Look Under the Hood - How to Assess your Business Model
By Molly Penn
Strategy should always factor in your organization’s current business model. You need to understand your business model in order to ascertain how bold you can be in your strategy. Do you have assets and liquidity to allocate to new initiatives? Or, is your plan more about regaining financial sustainability? These two situations would result in entirely different strategic plans. Here are some ways you can better understand your organization’s business model.
Conduct a Profitability Analysis
Create a spreadsheet of individual programs or lines of business that shows both restricted and earned income, direct expenses as well as a pro-rata share of administrative overhead. This analysis will show the level of philanthropic subsidy required to sustain each program or business line. This is crucial to understand as part of a planning process since each plan must also have a sustainable business model.
Analyze Fundraising Trends
Analyze trend data on fundraising success to ascertain how the organization is performing in terms of philanthropic subsidy. In some cases, such as founder-led organizations, this may also include a deeper dive on who solicited each gift over the past 5 years to ascertain how important it is to look at succession planning.
Examine organizations with similar missions and comparable business models to see how your organization compares. Look to see what percentage of program expenses are covered by earned revenues. Look also at program prices (if applicable), or if your organization depends on earned revenue (not from government contracts), look to see what percentage of their budget is allocated to marketing expenses. There are many facets of the business model worth doing a deeper dive on to see how you stack up.
Operating Expense Coverage
Analyze whether your revenues cover your full operating expenses - including things like depreciation expense, debt payments, cost of fixed assets, etc.
Perform a Liquidity Analysis
Determine how many months of operating expenses would be covered by your liquid net assets (hint: 6 months of liquidity is considered healthy).
Examine Fundraising Efficiency
Determine what percentage of contributions are spent on fundraising annually - and benchmark that against competitors to see how you stack up.
Conduct a Risk Assessment
Conduct an internal risk assessment on your financials to determine whether action is needed to address things like financial reporting and internal controls. Then conduct an external risk assessment to determine how at risk your various sources of funding are.
These are not necessarily activities that have to be engaged in every year, but they should always be included as part of a regular strategic planning effort - every 3-5 years. You will sleep better at night and your board will trust you more.
Talk to us about how to assess your business model!