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Roundtable: The Business of Nonprofits

Posted: April 18, 2013 2:00 a.m.
Updated: April 17, 2013 5:49 p.m.
 

While many nonprofit organizations often serve residents who are in need of help, few people realize that while the organizations are seeking funds to carry out services they still must operate under many of the same rules and regulations that a for-profit business must.

The SCV Business Journal invited representatives from three local organizations to share their experiences running a non-profit, and yet having to operate as a business at the same time. We spoke with: Cheryl Laymon, executive director of the Samuel Dixon Family Health Centers, Rachelle Dardeau, executive director of the Santa Clarita Valley Senior center, and Kim Goldman, executive director of the SCV Youth Project.

Describe your organization’s mission and the clients you serve.

CHERYL LAYMON:  Our objective is to ensure that primary care is available in an affordable, accessible manner to any and all residents of the Santa Clarita Valley. We provide the full range of primary care.

Our patients tend to be low-income, and they’re always uninsured. Most of them are working or going to school, very few of them are not doing anything, so to speak.

We have three locations: the original Val Verde location, Canyon Country and Newhall.

Everything’s available on a sliding fee schedule. We have some services that are free based on government programs.

KIM GOLDMAN: We are in our 12th year of providing free counseling to teenagers ages 12-18 in Santa Clarita at the junior high and high school campuses.

Our whole mission is to educate and empower kids to make healthy decisions on their own. And it’s all free.

We meet with students on a one-on-one basis, group  support setting, or education outreach and crisis intervention for kids that are dealing with issues revolving around drug use, alcohol, pregnancy, STDs, depression, suicide, anger – anything you can imagine teens are dealing with. We provide them a way to talk and share.

RACHELLE DARDEAU: The Senior Center’s primary objective and mission is to make sure our seniors have quality of life, a life with dignity and independence. We make sure they have that primarily through the programs we offer, but also through nutrition, legal needs and advocacy.

Depending on various funding sources, our programs serve ages 50 and over, disabled and low-income seniors.

How are your organizations funded?

LAYMON: We are not a free clinic; we charge for our services. It’s an important distinction because no one would ever be refused services because of an inability to pay, but a free clinic is licensed differently in California. We’re licensed as a community health center. So services are on a sliding fee scale.

We access a lot of state and federal programs, which enable us to provide services at a lower cost or no cost to the patient. Later, we get reimbursed from those sources.

We also have a lot of Medical Managed Care patients. And one of our biggest programs is actually a family planning state program.

Over half of our budget comes from federal, state or county resources. We also charge patient fees, and that accounts for about 10 percent of our funding. We receive foundation grants, and we also do some fundraising.

We are also trying some online fundraising because we don’t think that Santa Clarita could have another dinner. It’s hard; it’s very competitive.

GOLDMAN: We provide all of our services for free, which was a lovely sentiment back in the beginning when we started. And I won’t change that now, but it does create difficulty for us in terms of fundraising.

All of our revenue is reliant upon foundational grants and the giving and kindness of others. We do fundraisers, as well. Grants and fundraisers are probably split about 50/50.

We don’t receive any state or federal funding. Locally, I receive a grant from the city but no funding from the school districts. We used to get funding from the school district, but budget cuts have made that unavailable.

I rub a lot of rocks together and try to water my money tree, but nothing is working. We are struggling; I’m working month-to-month.

DARDEAU: Over 50 percent of our funding comes from contracts – federal, state, county or city. We provide a service and are reimbursed later, though it doesn’t cover 100 percent of the costs.

We have program income – or donations coming directly from those programs – which accounts for about 20 percent of our funding. Although programs are no cost to seniors, we are allowed to recommend a suggested donation. They can donate or not, but no one is turned away for a lack of ability to pay. If we didn’t have the program, we wouldn’t have those program donations, and we would lose about 20 percent of our funding.

Another 20 percent comes from foundation grants. Cash donations and fundraising bring in about 3 percent of funding each, as well.

I’ll echo what my colleagues have said – the fundraising competition is very stiff in the Santa Clarita Valley.

How does a nonprofit differ from a for-profit?

GOLDMAN: The difference between a nonprofit and for-profit is just really our tax status. We hire and fire, and we still have to file our taxes, pay payroll taxes. We do all the same things that the for-profit companies do. We just provide a different service.

I still have to run a business. I still have to operate, follow human resources. We’re still susceptible to lawsuits. Our setup is a little bit different, but I’m still a business at the end of the day.

DARDEAU: There are actually major differences between the for-profit and nonprofit. The majority of those differences comes from the perception of people who want to donate money to a nonprofit. You hear all the time, ‘What’s your overhead.’ We have all the same overhead as a for-profit business, but the public expects us not to have any of the overhead. We still have to pay unemployment taxes and insurance.

Another major difference is that most of us in the nonprofit world will not spend money on advertising because the money will stop (coming in).

GOLDMAN: One of the things that we came under fire for was spending too much money on advertising, as a way to increase revenue, and we got railroaded for that. There is a perception that people in the nonprofit world need to be living well below the poverty line, that we should be scraping by.

I was once denied money because my salary was a big line item in the budget. But I was doing five jobs at the time because I couldn’t afford to hire anyone else. There was a perception that I am making too much money for a nonprofit. I can barely make ends meet.

We have to struggle to look poor enough so people to want to give to you, but you can’t look so poor that people don’t want to invest in you. It’s a fine line.

 DARDEAU: People hear about nonprofits and the tax-free status, but the reality is we still have all the same laws and regulations as a for-profit.

When all the fees and regulatory costs go up, that affects us the same way. We have to pay the same payroll and medical taxes as a for-profit, but at the same time, we’re under the scrutiny of whoever wants to look at our documents online. And we’re being criticized for personnel fees – which include those same payroll and medical taxes.

By the same token, we’re experiencing cuts from sequestration. Every one of our programs will be affected – anywhere from a 5-8 percent cut to every program we offer. Yet, the cost to do business is going up. So it leaves precious little.

LAYMON: There’s another key difference between nonprofit and for-profit. For-profit businesses can negotiate the selling price of a product to increase the profit margin and generate more sales. But we have a set price, and we have to figure out how to subsidize the rest. That’s our only option.

As far as accountability, we have about an audit a week, coming in to see if we are spending our funds wisely. I have to say we’ve never been denied a grant because of expenses to overhead because we have always been on the slim side, which we make a point to do.

LAYMON: That’s true. The majority of our costs are related to personnel because that’s who is delivering the service. Some foundations like to fund equipment, some like to fund property. It just depends on what that foundation is set up to do. You just have to find the right one.

DARDEAU: Another difference is we can’t manufacture more products in order to increase revenue like a for-profit could. We are all in human services. We can only work so many hours in the day, by law.

LAYMON: If we did try to provide that additional service, we wouldn’t be able to afford it because of the money to subsidize those costs.

It’s always a balancing act. I have to be sure that I can match meeting community need against the resources that I have. Otherwise, we’d be out of business tomorrow.

Health care is not cheap in the nonprofit world. People can’t afford to pay the cost; reimbursements don’t cover the cost 100 percent. You’re always subsidizing cost somehow, which a for-profit wouldn’t be thinking about.

DARDEAU: For-profits can reason that if they put an ad in the newspaper every day, more people will know about and purchase their services. For nonprofits, it’s almost a disadvantage because you can’t meet the cost of providing the services for more people.

GOLDMAN: This has been an ongoing argument with my board. They want us to promote the Youth Project. But I can’t take more clients because I don’t have anyone to service them. But you can’t tell more people about it so they want to buy into your service.

It’s a real catch 22. People will call based on references, and it’s great because I want to help as many people as I can. But my staff can’t take anyone else on.

People think nonprofits need cash most. Could you also benefit from equipment donations?

DARDEAU: Equipment presents another interesting dichotomy. If you were in a for-profit business, it would be much more cost effective to purchase new, reliable equipment.

In a nonprofit, you can’t borrow on your future. I can’t go out and purchase a new piece of equipment knowing that I’ll make up that difference next quarter. If you don’t have the money there, and someone doesn’t donate it, you do without. Consequently, your repair costs start to increase. It backfires. But you don’t have the large cash outlay at the forefront to purchase the equipment. So you can’t do it.

DARDEAU: We need in-kind donations. But we have to be careful with that.

There are wonderful, well-meaning people that donate, but we can’t use it because it is so old it won’t work with our current equipment.

So you need new in-kind donations?

DARDEAU: Yes, and we have gone to the community to meet needs before. The community donated money for us to purchase a brand new ice machine, which is important because we are a cooling center for seniors. We looked at used ones, but we don’t want to buy someone else’s problem. We need it to last.

It’s like we are constantly in startup mode. We are in the process of converting our fleet of vehicles for meal home-deliveries to be much more gas-efficient. We deliver 250 every day, and the gas is ridiculously expensive. So we are in the process of converting that a few at a time, but in the long run, we will save a lot of money.

 Is it possible to create a separate for-profit entity to help support your nonprofit?

DARDEAU: Sure. Nonprofit doesn’t mean that you can’t make a profit. It means that your profit goes directly back into the business. There are things we could do, and there are things we are exploring – bringing new services to Santa Clarita that aren’t available to seniors.

The challenge is our clients are accustomed to the contracted programs that we aren’t allowed to charge for. If you’re enrolled in a program that you can’t afford, and it’s not fee-based, what is the likelihood you would pay for a program if it were fee-based? The people who use our services would not be able to avail themselves to a for-profit.

LAYMON: You see charities that run thrift shops to make a profit, for example. There are those profit-making components that can help your basic mission survive. But there aren’t a lot of opportunities out there.

DARDEAU: It would be a for-profit organization that takes its profits and donates it to you. You could not be affiliated with that for-profit. You can have a foundation on the side, but again, that has to be a nonprofit.

How do you manage to make sure board members are really bringing value to your organizations?

GOLDMAN: This is probably one of my biggest areas of struggle. Being so small, we are very much a working board. We roll our sleeves up and get dirty. I don’t want people that are there in just name only. A couple years ago we did a brief sweep, and that was very difficult. Now, we have our expectations, but we are terrible at holding each other to them. We’ve very much become a family, and that presents it’s own struggles.

I’m not going to kick someone out if they come back without a sponsorship, but then it falls on me because the money is already committed. And we need the sponsorship.

How do you determine hiring requirements for board members?

LAYMON: Our board has changed over the past couple of years because of our federal status. We’re not looking for people who can come in and do the give or get. We’re looking for people who are actually consumers of our health, so we’ve taken a different direction in that respect, which has made a difference.

Because our consumers tend to be low-income and consumers, and therefore underinsured, they’re not going to be dominant in a fundraising capacity. If somebody comes on for the wrong reason, they’ll stay for a while but they end up leaving. It’s just not a good fit. Most of our board members are very long-term.

DARDEAU: Our board members are invited to be on the board based on a grid of skill sets.

LAYMON: If you’ve got a board that’s operational, policy making and fundraising, then I think it’s tricky to get them to change their hats. That’s a delicate balancing act.

Can you think of something that was a challenge and then how the organization dealt with it?

LAYMON: Cash is still king in my life. A couple hundred thousand dollars were held up at the state level a few years ago, and we couldn’t figure out why it was being held. It goes back to the cash; it goes back to paying the bills.

DARDEAU: I think all of the challenges for nonprofits come down to funding. The funders, in our case the Los Angeles County for our nutrition program, don’t always know what to expect because they are mandated to follow what’s coming down from state and federal governments. They suggest how we should allot that money.

One of our biggest challenges was not being able to serve almost 20,000 of the meals that we were able to last year. That’s a huge problem. The county had to come down here and tell them, ‘Yes, this is the truth. That’s what’s going on.’

And, money is not free. There are always restrictions to that money. We are audited on a regular basis. All nonprofits are under that kind of scrutiny. 

GOLDMAN: I don’t think people understand just how many services are offered by the nonprofits. If we all defaulted for a couple of days, people would just freak out.

Funds or grants are often available for new programs, but, I can’t keep creating new services. I don’t know if I’m going to get the money, and I have no idea if I can sustain it.

How do you determine how much to allocate to administration and services or programs?

LAYMON: If you get you’re overhead too low, all of a sudden you’re not effective anymore.

GOLDMAN: The Hart district cut our funding, but I still provide service at the same level or an increased level because the services at the schools are being reduced. The counselors can’t provide the services at the level that they were, plus that’s not their area of expertise. I love the schools – they’re fantastic – but they’re not trained in mental health. So our needs and our requests for services have skyrocketed, and I’m still providing it at the level I was when I was getting my contract then.

So I keep my services at the same level. I even add more programs because the need is there, with zero income.

Are you noticing and increasing need for services?

LAYMON: The people are there, the need is there, but we don’t have an inner city. We don’t have a ghetto. It’s spread throughout the community.

I think we’re seeing a difference right now because of the economy. People are coming down for health care to Samuel Dixon that probably would have never thought of it because they had insurance, and now it’s a different ball game.

GOLDMAN: Well in my services, the things that I’m seeing are drastically different than when I first started. The level of depression, the level of suicide has increased. Drugs and alcohol and risky behaviors have increased. Because the pressure on the home, because of the economy, it’s really that trickle down effect. Kids are either being micro managed by mom or dad or have no parenting because there’s nobody around.

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