careful eye on true costs and net revenue when evaluating an earned revenue program, and thus finance should set up the accounting system to enable thorough monitoring.
If the revenue stream ends up being liable for UBIT, the finance team will need to be prepared to fully allocate costs in order to track activities on a separate P&L for their 990T tax return.
Other Software Systems
Unless an organization is pursuing a particularly complex earned revenue model, the finance team should be able to maintain its current accounting software systems so long as there are plans and processes for importing sales information into the accounting software. Some things to note:
If asking for donations alongside purchases, such as donations on top of ticket sales, ensure proper accounting for and separation of the two elements. Track the earned revenue activity independently, as shown above.
Most electronic sales platforms impose fees that must be accounted for.
Establish procedures to reconcile cash deposits against daily sales, if applicable.
When using point-of-sale, ticketing, or billing systems, ensure proper reconciliation with accounting and prioritize systems that can sync with the accounting software for increased efficiency. Some of the more robust accounting systems may have modules or add-ons to accommodate such activities.
In Conclusion
There are many success and failure stories in the arena of nonprofit earned income, which also can be seen as collective entrepreneurism. For organizations in fields where such revenue streams are common, you may easily find a wealth of case studies, tools, and other information to help you build and, over time, fine-tune your models as conditions and approaches progress. But nonprofits innovate by nature, and that leads to the constant emergence of new models to wonder over. Don’t be afraid to ask your colleagues who are steering those efforts to share the knowledge and experience they have gained experimenting with new markets, forms, and transaction models. We at the Nonprofit Financial Commons stand ready to help.
Polanco, Hilda H., and the Editors. “Models and Components of a Great Nonprofit Dashboard.” Nonprofit Quarterly. March 30, 2016.
The relevant accounting guidance is from FASB ASC606: see here for more details and documentation.
[post_title] => Nonprofit Earned Income: Critical Business Model Considerations for Nonprofits
[post_excerpt] => Ask yourself: Is there an earned income-producing activity that’s a good and natural fit for your nonprofit’s mission? This appears to be a core driver to success or failure in earned income projects, so it’s a good place to start. There are at least two major factors: how core the activity you are considering is to mission achievement, and the overlap in what some refer to as “organizational technology” but we will call organizational infrastructure.
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[post_content] => Every year, the Nonprofit Finance Fund puts out a report based on a survey. This year’s survey report, reflecting 1,168 nonprofit respondents, displays NFF’s new focus on racial equity. Its introduction summarizes how the ugly legacy of long-term funding practices on organizations run by and serving people of color played out during the 2020–21 period of COVID response. How did your organization experience and address these dynamics? What do we need to do next as a whole sector to redress historic inequities?
Nonprofit Finance Fund 2022 Survey
Every year, the Nonprofit Finance Fund puts out a report based on a survey. This year’s survey report, reflecting 1,168 nonprofit respondents, displays NFF’s new focus on racial equity. Its introduction wonderfully summarizes some of the pandemic funding/revenue dynamics referenced above.
Imagine our wonder to be able to relay in this moment that nonprofit survey respondents report being in a stronger financial position than they were pre-pandemic. At the same time, the majority of our survey respondents reported that they continue to face financial challenges: achieving long-term financial sustainability, covering the full costs of their operations, and raising unrestricted funding foremost among them. While we should celebrate nonprofits’ relative strength in the present, we must also take action to ensure these gains are preserved well into the future.
COVID-19 upended the traditional funding practices in the sector, and the changes were both welcome and needed. We hope the sector will learn from and build on this moment, rather than reverting to the practices of a broken funding/financing system to support nonprofits. But we wonder: Can nonprofits expect this level of flexible or unrestricted funding to continue?
But all things are not equal, as some of their most interesting findings reveal:
In FY2021, 36% of nonprofits received more than half of their funding in unrestricted funds, including general operating support. Unrestricted funding is critical for most nonprofits; it lets them decide how to spend their funds to best support their work. Forty-one percent of white-led nonprofits received 50% or more unrestricted funds in FY2021 as compared to 26% of BIPOC-led organizations.
66% of white-led organizations ended FY2021 with a surplus, as did 64% of AAPI- and Latinx-led organizations. 49% percent of Black-led organizations ended FY2021 with a surplus.
White-led nonprofits were also more likely to receive corporate donations in 2021—71% vs 58% for BIPOC-led nonprofits. They were also more likely to have revenue from sales (23% for white-led organizations; 11% for BIPOC-led organizations), from the federal government, excluding PPP (46% of white-led organizations; 32% of BIPOC-led organizations) and from investment income (33% white-led vs 16% BIPOC-led).
Achieving long-term financial sustainability is the most cited financial challenge across the sample. 82% of BIPOC-led organizations reported this as a top need, as did 69% of white-led organizations.
The report then digs deeper into some of the difference between BIPOC-led nonprofits and those with white leadership, finding:
A greater number of BIPOC-led organizations saw an increase in service demand during the pandemic: 81% of BIPOC-led nonprofits, compared to 67% of white-led organizations. They are more likely to have leadership that represents the communities they serve: 57% of BIPOC CEOs/EDs have lived experience that is representative of one or more of the communities their organization serves, compared to 18% of white CEOs/EDs. Also, BIPOC-led organizations were more likely than white-led organizations to take public action about racial equity: for instance, 59% of BIPOC-led organizations publicly advocated for policies to advance racial equity in the communities they serve, compared to 41% of white-led organizations.
Takeaways: NFF’s survey surfaced the fact that nonprofits led by people of color carried a disproportionate burden over the pandemic period. They were also more active in addressing the deep, race-based, systemic problems that played such a large part in fueling the pandemic’s disproportionately pernicious effects on communities of color and are in more precarious financial positions today. Accordingly, funders should observe a “reparations” agenda aimed at achieving long-term equity.
[post_title] => Nonprofit Finance Fund Findings on The Racial Realities of the Nonprofit Economy
[post_excerpt] => Every year, the Nonprofit Finance Fund puts out a report based on a survey. This year’s survey report, reflecting 1,168 nonprofit respondents, displays NFF’s new focus on racial equity. Its introduction summarizes how the ugly legacy of long-term funding practices on organizations run by and serving people of color played out during the 2020–21 period of COVID response. How did your organization experience and address these dynamics? What do we need to do next as a whole sector to redress historic inequities?
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[post_content] => This is one in a series of six case studies of nonprofits charting their financial strategies through the pandemic. These studies were performed as part of the “discovery” phase of the Nonprofit Financial Commons, and they have helped to collectively inform and inspire our work. We are deeply indebted to NDAC for its staff’s willingness to share this story of daily strategic observation and action.
This case describes Northern Dental Access Center (NDAC), a Minnesota-based, rural-serving nonprofit dental practice with an annual expense budget of around $4 million in earned revenue. Even though its primary revenue is earned, the organization does not set the rate of payment — Medicaid (the payer) does, and that rate is far lower than the real cost of service.
The organization has, within that basic reality, grown significantly over the past decade, but its niche has been carefully negotiated. When the local market, made up primarily of for-profit practices, shut down for all but the most extreme emergencies during the pandemic, the organization renegotiated its niche with a wide range of partners, including contractors and volunteers. Some of the ways it ended up standing in for its neighbors may pay off in the long term.
The growing strength of NDAC lies in the marriage of its commitment to mission to a deep attention to detail. This commitment leads it to maximize of the number of people who can be served—under even the most restrictive of conditions—while not losing the capacity to rebound to scale, whatever that may prove to be in the future.
ENTERPRISE MODEL: Primarily Fee for Service
Nonprofits who use a fee-for-service enterprise model primarily receive those fees directly from individuals, through a third-party payer such as government or private insurance, or a combination of the two. Sometimes the fees may be subsidized by other supporters of the organization. Fees for service is far and away the largest revenue source for the nonprofit sector, accounting for more than $1 trillion in revenue each year, but the lion’s share of that flows to major health and educational institutions many of which have buffers in reserves and endowments.
RISKS
For nonprofit fee-for-service organizations, pricing is always a concern, as are proper capitalization and fitting the size and scope of the organization to its market. Risk often comes from misunderstanding the market, or the timing and scale of costs required to serve that market in ways that build trust and brand loyalty. Product quality and the ability to make good on brand promise are additional internally driven risks. External risks, of course, include being rendered inactive by external circumstances (as in the pandemic closures) and losing momentum, thus eroding the core resources necessary to providing the promised service and losing vibrant relationships with customers.
In this case, the fact that the primary payer is Medicaid brings with it many of the same problems government-funded programs experience, in that Medicaid does not pay full costs and therefore can leave the organization with problems of cash flow and insufficient operating money.
There are many fields in the United States in which nonprofits and for-profits serve the same market — for instance, the performing arts, health care (hospitals, nursing homes, home health care), and the production of news. There is also a history in the United States of prioritizing for-profits over nonprofits in some of these fields by legislating against “restraint of trade” in the open market. Suits have been brought and bills passed to protect for-profits against any undercutting of their interests by nonprofits working with a subsidy of some kind. But the last forty or so years have also seen an explosion of for-profits into traditionally nonprofit spaces, where they exist primarily on money spent by government for the public good. Where there are no or insufficient government subsidies, however, and both nonprofits and for-profits exist primarily on public money, the public good has sometimes suffered dearly. This is arguably true with nursing homes, journalistic news outlets, and for-profit colleges.
Dentistry is one field in which for-profit providers often guard their market share, in part by resisting the emergence of nonprofit providers even if their role encroaches in only a minor way on the for-profit market. This leads to a serious lack of access to affordable dental care for people with lower incomes, and that, in turn, leads to any number of problems related to community health and wellbeing — the public good, in other words. Despite widespread need and, critically, the reluctance of some for-profit providers to take Medicaid, which reimburses only a portion of the costs of delivering care, nonprofit dental clinics remain few and far between, with many of them affiliated with larger medical institutions who have the power and heft to overcome the legal and regulatory barriers placed in their paths.
THE ORGANIZATION: Northern Dental Access Center
Northern Dental Access Center, serving a primarily rural and low-income area, is one of a few independent safety net dental centers across the state of Minnesota. It took the organizers, drawn from concerned groups in the public and private sectors, seven years to build a stakeholder environment among local dentists and others who trusted them enough to allow the effort to take firm root. Still, even then, Northern Dental started small, using a patchwork of different forms of startup capital since grants were thin on the ground. The donation by MeritCare Health (since absorbed by Sanford Health) of a one-year-free lease for space allowed the organization to use the money they had raised for space to buy new equipment. Area dentists donated their services, which prevented a heavy investment in key but temporarily idle personnel even in this highly regulated professional field.
Northern Dental’s enterprise model is primarily fee for service, contracted directly by the party receiving that service. That party has a choice (whether that choice is real or theoretical) in where to “spend their money,” or in this case, their Medicaid dollars. The endeavor therefore requires not only skilled and licensed professionals to provide dental services, but also systems and staff that can optimize the transactions with the third-party payer — in this case, Medicaid, which many other dental providers do not accept but in which Northern Dental specializes. This virtually ensures that Northern Dental will continue to grow if they track their market and keep their highly sensitive enterprise formula balanced—and if Medicaid benefits are not limited. (The last section addresses this in further detail.)
In other words, Northern Dental must be able to contract for the right number of dentists with the right skill sets for the population expected. From there, other questions evolve about geographic span and facilities. It may not be a formula for getting rich, but it does make sure people who need dental care get it, which is by no means a given in dentistry.
PRE-EXISTING CONDITION
As we stated in the introduction, Northern Dental’s great strength lies in its commitment to mission and attention to detail. NDAC always maximizes of the number of people that can be served without losing capacity. Erica Lundberg explains how and why, and in doing so illustrates the complexity of nonprofit financial management and planning:
Each dental procedure has a code and a fee. We submit claims to MCOs that manage Medicaid for the counties we serve, and they reimburse us based on negotiated contract rates. Minnesota has one of the lowest reimbursement rates for dental treatment, so in reality we receive roughly 50% of those fees. The other 50% is revenue that we have to write off our books every year. We call that “contractual allowances,” and it is lost revenue — nothing we can expect to capture — so we budget knowing that. We continue to track the larger production number to be clear to funders and stakeholders about the true value of our services. It is also a consistent reminder that we are a nonprofit organization, taking on work that is genuinely not “profitable.”
Even with this built-in need for subsidy, the case for Northern Dental’s service is compelling, and the organization was on a steady growth trajectory through 2019 when its expenses hit a high of $4,363,963. By then, it had multiple clinic sites and well-managed systems for patient care and billing. It also had an extensive system of supporters, including a few local philanthropies providing charitable support to bridge the gap between Medicaid and the true costs of service while providing some capital for growth.
Amid Growth, the Pandemic Hits
For Northern Dental, growth requires the establishment of fully fitted out and staffed physical sites, so when the flow of revenue suddenly stops, it presents immediate solvency problems. In a time of growth, and with relatively low margins of available cash, the impact of COVID could have been devastating for Northern Dental, which was not allowed to do any but emergency business under Minnesota’s statewide restrictions for a portion of 2020.
The state first closed all dental clinics, and subsequently amended that order to allow only tightly defined emergency services. Thus, the bulk of Northern Dental’s revenue was immediately compromised for what was to be an indeterminate period. Northern Dental’s patient load declined precipitously. Lundberg reports that four thousand appointments had to be cancelled immediately, and the cancellations caused earned revenue to plummet from $600K monthly to as low as $20K in Northern Dental’s worst months of 2020. Most of the staff of the two clinic locations were furloughed within weeks.
It is interesting to note that Northern Dental’s patient encounters declined by around 30%, which aligns with what the Urban Institute reported as the median decline in fee-for-service for nonprofits in 2020.
Jeanne Larson, the executive director, drew up a fallback budget that projected up to a $1.3 million loss, understanding full well that the situation could end up closing the organization entirely.
REPLICABLE RESPONSES
Increase Revenue and Decrease Expenses — STAT!
A suspension of the ability to do business could be fatal to an organization primarily dependent on fee for service. But NDAC, having proven its value proposition, amped up its grant writing. Larson, based on Northern Dental’s track record and reputation, took a leap of faith, submitting grant requests to funders that had never heard from the center before — at one point, writing eight applications in eight days. The strategy brought in $156,000 in grant money over the previous fiscal year. The strategy might not have paid off so handsomely, nor been an advisable use of the executives’ time, in another year.
Expenses were reduced by $250,000, largely from not having to pay fees for contracted dentists and other costs related to service delivery. While this was going on, the organization applied for and received a PPP loan worth $409,500, which was later forgiven. That loan allowed the organization to retain the staff that kept the organization on formula, resulting in a surplus of almost $600,000.
Seek Out Information as Early as Possible to Adapt as Quickly as Possible
This small but well-networked organization sensed it might be in for a crisis of unknown proportions and timeline as early as December and began what was to be an extended exercise in educated agility. Meanwhile, in an act of great prescience, they brought up their stores of PPE, buying it wherever it was available.
Board State of Emergency: Good Governance in the Face of Immediate Risk
By mid-March, the state of Minnesota had ordered most of NDAC’s work to cease. Around that time, Northern Dental’s board of directors realized the need to suspend their more rudimentary governance activities so staff leadership would have not just more time but more independent decision-making capacity and administrative “powers.”
Thus, with the degree of strategic immediacy the situation required, the board declared an organizational “state of emergency” to allow for more rapid movement. Larson monitored the external environment while Lundberg monitored their operations. Clear reorganization granted the administrative staff more latitude in a shifting landscape while recognizing and confirming that the board was not simply relinquishing its responsibilities.
Immediate and Constant Communication to Stakeholders
One consequence of the suspension of services was that NDAC’s patients, contracted care providers, and “non-essential staff” were cut off from day-to-day, in-person contact with the organization. This left a vital set of hard-won critical relationships in danger of atrophy, so Northern Dental centered a communications strategy that was meant both to inform and nurture.
Subject: COVID-19 status — Northern Dental Access Center closingDate: Wednesday, March 18, 2020, 2:49:00 PM
Importance: High
I’m sad to report this decision that we made at noon today: Due to circumstances beyond our control, Northern Dental Access Center—Bemidji will be closed on Friday, March 20, until further notice.
Patients with scheduled appointments will be contacted by our office for rescheduling. We will make every effort to respond to patient phone calls on a regular basis.
Northern Dental Access Center—Halstad will be open on a limited schedule through this week, and closed starting March 23, until further notice. Patients are asked to call ahead for further information.
Urgent dental triage will be available on a limited schedule, by telephone, and when necessary, we may bring a dentist in to complete an emergency procedure, to CURRENT PATIENTS only. With all the dental offices in the region closing, we are not able to accept patients who have a dental home elsewhere.
Updates can be found on our website at www.northerndentalaccess.org
Tailored communication with all stakeholders became a daily concern, but it was already at the heart of the organization and its the organizing tradition. Here’s how Larson describes the history, culture, and return on investment of Northern Dental’s approach to communication:
Northern Dental Access Center was created through a remarkable community collaboration, and we serve a large number of people all over the region. We have always had a commitment to transparency and accountability, and we took cues from other public officials who — even when information was constantly changing —understood the value in keeping people informed. To be such a critical community asset and then just shut down added to the strain faced by patients, dentists, emergency rooms, and others. Our best remedy was as much communication as possible, assuring stakeholders that we were doing the very best we could to overcome this time and emerge intact. That communication helped build trust so they could be patient and empathetic with our efforts. And being open and honest with funders brought them into our problem-solving work — they responded with generosity, flexibility, and gratitude. Had we kept our worries and strategies to ourselves, we would have been trying to do it all ourselves—which was simply not going to be enough to survive the challenges we faced.
On-Site Staff Reduced to Fit Allowable Caseload
A seven-member direct care staff was kept on for those few patients who fit the emergency guidelines. It was here that the organization’s core commitments, values, and principles became evident in a series of decisions that would eventually put the organization back on its feet and in what Larson calls “the sweet spot” of their practice, serving the greatest number of patients possible in a way that sustains the organization over the long term.
Strategic “Extravagance” for Human Resources
A good portion of Northern Dental’s strength lies in its staff, and it tries to recognize and reflect that understanding in policies that some might see as “extravagant,” especially in tough times, but which they see as serving everyone’s best interests. For instance, the organization pays the full cost of family medical benefits to all full-time staff, and it defines “full time” in the broadest way allowed.
DT: July 30, 2020
TO: All staff
FR: Jeanne
RE: “Full-time” hour threshold
Thank you all for your continued commitment during these difficult times as we transition to increasing our services to patients.
You’re probably aware that we are monitoring our capacity, production, and efficiency on a daily basis to be sure we can sustain a revenue stream that preserves our ability to survive the disruptions we are seeing due to the COVID pandemic.
Because I recognize that the staff scheduling changes week to week, I would like to ease your worry about the minimum weekly hours that we typically require to be considered “full time” and maintain health insurance benefits.
Through December of 2020, we will continue to cover your health premiums, even if you work fewer than 32 hours in a week. While this blurs the lines between full time and part time for the coming months, this change applies to employees who are currently enrolled in our Blue Cross/Blue Shield plan.
Later this fall, we will better understand our employee health plan options for 2021 and the associated costs. I wish we knew more now, but this interim solution is our best attempt to demonstrate our commitment to you, and our gratitude for your work. Please communicate with your supervisor about your weekly schedule, and feel free to reach out to Jenn, Erica L., or me if you have any concerns.
The same sensibility carried through for the line staff that remained on duty during the height of COVID, who were afforded a generous $600/week bonus for the risk they undertook. Lundberg said provisions like these put them in good stead when other organizations tried unsuccessfully to recruit their staff, even during the pandemic.
Working Every Detail in a Tight Margin Environment
Once restrictions began to lift, Northern Dental’s recovery process started almost immediately. Lundberg was tasked with working through the details of gradually reinstituting services. It was a painstaking job that required matching patient needs to the regulations and requirements as they evolved day by day and to the staff and the professional dentists who contract with Northern Dental.
THE DAILY TRACKER
When we were ready to start calling back employees from furlough in the summer of 2020, our guiding principle was that we couldn’t afford to lose money. Erica [Lundberg] created a daily tracker on an Excel spreadsheet that included the wages expense for each employee and dentists, an average infrastructure cost (mortgages, supplies, lab fees, etc.), and the patient production for each day. Because we know what our Medicaid reimbursements are (as a percentage of production), she could track each day and whether we made or lost money. In real time, she could see what employee, patient, and provider mix was most effective. She used that tracker as a planning tool by inserting future scenarios to determine the financial and patient impact of each employee return….
With daily incremental growth in coming back from COVID, she could identify the tipping point when it was financially feasible to bring the next person back. One by one, we were able to get everyone back before the federal added employment benefits expired and maintained a steady increase in patient encounters. Part of our calculations included the monthly costs to maintain every employee’s family health insurance coverage throughout their entire furlough; we wanted to ease the minds of our employees during that uncertain time and demonstrate our long-term commitment to them so they would trust our intent and be able to stay home and stay safe without worry. Even now, long past the most tenuous times, Erica uses that tracker to guide our decisions. It’s become a highly effective management tool. — Jeanne Larson
Since this was a core management orientation of the whole operation, this process wasn’t brand new, but this deep dive into the details left them with a much better understanding of where they might achieve more efficiencies in their day-to-day practice. Those efficiencies, both Erica and Jeanne assert, will leave more room for meeting other needs.
On another front, Northern Dental left no resource stone unturned when it came to government funded loans and grants (see approach to private grants above).
Federal Provider Relief Round #2 (they were not eligible for Round 1) = $60,000
Federal Provider Relief Round #3 = $346,000
Federal Rural Provider Relief = $18,200
Federal Provider Relief Round #4 = $157,000
PPP – Draw #1 = $419,000 (forgiven)
PPP – Draw #2 = $479,000 (forgivable)
EIDL = $10,000 (forgiven)
Additionally, Northern Dental was awarded $10,000 through the state nonprofit relief fund (administered through the county), and it plans to pull down federal employee retention credits to cover the costs of their payroll taxes. They hope that might add another $50,000–$60,000 from that program.
Larson says that the money did not come to find them but was the result of vigilance and working every network. “I will say that the vigilance necessary to capture these programs shouldn’t be underestimated. I know of many of my peers who didn’t apply because they thought it would be too cumbersome. or thought they wouldn’t be eligible, or they didn’t want the federal oversight. As an aggressive fundraiser, I’m not shy about applying for everything I can find, and I’m always scouring the landscape for opportunities.”
Nimble Refitting Rather than Downsizing
Several organizations in these case studies reduced or redesigned some services while expanding and initiating others, and Northern Dental was no different. The organization continued to be patient- and community-focused, and instead of using their now well-organized system merely to address the portion of their own patients they were allowed to see under COVID emergency guidelines, they opened capacity to meet the larger community need unaddressed and unmet by more mainstream practices.
Larson recalls, “In the midst of the harshest restrictions, many private practice offices closed completely — some because the dentists themselves were in a high-risk category due to their age, or because their staff did not want to risk their own safety. At the request of private dentists, we opened our few appointment spaces to address their patient emergencies.… In addition, another regional safety net dental practice was not able to reopen, and we agreed to take their emergency patients as well. This further cemented our role as a community partner and asset, but did place even greater burdens on our limited capacity at the time.”
This last point about reinforcing Northern Dental’s role as a necessary partner in the area’s dentistry community speaks to the importance of creating social capital — even, and maybe especially, in the direst of circumstances. For Northern Dental, which carefully eschews any hint of competition with its neighbors, this opportunity was momentous.
ONE YEAR LATER
Larson reports that even as the organization has managed to adjust in response to extreme disruptors, it continues to face significant ongoing environmental tumult in its “market”:
The expanded eligibility for Medicaid enrollment that was implemented during the height of COVID has only expanded our target population, yet our facility and workforce capacity remains stagnant. Simultaneously, the strain on the private sector has forced many to reduce capacity or close altogether, further reducing dental access for the general population in the region. Demand for care is crippling and creating another set of challenges.
On top of these issues, she adds, “The state has also suspended annual renewals of Medicaid coverage for almost two years now, and soon that will end, and all enrollees will be required to recertify their eligibility. People in the know on this are expecting that 30–50% of current enrollees will be cut off sometime this spring.… That will create a nightmare for us and for patients.”
So, in other words, nothing has “calmed down” for the organization or its vulnerable patients, but the organization has brought some of their pandemic-inspired practices forward:
The Daily Tracker that informed how far we could stretch a team’s capacity taught us that we could increase the amount of dental care provided in each patient appointment. And we have decided to keep the idea that employee health insurance isn’t tied to a minimum number of hours in a week. We have learned that this is a wonderful way to support the younger generation of workers who desire a different approach to work/life balance.
In these times of the “Great Resignation,” we have seen long-term loyalty and retention because we provide the flexibility of time without sacrificing employee and family health. Many still face unpredictable childcare situations, erratic school closures, and periodic exposures and COVID cases.… It has eased so much strain on them — and on our supervisors, who simply don’t have to monitor this aspect of the work.
At the same time, the organization is attempting to move ahead with further geographical expansion. Larson discussed the organization’s current ambitions, which are based on a business model that is operationally sustainable but requires around $4 million in capital for facilities and equipment:
Regarding our expansion project, we are working in concert with Apple Tree Dental, another successful nonprofit safety net dental provider in the state, to improve access to dental care among the Medicaid population in the Detroit Lakes and Becker County (and adjacent counties), where more than 75,000 Medicaid enrollees live. Area private practice dentists have reached out because of their continued frustration with being unable to serve the growing demand for care among people they are ill-equipped to serve.
We hope to build a new clinic in Detroit Lakes, and Apple Tree hopes to expand its current facility 25 miles away in Hawley, so that together, we can provide a continuum of care that leverages our unique strengths. Our model sets a new standard for efficiency and effectiveness for in-clinic preventive and restorative dental care; Apple Tree is highly successful in its outreach to community settings like Head Starts, nursing homes, and more. It’s an exciting partnership that can demonstrate even more success in bringing dental access to underserved, rural communities.
Northern Dental Access Center has just been awarded the 2022 Outstanding Rural Health Organization Award by the National Rural Health Association.
APPLICABLE RESEARCH: SURVIVAL OF THE FITTING
The largest source of revenue for US nonprofits by far (at $1 trillion in 2015) is private fees for service. Much of these fees flow to health organizations, which are often megaliths in comparison to nonprofits in general. Following that revenue pool as a slow second is the federal government, which is around half of that at $491 billion.
Fees for service that require not just billing but third-party billing by code are labor intensive in terms of transactions and require sufficient reserves to allow time to collect what is owed after the services are rendered. This requires administrative systems that are well coordinated with service delivery and well monitored.
But even if a modestly sized nonprofit can organize itself to establish and manage these kinds of intensive transactional systems, it is often left with problems of undercapitalization and, in contested fields, market jealousy. Here is where a rule of “survival of the fitting” can be brought to bear. In Images of Organizations, Gareth Morgan proposes a number of basic metaphors we can use to shape our approaches to establishment, management, and growth of organizations serving those with constrained incomes in turbulent or potentially turbulent environments. One of these is the organization organized around flux and transformation, a metaphor that well suits civil society. From the NOBL Academy’s “How 8 Organizational Metaphors Impact Leadership”:
People who see organizations in terms of flux and transformation have embraced uncertainty, complexity, and even chaos in terms of the changes their organization is experiencing. You can think of this metaphor as an evolution of Organism — rather than thinking that simply the environment changes and then the organization must respond in kind, this metaphor says that both the environment and organization influence one another, and both must respond to change.
This way of working seeks to make itself effective and trusted through partner-informed and partner-fueled adaptation.
[U]nder this paradigm, leaders are called to experiment with small, safe-to-fail changes and then marshal resources to further successful experiments while shutting down failures; in contrast to the organism view, changes within an organization also spur changes in the environment
In the case of Northern Dental Access Center, the organization has social capital built into its DNA as a result of a lengthy period of cooperation (even with potential “competitors”) during its founding phase. These relationships have since been reinforced through constant active communication with stakeholders, use of local dentists as non-full-time contractors, and willingness to serve emergency patients of for-profit practices during the worst of the pandemic. Thus, it has used cooperation to establish credibility and networks of support, a strategy that has replaced competition as an effective route to market capture and expansion.
Its recent award from the National Rural Health Association is a conversion of this social and local cultural capital it has accumulated into symbolic or reputational capital. But to complete the virtuous cycle, financial capital has to complete the launch pad for its next phase — $12 million in capital, to be exact.
[post_title] => Northern Dental Access Center Expansion through Service to “Competitors”
[post_excerpt] => This original case study examines the pandemic-related financial strategies deployed by a nonprofit providing dental services to low-income people in rural Minnesota. The organization was not only largely dependent on fee-for-service revenue, but it had an almost impossibly tight margin, and its ability to provide services was curtailed by the state for an indeterminate period. This case speaks to the need to recognize nonfinancial capital in organizational strategies during times of crisis, and to the need to understand the capital needs of nonprofits in a more complete and nuanced fashion.
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[post_content] => Once you have completed your annual budget process, these tools can help your team translate your newly minted operating budget into a detailed cash flow projection over the course of a fiscal year.
Visit the Wallace Foundation: Strong Nonprofits Toolkit
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[post_excerpt] => Once you have completed your annual budget process, these tools can help your team translate your newly minted operating budget into a detailed cash flow projection over the course of a fiscal year.
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This is an online romp through the landscape of the nonprofit lending landscape, including lines of credit, facilities loans, capacity-building loans, and more, along with the types of lenders and loan terms you may encounter for each category.
Kate Barr, of Propel Nonprofits and Dana Liberman of IFF are the hosts of this session with decades of nonprofit lending between them.
Ask yourself: Is there an earned income-producing activity that’s a good and natural fit for your nonprofit’s mission? This appears to be a core driver to success or failure in earned income projects, so it’s a good place to start. There are at least two major factors: how core the activity you are considering is to mission achievement, and the overlap in what some refer to as “organizational technology” but we will call organizational infrastructure.
Every year, the Nonprofit Finance Fund puts out a report based on a survey. This year’s survey report, reflecting 1,168 nonprofit respondents, displays NFF’s new focus on racial equity. Its introduction summarizes how the ugly legacy of long-term funding practices on organizations run by and serving people of color played out during the 2020–21 period of COVID response. How did your organization experience and address these dynamics? What do we need to do next as a whole sector to redress historic inequities?
This original case study examines the pandemic-related financial strategies deployed by a nonprofit providing dental services to low-income people in rural Minnesota. The organization was not only largely dependent on fee-for-service revenue, but it had an almost impossibly tight margin, and its ability to provide services was curtailed by the state for an indeterminate period. This case speaks to the need to recognize nonfinancial capital in organizational strategies during times of crisis, and to the need to understand the capital needs of nonprofits in a more complete and nuanced fashion.
Once you have completed your annual budget process, these tools can help your team translate your newly minted operating budget into a detailed cash flow projection over the course of a fiscal year.
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Join us on June 20, 2023, for Nonprofits and Government Funding: Business Model Basics. This next webinar in NFC’s unique business model series is on the management and strategic requirements for nonprofits that are predominantly dependent on government funding.
