Earlier this week the Nonprofit Finance Fund released the results of their 7th annual State of the Sector survey about the financial health of the American nonprofit sector. This on-going survey, now in its 7th year, has become a fascinating marker to gauge how the nonprofit sector is evolving amid a changing economic climate.
The Nonprofit Finance Fund launched the survey in 2008, when the economic crisis was just beginning. This year results from 5,451 respondents show some positive signs of adaptation and growth, but also recurring challenges that continue to face the sector.
Nonprofits are unable to meet a growing demand for their services:
- 76% of nonprofits reported an increase in demand for services – the 7th year that a majority have reported increases.
- 52% couldn’t meet demand, the third year in a row that more than half of nonprofits couldn’t meet demand.
- Of those who reported that they could not meet demand, 71% said that client needs go unmet when they can’t provide services.
Nonprofits still (not surprisingly) struggle to make ends meet. While some nonprofits are achieving financial sustainability (47% ended 2014 with a surplus, the highest in the history of the survey), many still face real challenges:
- 53% report three months or less of cash-on-hand.
- 32% find achieving long-term sustainability a top challenge.
- 25% struggle to be able to offer competitive pay and/or retain staff.
- 19% can’t raise funding to cover their full costs.
And these financial challenges are due in large part to the catch-22 funders place nonprofits in by routinely covering only a portion of the full costs of the programs they intend to support:
- 70% of survey respondents receiving Federal funding report that the government never or rarely pays for the full costs of delivering services.
- 68% of respondents who receive state funding say the state government never or rarely pays for the full costs of delivering services.
- 47% of respondents who secure foundation funding report that foundations never or rarely cover their full costs.
- While 89% of nonprofits are asked to collect data to capture the effectiveness of programming, 68% of funders rarely or never cover the costs associated with measuring program outputs or outcomes.
So we still have a long way to go.
But those nonprofits who are faring well in this environment are those being strategic. As one human services nonprofit leader put it:
“Sustainable funding continues to be our greatest challenge. Our actions to address this challenge include developing and adhering to a strong and dynamic strategic plan; diversifying our program funding streams as much as possible; developing and communicating a strong community impact statement for our programs; and focusing on increased donor engagement in order to increase fundraising dollars.”
You can dig further into the data from this and past years’ surveys here.
Photo Credit: Nonprofit Finance Fund
What a great month March was. Just as the weather started to turn to Spring (I hope it did where you are too), there was a whole host of great reading to digest. From analysis of the new breed of philanthropists, to controversy about contest grantmaking, to mission investing progress, to tips and guides on nonprofit finance, leadership and financial advocacy, there was lots to read.
Below are my picks of the 10 most interesting reads in the world of social change in March, but as always, please add to the list in the comments.
You can also see the 10 Great Reads lists from previous months here.
- Call me biased, but I think the biggest social change news in March was the launch of the Performance Imperative, a detailed definition of a high-performance nonprofit, by the Leap Ambassadors (of which I am one). Many reviewed the new tool, including Phil Buchanan from the Center for Effective Philanthropy who wrote that nonprofit performance is a “moral imperative.” And if you want to learn more, there is a webinar drilling down on the PI later this month.
- Who says online debate never results in change? There was a big discussion on the Chronicle of Philanthropy‘s site this month over the Council on Foundation’s plans to hold a “Shark Tank”-like contest for nonprofits. Many felt this contest would be a step backward, forcing nonprofits to perform for money, so the Council scrapped the contest and created instead a panel discussing the positives and negatives of contest-style grantmaking.
- F.B. Heron Foundation CEO, Clara Miller (formerly of the Nonprofit Finance Fund) is a true nonprofit finance visionary, and this month the Foundation passed the halfway mark on their goal of putting ALL of their capital toward mission. And writing in The Guardian, Tim Smedley would seem to agree with their goal when he makes the case for mission investing.
- Chris Gates (from the Sunlight Foundation) and Matt Leighninger (from the Deliberative Democracy Consortium) wrote a fascinating letter to the editors of the Chronicle of Philanthropy taking issue with Diana Aviv’s comments on recent Independent Sector research about technology and nonprofit institutions. Gates and Leighninger argue that there is great opportunity in technology if nonprofits embrace it effectively, as they put it, “It is true that the rise of the Internet is forcing institutions like governments, foundations, nonprofits, and professional associations to rethink how they operate. They have to adapt to the needs and goals of 21st-century citizens or perish. But ultimately, people want the same things they always have: to belong to a community, to have a voice, and to make an impact…if institutions can provide those things in this interconnected time, they will thrive.”
- American educators and education funders have focused in recent years on science and math to create a more effective and competitive American education. But Fareed Zakaria, writing in the Washington Post, thinks that’s a big mistake, “As we work with computers (which is really the future of all work), the most valuable skills will be the ones that are uniquely human, that computers cannot quite figure out — yet. And for those jobs, and that life, you could not do better than to follow your passion, engage with a breadth of material in both science and the humanities, and perhaps above all, study the human condition.” Amen!
- The fourth installment of Tom Watson’s on-going series about the changing face of American philanthropy focuses on the class of new, entrepreneurial philanthropists, those young, tech wealthy donors who are pushing for data-based social change. And Pascal-Emmanuel Gobry takes it even further arguing that “effective altruism,” what he calls this data-centered approach to philanthropy, is only one potential method of investing in social change, not the only or best approach. As he puts it, “making the world a better place is an inherently speculative behavior — if we knew how to do it we’d have already done it. Therefore the most prudent collective thing to do is to try a very wide swath of different approaches rather than a single one.” And as one of these new philanthropists, Facebook founder Mark Zuckerberg’s investment in Newark public schools continues to come under fire.
- The National Committee for Responsive Philanthropy put out a fantastic report on the need for more philanthropic investment in nonprofit leadership development. This should be required reading for every philanthropic and nonprofit leader in the country.
- The National Council of Nonprofits developed a guide for nonprofit leaders to advocate for their funding rights, particularly around indirect rates, with government funders.
- And there were lots of great tips and tools this month for becoming an effective financial leader. The Nonprofit Finance Fund released a list of tips to help “keep business and finance an integral part of decision-making.” And Kate Barr offered 6 Takeaways from the Nonprofits Assistance Fund’s annual Nonprofit Finance and Sustainability Conference.
- Finally, Jocelyn Wyatt from IDEA.org argues that general funding for nonprofits is the “future of innovation”. Yes please!
Photo Credit: BibBornem
It’s that time of year again – the Nonprofit Finance Fund’s annual State of the Sector Survey of nonprofit leaders.
If you are a nonprofit leader struggling with increasing demand for services amid diminishing funding, if you are frustrated with funders’ lack of understanding of the challenges you face, if you want the sector to recognize the hurdles and get better at addressing them, you need to voice your perspective by taking the survey.
The Nonprofit Finance Fund is one of the country’s leading community development financial institutions (CDFI) making millions of dollars in loans to nonprofits and pushing for fundamental improvement in how money is given and used in the sector.
They started the annual State of the Sector survey when the recession hit in 2008. Collective efforts to understand the extent of the challenges the economic restructuring was having on the nonprofit sector were decentralized and largely anecdotal. NFF’s survey is an effort to bring information about the nonprofit community together so that it can be used to address these challenges. You can view the results from past surveys here.
The anonymous survey takes 10-15 minutes to complete and asks about your organization’s recent financial and management challenges. The knowledge gathered through the annual survey is shared with funders, government officials, nonprofits, media, lending institutions, and many others through conferences, policy recommendations, and other efforts. And now with more than 5 years of Sector Survey data, we can analyze and understand trends and begin to make a larger argument about what nonprofits need and what funders and policymakers must do differently to support their work.
The survey really is the only effort of its kind to take the pulse of the sector. And I am excited to see how the results are increasingly used to advocate for some significant improvements to the state of the sector.
This year’s Sector Survey will be open to responses until February 17th, so if you are a nonprofit leader, click here to take the survey and let your voice be heard. The results of this year’s survey will be available in early April.
Photo Credit: Nonprofit Finance Fund
I started a new blog series in March about overcoming the many fears that cripple the nonprofit sector, the first one being the fear of investment. Today I want to talk about the nonprofit fear of money. Because the nonprofit sector is focused on mission, as opposed to profit, money is often ignored at best, or feared at worst. Many nonprofit boards and staff find money distasteful, burdensome, and avoidable.
But money can be used as a powerful tool to create more social change. In order to overcome the fear of money and start using it effectively, nonprofit boards and staffs must:
Embrace Its Power
Without money, your compelling, inspiring, world-changing mission is only a sentence on paper. As much as we might like to deny it, nonprofits very much exist in a market economy. So instead of trumping all, mission is merely one of the things nonprofit leaders need to be thinking about as they are working toward social change. Because without a smart strategy for how you will secure and use money you are sunk.
Really, Really Understand It
Of course money is scary if you don’t understand it, and most nonprofit leaders don’t have a finance background. So learn all you can about money. Find an accountant who speaks English and can explain how money flows in and out of your organization. Make sure you are receiving and sharing with your board monthly financial statements that are understandable. Ensure board and key staff all have basic nonprofit financial management training so everyone speaks the same language and understands the key ratios they should be analyzing. This common understanding should serve to generate substantive conversations about the best use of money to further the work of the organization.
Involve Everyone in Raising It
I know I sound like a broken record, but EVERYONE at a nonprofit should be involved in bringing money in the door in a way that fits well with their skills and experience. Every board member should have a money responsibility. Be strategic about putting each individual to their highest and best money-raising use. And every staff member, even program staff, can be enlisted to explain the program to potential donors, gather client stories, or provide data about the program so that you can garner more support. No one at the organization should be allowed to say “I don’t do the money thing.” Money is everyone’s job, because with no money there is no mission, remember?
Budget for Having Too Much of It
It is unseemly for a nonprofit to operate a surplus. Funders don’t like to see an organization too far into the black, and board members become uncomfortable when “too much” money sits idle. But money sitting in a bank account means the organization no longer lives hand to mouth, continually putting out fires, and focusing only on keeping the doors open. Operating reserves allow an organization to think strategically, take some risks, streamline the business model, innovate the solution, and weather economic uncertainty all in the name of delivering bigger, better social impact. So overcome the taboo and budget for a surplus that creates operating reserves.
Talk About It. All. The. Time.
Because money is so central to mission you cannot make decisions about the organization, about programs, about staffing, really about anything without understanding the financial implications of those decisions. Therefore, you must be talking about money all the time. Not just when the finance committee of the board meets, or when you are reviewing the monthly financial statements, or when your latest fundraising event falls flat. Money must be a constant conversation. It must be fully integrated into everything you do.
The key to financial sustainability, and ultimately significant social change, is being smart about managing money. But you cannot be smart with money if you are afraid of it. Money can be a beautiful, powerful tool for creating social change. Embrace it.
Photo Credit: orudorumagi11
I’m a little late getting the June 10 Great Reads list out this month because I was on vacation. But June didn’t disappoint, with some great articles that make us think about things in new ways, from how philanthropists fund, to how “nonprofit” is defined, to how homelessness and food insecurity can be solved, to how Millennials give and much more.
Below are my ten picks of the best reads in social innovation in June, but please add what I missed in the comments. If you want to see more than just this list of 10, follow me on Twitter, Facebook, LinkedIn or Pinterest. And if you want to read 10 Great Reads lists from past months, go here.
- A new debate raged on the “old” topic of defining the nonprofit sector. Phil Buchanan at the Center for Effective Philanthropy started it off with this 6-part series on articulating the value of the nonprofit sector. And along the same lines, Mark Hecker at the UnSectored blog wrote this really thought-provoking piece about the language of social good.
- From The Atlantic comes a great article about the enormous opportunity of impact investment, “How Financial Innovation Can Save the World.”
- The on-going drumbeat to get nonprofits to advocate for their own sector in Congress gets louder with “Nonprofits Missing From Big Battles (in Congress)” and a united movement among San Francisco nonprofits to push for more city funding.
- David Henderson is easily one of the greatest thinkers in the social sector space and he takes issue with a new app designed to “solve” homelessness. His post really begs the question, “To What End?”
- Always at the ready with fantastic financial tools for the nonprofit sector, the Nonprofit Finance Fund releases a list of Top 10 Finance Essentials for nonprofits and, not to forget that the philanthropy that funds nonprofits also needs to change, they also have a list for nonprofit funders.
- In The Washington Post, Sarah Kliff explores new experiments and studies about how to solve urban food deserts.
- As a mother of two young boys I agree there is definitely something to emulating how kids play, as Philip Auerswald argues at the Harvard Business Review blog: To Innovate, Play with Pieces Off the Game Board
- The third annual Millennial Impact Report, about how the millennial generation connects with nonprofits, was released and lots of people had things to say about the data, including 3 New Truths About Millennials and How Millennials Connect, Involve and Give.
- At the Center for High Impact Philanthropy blog Jen Landres describes how philanthropists can have much greater impact by being “unsexy” in their giving.
- Decrying the over-emphasis on capital campaigns in the arts world, Rebecca Thomas and Rodney Christopher argue that “scores of organizations jeopardize the long-term vibrancy of their programs because they focus on getting the building built rather than having a healthy organization inside it.” Amen to that!
Photo Credit: Frank Starmer
Since I was on vacation for a couple of weeks in August and pretty much unplugged, I’m probably not qualified to list the 10 greatest reads in social innovation for the month of August, but I’m still going to give it a shot. As always, please add what I missed to the comments.
You can also read the lists of Great Reads from previous months here.
- Guest blogger on the Tactical Philanthropy blog, Jed Emerson, a pioneer in the impact investing arena, argues that impact investing is at risk of missing a key opportunity to move the field forward.
- Strategic finance is one of the hardest things for many nonprofit leaders to master, but also one of the most critical. Nonprofit Finance Fund explains how to approach it.
- Sea Change Capital Partners and Lodestar Foundation are partnering to create a new fund to pay for nonprofit collaboration and mergers. A pool of merger money is a great new addition to what is a pretty big hole in the nonprofit capital market.
- From the Harvard Business Review blog comes the argument that sometimes it can be good for business to fire some customers. This concept should apply to nonprofits’ donors as well.
- One of the biggest hurdles to nonprofit performance measurement is a lack of money to make it happen. On the Social Currency blog, Angela Francis explains how nonprofits can find the money for evaluation through capacity capital.
- The biggest news in August was nonprofit Jumo’s merger with for-profit GOOD. Antony Bugg-Levine (who was just announced as the new CEO of the Nonprofit Finance Fund yesterday) explains how this merger is just the beginning of a real blurring of sector lines to come.
- On August 24th, US Secretary of Education @arneduncan held a Twitter Town Hall to answer questions about America’s public education system and his ideas for reform. You can see the Tweets at #askarne or read the highlights here. He plans to hold another Twitter Town Hall soon.
- The Future Generations blog offers a great framework and examples of that often touted, but rarely understood, concept: “scale.”
- In the wake of Steve Jobs’ resignation from Apple, Cliff Kuang offers a reflection on Jobs as a supreme innovator and great user of technology.
- From the tech blog, A Smart Bear, comes a lesson for entrepreneurs (and social entrepreneurs too) when being an expert is harmful.
Photo Credit: afunkydamsel
I’ll give a full rundown of my Day 1 experience at SoCap in a later post, but first I have to admit my excited anticipation of this year’s Social Capital Markets conference encountered some disappointment yesterday as the third annual conference kicked off. The day began with a co-keynote address by Sean Stannard-Stockton, from Tactical Philanthropy and organizer of this year’s first philanthropy/nonprofit focused track at the conference, and Kevin Jones, co-founder of SoCap. Kevin and Sean’s figurative two-step was a nod to the on-going confusion about where/whether philanthropy and the nonprofit sector fit, or how they fit, into a conference who’s heart and founding are heavily in the double bottom-line, impact investing camp.
Sean gave an eloquent speech arguing for the inclusion of the nonprofit/philanthropy sector in this movement to create a social capital market, arguing that “We don’t speak the same language, but we have the same goals,” and “We need to come together to be better able to find what we are both looking for.” But Kevin still referred to Sean and his track as the “nonprofit clan” and Sean as its “emissary.” I’m not sure why there has to be this awkward line between impact investing and philanthropy, but apparently there is still quite a bit of discomfort with the connection between the two worlds. As Stacy Caldwell, Executive Director of Dallas Social Venture Partners, so eloquently Tweeted yesterday:
I’m not sure that we are past the “awkward” stage yet.
To me, it seems so obvious that the nonprofit and government sectors, who hold the majority of money up for grabs in the social impact space, must be full and equal partners in the creation of the social capital marketplace.
But we are still speaking two different languages. And I’m not sure we’re pushing the conversation forward.
The first breakout session I attended yesterday was the Tactical Philanthropy Track’s “Decriminalizing Fundraising” session with two of the rockstars of nonprofit fundraising: George Overholser, from Nonprofit Finance Fund, and Dan Pallotta, author of Uncharitable. But I have to be honest with you, and it pains me to say this about two people I admire quite a bit, I was underwhelmed. The session was just a recap of the spiels George and Dan have given many times before, rather than a cutting-edge discussion and demonstration of how we change the broken funding of the nonprofit sector. If you missed the session, or haven’t read any of Dan or George’s writings, Adin Miller did a great job of summarizing the session on the Tactical Philanthropy blog. But the conversation didn’t go nearly far enough. As Adin said:
In general, the audience seemed to agree with the speakers’ position. There were little to no objections to their key points. The questions from the audience reflected more practical inquiries related to changing perceptions and attitudes toward nonprofits and freeing them up to truly grow the sector. And yet, I feel the conversation has just started and that we need a lot more insights into new strategies and tools to truly decriminalize fundraising.”
There ARE new tools and examples of organizations doing exciting things to finance their social impact in the nonprofit space. I would have loved to hear about those, instead of these old arguments about the need for new tools. And I would have loved to see a discussion about what infrastructure and structural changes need to happen in the sector to push funding forward and how we make those happen.
In the sessions on impact investing and the general sessions later in the day there is a constant movement to push the conversation forward, to unveil new tools, to detail new approaches, to describe new infrastructure in order to push the impact investing sector forward. There is a very palpable sense that this new market is ours to create, “We are the ones we’ve been waiting for,” as Lisa Hall from the Calvert Foundation said in a later session on impact investing. But yesterday at SoCap I didn’t see that same confidence, that same rigor, that same diligence, that same drive in the nonprofit/philanthropy side of the market to create new funding vehicles, new solutions to the broken funding structures we encounter every day.
Let’s see how today goes…
As promised, today we are bringing you Part 2 of our interview with George Overholser from the Nonprofit Finance Fund. You can read Part 1 here.
Nell: You have argued before that to transform the nonprofit capital market we need a few capital deals at the top of nonprofit market. How do you think the bottom 80% of nonprofits (those with budgets under $1M) fit into a transformed nonprofit capital market?
George: I absolutely believe that the nonprofit capital market needs to extend everywhere, not to just the high profile “darlings” that seem to get all of the attention, but also the millions (!) of smaller nonprofits that truly make up the lion’s share of our vital nonprofit sector.
So why focus first on multi-million dollar growth plans? This is an excellent question!
One part of my response comes in the form of a reminder. Remember: MONEY AND CAPITAL ARE NOT THE SAME THING. Every nonprofit needs money to operate. But quite appropriately, only a small percentage of nonprofit organizations actually aspire to undergo major growth, or any of the other disruptive transformations that are inextricably linked to a capital investment. Very few for-profit companies with revenues of $1 million or less are interested in taking on equity. Nor should they! Small is beautiful! They are the bedrock of our economy. The same goes for our smaller nonprofits.
Still, what about the small organizations that DO aspire to undergo a big transformation, perhaps to double their ongoing impact, for example? Why not focus on them?
Well, I believe that it is absolutely vital that we come up with a way to better capitalize these smaller organizations. Sadly, though, at this stage of capital market evolution, it is still quite expensive to prepare for a successful nonprofit equity campaign. Unless several million is being raised, the hundred thousand or more dollars of required planning, documentation, due diligence, marketing, reporting and campaign management expense is prohibitively high. This constrains us to campaigns of $5 million or more, which, in turn, constrains us to organizations that are already pretty large.
In some ways, we shouldn’t be surprised. There are hundreds of professional fundraising consulting firms that assist with traditional capital campaigns, involving billions of dollars each year. But they, too, are unable to justify their fees unless the campaigns involve a lot more money than most “small” nonprofits are prepared to take on.
I hope that some day there will be a less expensive way to create compelling “asks” for equity capital, but that day has not yet arrived.
As a field, we are still in the very early days of showing how (learning how!) philanthropic equity can help organizations thrive. As such, it seems prudent to focus initially on the limited number of comparatively high-profile organizations that seem best prepared to implement their social impact growth plans. This has led equity funders to partner, at least initially, mostly with organizations that have already shown they can scale. To date, NFF has worked on 16 transactions, involving $310 million of new philanthropic equity raised. Every one of those 16 organizations went into their campaigns armed with track records that showed, compellingly, that they already know how to grow, and are now prepared to accelerate. So far, in just two or three years, the group that we track closely has more than tripled its level of program execution, while also more than doubling the long-term business models that will sustain the execution once the equity runs out. If results like these can be kept up, I expect it will help to attract more and more equity-like funders that serve an ever-broadening range of high-performing nonprofit organizations.
Nell: You have argued in the past that the reason a nonprofit market for growth capital has not materialized is because nonprofit accounting does not allow for a distinction between money to build the organization (investments) and money to maintain services (revenue). But beyond the accounting issues there is also a fundamental lack of understanding about finance in the sector. What do you think will change that?
George: I envision an evolution where funders become more and more specialized. Most funders, I envision, will migrate towards playing the role of BUYER. They will be the real connoisseurs that search among providers to learn what works best. Then, without seeking to change those providers, they will fund the providers to do what they do so well. Collectively, the buyers will be an important part of the field’s overall portrait of sustainability. I would include government as being among the most important buyer-type funders, but so, too, would be the many philanthropic funders who seek the most effective existing ways to achieve social impact with their money.
I would expect a smaller number of funders to focus on playing the role of BUILDER — they are financiers, really, or banks. These financial specialists will play a niche role. Because nonprofits can only take on a limited amount of equity, the BUILDER funders will actually have to compete against each other to “win” the right to invest in the most promising nonprofit firms. And the way they will win in this competition is by offering not just money, but also very sound financial know-how, to the organizations they partner with.
Lots of accomplished BUYERS, a smaller number of accomplished BUILDERS. I sometimes explain this line of thinking by describing what happens when you go into a flower shop – suppose you want them to send flowers to your mom in Florida. Clearly, the vast majority of money that flows into this flower shop is money in exchange for flowers (BUYER-type money). Only a very small percentage of the money that flows into the flower shop comes in the form of capital – a bank loan, perhaps, or, in the early days, an initial equity stake. Thus, the vast majority of check-writers are interested in FLOWERS and the benefits that flowers bring. Only a very small minority of check-writers are interested in BALANCE SHEETS and the other technical details of finance.
I am hopeful that nonprofit equity accounting will allow funders to be better at self-selecting into their chosen areas of expertise. Most will need to be BUYERS of program execution. A smaller number of funders will emerge as the financially-oriented BUILDERS that are needed to provide philanthropic equity and growth stewardship.
Nell: Do you think there is something to be gained by having the bottom 80% of nonprofit organizations better financed, more knowledgeable about finance and with more access to patient capital? What needs to happen to get there?
George: This may sound strange, but I believe that the key to helping most nonprofits to thrive has more to do with improving our BUYING behaviors than to do with finding more capital. To me, the problem is not so much that the bottom 80% lacks access to the capital they would need to maintain healthy balance sheets. Rather, they find themselves chronically saying “yes” to funding arrangements that cause them to deplete these capital reserves. The capital can be raised — but the unhealthy buyer relationships cause the capital to evaporate.
It’s hard to place blame for this phenomenon. Taken one at a time, most of the grants that an organization relies upon make a lot of sense. But, collectively, when multiple funders converge upon an organization with differing theories of change, or expectations that someone else will pay for overhead, or a hunger for customized reporting, special tweaks to the program, and long conversations about small checks, organizations can’t help but burn through whatever small cushions of capital they may have squirreled away.
We need to raise consciousness among BUYERS that whole enterprises — not just programs — should be kept in mind when they make their grants.