Seven deadly sins nonprofits need to avoid.

Many nonprofit senior living communities have very talented and experienced professional teams. They do an excellent job of balancing mission and sound business fundamentals.

But there are also a growing number of nonprofit facilities that face significant challenges and, in fact, have flawed business models. Constructive criticism is not easy, but in today's environment it's necessary. Here are seven real world threats to the viability of many nonprofits, though clearly not the only seven.

1 Laissez-Faire Marketing. In the early 1990s, a nonprofit senior living campus might have been the only game in town. Now there could be competition from six aggressive new communities, that might offer a superior product and comparable services at competitive prices.

Waiting lists at many nonprofit facilities have depleted. For some communities, occupancy in independent living and assisted living facilities has decreased to less than 90 percent, and the private-pay ratio in the nursing home may have declined from about 55 percent to 40 percent. In some cases marketing is still called "admissions" and is structured primarily to respond to unsolicited requests.

A new executive director at one community said his organization is designing a sales and marketing program that will expand its base of new leads and qualified prospects and deliver those prospects to the community for conversion to sales. With a computerized lead-tracking system, some months might cost a little more than in the past, he said, but the expected increases in occupancy and financial results should compensate.

2 Phantom Entry Fee Income. Communities with entry fee pricing amortize earned but previously collected entry fees into reported income based on the expected life of the resident (for non-refundable entry fees) or the useful life of the facility (for refundable fees). This commonly accepted and appropriate accounting practice, however, artificially inflates the current income statement on a cash basis.

A typical income statement might show several hundred thousand dollars of "earned entry fees," but the actual cash might have been collected and spent months and years earlier. Some board members have been misled into thinking the community was doing just fine when they were actually approaching a near-term cash crisis.

Progressive nonprofit professional staff members now submit definitive cash flow statements at every board meeting indicating the real cash position of the organization. Some also include operating versus non-operating revenue and the current status of accounts receivable and accounts payable accruals.

3 The "Peter to Paul" Operation. Entry fee refund obligations to a deceased resident's estates are largely--but not solely--driven by reselling that same unit in a timely manner. Though some might see it as akin to an illegal Ponzi scheme, this legal operation might be better described as "taking from Peter to pay Paul."

An ineffective marketing program or a sub-par product, however, results in slow resales and increased vacancies. The problem is compounded when a community experiences excessive expenses and its endowment funds are hammered by poor stock market performance. This has become a real world scenario for some nonprofits.

4 Excessive Operating Expenses some nonprofits.

4 Excessive Operating Expenses and Cost Creep. This issue can best be explained by the words of a sponsor who took decisive action. "For years, we have justified annual budget increases by building off last year's numbers," she said. "I've now asked every department head to go back to square one and budget their costs objectively from 'a zero base'".

That's just the preliminary work. She then asked them how they could cut operating expenses by an additional 5 to 7 percent in ways that would have minimal impact on resident quality of care or quality of life. The eventual 5 percent savings in operating expenses "came in small increments: an FTE here, some minor operating supplies there. Some reductions were achieved by a tighter integration of the 'back of the house' in terms of how we delivered and served the food to each of our three satellite dining rooms."

5 Incestual Benchmarks. The nonprofit sector measures performance by peer-derived benchmarks. That sounds fine, except it assumes the comparisons are fair at the start.

Many of these margins and benchmarks are actually sub-par when compared to sound and reasonable business models being experienced by other successful sponsors. Many of these benchmark comparisons reflect communities with less than optimum experience, but are charging competitive market rates while having little or no tangible charitable content.

6 Challenged Endowment Funds. Traditional endowment resources have been challenged from several perspectives. The overall investment returns since the year 2000 have been flat to declining. Experts predict the annual investment income in the near future is likely to involve single digit increases.

Fundraising has become only more difficult. Many nonprofits have relied on endowment income to help pay operating expenses and debt payments. But many donors now prefer to help fund permanent campus improvements or other investments with tangible, long-range benefits. They are becoming more reluctant to fund operating losses without clear evidence of tangible charitable content.

Some nonprofit staff and board members have taken bold steps. They no longer use fundraising proceeds to subsidize operations deficits. Instead, endowments will pay for either tangible and permanent long-run capital improvements or to initiate new, innovative and financially responsible programs. After demonstrating complete financial viability using competitive number of units to provide scholarships for economically disadvantaged residents as part of the tangible charitable content and mission. Of course, this direction came after testing the philosophy on potential donors and receiving a favorable response.

7 Challenged Tax Exemptions. Nonprofits typically do not pay real estate taxes. But many state, county and city officials facing huge deficits or tightening operating budgets have challenged those tax exemptions.

Some states have begun demanding tangible evidence of facilities offering below-market rates and other quantitative charitable content.

There may be room for compromise, however. Some LTC communities are being assessed only on independent living assets, not assisted living or skilled nursing.

Others are trying to work out agreements to continue a tax moratorium for a period of time, while others have proposed "service use fees" rather than conventional real estate taxes, known as "payment in lieu of taxes" (PILOTs). This continues to be a controversial issue.

For some organizations time is short for an objective strategic situation analysis that will likely lead to tough decisions. Each organization will have different circumstances. But one thing is clear: the time to implement change is now.