One Day I Talked to a Great Finance Executive …

Two weeks ago, the heat index in New York City was 107 degrees. One would have thought the session I participated in with a finance executive and a bunch of fundraising executives would have been just that hot, right? Well, it was one of the best meetings I've had discussing investments in direct marketing in a long time.

Let me explain. The Direct Marketing Association Nonprofit Federation had its 2013 New York Nonprofit Conference two weeks ago. All the who's who of the nonprofit and agency worlds were in attendance networking, learning and discussing the industry's latest challenges.

The session I'm referencing above with the finance executive was titled "Survivor Finance: 
How to Not Get Voted Off the Investment Island." We had all perspectives represented in the discussion — the agency executive, the fundraising executive and, yes, the finance executive. But this conversation was much more than a one-hour presentation — my fellow presenters and I actually had talked for several months about how to manage investments in fundraising programs. And, believe it or not, our conversations were real, including sentiments about "not wanting to be transparent" and how "fundraisers don't appreciate the risk of finance management." In the end, not only did our panel evolve, but the advice from all sides of the table was positive and very effective.

E-mail me if you want the presentation materials, but I'm giving you all the details below in hopes that no matter what side of the table you are sitting on you can benefit.

Wise thoughts from a finance executive
There are two elements to the financial conversation — the organizational perspective and the department perspective. From the organization's perspective, the finance team has to think through various issues:

• Available cash — How much cash is available at the time of the investment request? For example, at the end of the year when fundraising around the holidays is high, there is likely to be extra cash around. The same goes with the end of a budget year when there is sometimes extra money left that has not been spent.
• Bank loan covenant ratios, other requirements — Yep, these are real issues that can cause hesitations to extending budgets or granting extra monies. Again, this is something that fundraisers need to know is part of the process.
• Degree of financial risk, with impacts — Is this something that has never been done before? Will the ROI be pretty safe to achieve, or is there a high risk that the investment will not provide a return as expected?
• Any ethical areas of concern? — This one is self-explanatory: Is the marketing offer on the "up and up"? Is there anything about the offer that is against the organization's tolerance, comfort zone for branding, etc.?
• Restricted or unrestricted revenue? — Is the revenue to be raised going to be unrestricted? Restricted, in most cases, is going to be the second choice, not the first choice.
• Alternative spending choices — What other requests are on the table? Chances are the finance team has requests from other departments for additional investment. What else is the organization trying to accomplish?

In addition to what the finance team has to think through about the overall organization, here is what it needs from the fundraising team:

• A believable financial model — Simply put, there is no benefit in fudging the numbers. It is eventually going to catch up with you when the results don't come in as expected. However, a believable financial model is actually backed up by some of the points below as well.
• Clear payback plan and dates — We all know that finance works on a schedule and is absolutely wired to think about money across that schedule. Therefore, a "payback" plan is critical for a successful relationship. If the fundraisers want to invest in a new strategy that costs $50,000, what is the ROI on that money and when will that ROI be achieved?
• External validation of assumptions — The finance team needs to understand if what it is being asked to invest in is something that has been done elsewhere. How successful has it been elsewhere? And how do those external examples match up to the assumptions being used for this investment?
• A history of success/credibility — Yes, it is true: Past failures can be a problem for you down the line (see bullet 1 above). If the fundraising team has asked for money in the past and the strategies did not work well or the financial plans were way off, this affects the ability of the financial team to believe the current plan being proposed.
• Capacity to execute plan well — Does the fundraising team really have the staff or the agency partners to actually pull off the investment plan? If the team has not been executing well on the budgeted plans, how will the new investment stress those resources?
• Your knowledge of the numbers — Last but not least, to quote Rob Putman, director of financial services for The Nature Conservancy, "You need to know your numbers cold!" The finance team cannot actually be held responsible for making sure the fundraiser numbers are correct. The fundraisers need to be able to discuss not only the internal numbers for their programs but also what is happening in the industry.

After all that, does it really just boil down to a checkbook entry?
After hearing the perspective of the finance team, Rob said something amazing to the fundraisers and marketers: "You all need to remind me of all the resources that could be available for this investment." In other words, as the fundraisers and marketers try to understand how the finance team thinks, it will also benefit them to understand how finance operates. Our finance executive on the panel identified these as "his tools" when considering new investments:

• Tolerance for unbalanced budgets — The big secret was out: The finance team actually doesn't always have to have a balanced budget. For the right investments and opportunities, it can make a decision to change the budget. But remember, a good partnership means the fundraisers and marketers help "protect" the finance team and make good on their promises and projections.
• Loans using reserves — Wow, what an interesting conversation we had. The example was simple: Every organization has money in reserves. It is required. But that money is invested in various places, and those investments are considered "conservative." Our finance executive suggested a loan against the reserves. How does it work? It's simple — if the reserves are making 3.5 percent interest but the fundraiser proposal could make much more than that, agree to cover the 3.5 percent with the payback (ROI). The organization uses donor dollars normally sitting in reserves to further the mission, yet the 3.5 percent interest (as an example) is also paid back in the ROI plan.
• Changes to internal resource allocation — Simple to say but hard to do. This means moving money from one budget to another. Granted, this is hard since it means money gets pulled away from one budget to fund the new idea. But if the investment is right, hard decisions can be made.
• Access to board or other donors — Depending on the type of strategy associated with the new investment, it is not beyond approaching specific board members or donors to help fund it. In some organizations, there are real opportunities to actually create a mutually beneficial relationship with a donor. The department gets the money, and the donors get to feel that they are funding something that is unique and specific to their interest areas.
• Money tucked away here and there — And, of course, sometimes there is money that is available. Granted, it's not just as simple as asking for it, but most budgets have some wiggle room and can be available for the right investment.

Our panelists each had different thoughts on all of the finance team's thoughts. But overall, here was the summary from the group.

1. Fundraisers must understand how finance executives make decisions and why! You must look through the lens of risk, funding models, challenges with restricted vs. unrestricted, what else is on the list of requests, etc. Be prepared on these topics before you approach them for an investment.
2. Think of new investments as opening a new business with your own money. What is the business plan to earn back the investment? Basic elements must be identified: timelines for ROI, aggressiveness of assumptions, staff capacity to execute, etc.
3. Be a partner and get creative! Through a good partnership, finance and other departments can get creative on funding. Can money be moved around? Is it OK to not have a balanced budget? Can a special case be made to the board? Could this be a loan with clear pay-back terms?
4. Educate and inform. Don't wait until you need something to educate on industry trends, benchmarks, challenges within the program, etc. Provide appropriate updates throughout the year to leadership that focus on the state of things. Keep your leadership well-informed along the way. Transparency is key.
5. Insist on donor lifecycle understanding: The key to understanding direct marketing is to understand that as donors progress from being prospects to first-year donors to multiyear donors they are different. The marketing metrics are also different. Leadership in the organization must understand the dynamics of acquisition vs. renewal. It is not just about fundraising ratio at a specific point in time. It is about investing in getting donors involved, cultivating that relationship and retaining it for the long term.

One thing's for sure: The days of "no partnership" with finance are over — that is, if you want a healthy budget and considerations for future investments!!

Special thanks to all the great panelists that informed this article and the DMA session: Christine Palmer, associate vice president of SCA Direct; Rob Putman, director of financial services at The Nature Conservancy; and Michael T. Vcelik, senior director of annual giving and Boys Town.