William Harper Associates

December 2007 NEWSLETTER

William Harper Associates Newsletter

This newsletter is a free service to the North American not-for-profit community from William Harper Associates. Its focus, like everything we do, is on helping organizations that do good, do better!

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In this issue:



SEASON'S GREETINGS: A message to my clients, colleagues and friends

Please accept my sincere wishes for the holidays. May they be filled with peace and joy for you and yours. And, may your new year be one of prosperity and happiness.

Thank you all for the opportunity to know you and grow by association!

FEATURE ARTICLE: Choose your suppliers strategically

Every organization needs suppliers to operate. Whether it is office supplies, technology products and services, consulting services, office space, or anything else, we all have to acquire these essentials to make our organizations run. Even our employees supply services to the organization in return for their pay.

In fact, one can think of our organizations as simply combining various goods and services in unique ways to achieve our goals and objectives. And so, if we set out those goals and objectives in accordance with an overall strategy, wouldn’t it make sense to choose our suppliers strategically as well?

The traditional, tactical purchasing process

If you’re like most organizations, when you decide you need a product or service, you specify the goods or services you require; you compare features, benefits and price; and you select the best value. You may have an informal, browse-the-catalog approach for some routine items; you may issue formal Requests for Proposals (RFPs) for others; you may have a number of processes to suit the particular purchase, but each process essentially accomplishes these three steps: specify, compare, select.

The above process, however implemented, is essentially tactical, or transaction based. Today we buy pencils – if we need pens tomorrow, we start all over again.

Traditional strategic purchasing

The traditional notion of strategic purchasing, on the other hand, is well articulated and commonly implemented in large, for-profit corporations. It involves things like analyzing spending, implementing technology solutions to create more efficient processes, arranging organization-wide purchases in pursuit of volume discounts, and meeting with suppliers to improve their performance.

These are good steps and appropriate for organizations in our sector to consider, subject to adjusting the scale to our generally smaller organizations.

But this still isn’t the whole strategic picture for not-for-profit organizations. Because our organizations are more complex than for-profit companies, our needs are often more complex, though sometimes in subtle ways.

Strategic purchasing for NPOs

Consider some of the ways that NPOs operate that are fundamentally different from for-profit organizations:

  • Size and scale – NPOs are generally much smaller and happier to be that way, preferring the nimble, in-touch-with-our-communities operating style. Rather than pursuing growth for growth’s sake (or for profit’s sake), we see the value in collaboration, free sharing of ideas and insights, and enhanced reach through partnerships. We can’t bring most suppliers to their knees like Wal-Mart can, and we probably wouldn’t want to anyway. When we do grow, it’s in a focused, deliberate way to benefit our stakeholders.
  • Greater reliance on suppliers – Because we run lean organizations, we often need that extra bit of care and attention from our suppliers. “Don’t just drop that computer, in its carton, at the door – and, after you set it up, could you please, please show us how to get the printer working with it?” It takes a special kind of supplier to exceed or even meet our expectations.
  • Price sensitivity – Most for-profit companies don’t really have a clue about price sensitivity! After all, they can mostly pass along their costs to their customers. For us, though, every dollar spent comes at our stakeholders’ cost.
  • The bigger picture – Above all, we’re here for something much, much bigger than the buck, and we might have expectations on our suppliers as well. No sweatshop labour, toxic ingredients or corner-cutting suppliers need apply. We might also want to positively support other organizations doing the right thing – casual labour from sheltered workshops, or fair-trade coffee and locally grown produce on our tables. Again, our requirements are often more subtle than seeing an “organic” label stuck on the non-biodegradable plastic wrapper.

So, how to balance these often-conflicting and demanding requirements? After all, we can’t allow a procurement process to paralyse us while we address these significant issues – we have organizations to run!

It is possible to work within these added constraints, and it is simpler than it may seem at first. Consider the following:

  • match your suppliers’ size and scope to your own – while not always possible, try to work with suppliers that will see you as a significant, though not overwhelming, customer. Being a big part of your supplier’s business is a pretty sure way to get the attention and value added service you need. Consider working with suppliers that your major NPO partner and collaborators use – especially where the supplies relate to an area of collaboration. This can help to smooth the inevitable operating wrinkles that come with collaborating, and your collective clout with a supplier can add to the service dimension further.
  • limit the number of suppliers – wherever possible, work with a few, good suppliers. Again, this will increase your importance to that supplier, and will also reduce the time and effort you must put into supplier relationships. Getting related products and services from one source also helps to minimize operational issues – if your computers don’t work with your printers, it’s easier to solve if you acquired both from the same reseller.
  • consider the long-term – we’re not governed by next quarter’s results. We have the ability, and need, to consider the long-term impacts of our work. In fact, we are often in it for the long term, since most of the quick fixes to the world’s problems were implemented years ago. Look for suppliers that are well equipped to support you in the long term, in the areas that will be your focus. If you expect your organization to increase its catchment area, and expand to new locations in the future, start working now with suppliers who can be where you expect to be (both literally and figuratively).
  • mission support – look for suppliers that work the way you do. This could mean looking at other NPOs as suppliers, or it could simply mean looking at other socially responsible for-profit suppliers. As a small example, one organization I know was looking for volunteer recognition items – rather than buy the usual logo’d, promotional products from the catalogue, they identified as their supplier an NPO that supported disadvantaged artisans. What a win-win!
  • price – don’t think that you have to pay premium prices to get all of the above – in fact, if the relationship is a great fit in these other areas, you’ll be the ideal customer for that supplier, and the pricing should be highly competitive. Not necessarily the absolute lowest, but certainly the best value for money.

RESOURCES: Imagine Canada's Ethical Code

Imagine Canada's Ethical Code was introduced in 1998 in response to growing public concerns about accountability among Canada’s charities. The Code lays out standards for organizations to manage and report their funds responsibly. Adherents to the Code are entitled to use the trustmark which signals to donors their compliance with Imagine Canada's fundraising and financial accountability standards.

Imagine Canada launched a review of the standards of the Ethical Fundraising and Financial Accountability Code (Code) in mid 2006. The review included both empirical research on fundraising issues, trends and regulation and consultations with charities on what the appropriate standards should be given their capacity constraints.

New! October 2007. Imagine Canada's revised Ethical Fundraising and Financial Accountability Code is now available!

A complementary discussion paper is intended to start a dialogue in the charitable sector about standards and their link to accountability, transparency and public trust.

For a quick overview of the Ethical Code, read Imagine Canada's two-page fact sheet. For more information, email "code[at]imaginecanada[dot]ca".

PRESS CLIPPING: Charities Trying Mergers to Improve Bottom Line

From the New York Times, November 11, 2007:

Charities Trying Mergers to Improve Bottom Line

QUICK TIP: Check your Website's Performance

We place a lot of trust in our communications and technology suppliers or staff to present us to the world the way we want. With printed pieces, we can look at the finished product and confirm their good work for ourselves.

With the Web, however, just because that new Web page looks great to you, doesn't mean that it will look great to everyone – different browsers and operating systems, monitors and screen resolutions, and even different Internet connections can significantly impact your users' experience of your site.

While you'll never be able to cover every eventuality (there are literally hundreds of browsers out there, even if you and I can only name one or two ... maybe three), you can check how your site looks in a number of different settings, at little or no cost.

The major browsers are all free: Internet Explorer, Firefox, and Opera can be downloaded by clicking on the links in this sentence. Install them all on your computer, and check your site on each one. You may be surprised - if your site looks identical on each browser, kudos to your Web designer!

You can also change the monitor resolution and colour settings on your computer, usually with very little risk of messing anything up permanently. For a Windows machine, for example, just right-click on your desktop (on the wallpaper) and select properties => settings. Your computer should automatically revert back to the current settings if your screen becomes unreadable. So, try some different settings, and check how your Website looks now.

Still got a slow dial-up connection at home (or does another staff member?) If so, great, load up your Website and see how long it takes – no magic threshold here. If you feel impatient waiting for your full-screen Flash presentation on your home page to load, so will others. The only difference is, most others will vote with their feet (well ... their mouse) and move on to another site before they even see that cool graphic if it loads too slowly.

This is a good job, easily done – it's even a task that you can delegate on a recurring basis to just about anyone in your organization.

FINANCIAL LITERACY TERMS OF THE MONTH: Budgets, Forecasts, Projections

When looking at financial operating results, we often compare the actual results to what we planned. This is a basic, and important, part of our monitoring and oversight activities. But, there can be confusion as to just what we are comparing these actual results to.

Often, we will compare actual results to our budget. The budget is simply the financial expression of our operating plan. So, at a certain point in time, we agreed on a certain course of action, and translated that planned course of action into a set of financial figures. After the fact, it is useful to compare what we planned to what actually happened. Differences are inevitable – plans change, and actual activities always differ from plans, sometimes slightly, sometimes significantly. Understanding where, and why, is important.

[We have written previously about the importance of having well-understood budget numbers, and about the value of not changing those figures every time something changes (since it is just too confusing to have multiple sets of numbers floating around). If you must revise a budget (for example, if a major source of funding falls through and significant program cuts must result), then be sure to clearly mark every set of figures. This issue is discussed at length in a previous newsletter.]

But, even with a single set of budget numbers, it may be appropriate to prepare other forward-looking financial information. For example, part way through the year, it may be appropriate to forecast our results. This amounts to determining our “best guess” about the near future. Or, quantifying the most likely set of operating results. This can be useful because plans change, and it is valuable to understand what is likely to happen in the near future.

On other occasions, it may also be useful to speculate on, or project, the impact of “what if” questions. “What if” we buy this building instead of continuing to rent? “What if” we get (or don’t get) this major new service contract? When considering a major change in operations such as these, it is important to understand the full financial impact of the change, perhaps by preparing a projection of the change’s impact.

In summary, then,

“Budget = Plan”
“Forecast = Most likely”
“Projection = What if?”

Whatever else you may do or not, however, it is vital to clearly mark every set of figures!

FROM THE ARCHIVE: What to look for in monthly financial statements (from April 2007)

If you are on the Board of a not-for-profit, you should be receiving interim (generally monthly) financial statements. But, if you're like many volunteers, month after month, it all starts to look the same, and it's not really clear what you should be focusing on. Of course, the answer will vary from one organization to the next. But, let's talk about a few common areas to look at.

First off, let's take a quick tour through the information that you are likely looking at (or should be!). For sure, the main thing you will have is an income statement, sometimes called a profit and loss ("P&L") statement, or statement of revenues and expenses. You may also have a balance sheet, statement of cash flow, and more detailed schedules by program or activity. But, today we will focus on the main course, the income statement.

Down the left side

This statement shows what your organization has earned ("income", such as donations, member dues, interest income, etc.) and what expenses have been incurred ("expenses", such as salaries, rent, supplies, and many, many other things) over some period of time. The various types of income and expense are generally listed down the left side of the page, usually starting with income, followed by expense. They may be listed alphabetically, from largest to smallest, or in some other (or no!) order. So where should you focus?

To answer this question, we suggest that the first thing to do (before you even look at the statement), is to ask yourself, "What do I expect to see on this statement?" Did your organisation pay salaries and rent last month? Did you expect to receive certain types of funding? Did you have a major event or program running in the month? Consider what you expect to be happening in the organization, and then look for the financial impact of those things. Use the statement as a check against your expectations and knowledge about the organization's activities.

Many figures will stay more-or-less the same each month, as you would expect: salaries, for example. Seeing these figures stay the same confirms your expectations about operations. If you see salaries increase, however, this should be a trigger to ask: did we hire a new person? Did we increase salaries? On the other hand, if you know that you hired a new staff member, did the salary figure increase as you expected? Make sure that the numbers reflect your understanding, and use the numbers to improve your understanding of what is happening in the organization.

Other figures will naturally go up and down from period to period. These fluctuations may reflect seasonal trends, program activity levels, or some other factor - again, consider what you know about the organization and what you expect to see happen. If the numbers don't confirm your expectations, ask. You will either improve your understanding, or identify issues in the statement - both good things.

Across the top

The headings across the top will generally include actual results for the current month and the year-to-date, probably similar headings for the previous year (comparative information), and possibly budget information for some or all of these periods. There may also be calculated information such as variances (i.e. the difference between this year and last, or actual and budget columns) or percentage change.

Remember that year-to-date ("YTD") information runs from the beginning of your organization's fiscal year. This may be the calendar year, but it may be some other period as well. It's important to know this period, and reflect on what has happened within the organization since that time.

The budget columns should reflect budget information that has been reviewed and approved by the Board. Be careful, if your organization revises budget numbers, that you understand which set of numbers you are looking at. ([March 2007]'s newsletter discussed the issue of revising budgets.) It is sometimes useful to think of the budget as your target - if the budget figures get revised, now you've got a moving target!

Variances are often presented as "favourable" or "(unfavourable)" - remember that this reflects the accountant's view, or more properly, a financial view of these words. Anything "favourable" leaves more money with the organization; anything "unfavourable" leaves less money with the organization. Even though spending money on our mission is what we are all about - and therefore you might think it's favourable to spend more money on our mission - from a financial perspective, this term means something quite different. It all relates to the effect on our bottom line in this context.

Some problems to watch out for

Not all numbers are created equal! Keep in mind the limitations of the numbers you are looking at:

  • current month numbers reflect a very short period of time - one month. It is very easy for the timing of transactions to be off by just a few days, and have a relatively huge impact on current month numbers. Something as simple as the timing of being approved for a grant can throw these numbers off by a big amount.
  • budget numbers, as we always stress, are simply the financial expression of the operating plan. And, plans, by their nature, are never as precise as the actual results. We tend to budget some amounts evenly over the year, for example, even though we know that we won't actually incur the cost evenly. But, in doing our planning (i.e. our budget), we don't know precisely (and probably don't care …) when every single amount will be spent.
  • small numbers are … well … small! And, so, a tiny change in a small number can look more significant than it really is. Keep a focus on the big numbers - the ones that can really cause problems for your organization.
  • percentage figures can be really misleading. Again, small numbers can create huge percentages that really don't mean much, whereas some small percentages might mask bigger problems. If, for example, salaries are three-quarters of your expenses, then a 4% increase instead of the planned 2% can spell big financial trouble.

Putting it all together

As we said at the outset, what you need to focus on will depend on your organization and its circumstances. But, here are a few rules of thumb that may prove helpful, especially if you are new to looking at your organization's monthly statements:

  • think about what is going on in your organization and what you are expecting to see, before you even pick up the statements. Look for amounts that confirm your expectations, and for amounts that challenge them;
  • focus more (though not exclusively) on the amounts that are normally your bigger items - large grants, major fee categories and events, as well as major types of expenses. These are where big problems, if they exist, can hide. It may also be where big improvements could be made;
  • tend to look at the year-to-date figures, since they smooth out very short-run fluctuations and timing issues;
  • compare the results to budget, since it will highlight where you are straying from your plans;
  • ask about numbers that aren't clear, or that include several items grouped together (for example, "administration expenses" is not a very explanatory caption). Ask what exactly goes into figures that are not self-explanatory.

Finally, if the statements don't paint a reasonable picture of the organization's finances, get the statements changed. Demand more detail, or less; demand comparative information, and budget information; insist on captions and groupings of information that are clear, sensible and revealing. The accounting for your organization should be an effective communications tool - it should tell a story - and if it isn't, you should insist on changing the accounting.


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