revenue

Today, with the help of a particular kind of money--Change Capital--Alvin Ailey American Dance Foundation is attracting new revenue by building a technology platform and internal capabilities that maximize opportunities for patron and audience engagement.  Merce Cunningham Dance Foundation is raising money upfront to wind down its operations in a graceful way and leave a meaningful legacy. 

These are success stories.  But, when grantmakers and grantseekers fail to make the distinction between different kinds of revenue and capital, the consequences can be dire: desired outcomes aren’t met, organizational infrastructure is hollowed out, and communities go underserved.  Given these risks, the nonprofit field and funder community need greater clarity about the role of each type of money and what they can separately and collectively achieve. 

First, some definitions:

General Operating Support

GOS is unrestricted revenue, meaning it can be spent at the organization’s discretion – on anything. It might be used to fund programming, to offset administrative salaries or to pay the rent.  In a universe where many grants are tied exclusively to specific programs or projects—often without paying for an appropriate share of the infrastructure required to deliver them—GOS is a rare form of flexible revenue that can pay for mission-critical expenses that few (sadly) are yet willing to support. As such, annual GOS is an essential element of a healthy revenue mix for any organization. It is typically raised from select foundations as well as individuals and corporations, often through special events.

Capacity Building Revenue

Grants for capacity building, whether formally restricted or not, are revenue typically earmarked for building new organizational knowledge, staff and infrastructure. Board development, expansion of the marketing department and the purchase of new technology would all qualify as capacity building expenses.  GOS is often but not always used to pay for capacity-building activities. In that sense, the two can overlap. The difference is that capacity building dollars usually have a specific non-programmatic intention.  They are typically raised from foundations.

Change Capital

Change capital is a concept we developed at NFF to describe a flexible form of capital, distinct from revenue.

Editor's Note: This post originally appeared November 4th, 2011 on NFF's Money and Mission blog at the Chronicle of Philanthropy. 

The economy’s slow recovery has prompted many nonprofit leaders to wonder how to prepare for what could be an even tougher and longer road out of the recession than anybody expected. While concerns about the possibility of a double-dip recession come and go, it is probably wise to follow the old adage to prepare for the worst and hope for the best.

Here’s what it means to prepare:

Shore up the revenue and find your weak spots

Don’t assume that because you have always received a grant from a particular donor that you will continue to receive one next year.  Reach out to your longtime grant makers, arm them today with real information about the value of your work. Do it now even if your annual report is not due until December. Look for reasons to remind them why your work—and hence their money—is essential.

Listen and try to understand how your grant makers are thinking about this crisis; it affects them, too. Virtually every foundation has gone through a reduction of sorts. Sharing is helpful and builds different kinds of bonds.

Seek out information that can be helpful, which means asking your grant makers and your clients for constructive feedback.

If you are not measuring your results, start now. Don’t worry about being perfect or starting a rigorous 10-year longitudinal study. Push yourself to move beyond the anecdote. Jim Collins, the author of Good to Great and other books, had it right:  “It doesn’t really matter whether you can quantify your results. What matters is that you rigorously assemble evidence—quantitative or qualitative—to track your progress. If the evidence is primarily qualitative, think like a trial lawyer assembling the combined body of evidence. If the evidence is primarily quantitative, then think of yourself as a laboratory scientist assembling and assessing the data. … What matters is not finding the perfect indicator but settling upon a consistent and intelligent method of assessing your output results and then tracking your trajectory with rigor.”

Take advantage of networks you have but don’t use.

Think broadly about your networks. Look at your competitors as comrades-in-arms and find ways to complement and enhance your work through partnership. Don’t just say you’ll collaborate because you’re supposed to.

How many out there think that your organization owns a lot and yet still seems to struggle to pay the bills?

If you’ve answered yes to this question, you’re not alone. I recently attended a fascinating Financial Leadership Clinic presented by NFF’s Jina Paik, Kayla Rosenberg, and Phil Rosenbloom and wanted to share one of the many graphics that we at NFF often use to show why the total net assets doesn’t always do a good job of reflecting the ready cash an organization has on hand to cover expenses.

In the chart below, we show how a nonprofit’s various revenue sources—temporarily restricted contributions, unrestricted contributions, earned revenue, and permanently restricted funds—contribute to your total net assets. Yet not all of those assets are actually ‘liquid’ or readily available. (We have yet to find a vendor that accepts our desk chairs in exchange for goods or services!)

What makes the nonprofit sector different from the for-profit sector is the restrictions on our contributions. While revenue coming into a for-profit business tends to be more liquid, nonprofits contend with temporary and permanent restrictions that complicate their finances and cloud the bottom line. That’s why we at NFF always encourage nonprofits to pay attention to the liquid portion of their Unrestricted Net Assets (water in the bucket diagram) in addition to calculating months of cash to determine what they have on hand and assessing their organization’s needs. 

NFF's Nonprofit Finance Buckets: What’s Left Over to Pay the Bills?

During a recent consulting engagement, I worked with the program and administrative staff of a mid-sized cultural institution to incorporate outcome measurement into its planning and management.  I posed the following question to the team: What is the business model and capital structure your organization needs to achieve its program and organizational goals?

A pause ensued before my clients asked me what I meant by “business model” and “capital structure.” The ensuing discussion reminded me how often consultants and sometimes funders take for granted that nonprofit staff and managers understand and agree what financial terms like these mean.

I returned to the office just in time, by coincidence, for a scheduled discussion on a related topic. NFF’s consulting staff had come together to discuss the following questions:

1. How do we define business model?  
2. What makes a healthy business model?

The dialogue was a lively one, and many of us ultimately opted for the simple and straightforward definition: a business model represents how an organization makes and spends money, in the service of its mission.

Because nonprofits do not exist to make a profit (although their existence very much depends on it), the linkage to mission was key. Ultimately, the revenue and expenses associated with a given nonprofit business model should depend on the creation and delivery of value for clients and communities.

The answer to the second question –how to define business model “health” – is far more complex. Often times, board members, funders or nonprofit consultants try to boil down health to a simple formula. For example, they equate healthy business models with fixed percentages of revenue or expenses (advocating for such pretty bad best practices as: 60% of revenue should represent earned income or fundraising expenses should be limited to 10%).  Or, they tend to forget that any combination of earned and contributed revenue should cover, with some reliability, not only total annual expenses but also regular balance sheet investments, including the building of liquid assets, maintenance of fixed assets and reduction of liabilities.

While Nonprofit Finance Fund dedicates a great deal of time to advocating for well capitalized organizations, many nonprofits in the arts and culture sector are still wrestling with how to create and sustain revenue streams to support operations.  When we talk about “well capitalized,” we mean a fully funded operating platform (staff, infrastructure, and assets necessary to run successful programs) and the appropriate amount of reserves to create a healthy balance sheet (sometimes referred to as capital structure).  These reserves can serve as working capital to cover cash flow, support repair and maintenance costs for facilities, or provide resources to test new programs without undercutting current services.

Where do these reserves come from?  While capital campaigns and investments of philanthropic equity are common sources, many organizations must fund reserves incrementally, over time, by generating operating surpluses.  With the economic downturn still challenging the nonprofit sector and limited staff resources a continual challenge, what can nonprofit leaders do to access and generate new sources of revenue?

This year, two arts service organizations, the Arts & Science Council (ASC) of Charlotte, North Carolina, and the Greater Pittsburgh Arts Council (GPAC) are launching initiatives to support arts and culture leaders’ efforts to bring in new dollars to support their organizations.  In Charlotte, the program is titled power2give and is described as an online cultural marketplace designed to connect donors with projects they are passionate about.  The site allows cultural organizations to promote projects in need of funding, and invites donors to contribute directly to the projects that most intrigue them.  This platform, devoted to supporting arts, science, and history initiatives, allows cultural patrons to help the organizations they love meet their needs.  With tools and resources for both donors and nonprofits, power2give.org, which goes live in July, aspires to make posting, donating, and promoting projects convenient and engaging. 

In my work as a consultant at the Nonprofit Finance Fund I’ve seen just as many high-performing, financially healthy nonprofits during the recession as I saw before the recession, which forces me to ask: What makes some nonprofits able to thrive even in the worst of times?  What these nonprofits have in common is an ingrained habit of timely decision making that constantly strives to balance mission with long-term financial health. These nonprofits have a history of managing to a surplus and building their reserves. When the recession hit, did they access reserves to replace lost revenue? Actually, no! They faced the changes and uncertainty head-on and made decisions that would keep expenses in line with falling revenue. They’ve built their decision-making discipline over time and it proved to be a key factor of their survival. These organizations will survive any number of economic jolts.

One example is the Children’s Museum of Houston which frequently faces a common nonprofit challenge: they are given start-up funds for a program but no commitment of ongoing funding. After the start-up funding dries up, the nonprofit is left with higher annual expenses and no offsetting revenue. The Museum says when it accepts start-up program funds, leadership acknowledges up front that if the funding can’t be maintained the program will be cut.  Then, they hold themselves to this decision. And have they actually had to discontinue programs? Yes. But this also forces them to prioritize fundraising for replacement funds as soon as the program launches because they know there will truly be no tolerance for continuing an unfunded program. It also forces them to be more discerning about what they say “yes” to upfront. Since they know that they will need to allocate finite, valuable fundraising resources to the continuation of the program, they will not accept money to start a new program unless they believe the program is absolutely mission critical. Executive Director Tammie Kahn who says, “We don’t want to burn our resources even if the start-up funding is provided if we can’t find a way to maintain the program over time. By doing so, we launch programs with day in and day out decision making that should make the program ultimately sustainable.”

 How has the Children’s Museum of Houston fared during the recession?