Every organization needs to build financial sustainability - the ongoing ability to generate enough resources from a diverse income base, thoroughly efficient spend and adequate controls. Financial sustainability comes from the financial autonomy given by multiple and diverse sources of income, ‘no-strings attached’ funding supporting independent vision, values, strategy and decision-making.
 
In the nonprofit sector, the funding base diversification includes establishing business ventures, such as commercial activities and partnerships, licensing agreements.  The income generated through business ventures is unrestricted revenue, the much needed type of income fueling the organizational sustainability dimensions (people and competences, infrastructure, processes).
 
Establishing a nonprofit business venture can benefit from adopting the Lean startup principles. In essence, the lean startup methodology helps maximize the value created and minimize waste at lowest possible cost.  The concepts of minimize waste, fail fast and improve are common denominators for both startups and nonprofits. Both types of organizations suffer the scarcity of resources with passion for their mission, both focus on growth and impact, each can learn a thing or two from the other.
 
Having worked with both, some words of caution in lean startup adoption seem appropriate.

Perceptions of failure
Lean principles operate under different set of perceptions in the startups and nonprofit worlds.
In the startups world, the philosophy is high risk - high reward and “failing forward” or “fail and move-on” is merely a personal failure, positively recognized as promoting innovation and growth. Failure is a badge of honor.
In the nonprofit sector, failure is negatively perceived because it has high stakes: multiple stakeholders bear the consequences (beneficiaries, communities, donors, partners, sponsors). They see the failure through the lenses of unrealized social benefits.
 
Lean startup adoption requires good understanding and buy-in among stakeholders.
 
Nonprofits business ventures are ...  businesses
Lean startup impacts all aspects of the business venture management and require:

• A strong foundation: well understood legal and local context, stakeholders commitment to lean startup business venture management philosophy Funders, especially public funders, may disagree with the approach if not explained well.
• A robust strategy process: Lean startup is about asking the ‘why’ at the right time and make the next step when the right answer is found.  Lean startup thinking needs a clear business canvas as a working tool to identify synergies and conflicts, formulate simple and clear goal statements, guide the hypotheses testing and the business decisions all the way in the execution.
• A robust market definition: Lean startup is changing the premises of action, questioning the market opportunity, the venture sustainability instead of organizational capability. Lean startup works on multiple iterations to find the right target customers and the right positioning vs., competition – in sales volume, pricing, partnerships, scaling up opportunities, etc.
• A pragmatic financial and operating plan: Starting a business venture to generate more income should not generate unnecessary risk, To review and confirm the business is on a path to success, lean startup needs a simple financial framework focused on key business venture dimensions: business model structure, drivers of financial performance, the financials and the overall management information systems capturing and processing data clearly and quickly. Full-fledged complex financial systems must be justified by the magnitude and the maturity of the business venture.

Lean startup is about working smarter not harder.
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Think culture before strategy
The “soft” stuff is the “hard” stuff… With all the financial reports and market positioning in place, the hard stuff remains the culture: leaders must foster the lean startup culture, explain the Build-Measure-Learn approach, grow competencies, processes and systems that leverage the value of this approach to work. Lean startup adoption means change and change happens when leaders are role modeling, where they explain well the direction and the approach, when the lean skills are developed and where the performance management is an active reinforcing mechanism.
Focus on building the culture must precede the investment in lean business venture.
 
Ultimately, the nonprofit business venture objective is to provide resources which lead to benefits sustainability, i.e. the benefits delivered by the nonprofit must continue to be received by communities and individuals, independent of the nonprofit programme continues.  If done well, with strategic clarity, operational discipline, and open stakeholders engagement, the lean startup principles can deliver real value and ensure the scarce nonprofit resources are used effectively to deliver sustainable benefits. 

Internal controls, policies and procedures should be periodically reviewed to ensure they are up to date and are functioning as intended. However there are few underlying conditions, which lead to some of the problems often found in non-profits such as excessive fundraising expenses, executive salaries, high overhead or downright fraud. Limited resources, tight operating budgets, disengaged boards, weak fiscal controls, high personnel turnover, loose roles and responsibilities and lack of timely information are creating financial and operational constraints that can be lingering for a long time until the problem is really identified.
 
The financial reports, even when regularly and comprehensively done, are not necessarily self-explanatory. Nonprofit accounting rules for restricted funds add significant complexity.  Red flags such as absent segregation of duties, missing bank /cash reconciliation, single signatures over disbursements without oversight, lack of management control are not visible in the financial reports as such.
 
The financial integrity of the nonprofits Starts at mission, values and objectives, Needs the right tone at the top board policies reflecting appropriate duty of care and Works when the appropriate procedures and systems provide for clear roles and responsibilities, including adequate segregation of duties and compensation aligned to motivation. 
Experienced finance professionals know that
Yellow flags are on the income statement, Red flags are on the balance sheet.
 
Every nonprofit board would benefit for maintaining and reviewing the flags checklist on a regular basis. 

Change is not easy to many people or organizations. The discipline of Risk management provides techniques to facilitate change.
Risk management is often misunderstood as being time-consuming, impractical, difficult, or perceived as a functional compliance duty. The need for risk management is downplayed by the absence of evidence (of risks), however this doesn’t mean evidence of absence (of risks). Although risk management facilitates, rather than encumbers, the achievement of objectives, rarely it is pervasive in the organizational culture and in the decision making process.
The quality of the risk management process is a reflection of the management team and Board risk appetite, their tolerance for uncertainty and pressure for results. 
How does a robust risk assessment framework look like:

• Risk management is integral to normal organizational processes and decision-making, driven from the top.
• Risk management is using simple language, concepts and common sense thinking. 

• Risk management cuts across the different responsible departments and stakeholders
• Risk management is transparent and inclusive of all organizational levels and stakeholders. 

• Risk management is a dynamic and ongoing process. 


Specifically, in Grant management there are four risk areas:

1. Programmatic risks – related to the program relevance, the quality of M&E
2. Financial risks – related to financial efficiency, fraud, theft
3. Service delivery risks – related to quality of services and products, delivery disruptions, equity of access to services
4. Governance risks – related to inadequate management, oversight and reporting

Recognizing that risk-free environments do not exist, in the decision-making process these four areas need to be carefully considered against agreed risk thresholds to enable the achievement of the organization’ mission and ultimate goal.
The purpose of establishing thresholds is to ensure that risks are not over- or under-managed and that the organization’s resources are effectively utilized. Reducing risk involves costs; the lower the risk threshold, the higher the cost. Lack of upper thresholds signals inadequate protection and exposure to unacceptable losses impacting the organization’s ability to meet its objectives.
The Board and senior management have a shared responsibility to nurture a risk-aware culture that encourages prudent risk-taking within established risk thresholds. 

​I started to be interested in Monitoring & Evaluation M&E as consultant in Sustainability and social value creation at DuPont Sustainable Solutions. Working with multinationals in the extractive industries, I advised on the social risk management in large infrastructure capital projects and operations. In this sector, local communities are negatively impacted by the construction and operations – proactive management of the social impact and value creation requires early planning, rigorous monitoring and evaluation of those negative impacts while at the same time, revealing the social value created on short and long term basis, distinguishing between output,  outcomes and impact. Sadly enough,  not many companies were  interested in employing a proactive thorough process for monitoring and evaluation.
 
We have adopted and successfully applied the Social Return of Investment (SROI) approach as a mean to make explicit the value creation, in a quantitative way, easy to understand for a broad range of stakeholders. I found that stakeholders consultation is paramount - the stakeholders collective input provided the necessary inputs to define the project elements and the M&E steps. Consultation revealed their needs and expectations and helped the projects to articulate ‘what’s in it for them’ to minimize  the inevitable resistance.
 
The seven steps in SROI approach are the logical evolution from inputs to impacts, applying the theory of change and using financial proxies, to understand the effects on stakeholders. The attribution process is a critical step: the challenge is to understand well the contextual factors and to isolate the program impact. In my experience, the attribution process involved a lot of subjective interpretations, therefore, transparency and again, consultation is paramount, to obtain buy-in from stakeholders. Last but not least, independent assurance is a necessary step to improve acceptance of results and inform the next steps.

Different types of nonprofit organizations have different cost structures.
Flat and too low overhead rates, regardless of the nonprofit profile, hamper nonprofits’ operational stability, depriving them from the means to invest in essential organizational infrastructure.
At governance level, create the ground for questionable workarounds and fundamental inefficiency embedded in the efforts to fit overheads hurdle rates at the expense of the program impact focus.
A last but not least consequence is the undermining of trust between the actors on both sides of the funding equation.
Sector segmentation, correct terminology and cost classification are essential procedural steps to support a wind of change in funding. Nonprofits must step up on transparency, communication and education efforts on what-it-takes to deliver and accelerate the impact.

Pay-What-It-Takes Philanthropy, Jeri Eckhart-Queenan, Michael Etzel, Sridhar Prasad, May 2016, 
https://www.bridgespan.org/insights/library/pay-what-it-takes/pay-what-it-takes-philanthropy

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NGOs are trusted because they are perceived as being nonprofit oriented, primarily helping to improve lives and reduce inequality. NGOs are, however, very diverse in terms of mission, goals, financial and organizational strength, operational vision and rigor, willingness and ability to demonstrate transparency and accountability. Public trust of NGOs comes from two main sources: performance and accountability. By performance is meant the useful social value placed on projects, which support positive and enduring change. With their increasing role in service delivery, NGOs must adopt more business practices, strengthen their management structures, become more enterprising and innovative, all whilst providing ‘better value’ for money. To maintain accountability at the standard now expected by most donors, NGOs must engage in a substantial amount of financial and programme management, monitoring, evaluation and reporting before, during, and after the end of the project cycle.


The 2015 Edelman Trust Barometer found NGOs were the most trusted among government, NGOs, media and business, but trust in these organizations fell the most over the past year, to 63 % from 66% a year earlier, with levels down or unchanged in 19 countries. [1]
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Businesses can learn a lot from NGOs’ receptivity to shifts in social values that shape consumer demand. Consumers and stakeholders are increasingly placing a premium on social impact, the territory that nonprofits know best. These shifts provide companies with opportunities for first-mover advantages. Companies should adopt NGOs best practices to build the ability to engage communities around a common cause, promote their strategy with articulated storytelling about the social impact of their products and services, treat the community as a major shareholder to which the business is accountable for delivering value.  

Most businesses produce benefits for society, however the society less and less trusts their strategies and means. Most NGOs deliver social value, however fund providers expect more business-like practices and transparency. Through partnering with NGOs, corporations can leverage the NGOs' greater legitimacy for competitive benefits while NGOs can leverage the business expertise and discipline to secure more sustainable funding.


[1] https://www.statista.com/Informed Public Trusts NGOs Over Media & Government

​NGOs must track expenditures, present the information to different stakeholders in very different formats, prepare narratives that maintain the funders trust and keep the funds flowing. Their end-to-end programme execution comes with very unique requirements in terms of accountability and cash-flow tracking, impact measurement and revision. Working with government agencies, foundations, charities requires willingness and capability to respond to the different set of rules, reporting and compliance burdens imposed be each.
 
Three management dimensions – common across private and not-for-profit sectors - define the capability of an NGO to meet funders’ expectations:
 
Real-time transparency: the ability to provide real-time visibility into the flow of funds from award through to service provided and across all field locations regardless of language or currency and to demonstrate use of funds in accordance with stated purpose and adherence with award terms.
 
Data dexterity: the ability to combine flexibility and granularity in budgeting, data capture and reporting to manage and report against any imposed funding restrictions, to deliver detailed reports as required by different stakeholders,   in a secure way, with a flexible account structure,  independent of the regular accounting reports.
 
Timescale flexibility: the ability to report across different time periods, since grants usually cross fiscal years and reporting is expected at multiple timescales :  the individual grant time period, the fiscal period of the recipient’s organization, and the fiscal period of the grantor organization. In most cases, the time period has nothing to do with the organization’s accounting periods or period end.

​While NGOs are finding innovative ways to do business better and more efficiently, they continue to look at the private sector as well to see which best practices are transferable and beneficial to adopt.
To begin the conversation, here are three business best practices that can make a difference to organizational operations in the fast-paced, demanding environment of NGOs:
Risk identification and mitigation: identifying NGO’s risk exposures (i.e. socio-political context, reserves, funding, health and safety of staff, governance, etc.), defining the risk tolerance levels and the mitigation of certain risks, ensuring a regular review and programme update
Managing the triple constraint - schedule, cost, resources - while also delivering the services and impact stated in the grant award.
Operational discipline: integrating from early budgeting stage the monitoring and evaluation of the programmes and stakeholders context and providing for regular reviews and updates as necessary

CPA Canada republished a useful account of important aspects relevant  in the transition from private sector to not-for-profit:

• the volunteer status of not-for-profit directors, which may affect motivation, commitment and board dynamic;
  
• the absence of regulations requiring board assessment for NPOs; and
  
• the diversity of ways in which not-for-profit directors can be appointed or elected, and the relative lack of control that an organization may have over their appointment and performance. 
  

https://www.cpacanada.ca/~/media/site/business-and-accounting-resources/docs/20%20questions%20directors%20of%20not-for-profit%20organizations%20should%20ask%20about%20board%20recruitment.pdf
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