We propose that nonprofit organizations get serious about managing their organizations so there can be operating surpluses and capital reserves. We encourage organizations to part from their sacred cows and untenable business models, to really adjust how they do business. Breaking-even doesn’t cut it anymore, if it ever did. For too long in the nonprofit sector, we have fooled ourselves into thinking that $0.00 at the end of the year meant success. Or that we need to build an endowment even if we are struggling to pay the bills.
We stepped back and challenged those long-too-held assumptions, looking at how flawed planning, communications and funding norms perpetuate our broken business models. Proper capitalization not only allows nonprofit organizations to operate day-to-day, but gives a chance to take a risk and seize opportunity. It allows us to weather change and recover from the storm. Capital supports acquisitions or upgrades and helps us meet future facility and equipment needs.
We need to explore a new paradigm and vocabulary that fundraisers and grantees, donors and grantors can use to inform and transform nonprofit financial practices and provide insights into having effective dialogues. We discussed community capital drivers, their institutional values and practices, and the ways that each entity fits into the sector.
Nonprofit organizations continue to budget, program and raise funds based on practices and perceptions established decades ago. Some of these "cultural norms" are actually detrimental to the long-term health of the sector and perpetuated by both funders and nonprofits. We work in outmoded ways, and then wonder why we don’t achieve success.
Grantmakers in the Arts, is a national group of major private and public arts funders and has been tackling these issues for several years. They have researched how under-capitalization is causing the chronic weakness that undermines the vitality of our sector. Originally funded by the Kresge Foundation and developed by Nonprofit Finance Fund and TDC, their workshop, Conversation on Capitalization and Community, allowed over 600 institutional and major donor participants in 14 major cities to discuss what it means to be well capitalized and achieve financial health and vibrancy. They have tested their model and emphasize that capitalization is the means to nonprofit success.
It is a message you don’t often hear in non-profit circles: You can’t capitalize a broken business model and every organization needs working capital. We weren’t sure how it would go over, but people loved it.
One woman said our session was “worth her entire cost for the conference and that the session was ‘real’ with serious content that made a difference. That we didn’t play games and that we said what she had been attempting to get across to her board for a while.” She was exuberant about it. That’s the way the whole conference was. There was meat on the bones everywhere. People want to change things.
It was nice to open the The NonProfit Times today and see some of our ideas quoted. Here’s the story:
5 Suggestions For Funders
This can be especially true for those entities helping arts or cultural nonprofits, which provide a benefit that cannot always be quantified.
Speaking during the Association of Fundraising Professionals International Fundraising Conference, Janet Brown of Grantmakers in the Arts and Brian Bonde of Advanced Certified Fundraising, provided five suggestions for funders about the help they provide to arts/cultural groups.
* Be clear about your chosen role. Are you a “buyer” (a source of ongoing revenue) or a “builder” (a source of periodic capital)? Funders can play one or both of these necessary roles, but each role requires a different kind of investment strategy.
* If you are a buyer (who provides revenue), fund programs and projects at full cost, supplemented by unrestricted support. Funders who invest in program expansion without supporting related operating costs are encouraging organizations to overextend.
* If you are a builder (who provides capital), orient support to the hierarchy of financial need. Encourage and support organizations to address their liquidity needs first by prioritizing working capital to manage cash-flow cycles and operating reserves to absorb regular operating risk.
* Talk about capitalization principles with organizations. Review business models with applicants and discuss what drives revenue and expenses.
* Talk about capitalization principles with other funders. Consider pooling capital resources with like-minded grantmakers.
by The NonProfit Times