Though I do not subscribe to the theme that nonprofits universally need to “act more like business,” in one area I do think that the business world has a lot to teach – the sources and uses of capital. Use the word “capital” in a discussion about nonprofit finances and the majority of the participants will assume that the topic is buildings and a “capital campaign.” Business leaders know that they need capital for a range of distinct and important purposes including short-term working capital, permanent working capital, and long-term asset creation. (more…)
I spend quite a lot of time reading financial reports from nonprofit organizations and talking to leaders of nonprofits about their financial situation. Delving into the financial reports of an individual nonprofit is like getting to know one verse of a song from a musical. Each verse is important and lovely to hear, but it’s even better if you can see the whole show - when you hear it in the context of the characters and story.
In the same way, the financial picture of an individual nonprofit can be understood differently if you understand the bigger economic picture of the nonprofit sector. How does this nonprofit compare to its peers or to the regional trends? What’s changing in revenue and expense composition? Because I believe that it is crucial that we understand this big picture, I was delighted that the Federal Reserve Bank of Minneapolis featured the nonprofit economy, what they dubbed “The economy’s middle child,” in the July 2006 issue of the fedgazette.
The publication includes several articles on revenue trends, services, financial data, and growth. Some of the their observations are especially helpful:
- Any portrait of nonprofit finances are skewed by large, health care organizations.
- Since 60% of nonprofits are so small they don’t have to file an IRS Form 990 and are therefore excluded from the data we’re only seeing a portion of the data.
- If the value of volunteer labor were included in the numbers, Minnesota nonprofits would represent an even larger portion of the economy.
Even with the data and reporting challenges, it is worth the time to understand the entire stage that we perform on as a part of the nonprofit sector.
The Minnesota Council of Nonprofits has also just released their annual report on the economic picture of nonprofits in the state. Read the 2006 Minnesota Nonprofit Economy Report.
At the beginning of the annual budget season, which for many nonprofits is in the fall, listen carefully and you will hear the wails of anxiety about what grants, contributions and contracts to include in the budget for next year. A frequently heard wail is: “Why can’t we be one of those nonprofits with grants that they can count on every year, and deep-pocket individual donors who always write big checks, and … if only we could be one of them, we’d be financially stable.”
I’ve heard this over and over. The truth is that this is a myth – and too many nonprofit directors and board members believe it. It’s an unusual nonprofit that has completely reliable and recurring sources of income year after year. Income, both contributed and earned, has to be continually researched, requested, proved, and unearthed by small, mid-sized, and large organizations. What makes a nonprofit financially stable is having the kinds of systems, plans, and people in place to do all of this consistently enough to get results they can count on. This means that we have to change our definition of the mythical financial stability.
The myth is that a nonprofit can find foundations and donors once and turn them into a never-ending stream. The truth is that nonprofits have to create a solid infrastructure for prospecting, requesting, completing, and maintaining grant and donor relationships. This is one of those bad news/good news realities. The bad news is that there isn’t an easy one-time fix for income budgets. The good news is that every nonprofit has the ability to create and build systems to bring in income consistently – if only they keep working at it.
For consistently interesting ideas and research about the financial reality of leading a nonprofit, read the Nonprofit Quarterly. Their most recent e-newsletter included a preview of an article profiling six income models for financial stability - Financial Independence: Six Approaches.
What do I mean by the “mission checkbook”? It’s that balancing point that every nonprofit organization needs to find. The point where the focus stays on the mission and community while also assuring that the right resources are available and used as effectively as possible. In my role as the executive director of a nonprofit organization that works to build the “business” side of other nonprofit organizations, I find myself at an interesting juxtaposition of nonprofits, philanthropy, and business. This affords me a pretty broad perspective of the way that nonprofits work – from starting up to growing their programs to struggling and facing very hard decisions.
There are plenty of opinions and experts about how nonprofit organizations “should” do their work and keep the books balanced. I agree with some, disagree with several, and get confused by others. There are a few things I am sure of. First, balancing the mission and money of a nonprofit is hard. It’s also an essential responsibility of executive directors and board members who want to be sure that the community will be served not just this week but also in the future. Secondly, leading a nonprofit is not just like running a for-profit business. While there are some common elements, I see marked differences every day. I came to this work after more than twenty years in community banking where I worked with businesses, entrepreneurs, and the bank’s board of directors. I understood marketing, financial analysis, and management. In my six years leading a nonprofit and working with hundreds of others I’ve learned about the additional complexity and dynamic that comes from balancing community needs and funder requirements, volunteers and paid staff, board members and executive directors, and demands for public accountability, transparency, and measurable results.
My hope for this blog is to expand on the conversations I have with executive directors, staff and board members of nonprofits, with foundation program officers, and with bankers and other businesspeople. Beyond the technical answers to many questions – how to create a budget, read a financial report or build an operating reserve – there are larger issues that impact all of us in the nonprofit world and our larger communities. I’ll be posting about these broader issues from my own viewpoint and with links and summaries of news and research. I’ll also share some of the day to day conversations and lessons we learn together about looking for that balance. You’ll also hear some of my opinions, so be prepared. Please share your own opinions, ideas, thoughts, resources, and questions to the mix.
