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:
|
Nonprofit Finance Fund
Annual Survey of Nonprofits 2011 (excerpted)
|
All Nonprofits
|
Arts Nonprofits
|
|
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.
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