The U.S. Surgeon General estimates that at some point between pre-kindergarten and 12th grade, about 1 in 5 American children will need treatment for mental health issues.  Sadly, only a small number will get the care they need to succeed in school and life. Based in Oakland, CA, East Bay Agency for Children (EBAC) helps address this urgent need by providing students experiencing emotional and behavioral difficulties—most of them from low-income families—with vital mental health, family support and educational services.

Nonprofit Finance Fund (NFF) worked with EBAC in 2006 after they received a United Way Program Award that included funding for capacity building and financial consulting. “It couldn’t have come at a better time,” said Executive Director Steve Eckert. “There’s so much passion in the world of direct service. But we’re not always as strong as we think we are in our understanding of finance. The reality is that internal capacity building is often an overlooked piece of what makes a nonprofit successful in their mission. When NFF came in and did financial training and analysis, it totally re-framed our strategic process and made us realize how important it was to get periodic outside expertise.”

NFF worked closely with Eckert and EBAC’s management team to better understand and articulate the organization’s programmatic story in financial terms. After many conversations and a review of several years of audited data, NFF collaborated with the EBAC team to share the organization’s financial patterns, strengths and weaknesses with the finance committee and board.

The analysis revealed that, as the organization’s funding from government contracts had increased, so had its instability: With bigger government contracts came increasingly complex receivables schedules and an exponential increase in budget size without a commensurate increase in reserve. EBAC, which receives nearly 80% of its revenue from the government, reflects the challenges facing many human services providers. While programs expand, behind the scenes, cracks begin appearing in their foundations, as monthly budgeting becomes more difficult to manage and the infrastructure starves. 

NFF recommended that EBAC begin working towards building 3 months of operating reserves to protect against the impact of uneven monthly revenue. In addition, given that the vast majority of EBAC’s income was tied to government contracts for specific programs, it recommended that EBAC invest in fundraising to diversify revenue streams and consider how revenue from different programs was affecting the organization’s health and sustainability.

“At the time, EBAC had only 1.5 months of reserves. NFF’s recommendations changed the whole mission of the board,” said Eckert. “I’ll never forget it. The data was so compelling that it entirely refocused our strategic planning on building reserves, to protect us from organizational shocks and work towards longer-term stability.”

Over the next five years, EBAC struggled to maintain surpluses to cover 3 months of expenses. And they are not alone: according to NFF’s 2012 Survey of 4,607 nonprofits nationwide, 54% of organizations felt that they could discuss program expansion with their funders. In contrast, only 21% felt comfortable discussing operating reserves, while just 12% felt comfortable discussing facility reserves.

“There’s still a stigma around surpluses in the nonprofit sector,” says NFF Director Nicole Simoneaux. “Some funders and supporters are critical of nonprofits that aren’t putting money into programs, while others see it as a reason to re-direct grants to organizations that are experiencing crises.”  

While the Board focused on carrying forward a reserve-building agenda, the Executive Director simultaneously led an expansion strategy that grew the organization’s budget from $5 million to $8 million over the next five years. With its heavy reliance on government, EBAC’s leadership had, over time developed financial tools and expertise to manage receivables and had become agile in responding to fluctuations in government funding. Eckert realized it was time to re-visit their long-term planning strategy in light of their new operating context and the economic situation. In 2012, EBAC reached out to NFF again in an effort to update the financial analysis, re-invigorate reserve-building goals, and re-assess needs.

“As EBAC’s budget grew by several million dollars, a 3 month operating reserves became a very large amount of money. There’s no one-size-fits-all solution, and the strategy for fundraising and building reserves should be designed to meet the organization’s specific challenges as the business model changes,” Simoneaux remarked, reflecting on the evolution of the conversation around reserves. “As a field, we’ve come a long way towards developing a more nuanced understanding about what reserves and capital are for and how to use them most effectively.”

With advice from Simoneaux, EBAC embarked on a Capitalization Planning process. EBAC’s new approach is less focused on aggressively fundraising to achieve 3 months of reserves, and more about developing  non-governmental sources of sustainable funding to supplement their core revenue.  “EBAC’s government contracts actually cover their full costs and, overall, have proven to be a stable source of revenue for the organization. Consequently, they didn’t necessarily need 3 months of operating reserves,” Simoneaux notes.  

As the economy and government funding have grown more volatile in the last five years, nonprofits are increasingly challenged to evolve much more flexible business models and planning processes that are reviewed on a frequent basis. “Gone are the 5-year strategic plans. With the flux in local and state government funding, nonprofits are entering an era of ‘real-time’ strategic planning. We need to be prepared to react to opportunities and challenges on 3-year plans, or less,” comments Eckert. “It demands that nonprofit managers step back and evaluate the environmental context more often than they used to. Getting an unbiased perspective from organizations like NFF is critical to supporting that rapid learning process.”