Social Currency


Ed. Note: A version of this post appeared on the Philanthropy Northwest blog.

Our 2013 State of the Sector survey explored a variety of financial and management challenges facing organizations across the country. The core story, as told by nearly 6,000 respondents, is of a fragile balancing act between rising community need and shrinking or stagnant resources for social programs.  Particularly in the last several years, in the wake of the financial crisis, organizations have struggled with a variety of challenges related to government support.

In the United States, we rely on government to provide key economic supports. We expect the federal, state, and local governments to play a role in educating our children, helping communities rebuild after natural disasters, and improve our collective quality of life. To deliver on this mandate, services like public education are administered by the government, while many other complementary programs– such as job training and placement– are outsourced to nonprofits. According to a 2010 Urban Institute study, nonprofit organizations (with records of income data) reported that nearly one-third of their revenue sources came from the government.

But there’s a catch: when demand for critical services goes up and people are least able to pay, government spending for social services typically goes down. Available government resources are tied to the same macro economic trends that cause an increase in service demand. Says one NFF survey respondent: “Our state contract rates have been cut to a point that it is almost impossible to break even and deliver services with a reasonable level of quality while also complying with contract requirements.”

In the midst of these ever-shifting resource dynamics are the consistent, structural challenges embedded in government contracting. According to our survey, 83% of nonprofits with federal contracts noted that the contracts did not cover the full costs of delivering services; 86% reported failure to cover costs at the state/local level. Anecdotally, our clients often report payment of about 70 cents on the dollar for the actual value of the services they provide. So to cover the true cost of working with the government, nonprofits must supplement their contracts through private donations and other fundraising efforts.

On top of the “full cost funding” disparity, the government also struggles to pay their contractors in a timely manner.

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As we’ve been discussing here at Social Currency, Nonprofit Finance Fund’s 5th annual State of the Sector survey provides a national snapshot of conditions on the ground, but it also gives us a wealth of data on individual subsectors. To follow up on our recent post about small nonprofits, we’re taking a closer look at what the survey reveals about how small nonprofits are managing in the wake of the recession. 

According to the National Center for Charitable Statistics, three-quarters of all registered nonprofits nationwide have budgets of less than $1 million. This same group comprised 48% of our survey’s total respondents, amounting to 2,822 organizations. Among these small nonprofits, over half (57%) primarily served or were located in low income communities.

Managing Demand for Services

Our key findings about the state of service demand for small nonprofits in 2012 were that:

  • More than three-quarters (76%) saw demand for their services increase
  • Less than half of providers (48%) were able to meet community need

To cope with these challenges, small nonprofits took a variety of service-related actions last year. Yet, when compared to larger nonprofits, small organizations were not as likely to make changes to programs or technology:

Service-related actions (2012)

Respondents with Annual Expenses < $1M (view in Analyzer)

Respondents with Annual Expenses > $1M (view in Analyzer)

Added/expanded programs or services

43%

53%

Increased the number of people served

37%

44%

Collaborated with another organization to improve/increase services

35%

42%

Upgraded technology to increase/improve service efficiency

22%

37%

Managing Finance & Operations

In the areas of finance and operations, small organizations appeared nimble in their ability to adjust their business models, with 24% changing the main ways they raised and spent money in 2012 (which was relatively the same for large organizations). Small organizations, however, appear less able to free up resources for participation in system-changing activities, such as conferences or government advocacy.

Operations-related actions (2012)

Respondents with Annual Expenses < $1M (view in Analyzer)

Respondents with Annual Expenses > $1M (view in Analyzer)

Change the main ways in which you raise & spend money

24%

25%

Attend conferences or network to build relationships

49%

60%

Advocate to government on behalf of your organization’s cause

33%

51%

Add to reserve funds

16%

24%

Seek funding other than grants / contracts (such as loans and investements)

15%

22%

Supporting Effective Change

We’re heartened to see small nonprofits taking much needed steps to sustain their business and their mission—and with the right support, all of these challenges are surmountable. But it requires a concerted effort between organizations and their funders to address ingrained, systemic challenges in an increasingly uncertain operating environment. Change is both expensive and risky. NFF encourages nonprofits to talk with their funders about their actual operating reality and funding needs. But our survey shows little progress in this area when compared to previous years.

When asked what topic they could have an “open dialog” about with their funders, respondents said:

 2013 Survey of Nonprofits Funder Dialogue

These issues are critical to the operational health of any nonprofit. And when left unattended, any of them can create management challenges and wreak havoc on an organization’s finances. NFF created a tip sheet for nonprofits and funders, offering our advice for navigating many of these topics. We would welcome comments below from those who have had success making these conversations a regular part of the grantee-funder relationship.

This month, NFF released its fifth annual State of the Nonprofit Sector Survey. Of the nearly 6000 respondents, more than 900 hailed from the arts and culture sector, representing 47 states.

The data provide a wealth of information about how arts and culture organizations are managing through an unprecedented time of economic and artistic flux. Current trends point to lasting changes in the way the sector operates and is funded. The arts specific survey results are available in their entirety here. I also encourage you to check out our online Survey Analyzer, where you can further filter the data by state, sector, operating expense and other dimensions.

These are the headlines.

Arts & culture organizations continue to operate with thin margins and low liquidity: 

“As the economy declined, we chose to sustain programs as much as possible to help maintain our local economic impact and community service. Consequently, we depleted our cash reserves that were normally used for capital maintenance and expansion projects. Today, these reserves are completely wiped out and our capital needs are mounting up.”

--Arts, Culture & Humanities NPO, FL

  • 42% of survey respondents reported an operating surplus in 2012, compared to 44% in the previous year.
  • The outlook for 2013 is more uncertain: just 28% predict ending the year with a surplus. 50% say 2013 will be the same as or harder than 2012.
  • The sector remains divided between the 'haves' and 'have nots': 60% of arts organizations reported three months or less of cash on hand. While 20% added to reserve funds in 2012, an equal number drew down already limited liquidity.
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"Over the past 3 years, the length of stays at our shelter has increased from 11 to 27 to 33 nights, because of a lack of affordable housing. We are scrambling to come up with creative solutions to shelter women for whom we have no room. Economic recovery is still not a reality here."

-Sarah Lange, Abby's House

This is a quote from one of the 4,607 respondents to NFF's just-released Annual State of the Sector Survey. If this sounds a lot like your organization's situation, you are not alone. This year's respondents tell a collective story of a sector still stretched thin, with organizations feeling distant from their funders and boards, and staff facing more work with less money and fewer benefits to take home. While the recession may be over, the nonprofit financial crisis isn't. Here are a few facts from the survey (to check out detailed results and analysis, visit the main survey page):

  • 85% of nonprofits experienced an increase in the demand for services in 2011.
  • This is on top of years of increased demand: previous NFF surveys found that 77% of nonprofits experienced an increase in demand in 2010; 71% experienced an increase in 2009; and 73% experienced an increase in 2008.
  • 88% expect an increase in demand for services in 2012. 57% have 3 months or less cash-on-hand. 87% said their financial outlook won't get any better in 2012.

NFF conducts the State of the Sector Survey to provide the sector with concrete data to act as a compass for decision-making. While there are some glimmers of financial improvement, the fact remains that people who need nonprofit services are slipping through the holes in the safety net. In the current system, nonprofits cannot keep up. And with government funding on the decline and private funding not making up the difference, there are no signs that things will get better any time soon.

We'll be taking a closer look at the results over the next few months and posting them here. In the meantime, take a look at our new Survey Analyzer. In our efforts to make the data more readily available to even more people in the sector, we created a tool that allows you to filter the results by geography, sector, and/or annual expense. Please share with us here what you find!

Editor's Note: A version of this post originally appeared at the ASU Lodestar Center Blog as part of their Research Friday series.

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: 

Planned Changes 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:

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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.

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.

So what might make arts organizations different?

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