At Nonprofit
Finance Fund (NFF), we use financial data every day in our work with nonprofits
and their funders. One source of data informing this work is our annual State
of the Sector Survey. Throughout the year, I’ve been blogging about key trends
from our 2011
survey, which was completed by nearly 2,000 nonprofit leaders nationwide.
They told us about their organizations’ financial outcomes from 2010 and
speculated on what 2011 would bring. As we look back on what was certainly a
challenging year, I thought it would be interesting to revisit some of their
expectations.
Nonprofit
leaders told us about planned changes to their service offerings in 2011:
Although
contributed revenue was generally down from public and private sources alike, a
majority of nonprofits indicated that they actually planned to add or expand
their offerings in 2011. Many anticipated expanding the geography they serve or
partnering with another organization in order to meet the increased
demand for their services. In fact, 88% of respondents indicated some sort
of shift in their service delivery. But it wasn’t just program change; management
steps and tough decisions were also required.
Nonprofits
told us about their planned financial management actions in 2011:
Nonprofit leaders
have learned to expect the unexpected. As a result, many predicted that they
would engage more closely with their board and develop a “worst case scenario”
contingency budget. If they were fortunate enough to have reserves, some groups
planned to tap them. Many organizations decreased expenses. But some
collaborated to manage their expenses and a third of organizations actually
increased their expenses. Twelve percent even expanded their space. A big picture
takeaway from both these charts:
As
we work with clients, provide workshops, and present on nonprofit finance issues
across the country, one question pops up again and again: how much cash cushion
should a nonprofit have? One of my NFF colleagues recently explained why the answer is
different for every organization and depends on
a number of factors. One rough benchmark often cited recommends nonprofits have
enough cash to sustain operations for at least three months. Having less than
one month of cash at your disposal is generally considered a cash crisis.
NFF
finds that organizations holding three to six months of cash have an easier
time thinking long term and building up reserves: a rainy day fund, facility
reserves, etc. Organizations with reserves are better prepared for an emergency
(major building repairs, loss of a primary funding source, severe economic
upheaval) and in a crisis it’s more likely that they can continue providing
their services uninterrupted.
Earlier
this year, nearly 2,000 nonprofit leaders completed our annual State of the
Sector Survey. One
question asked was, “How much cash (including reserves) does your organization
have readily available?” Nationwide, 9% of the social service providers who responded
reported having “0 months” of cash. Another 20% had enough to cover 1 month of
expenses, while 34% reported that they had “2 - 3 months” of cash on hand. So
the results seem to say that just about a third of social service agencies are experiencing
a cash crisis, another third are managing, and the remainder has a comfortable
cash cushion.
In
practice, however, our consultants see a very different picture.
Twenty-five percent of annual operating expenses. That’s
what the National Center for Charitable Statistics recommended in it's Operating Reserve Policy Toolkit for
Nonprofit Organizations, published in September 2010 in partnership with
the Center on Nonprofits and Philanthropy at the Urban Institute and United Way
Worldwide.Grantmakers in the Arts, in
January 2010, launched their National
Capitalization Project and at their October meeting in Chicago released a
summary document which stressed the importance of well capitalized
organizations and added, “…we repeatedly
came back to the fact that the most common source of capital is accumulated
surpluses. We agreed that getting organizations to achieve a surplus would
require encouraging a significant shift in nonprofit practice and culture, a
challenge we thought well worth undertaking.”
Nonprofit Finance Fund has long been a proponent of healthy
balance sheets, but as the reports and recommendations mount, it’s clear that NFF
is not alone in suggesting a course of action that considers the creation of
reserves.While reserves alone do not
comprise total capital structure, they are an indicator of the degree to which
an organization is prepared for the day to day and long term challenges they
may face.Capital structure is the nature, composition and magnitude of the
assets, liabilities and net assets comprising the balance sheet – or in
other words the financial and physical platform from which the organization’s mission
is accomplished.
The provocative question is, how will nonprofits develop
healthier balance sheets?And perhaps
more pointedly, how patient are we willing to be?While generating operating surpluses may be
ideal, it will take time and patience to realize a well capitalized sector
utilizing this approach.Our third
annual national
survey of over 1900 nonprofit leaders (funded by Bank of America) is
telling on this point:
Organizations
reporting break-even or deficit levels in 2010
56%
59%
Organizations expecting 2011 results at or below
break-even
70%
73%
Organizations closing the year within a 5% margin above or
below break-even
56%
59%
Organizations
expecting 2011 results within the 5% margin
60%
66%
Organizations with 3 months or less of cash in reserve at
the time of survey (early 2011)
60%
65%
So, is capitalization via accumulation of operating
surpluses the answer? In simple terms,
if we are waiting for the sector to build (or re-build) balance sheets
independent of new philanthropic dollars, it will take a minimum of five years
for those functioning at the 5% surplus level to generate even the equivalent
of three months of additional cash reserves.
At NFF our recently released paper, The
Case for Change Capital in the Arts, sets out a series of definitions,
strategies, and sample cases from our work with Leading
for the Future (funded by the Doris Duke Charitable Foundation) that can
inform the conversation about capitalization.
In today’s economic environment, in the midst of the conversations and
changing dynamics in the field about capitalization for nonprofits, the time
for an equity ethic, an embrace of philanthropic
equity if you will has arrived. While we have many tools to teach nonprofits
how to create new strategies for operating that generate surpluses, the sector
has been struggling for a long time with inadequate capitalization. Asking nonprofit leaders to generate
operating surpluses to build healthy balance sheets will also require asking ourselves
if we are providing the proper support for that expectation to be realized.
In times of recession, financial uncertainty and job stability are at the top of everyone's minds. They come to the forefront of the national agenda, spurring our government to step up and take action (whether sufficient or not). But for some workers, job instability may be more than a passing trend.
Of the 1,935 organizations that responded to our State of the Sector Survey this year, we took a closer look at organizations reporting higher percentages of contract workers on staff. While most sectors had relatively lower percentages of contract workers, the arts (represented by 373 survey respondents) dramatically stood out.
While 48% of non-arts organizations had no contract workers, only 25% of arts organizations operated without contract workers. 23% of arts nonprofits operated with 76-99% of staff as contract workers, compared to only 3% for the rest of respondents. 6% of ARTS organizations operated with 100% of staff on contract.
There are a number of reasons why organizations might need to rely heavily on contract workers. Younger or start-up organizations still gaining their footing often employ on contract to minimize the costs and complexities associated with providing extensive employee benefits. They also have less visibility into their futures and are less able to guarantee long-term employment.
For arts organizations that operate on small budgets, a few dollars can make a major difference in both mission impact and stability. Small nonprofits may rely on higher percentages of contract workers and volunteers to maintain more agility and do more with less. Of the smallest arts organizations that responded--91 organizations with budgets under $250,000--substantial 21% operated with their entire staff on contract. When we compared these numbers to small nonprofits across the board, however, the numbers weren't quite so stark. Of the total 333 organizations with budgets under $250,000, 15% operated with an entire staff of contract workers.
Recently, a nonprofit leader who was considering whether to take the
NFF
State of the Sector survey asked us: “So how do you use these results, anyway?”Good question.And the
(unspoken) question behind the question is an equally valid one: “I’m busy
running an organization that provides valuable services in the community.Why is it important for me to take time away from that to fill out this
survey?”
Our survey
is discussed widely by a variety of stakeholders in the months following the
release of the results, and our hope is (and experience shows) that funders use
the information to improve their awareness of, and ability to respond to, the
sector’s needs. We also hope (and have witnessed) that nonprofits use the results as a broad benchmark for their own experiences, to understand that they are not alone in what they
are experiencing, and to relate their
own financial situation and actions to the
wider sector.
So how do we tell the
world about the survey results?They’re only useful if people know about them!First,
we issue a national press release about the
survey results.In each of the past two years, the
results drew the attention of national mainstream and philanthropic press, and,
in nonprofit sector blogs, served as a basic touchstone for discussions about
trends in the sector. In short, the
survey serves as a bellwether for the
sector’s health, raising widespread awareness of major challenges like cash
shortages, deficits, and the need to
make difficult financial decisions.
In September 2010, the National Bureau of Economic Research
took a retrospective look and told us that the recession was officially over,
that it in fact had ended
in summer 2009.Great news!Or was it?While it is of course a relief to hear that any recession is over, this
one seems to have serious lingering effects, both for the social sector and for
the people we all serve.
To find out what’s really happening, we’re reaching out to
nonprofits to fill out our 2011 Annual State of the Sector Survey. We heard
from 1300 nonprofits in the 2010 Survey.The message was strong—the tough times were continuing well beyond the
official end of the recession.For our
2010 Survey, 89% of respondents expected 2010 to be as difficult or more
difficult than 2009 for their organizations.Only 18% expected to operate above break-even last year.Sixty-one percent had three months or less of
cash available to cover regular expenses; of that number, half had 30 days’
worth or less.At the same time that
they faced these financial challenges, 80% of respondents were bracing for
increased service demand, and 54% thought 2010 would be tougher on their
clients than was 2009—the year we were actually in recession.
Not only was the message strong, it was also passionately
delivered.We asked nonprofits what they
were most proud of about how they had responded to the previous year’s economic
challenges.The picture was of a sector
that was incredibly brave—and creative—in facing very tough situations.A small sampling of some very big messages we
heard:
"As our finances have become tighter we have
had to become more resourceful to make sure the needs of our clients are met.
Just because the funding is not there does not mean the need goes away. If
anything the need for our services is even greater than before." –Public/Societal Benefit Organization
"We were able to convince some
foundation donors to cover grant reductions of other foundation donors. We are
less optimistic that we will be as successful with the foundation community in
2010. We have added more corporate people to our board and expect new networks
to be helpful in accessing corporate and individual donors." –Education Organization
"In spite of a significant
reduction in funding and a consequent reduction in staff, we were able to
preserve most programs and services. However, we recognize that staff are going
'above and beyond' to make this so and we realize that, without a significant
change such as a merger, we will ultimately need to cut back services
significantly." –Human Services
Organization
So what’s going on now?The start of a new year is a good time to pause and take stock, as a
step in planning for the future. In our 2011 State
of the Nonprofit Sector Survey, we are eager to hear whether this year will
bring better circumstances for nonprofits and the communities we all
serve.If you haven’t already taken the survey,
please consider doing so—the survey brings national attention to the issues we
are all facing, and its power to make stakeholders sit up and take notice comes
from its collective voice.(And if you
want another reason to take the survey, scroll down and check out the 'trailer' my colleague, Andrew Schwalm, made—it’s fun, short, and
action-packedJ)We hope to hear from you!Grab our RSS feed or check back here periodically as we report on the results!
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