The Nonprofit Business Plan: A Leader's Guide to Creating a Successful Business Model

The Nonprofit Business Plan

The Leader’s Guide to Creating a Successful Business Model

David La Piana

Heather Gowdy

Lester Olmstead-Rose

Brent Copen

Turner Publishing Company

200 4th Avenue North • Suite 950 Nashville, Tennessee 37219

445 Park Avenue • 9th Floor New York, New York 10022

www.turnerpublishing.com

The Nonprofit Business Plan:

The Leader’s Guide to Creating a Successful Business Model

Copyright © 2012 David La Piana. All rights reserved.

Cover design by Mark Bergeron/Publishers’ Design and Production

Services, Inc. and Gina Binkley

Book design by Glen Edelstein

Book artwork by Mark Bergeron/Publishers’ Design and Production Services, Inc.

Library of Congress Cataloging-in-Publication Data

The nonprofit business plan : the leader’s guide to creating a successful business model / David La Piana ... [et al.].

p. cm.

9781618588784

1. Nonprofit organizations--Management. 2. Business planning.

I. La Piana, David, 1954-

HD62.6.N6543 2012

658.4’01--dc23

2012025450

Printed in the United States of America

12 13 14 15 16 17 18—0 9 8 7 6 5 4 3 2 1

Table of Contents

Title Page

Copyright Page

ACKNOWLEDGMENTS

PREFACE

HOW THIS BOOK IS ORGANIZED

CHAPTER 1 - WHAT IS A NONPROFIT BUSINESS PLAN AND WHY DO YOU NEED ONE?

CHAPTER 2 - GETTING STARTED: DESIGNING AND LAUNCHING YOUR PROCESS

CHAPTER 3 - ASSESSING YOUR CURRENT BUSINESS MODEL

CHAPTER 4 - RESEARCHING YOUR MARKET

CHAPTER 5 - DEVELOPING YOUR PLAN

CHAPTER 6 - PROJECTING THE FUTURE: BUSINESS PLAN FINANCIALS

CHAPTER 7 - PULLING IT ALL TOGETHER

CHAPTER 8 - BUSINESS PLAN AS DECISION-MAKING TOOL

CONCLUSION - DARE2 SUCCEED – GO OUT AND MAKE IT HAPPEN!

APPENDIX A - SAMPLE BUSINESS PLAN: KNOWLEDGE FORCE

APPENDIX B - FINANCIAL MODEL TEMPLATE

WORKSHEET 1 - FORMING YOUR PLANNING TEAM

INDEX

ACKNOWLEDGMENTS

Special recognition goes to the team responsible for harnessing all of this thinking and putting it into a cohesive form. Heather Gowdy, Senior Manager for Research and Innovation, captained our team, bringing a deep knowledge of business planning and nonprofit consulting as well as a special skill for corralling her busy teammates. Lester Olmstead-Rose, a Partner who is our most senior strategic planner, was central to the team’s effort, as was Brent Copen, a former colleague who is now a nonprofit CFO but remains an ongoing collaborator. The thinking represented in this book is a team effort, as was the writing.

PREFACE

Several years ago, my colleagues and I wrote The Nonprofit Strategy Revolution, creating a methodology that pushed beyond the limitations of traditional strategic planning. That approach—Real-Time Strategic Planning (RTSP)—was embraced by nonprofits seeking ways to align mission and vision with programmatic choices and operations within the context of an ever-changing external environment. But even as the Revolution was under way, our clients, grantmakers, and others in the sector began raising a common challenge: how can an organization obtain a sufficient grasp of the economic and operational implications of its strategic decisions and, in doing so, lay the groundwork for successful execution, execution that will truly accelerate growth and success? The difficulty stems partly from a lack of data, but, more important, the sector lacks a rigorous methodology for connecting mission to strategy to execution in a sustainable way.

Absent a widely available methodology for making these connections, the nonprofit leaders with whom our firm is privileged to work were increasingly asking us to help them develop a business plan rather than a strategic plan, although very often these terms had no precise definition. Working together with these clients to clarify and meet their needs, we have developed a methodology that roots strategic decision making in strong economic analysis, a methodology we call DARE² Succeed. The lessons and tools that form the core of that methodology are presented in this book.

Business Planning: DARE² Succeed

As with all innovation projects at La Piana Consulting, this one is a team effort. Our consultants initiated the internal conversations leading to this book, first sharing what they were hearing from our clients and generating ideas regarding ways we might address these challenges. They continued to play a crucial role throughout the process as we tested emerging tools with clients and repeatedly squared our thinking with our experience in the field to make sure that the ideas you encounter in these pages represent practical and workable approaches to accelerating your organization’s success.

The Nonprofit Business Plan is aimed at nonprofit leaders who want a deeper understanding of the choices, and consequences, they face in either continuing to pursue their current business model or changing it. Our audience includes nonprofit CEOs and other senior staff leaders, as well as staff members who aspire to future leadership roles. It also includes board members who seek a deeper understanding of their organization’s business model and those who come from the corporate world and have been told that the nonprofit sector is different. Indeed it is, and we hope this book will help these readers to see how to apply their commercial experience in the social sector. This book will also be of interest to foundation program officers seeking a better understanding of the organizational health of their grantees or an assessment of the likelihood of success of a new venture for which a grant seeker has requested support. It will be of help to our fellow consultants, who are increasingly asked to help nonprofits create business plans and, in so doing, support fundamental organizational transformation. Finally, this book may be of interest to students enrolled in graduate-level nonprofit management programs and their instructors. Collectively, this audience constitutes our colleagues. To them, we offer our own learning as a spur to conversation and continued learning for us all.

David La Piana

June 2012

HOW THIS BOOK IS ORGANIZED

The Nonprofit Business Plan proceeds from the more general to the more specific. In this way, a general-interest reader who does not intend to actually produce a business plan—at least not now—can begin at the beginning and continue reading until the level of specificity moves beyond what he or she is looking for. Meanwhile, the reader for whom this book is a guide to creating an actual business plan can also begin at the beginning and just keep going.

Chapter 1 begins by defining business planning, then compares and contrasts business planning with strategic planning, and provides guidance on determining when each might be needed.

Chapter 2 introduces the concept of a planning team and presents six questions that every planning team should answer at the beginning of the business planning process.

Chapter 3 focuses on the nonprofit business model, and provides a method for assessing the health of an organization’s current business model as a way to understand and—if necessary—change it.

Chapter 4 addresses market research, identifying the basic questions that need to be answered before launching any new program, partnership, entity, or growth strategy, and suggesting methods for finding answers to those questions.

Chapter 5 presents our basic framework for creating a business plan, identifying the key questions that a business plan must answer, and describing some additional ways organizations can go about finding answers to those questions. It also provides a model table of contents for a business plan.

Chapter 6 focuses on the economic and financial aspects of a business plan, providing both a broad overview and specific tools nonprofit leaders can use. It is intended for the generalist and the manager rather than the financial specialist. It requires understanding your numbers and points out where you should engage your CFO, accountant, or Board Treasurer to provide deeper analysis.

Chapter 7 walks through the sections of a typical business plan and reviews what should be included in each.

Chapter 8 answers the question: now that I have all this information, what do I do with it? It presents a way of approaching decision making that will engage key constituencies from funders to staff. It also addresses the difficult situation in which your effort produces a business plan that proves conclusively that your exciting new idea won’t work.

Finally, an Appendix offers a sample business plan.

CHAPTER 1

WHAT IS A NONPROFIT BUSINESS PLAN AND WHY DO YOU NEED ONE?

Consider the following statements:

Business planning is for businesses, and strategic planning is for nonprofits.

A business plan is just a strategic plan with numbers attached.

I don’t need a business plan, I need a business case.

These are some of the statements we have heard from clients in the course of discussing and engaging in business planning over the last several years. Each is built on certain assumptions common in the nonprofit sector.

Business planning is for businesses, and strategic planning is for nonprofits.

This statement revives the old concept of nonprofit exceptionalism. After being told for more than two decades that they should operate more like businesses, nonprofits sometimes rebel, asserting that the distinct role, financing, and culture of most nonprofits make them completely different from businesses. We prefer Paul Light’s now-classic exhortation that, in response to such arguments, nonprofits should try to become more nonprofit-like.¹ That is, nonprofits live in an economic world just as businesses do, but they have an essentially different function in society and therefore need to use caution in adopting business tools and business thinking wholesale. The bottom line: a nonprofit needs a business plan just as much as a business does, perhaps more so given the narrower room for experimentation and the high consequences of failure—both of which can be traced back to often narrow operating mar-gins and lack of adequate capital. But that business plan must be tailored to the unique needs of each nonprofit as it navigates its own complex path. Just as a manufacturing-company executive would not tolerate being forced into a business planning process designed for a retail business, nonprofits need a business planning process that fits with their sector’s and their organization’s requirements.

A business plan is just a strategic plan with numbers attached.

This second statement implies that a strategic plan is still the basic document required for establishing a nonprofit’s direction and that to undertake business planning simply means adding a budget to that document, perhaps in an appendix. Such an approach reflects a missed opportunity. A solid business plan goes beyond articulation of strategy and projection of revenues and expenses: it delves into the organization’s economic logic and operational requirements, testing leadership’s assumptions and showing how and why the budget presented is likely to be sustainable in the long term. It informs strategy, rather than being purely derivative of it.

I don’t need a business plan, I need a business case.

This statement reflects both a bit of discomfort with the idea of business planning and a common concern among those seeking to create one. Often, nonprofits desire first and foremost a case statement for fundraising, a document that will persuade investors to fund the proposed venture. Once they enter the business planning process, however, even the most reluctant nonprofit leaders usually become enthusiastically engaged in understanding at a deeper level the enterprise or activity for which they seek to raise funds. Of course, a solid business plan is indeed a great fundraising tool, but that is a secondary benefit; the primary value comes from engagement in a rigorous, analytical process that drives strategic, mission-oriented decisions.

CASE STUDY

An animal services agency wants to end its government contract for animal control so that it can become a no-kill shelter—a major programmatic shift. The board votes to move forward based on the mission imperative and a review of some basic financial data related to the savings that would accrue from eliminating the animal-control positions; it anticipates attracting new funding to cover other program costs. One year after severing the contract, the organization finds itself in financial crisis and is forced to dramatically reduce its public-education, animal-adoption, and shelter programs because donors didn’t step up as hoped.

What went wrong? In large part, the organization’s crisis could be traced to the absence of a thorough analysis of the shared costs that had been covered by the government contract, an honest assessment of the likelihood that new donors would come forward in light of the programmatic shift, and a plan for ensuring sustainability until that happened.

BUSINESS PLANNING DEFINED

Nonprofits often use the terms strategic planning and business planning interchangeably, but a good business plan goes beyond the traditional strategic plan with its focus on mission and vision, goals, and objectives. A business plan tests the proposition that a particular undertaking—program, partnership, new venture, growth strategy, or the entity as a whole—is economically and operationally viable. It provides a window into the drivers of economic success (including market factors) and the scale, structure, leadership, staffing, timeline, costs, and risks that must be examined and negotiated for the venture to succeed.

DEFINITION

A business plan tests the proposition that a particular undertaking—program, partnership, new venture, growth strategy, or the entity as a whole—is economically and operationally viable.

Although much has been written about business planning in the corporate sector, it is not sufficient to take the basic pieces of corporate business planning and simply insert the word nonprofit in each. Nonprofits live in a different economic world from that inhabited by corporations. They have different priorities and aims and derive their funding in different ways. The nonprofit business planning process must integrate these uniquely nonprofit elements with the unavoidable reality of any economic enterprise; it must generate enough cash to cover its expenses, both capital and operating, or it will fail, no matter how noble or essential the mission.

WHAT MAKES NONPROFITS DIFFERENT

MARKET FAILURE. One of the defining features of the nonprofit sector is its focus on the provision of goods or services that are not profitable (or profitable enough) to incent businesses to provide them in sufficient quantities. Nonprofits must make up the market shortfall by attracting other sources of revenue, including third-party payers.

THIRD-PARTY PAYERS. A nonprofit organization’s customers are