Risk and Resilience: The Portfolio Approach to Fiscal Sponsorship, Part #1
[Note: This series was co-written by Josh Clement and Schulman Consulting. For more on Josh, click here or scroll to the end of this post.]
If you’re reading this, you no doubt know that managing a fiscal sponsorship program presents unique challenges. One of the more challenging aspects is advancing your organization’s mission while also keeping an eye (or two) on your financials. Reconciling pizza receipts for a project is one thing; but trying to figure out exactly how much money your organization will earn from that project in two years is quite another.
And that was before the Coronavirus pandemic hit. Now, your job has gotten more difficult in lots of ways.
Fiscal sponsorship relies on the continued growth and financial success of the projects underneath the fiscal sponsorship umbrella. Each of these projects has different types of funding, from one-off events and individual donors to accrued reimbursable government contracts and foundation grants.
Most fiscal sponsors have projects that widely vary in size, in the work they do, and how they are staffed. With those differences, projects also have their own financial ebbs and flows. If you work in this field, this is not news to you.
But, it does make accurately forecasting the sponsor’s financial future more complicated (and that was before a global pandemic was thrust into our 2020 plans). Due to the complexity of accurately projecting budgets for a plethora of individual projects, perhaps you and your team instead pick a single revenue growth goal number, based on the last few years, to project the future. Then you hope that the ups and downs of your projects will average out and get you to that goal.
And maybe this method works for your organization. If it does, great. You can stop reading now and close this browser window — no questions asked.
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If you’re still here, you’re likely looking for a better way. We think we have found a better way by thinking about fiscal sponsorship finances through the lens of risk and resilience.
With risk, we look for the potential challenges your organization might face, such as sudden losses in the portfolio due to the departure of large projects or major funders changing priorities. With resilience, we care about the ability of fiscal sponsors to weather these financial challenges, which requires looking closely at project finances and growth.
Now, we certainly do not expect all projects to grow at the same rate, but the growth and losses can always be averaged out to a single number (in the example below, at a 26% growth rate). However, when you start working with individual projects to put together next year’s budget, you know how problematic this can become.
Graph 1 –26% Growth Rate
Let’s use that 26% growth rate above for this example. A fiscal sponsor has Projects A and B in its portfolio:
Project A: FY18 Revenue – $392,630
Using our expected 26% growth rate, Project A is expected to bring in nearly $500,000 in FY19. But this does not account for the real life context, as Project A had a playground burn down in FY18, which led to a massive individual donor campaign. In FY19, a more normal operational year, they brought in $144,200, which caused our projections to be off by more than $350,000!
Project B: FY18 Revenue – $429,739
Project B is expected to bring in near $550,000 in FY19 under an expectation of 26% growth. However, Project B is an at-scale social enterprise that primarily raises revenue from space rentals. In order to grow significantly, Project B would need to invest in additional space or change their program model. In FY19, with no program changes, Project B brought in $479,724 in FY19, meaning our “projections” were off by $60,000.
To mitigate these flaws in our projections, a more effective way of understanding the fiscal sponsorship portfolio is to look at each fiscal year by project revenue, as this highlights how the portfolio is truly shaped and how projects are influencing the organization’s overall growth.
Graph 2 – Breaking the Portfolio Down by Project
Maybe your finance team already produces something along these lines (whether it’s a graph like this, a table in Excel, or a report from your financial accounting software), and if so, great: You already understand how the different projects in your program contribute to your organization’s revenue. (Hint: If you’re not doing this already, and if you charge different fees for different types of funding, you should try creating one of these using fee data instead of overall revenue.)
If you’re looking at reports like this at the end of the year, then when it comes time to plan and budget for next year, you’ve likely asked your projects for their best projections based on existing plans, along with their “known”, “planned” and “unknown” sources of funding.
Some will give you very conservative estimates, some will come up with more aggressive goals, and some will end up in the middle.
And even though you’re now looking at your program at the project level you’ve still got somewhat of a mish-mash of projections.
This may get the job done and be good enough for you, your Board, your team, and your community stakeholders. If so, great.
But maybe there are deeper questions that your Board has asked you or that you’ve asked your staff: Which projects are likely to grow and why? And when they grow, how likely are they to continue growing? And how does all of this impact whether or not they are going to stay under fiscal sponsorship at your organization?
We’ll get into these questions and more in the second post in this series, available now.
About Josh Clement: Josh Clement is the former Grants and Development Manager at Strong City Baltimore. While at Strong City, he designed a new approach to financial analysis, which he has since brought to others in our sector. He’s partnered with Schulman Consulting to share his expertise and knowledge. He’s also currently earning his Masters in Public Policy at the Humphrey School for Public Affairs at the University of Minnesota.