A Steward Leader Pays Attention to Value
When you hear the phrase “maximize financial value” what does it mean to you?
- Making more profit? (Which feels problematic for many nonprofit and ministry leaders.)
- Squeezing maximum benefit of each dollar by reducing costs, and thus preserving a bank balance? (Something that feels virtuous for many nonprofit and ministry leaders.)
- The net worth of the organization, reflected on the balance sheet? (Something few nonprofit or ministry boards ever pay attention to.)
- Increasing the price (value) of an organization should it be sold, merged or acquired? (Something that glazes over the eyes of many nonprofit and ministry leaders)
A Convene Team I lead in eastern Wisconsin was privileged, recently, to hear Michael Petty speak on how an organization can maximize its financial value (Mike chairs a similar Convene Team in the Washington D.C. area). He made it abundantly clear that option 4 is what is meant. While his input was given to business owners, the material he offered applies to nonprofit and ministry leaders as well.
Yes, it is hard to calculate the value of any organization.
Yes, it is even harder to calculate the value of a nonprofit organization.
But, should merger or acquisition or sale ever make sense, that value will have to be calculated and agreed to.
It is better to establish and monitor that value from the beginning than to do it when it becomes critical and anxiety starts to grow.
- It reflects that the board is wide-awake and attentive to the fiscal condition of the organization. It is actually paying attention!
- A solid demonstration of value helps the current organization, and any successor organization; to provide strong evidence of solvency should any form of credit need to be pursued.
- It expects an up to date and clean balance sheet.
- There is ample evidence that major donors expect fiscal strength, rather than looking to rescue a sinking or merely stable organization.
- It provides a sense of missional impact (see the following paragraph for more on this).
According to Michael Petty, financial value is measured by the ability of the organization to generate economic profit (in the case of a nonprofit, this is the ability to flow cash positive) from its current and future operations, plus its net cash assets. It becomes interesting and exciting conversation to project what those cash flows from current and future operations might be, and the missional impact they will represent.
Yes, this is guesswork, but it is educated guesswork. It helps the board and executive staffs understand the impact they are achieving now and into the future. This provides negotiating strength—not so much to win at someone else’s expense when making a deal, but to understand and accurately represent the value that has been created by donors for those who benefit from the mission, whether the organization continues to operate alone, folds in the strengths of another organization they acquire, merges operations with a like-minded organization, or rolls up into the leadership of an acquiring organization.
- Clean up your balance sheet so that you know what the net worth of the organization is, a key element in calculating financial value.
- Figure out your organization’s formula for calculating its value. This can often be done with an expert’s help, or by comparing with similar organizations that already completed the exercise.
- Monitor the value as part of the metrics that are tracked. Once established this is relatively easy to do simply by plugging in the numbers.
Here is where Steward Leadership comes in. A Steward functions on behalf of the real Owner and gives account in the end for their stewardship. The value of the organization is of far greater import in this accounting than whether the bankbook is in balance, or all debts have been paid off.
Finishing this blog post, I hope it has been provocative enough to foster good and reflective conversations. We benefit from raising the bar of what we pay attention to in the fiscal aspects of Kingdom efforts.
Mark L. Vincent is the CEO of Design Group International. He serves as a CLA Leader2Leader facilitator and is actively involved as a subject matter expert and faculty for the CLA Outcomes Academy – Online. His post today is an except from his work entitled, Creation: the moral meaning of money (2005 Design For Ministry.)
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