NFF's Social Currency Blog

House Threatens the Violence Against Women Act!

adeshmukh — Fri, 18 May 2012 15:55:20 +0000

Once a bill that sailed through Congress, free from bipartisan debate, the Violence Against Women Act (VAWA) is now under attack. VAWA was first passed in 1994, on the heels of the O.J. Simpson trial, bringing new resources to local law enforcement and providers to develop collaborative approaches in dealing with domestic violence. Research by the RAND Corporation seems to suggest that in California, this funding has provided critical resources that have not only lessened the rate of incidents of domestic violence per capita but has also resulted in a decrease in the severity of the violent act.

Since then, VAWA has helped improve violence prevention programs, rape crisis centers, legal aid for survivors of domestic and sexual violence, and much more. When VAWA recently came up for re-authorization, Representatives Jan Schakowsky and Judy Chu sponsored a bill that would expand protections for Native American women, the LGBT community, immigrants, and others that are poorly covered under the Act’s current regulations. Passed by every woman in the Senate, the bill has been opposed in the House with an alternate bill, HR 4970, that decimates protections for some of the most vulnerable members of our society.

State budget cuts have already wreaked havoc for the shelters and other service providers that help victims of domestic and sexual violence. In our work with DV service providers in California, budget delays and cuts have caused closures and increasing fragility that are forcing the sector to entirely re-think their business model. Further cuts to federal legislation will force even more organizations over the brink.

Legislation like HR 4970 would not only cause further financial peril, but could have very a significant and downright dangerous impact for victims. Our work with organizations like the Center for the Pacific Asian Family and the South Asian Helpline and Referral Agency has underscored the critical need for culturally-relevant services for immigrant populations. Among other things, HR 4970 would require the abuser be notified that victims were seeking support from VAWA. This not only decimates confidentiality, but tramples their civil rights.

To speak out against HR 4970, sign UltraViolet’s petition at http://act.weareultraviolet.org/sign/vawa/?source=uv_website. Learn more about VAWA and other legislation supporting victims of domestic violence at http://www.nnedv.org/policy/issues/funding.html.

To learn a little more about the funding history of DV organizations in California, check out the timeline below.

Funding for Domestic Violence Organizations in California on Prezi

The Truth About Endowments

DAlexander — Wed, 02 May 2012 13:31:25 +0000

Editor's Note: This post originally appeared May 1st, 2012 on NFF's Money and Mission blog at the Chronicle of Philanthropy.

Nonprofits and their donors often see endowments as the route to financial stability, but they aren’t the right solution for every organization. Here we debunk some of the longstanding myths about endowments.

Myth #1: A strong, sustainable nonprofit needs an endowment.

The one thing that sustainable nonprofits need is enough income to run their programs and pay for salaries, facilities, etc. An endowment is one of many ways nonprofits can generate income. But for some groups, it is unnecessary or even a bad idea.

So before deciding to establish an endowment, nonprofits should decide if doing so addresses how income will be used to achieve the mission, when it will be needed, and how much will be needed. Organizations that are in financial crisis, that have limited capacity to attract more donors, or that have short-term missions should avoid establishing endowments.

Myth #2: An endowment must be continuously funded and can never be drawn down.

Nonprofits can choose when it’s most feasible to add to their endowments. For example, if it’s important to increase direct aid during a natural disaster, a relief organization might reduce or even forgo endowment funding for some period of time and redirect donors to an emergency appeal. Alternatively, the board might continue to fund the endowment regardless of its current needs if, for example, it has a far-reaching goal, such as to eradicate hunger.

While most endowments have permanent restrictions on the use of their principal, others have only temporarily restrictions or even completely unrestricted components that allow the money to be spent. Endowments can also have end dates rather than existing in perpetuity.

Myth #3: An endowment is the same as a board-designated reserve account.

A designated reserve account is a pool of funds established by the board to provide certain types of capital to the organization. There are several kinds of designated reserve accounts: A working-capital reserve can provide funds during normal parts of the business cycle when cash is low–for example, when awaiting payment on a contract. A “rainy day” reserve is available for unexpected challenges or opportunities. Funds can also be reserved to help an organization recover from financial distress or to expand or acquire facilities. These pools are managed internally, though the board may place restrictions on their use.

Endowments, on the other hand, are not intended to fund routine operating activities and are often managed externally or held outside of the reach of the nonprofits’ general business managers.

Myth #4: There are limits on the amount of interest income that a nonprofit can take from its endowment

There are no such legal limits. The amount and timing of distributions is determined by the governing body of the endowment. Interest income is often used to fund board-designated reserves for future projects and to expand current programs and services. Nonprofits should, however, have realistic expectations about the yield on endowment investments. Only a large endowment that is professionally invested to maximize returns is likely to generate enough earnings to make a dent in the operating budget. Community foundations are well suited to manage smaller endowments.

When nonprofits recognize how fluid money can be, they can better assess the types of capital and cash flow they need to support both short- and long-term objectives and avoid making unnecessary trade-offs. They will also be able to tell a more compelling financial story to donors, clearly articulating their rationale and timing needs for a range of funding options including endowments, reserve accounts, grants, loans, and investments.

Introducing Financial SCAN: Nonprofit data analysis done right

adeshmukh — Thu, 12 Apr 2012 13:58:00 +0000

Nonprofit Finance Fund (NFF) has long held that nonprofit organizations are more than just the sum of their programs, and more than their overhead ratios. Existing nonprofit ratings platforms are simply inadequate to the complex task of analyzing and deriving insights from nonprofit financial data. They do not help nonprofit organizations communicate their financial story and goals to staff, board members and funders. They fail to provide a holistic picture of an organization’s business model and balance sheet.

Currently available tools can lead to premature or misinformed fund-no fund decisions, rather than a more enlightened grantmaker-grantee dialogue about what organizations need to survive and thrive. They risk turning nonprofit financial analysis into an exercise in compliance rather than a tool to advance organizational effectiveness.

If we’re honest with ourselves and really care about long-term effectiveness, we need to conduct the kind of comprehensive financial analysis that looks at the entire nonprofit enterprise. We need a more nuanced understanding not only of costs but also of revenue reliability, profitability, balance sheet health and liquidity. We need to look beyond numbers and ask probing questions about what kinds and amounts of resources are required in the context of an organization’s strategy, marketplace and lifecycle. These questions might include:

Which key revenue streams are relatively reliable and which are at risk?
Is the organization covering its full costs and generating regular surpluses?
If not, are expenses adjusted in line with changes in revenue?
Does the organization have adequate access to cash to manage its cash flow cycles?
Are facilities and other fixed assets maintained as they depreciate?
Is the organization’s board prioritizing saving for the long term and setting aside surplus cash into reserve?

Answering these questions takes time and requires sophisticated analysis skills. Fortunately, help is at hand. NFF has been working with GuideStar for more than a year to create a new data platform for nonprofit financial analysis and education. Financial SCAN (Situation & Comparables ANalysis) provides instant financial information on 280,000 nonprofits across the country.

Derived from Form 990 data filed with the IRS, Financial SCAN shows up to five years of financials for a nonprofit. Dashboards and graphs reveal ratios that are much more relevant to organizational health and stability, such as: profitability margins, estimated full costs, depreciation of fixed assets and months of liquidity. The platform allows you to compare the financials of multiple peer organizations to better understand trends across a sector. We’ve also incorporated an educational guide to help users make sense of the data and understand its implications.

By bringing transparency and comparability to financial information in the sector, Financial SCAN can provoke more informed, less judgmental and increasingly honest dialogue among nonprofits, their funders and advisors about what organizations really need to be stable and effective. We encourage you to learn more about Financial SCAN and how it can be helpful to you.

Introducing Financial SCAN

aschwalm — Tue, 10 Apr 2012 14:02:49 +0000

Today we are truly proud to launch a new online nonprofit financial analysis tool, which we created in partnership with GuideStar, called Financial SCAN: http://www.guidestar.org/financialscan. GuideStar's senior product manager Pam Jowdy sat down with NFF’s vice president, Rebecca Thomas, and GuideStar’s senior vice president, Lee Glenn, to discuss this innovative new platform – the highlights are below. You can find the full video on our YouTube Channel here.

Pam: So Rebecca, tell me more about the problem that you are trying to solve – what is unique about this tool and how can it help nonprofits and foundations and professionals?

Lee Glenn, SVP of GuideStar, and Rebecca Thomas, VP of Nonprofit Finance Fund, discuss Financial SCAN

Rebecca Thomas, Nonprofit Finance Fund: NFF and GuideStar came together to really create a new financial health analysis standard for the nonprofit sector. Right now, there really is no industry-wide standard. Nonprofits are asked to create lots of reports, myriad data points for funders, reporters, advisors, and that really detracts from what they do best which is delivering a great program. Meanwhile, nonprofit funders and advisors score through all this data but really lack a shared understanding of what to look for and why it matters. The upshot is that no productive dialogue takes place between the parties about what it takes to run and maintain a healthy nonprofit organization. It’s not all that different from the challenges that we all face when we sit around the dining room table and talk about our finances – we don’t agree on basic financial terms and why they matter, we can’t have a good conversation about how we’re spending our money, how we’re saving for a rainy day and what kind of liquidity we need to pursue our future goals.

Pam: That sounds like a very interesting challenge to tackle. So Lee, can you tell me a little bit more about how specifically Financial SCAN will help me? How’s it work?

Lee Glenn, GuideStar: Financial SCAN is an online tool, it’s really easy to use, just like using TurboTax, so virtually everybody will have access to it and be able to use it and understand it. There’s something in it for everyone, no matter which position you are approaching the tool from: you can be a funder, advisor, or nonprofit, and it has some sort of information in there that will be interesting to you. We use a series of dashboards and metrics for at-a-glance analysis. We use graphic representations and educational content for a deeper dive and we also use peer comparisons so you can understand how your organization fits into a group of organizations of your choosing. It’s our hope that Financial SCAN will be used by decision makers in the nonprofit space to be consulted before they make any key decisions or start any big projects. Financial SCAN is a very cost effective way to get this insight. We know that cost is issue for nonprofits, so we developed a program for nonprofits to have temporary access a couple times a year.

Pam: That’s great. Rebecca, as a funder, donor or advisor, will this tool tell me where I should give? If I’m a nonprofit, do I need to be concerned the SCAN might rank me against my peers?

Rebecca: Nonprofits definitely don’t need to be concerned. Financial SCAN is really not about passing judgments on the relative merits of individual organizations. NFF really believes that the existing ratings and rankings platforms are inadequate for some of the complex decision-making that goes into deciding whether to support an organization and how to support that organization. Another thing I want to point is that Financial SCAN is really about a comprehensive analysis of an organization. We don’t focus on just a few limited metrics of organizational health like the overhead ratio – that’s one example of a metric that is commonly held up. Yet, in NFF’s experience, it really has no bearing on an organization’s stability or effectiveness in delivering in its mission.

Pam: So, informed conversations, no arbitrary metrics like overhead ratios – that is a noble goal, no doubt. I hope you don’t work yourselves out of a job in the process.

Rebecca: I hope we don’t either! But, in all seriousness, more analysis will have to be done. There is always more learning that all of us can do. But Lee and I are so excited to bring together all the stakeholders, involved in making social impact, to have a real candid conversation about it takes to effectively resource an organization, and what the relationship is between financial health and nonprofit effectiveness.

Pam: Wonderful. Well, thanks for your time guys, and good luck. And if you’d like more information, please click to http://www.guidestar.org/.

State of the Sector Survey Results Released

adeshmukh — Mon, 02 Apr 2012 17:44:15 +0000

"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!

Baseball’s Lessons on Promoting Social Change

asoya — Thu, 08 Mar 2012 16:55:26 +0000

Note: This post originally appeared on NFF's blog at the Chronicle of Philanthropy.

In an annual ritual marking the change of seasons, pitchers and catchers just reported to Florida for spring training. Professional baseball sends a powerful lesson to those of us who work to solve social problems: Despite nearly 150 years of entrenched traditions, the sport has shown itself to be open to change. And that change is transforming how the game is played.

How does baseball point a path forward for those of us struggling to support a just and vibrant society in our troubled times?

The answer lies in the story of Billy Beane, manager of the Oakland Athletics, who demonstrated how radical innovation can allow anyone to achieve positive transformation even against seemingly impossible constraints.

Mr. Beane, immortalized in print and film by Moneyball, watched his baseball team lose the 2001 playoffs to the much wealthier New York Yankees. He approached the Athletics owner for more money to spend on salaries and was turned down—the money just wasn’t available. Yet Mr. Beane refused to take that as defeat. He still wanted his team to achieve greatness.

Mr. Beane’s staff members offered to work harder and put in longer hours to help the team win. However, he sensed that even an improved version of business-as-usual would lead to failure. He did not have access to the funding others had used to solve similar problems. He needed to radically reinvent how he ran the team to have any chance of success.

Billy Beane’s journey offers a powerful map for health clinics, homeless shelters, schools, theaters, and other organizations that weave the essential fabric of our communities. If this sounds like a stretch, consider their parallel path:

Like the Oakland Athletics, these organizations are facing crushing budget constraints. And like Mr. Beane, their first response is often to try to tap traditional financing sources for more money. Operating in a small market, the Oakland Athletics could not sustainably spend more on salaries.

Similarly, given the economic pressures we will continue to face for years to come, we do not have the resources or financing that we used to have to support our social organizations. Yet the needs these organizations address must continue to be met.

So what can we do with lower budgets? I side with the romantics who refuse to accept that we must lower our standards for how just and vibrant our communities can and will be. But like Billy Beane, we are gradually realizing that just getting better at business-as-usual approaches is not going to be good enough for long-term sustainable impact. Even many of our most efficient organizations are going bankrupt.

If we accept these budget constraints and refuse to lower our ambitions, we must embrace radical innovation. Billy Beane adopted data-driven analysis to put together a winning team.

For nonprofits, innovation will take more diverse forms. It will lead organizations previously competing over shrinking resources to collaborate. It will inspire visionary leaders to rethink their approaches to the problems they want to solve. It will mobilize “complete capital” approaches that draw on for-profit investment alongside charity and government subsidy. And it will require us to support these organizations smartly as they shift from old business models to new, more sustainable ones.

So how can we better support game-changing innovations in the social sector?

For a donor or socially minded investor, a key piece of the puzzle is to look at the organizations you support in the greater context of the social problems you wish to influence. Billy Beane didn’t just think about winning a single game; he lifted his head up to look at the bigger picture of how baseball could be played in a different way. Similarly, for example, do you want to help a single organization or be part of the greater solution to solve homelessness in your community?

Two of Boston’s most important organizations that serve the homeless, Pine Street Inn and HopeFound, asked themselves that question two years ago. After a careful evaluation assessing how to create the most significant social change, HopeFound and Pine Street Inn recently announced a merger that will allow the combined entity to offer a more comprehensive set of homeless services than either organization could achieve alone. Through the support of the Catalyst Fund, a five-year fund to support the exploration of nonprofit collaboration and mergers in the Boston metropolitan area, homeless men and women will have better access to the services they need to get off the streets, out of shelters, and into permanent housing, bringing us one step closer to ending homelessness in Boston.

If you donate to nonprofits or sit on their boards, you can support these kinds of transformations by keeping an eye on the ultimate social impact you wish to achieve. As a board member, how might the organization you support work with other organizations in the community to achieve its mission? As a donor, what is the full scope of financial resources it takes for an organization to implement the change needed to achieve this kind of innovation? And how can you contribute to that?

The lesson for all of us is that we need to provide flexible, unrestricted funding that can allow innovative organizations to figure out new ways to meet their mission, rather than just paying for the services they have provided in the past. We also need to provide the “change capital” that will allow organizations the flexibility to build the capabilities they will need in the future. Focusing on overhead ratio as a proxy for efficiency when we consider where to donate has never made sense and is only more destructive now.

Like Billy Beane, those of us who work in the social sector must embrace his winning spirit by relentlessly asking, “What works better?” rather than, “What have we done in the past?” And we can all support the practical romantics who are figuring out how to change the game to create the type of society we all want to live in.

Nonprofits and Solidarity Economies

PRosenbloom — Tue, 21 Feb 2012 16:06:13 +0000

Part 1 of 3: Re-examining Nonprofit Economies

The pursuit of a just and equitable society can invite a measure of paralysis when you’re faced with the simple challenge of where to start. Even if you narrow your focus to the nonprofit sector in particular, there are countless ways to approach the question of how to effectively promote positive change.

At NFF, our approach has been to help nonprofit organizations develop the financial capacity to keep providing the programming their missions demand. The end goal of this work is the facilitation of social change, but the approach demands an initial focus on the welfare of individual organizations. But what if we approached the question from another angle? What if we started by focusing on the needs of whole communities and then asked what resources individuals and organizations - including nonprofits - could provide to fulfill those needs?

We recently spoke with Cheyenna Weber of SolidarityNYC, a collective which seeks greater visibility and networking opportunities for organizations such as cooperatives, collectives, and credit unions - participants in New York City’s “Solidarity Economy” - in order to foster grassroots economic development and social justice. Drawing on that conversation, we plan to present a series of three posts, where we look at how the solidarity economy reframes the problem of the economics that undergird an institution-focused nonprofit sector, then we’ll flesh out the solution a solidarity economy framework proposes, and, finally, we’ll look at real-world examples that suggest practical steps funders, nonprofits and their communities can take to bring about more comprehensive strategies for change in particular communities.

We know that nonprofit organizations exist, first and foremost, to achieve social missions. However, the current economic crisis has also made it quite clear that regardless of tax status, nonprofits navigate the same economy as their private and public sector counterparts. Because nonprofit programs are designed primarily around criteria of mission achievement rather than stand-alone economic sustainability, and because these programs are often intended to serve clients who are unable to pay market rate for services, they rarely earn enough direct revenue to cover the organization’s costs. Instead, nonprofits must rely on economic subsidy from other sources - often government or private sector wealth.

So, it’s not just that nonprofits are in the same macro-economic boat as everybody else – nonprofits rely on these other sectors to survive. For nonprofits, this often means navigating a dual relationship, trying to meet the priorities of those paying for services on one side and the needs of those receiving services on the other. In this relationship, each party comes to the table with a set of priorities which can sometimes vie for attention.

For example, if a nonprofit relies on grant funds in order to maintain operations, leadership may feel forced to adjust the program structure in order to pursue a particular piece of programmatic funding (and the overhead coverage it provides) even if it does not quite fit with the mission or client . Furthermore, two nonprofits with similar missions can find themselves in competition for funding from the same sources, and may therefore be less likely to undertake collaborative efforts with one another, even if those collaborations might best serve their constituents.

In other words, the power of money - even the most well-intentioned money - can decrease the power held by clients and the organizations that serve them to shape the programs intended to bring about change in their communities. In this way, the economic model of the nonprofit sector can ironically replicate some of the very inequities the sector seeks to address.

Much of our work at NFF is concerned with the tactical work of supporting individual nonprofit organizations (or groups of organizations) by helping them navigate the economics of the current system. But, if our broader goal is to build a more just, vibrant and equitable society, does that demand an approach that seeks engagement with that broader community and subsumes its interests to the persistence of particular institutions?

This question is in no way intended to diminish the importance of the work that nonprofits do or the support that they receive through government and philanthropic funders. Rather, we want to ask whether a system that emphasizes institutional boundaries and, in many cases, preserves a firm distinction between funders and clients is really the best way to achieve the social missions that drive the sector.

In upcoming posts, we want to explore the alternative economics presented by the solidarity economy in order to imagine how a focus on deeper interdependence, horizontalism, and community engagement might encourage a more sustainable and effective approach to social change.

Why Take a Survey?

jtalansky — Tue, 07 Feb 2012 16:14:09 +0000

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

In our professional and personal lives, we are all asked to take a dozen or more surveys every year. At work, I receive email surveys on everything from how we use social media to how we like the services of our vendors. At home, I get opinion questionnaires from organizations ranging from political parties to movie ticket vendors.

Being the recipient of so many surveys, I pick and choose which I respond to. No doubt you do as well. As NFF embarks on its fourth annual nonprofit State of the Sector Survey, I hope you will choose to spend a few minutes of your valuable and busy work time responding to ours. Here’s why.

Nonprofits are our social safety net, particularly now, during the hard times our country continues to experience. They help and enrich people and communities, some of whom face dire health, housing, or food access circumstances. Yet many of the nonprofits that we rely on for a just and vibrant society are themselves in dire circumstances. Revenue is down, particularly from government funders, while service demand is up (77% saw a rise in service demand last year, on top of increases in service demand in previous years).

As we’ve seen with the rise in democratic political movements across the globe, there is power in the collective voice. We do this survey because nonprofits need to raise their collective voice, and the survey provides a powerful vehicle to do so. Last year we heard from close to 2,000 nonprofits from all states and sectors. We learned of their cash challenges, their rising service demand, and of the limits to many of their funder conversations. We heard of the extraordinary measures they took (one Executive Director even took out a mortgage on her home) to continue to provide services in their communities. The revelations from the survey were discussed in national media and shared widely with funders and nonprofits. In a sector that is often lacking data, the survey uses numbers to illustrate the real-time trends related to real-time financial and operational challenges nonprofits are facing.

Every day, Nonprofit Finance Fund makes the case for better financial practices and more user-friendly financial support for the nonprofit organizations that are working to solve social issues. We are one of many who support the sector and recognize that it needs a new way of doing business (and new methods of funding and financing) if organizations are to continue doing their good work. The survey results provide a powerful tool that we all can use as we advocate for the sector. We hope that you will help us by adding your voice to our collective story.

Please take a few minutes to respond to this survey, which is anonymous: http://app.fluidsurveys.com/s/nonprofitsurvey/. (If you do choose to give your name for press or follow-up purposes, we will never share your individual results!)

After taking the survey you can also help NFF get the word out by linking to this blog post or sharing the survey via social media. You can find us on Twitter as @nff_news, and the hashtag for the survey is #2012Survey.

Capitalization Planning

RThomas — Tue, 17 Jan 2012 18:12:57 +0000

Great art is often created without lots of money and can be enjoyed for many years. Great arts organizations without the right kinds and amounts of money, however, struggle to see another day.

Mission success for nonprofit arts organizations is reflected in the creation, sharing and appreciation of meaningful work. Each organization has a different artistic vision and goals, as well as its own strategy for reaching and engaging audiences. Behind every successful organizational strategy there should be a sound approach to obtaining and stewarding the financial resources required to support mission execution over time. This is a capitalization plan. At its essence, a capitalization plan serves as a roadmap for ensuring an organization has the cash and other assets it needs to manage risk and pursue opportunity.

Strategic plans often lack a rigorous financial foundation. They fail to consider the long-term financial resources needed to support program goals. And when they do include a financial plan, they often conflate regular revenue (ongoing) with capital (periodic), or neglect capital needs altogether. While financial projections that quantify the future revenue and expenses associated with a strategy are critical components of any strategic plan, they are not enough. Consideration must also be given to the organization’s long-term balance sheet –or capitalization– needs.

A capitalization plan is really just an approach to building the right balance sheet. It should consider the kinds and degrees of artistic and organizational risk an organization can and wishes to tolerate, as well as the creative ambitions to which its leaders aspire. Specifically, a capitalization plan should address an organization’s financial health and goals in the following three areas: liquidity, adaptability and durability.

Liquidity: having adequate cash to meet ongoing operating needs
Adaptability: access to flexible funds to adjust to evolving circumstances
Durability: assets to address a range of future needs

Capitalization planning is not one-size fits all

While the amount of adequate liquidity may differ by organization, cash is king for all nonprofits, regardless of size. Many organizations also need periodic access to flexible capital to pay for adaptation –whether related to growth, restructuring, program revitalization or even downsizing.

Most arts organizations don’t own property or have ambitious growth plans. For them, a capitalization plan that focuses on liquidity and adaptability may be sufficient. This plan would articulate the amount of cash required to manage the cyclicality of receipts and disbursements and to recover from (or adapt to) the occasional mis-step or loss of funding. With sound financial planning and management, these funds are most readily secured through cash-generating surpluses—and set aside in reserves. Capitalization plans for such organizations might also include an approach and timeline for raising or saving cash to invest in infrastructure or other new capacity, such as: technology upgrades; replacement of equipment, sets and costumes; upfront investments in new staff; and artistic experimentation.

Growing or complex organizations, which often have endowments and substantial fixed assets (i.e., facilities), should be clear in their capitalization plans about the resource requirements of long-term durability. This means building up cash (for liquidity and adaptability) alongside other fixed or permanently restricted assets and sometimes making choices to defer long-term investments if liquidity is not sufficient to support them.

A case study in capitalization planning

Consider the case of a mid-sized theatre company that, due to consistent success at the box office and with donor development, is taking the next step in its growth trajectory. Its strategic plan calls for purchasing a new facility that houses two additional theatre spaces. The organization achieves its $5 million capital campaign goal, but the costs of the building run over budget. To cover the shortfall, existing cash is depleted and a ten-year term loan, secured by the building, is required. Once the facility opens, expenses increase as more performances and staff are added. For the first time in many years, the organization runs a sizable deficit because anticipated audience growth does not materialize and loyal funders and donors have been tapped out by the campaign. Within three years, deferred maintenance on the original facility reaches a crisis point and cash on hand dwindles to negligible levels.

This organization’s critical error was not planning for the short and long-term capital and operating requirements of program and facility expansion. It is all too common to fall into this trap. Raising capital for bricks-and-mortar alone can be a herculean task, and many organizations fear that their project won’t get off the ground if the price tag is too high.

A capitalization plan helps organizations identify the range of needs that a capital campaign should address and make strategic choices about what they can realistically raise and therefore, do. Such a plan would have directed this organization to include funds for some or all of the following in its fundraising strategy:

2-3 years of flexible capital sufficient to cover temporary operating deficits post expansion, until regular revenue catches up with expenses
working capital adequate to cover low cash months of the year
several months of cash to respond to opportunities and weather unforeseen risk
a board-designated reserve for future improvements to both facilities.

A capitalization plan would have also articulated future annual surplus targets that would be fed into the budgeting process and used to maintain and grow working capital and reserve funds. These surplus targets would be informed by a creative marketing plan to engage sustained audiences and a fundraising plan for raising realistic amounts of recurring contributed revenue from individuals and institutions.

As it stands, the organization’s creativity, resiliency and relevance are in jeopardy. Liquidity is depleted. Adaptability can no longer be strategic. Durability is in question.

Capitalization planning for change efforts

Many strategies for change, as seen in the example above, require an upfront capital investment for one-time or future ongoing expenses that aren’t yet fully supported by revenue. They also need to be supported by a combination of fixed and liquid assets appropriate to the organization’s future state and mission. Successful change can be a costly and risky endeavor unless it is accompanied by a plan to sustain itself with reliable revenue (supported by viable evidence of a market of patrons and donors) and a healthy balance sheet.

If an organization (regardless of its size or facility intensity) has plans to undertake major change –the kind of change that will result in new or different programs or ways of operating– its capitalization plan should address the following questions:

How much “change capital” (upfront money) is needed to achieve the shift?
From what sources will this capital come?
How will the capital be invested to build future revenue that can offset any new annual (as opposed to one-time) costs?
What kinds and levels of working capital and savings will be needed to support the evolved organization?

Marrying finance and strategy

Finally, capitalization planning cannot be done in isolation. It must be inextricably linked to and supportive of a strong strategic plan, inclusive of meaningful market research and achievable financial projections of revenue and expenses. Such connected, iterative, and ultimately rigorous planning can empower an organization to make the case to funders, board members and other important stakeholders for more of the right kinds of money to support its artistic vision, mission and impact. This process can also help leaders understand the financial resources needed to achieve a given set of goals—and to consider options in advance should obtaining those resources not come to pass. Thoughtful planning with a capital perspective can help prepare for the unexpected—whether unsettling or energizing.

The Failure of Regulation by Ratio

PRosenbloom — Wed, 21 Dec 2011 16:03:58 +0000

“The bomb buried in Obamacare explodes today,” Rick Ungar declares in a December 2^nd Forbes blog post describing a regulatory provision in the Affordable Care Act:

"[T]he medical loss ratio...requires health insurance companies to spend 80% of the consumers’ premium dollars they collect—85% for large group insurers—on actual medical care rather than overhead, marketing expenses and profit. Failure on the part of insurers to meet this requirement will result in the insurers having to send their customers a rebate check representing the amount in which they underspend on actual medical care."

If this regulation is indeed a bomb, then nonprofit administrators must now be totally shell-shocked from navigating the demands of donors, institutional funders, government agencies charity rating agencies, consultants and even board members who want similar oversight of the ratio between program and administrative or fundraising expenditures and then use that data to make claims about operational efficiency.

The fact that this kind of ratio system is now being applied prominently to a for-profit industry gives us an opportunity to highlight the way similar measures have served as a minefield in the nonprofit sector for years.

The differences between nonprofits and insurance giants are more striking than the similarities. As for-profit entities, insurance companies’ customers are expected to pay a market rate for their services, these funds are always unrestricted, annual surpluses are encouraged rather than stigmatized, and financial gain is the primary motivator. None of these apply broadly to nonprofits.

Presumably as a matter of public policy, the medical loss ratio is being applied to insurance companies because those companies might otherwise spend even more on lavish executive salaries, luxurious offices, and so on. But, in an environment where nonprofits face restricted grants and overall scarcity of funds, not to mention baseline commitment to mission, what would be the equivalent goal for imposing such ratios on the nonprofit sector? Are such measures likely to be successful in inducing “operational efficiency?”

In posts following up on Ungar’s initial article, Sarah Kliff (on the Washingon Post’s site) and Ungar raise the issue of how the government will define which expenses qualify as direct medical care, which will be administrative expenses, and which expenses could be left out of the equation altogether. Many of these particulars seem to be addressed up front in the legislation, though one assumes that the financial staff of insurance companies will ultimately find room for interpretation.

For the nonprofit sector, too, that room for interpretation is significant. An information sheet created by the Nonprofit Assistance Fund lists the two sets of administrative and fundraising expense definitions provided by the IRS and FASB, respectively. Neither set of definitions is terribly detailed. Moreover, as NAF notes, they are not consistent with one another. Each nonprofit is left to slice and dice the significant grey area between program and administrative expense with a variety of allocation methodologies, trying to maximize the program side of the ratio. As a result, the data are virtually useless to donors in evaluating any individual organization, much less comparing its performance to another.

More importantly, for nonprofits, the drive to maximize direct programmatic expenditures as a percentage of the total budget often leads to inadequate investment in administrative infrastructure. As a result, nonprofits end up relying on sweat equity to generate programmatic results with, well, explosive results for organizational sustainability.

So, the Procrustean bed of the fixed ratio fails in two dimensions: (1) It is too blunt an instrument and too susceptible to manipulation to tell us anything of value in most cases, and, for nonprofits in particular, (2) the fixation on adherence to the ratio can undermine just what it seeks to reinforce—the efficient, reliable provision of services over the long term. One might be given to wonder, as Ungar does, whether that isn’t precisely what it is designed to do!

I don’t want to argue against regulation for the insurance industry. Nor do I think the nonprofit sector should be free from oversight. However, it does seem reasonable to expect that methods of regulation, oversight and evaluation be tailored to fit the industries they address. Expenditure ratios may or may not be effective in regulating the insurance industry, but for nonprofits it’s high time to move onto other measures.