Case for Capital

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: 

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:

Last week, my colleague Emily Upstill wrote about the need for nonprofits to “right size” their mission in order to better communicate what they can (and can’t) realistically accomplish. This post focuses particularly on the issue of funding your nonprofit’s investment in data collection and outcomes measurement. What are the financial implications for nonprofits dealing with the pressure to measure and report outcomes? 

First, how did we get here? 

The language of “investment” is inaugurating a paradigm shift for nonprofits. As the philanthropic sector continues to evolve, charitable giving is adopting a Wall Street lexicon—and this trend will only intensify as nonprofits compete for diminished resources to serve increased needs. Foundations produce logic models asking grantees to demonstrate their long-term outcomes and impact while venture philanthropists and social entrepreneurs encourage “informed donors” to ask about their contribution’s return on investment. 

In the most clear-cut example, Social Impact Bonds (also known as Pay for Success Projects) set forth a defined investor role, one whose returns materialize only when the participating nonprofits can quantifiably demonstrate successful outcomes. NFF recently hosted a webinar on Social Impact Bonds, in which Jeff Edmondson, President of Strive, succinctly summarized the shift, “As we move from a charity mentality to an investment mentality, social impact bonds reinforce the need to use data to drive impact.”

For these philanthropic investors, funding decisions favor nonprofits able to prove their impact with data. At the same time, we’re seeing many nonprofits, formerly dependent on government funding, working in unfamiliar territory to court more individual and foundation supporters. As a result many nonprofits harbor uncertainties about what data and provable outcomes are expected of them.

What’s a nonprofit to do?

National Black Arts Festival, one of the ten arts organizations participating in our Leading For the Future (LFF) initiative (with Doris Duke Charitable Foundation),  produced a fabulous video about their efforts to expand outreach to new audiences using Change Capital.  You can see the list of other participating organizations here and read some of the early lessons of the LFF initiative in the Case for Change Capital report and Financial Reporting Done Right, a companion guide to accounting for capital in nonprofit organizations.

Nonprofits need capital to plan for and invest in strategies that will help them prepare for future growth and make changes to the way they operate. They also need reliable and recurring revenue to sustain themselves year in and year out after the change has happened.

Through our Leading for the Future Initiative, Nonprofit Finance Fund is directing more than $10 million of a specific kind of capital -- change capital -- to ten performing arts organizations* that are adapting their programming, operations and finances to ensure long-term health and vibrancy.

With funding from the Doris Duke Charitable Foundation, these ten nonprofits are working with NFF over five years to develop and implement plans for achieving this transformation. The goal is to provide these organizations with the flexibility to test new ideas, explore new business approaches, resist distraction, and even risk failure. While each participant is investing its capital differently, all seek to reaffirm the value of their art, while increasing reliable net revenue and building more liquid and adaptable capital structures.

NFF is excited to share with our readers and clients a series of new publications on the need for and uses of capital in the arts. The written and video materials convey stories and lessons learned from the Initiative thus far. Nearly three years into the program, we now have much to share with the field, both funders and nonprofits alike.

Please check out our new publications:

1. The Case for Change Capital in the Arts shares the philosophy governing the Leading for the Future Initiative and discusses the need for and application of change capital in the arts. It also outlines core principles and practices that can improve capitalization in the sector but that will require changes in behavior by both nonprofits and funders alike. The piece tells how each of the participating organizations is applying change capital to undertake meaningful artistic, organizational and financial change.

2. Financial Reporting Done Right introduces a new way of financial reporting that improves transparency around how organizations manage their capital resources. While conventional accounting and reporting treat capital and revenue in the same way, NFF recommends that nonprofits make straightforward adjustments for capital that better reveal their true operating performance and progress.

3. Change Capital in Action: Hear how three organizations are applying change capital to realize their artistic and organizational ambitions! Center Theatre Group, National Black Arts Festival and Steppenwolf Theatre Company share their stories in these short videos.

NFF has long advocated for greater access to capital for nonprofits, particularly as they invest in growth or change. We’re excited to share these real-life examples of change capital in action in the arts. To learn more about the Initiative, please check out our other recent writings:

Envisioning Success: How Funders and Nonprofits Can Lead for the Future

Chronicle of Philanthropy: Four-part Interview Series with Ben Cameron, Program Director for the Arts at Doris Duke Charitable Foundation

* Participants in the LFF Initiative include :

Alvin Ailey Dance Foundation, New York, NY
Center Theatre Group, Los Angeles, CA
Cunningham Dance Foundation, New York, NY 
Jacob's Pillow Dance, Becket, MA 
Misnomer Dance Theater, New York, NY 
National Black Arts Festival, Atlanta, GA
Ping Chong & Company, New York, NY
SITI Company, New York, NY 
Steppenwolf Theatre Company, Chicago, IL 
The Wooster Group, New York, NY

Ten artistically excellent performing arts organizations* gathered in New York at the end of April to discuss how each is applying $1 million of change capital to adapt their art, operations and finances in ways that contribute to long-term viability and vibrancy.  The event was the second annual convening of the Leading for the Future Initiative, a five-year investment program managed by NFF and supported by the Doris Duke Charitable Foundation.  Over two days, the organizations participating in the Initiative shared the lessons they’ve learned and the obstacles they’ve overcome as each seeks to refresh or reconfigure its business models to advance artistic goals.

During the convening, we engaged in candid discussions about what “success” in the arts sector might look like, exploring the roles both funders and organizations can play.  The takeaways from these conversations have application for funders and nonprofits alike, regardless of nonprofit sector.  Here are some of the ways the groups envision success: 

1. More organizations would budget and manage to surplus, strengthening their business models and balance sheets. Strong finances would be recognized by funders and nonprofits alike as critical to long-term artistic success. As one participant in the convening noted, almost all nonprofit organizations subsist on “a starvation diet” and need encouragement to establish reality-based annual operating budgets.  
2. Nonprofits would have greater access to a) multi-year, more flexible revenue at the enterprise level, and b) periodic capital to make artistic and organizational change. Organizations most value and need general operating support, which provides management with the ultimate discretion while contributing to the coverage of full annual operating costs.  Nonprofits also require sizeable and episodic infusions of change capital –which is distinct from revenue– to cover the temporary deficits and/or exceptional expenditures they may incur as they invest in new infrastructure, adjust or improve programming, realize efficiencies, and recover from inevitable setbacks along the way.