Welcome to Research Friday! For this week’s post, we welcome Angela Francis from Nonprofit Finance Fund to discuss NFF’s recently released State of the Sector survey findings. We've had a great response thus far to Research Friday, our weekly series on nonprofit research. We welcome your comments, feedback and suggestions!

Nonprofit Finance Fund recently completed its third annual "State of the Nonprofit Sector" survey with the help of nearly 2,000 nonprofit leaders nationwide. Respondents came from large organizations and small, and from all sub-sectors, and include a small sample from Arizona.

Since we started this undertaking in 2009, we've heard each year that demand is on the rise, and that remains the expectation for 2011. To meet this growing demand—which comes on top of each previous year's increases—nonprofit managers continue to be resourceful in their efforts to balance mission, capacity, and capital. From collaboration to cost management, nonprofits are trying to protect their (precious little) infrastructure and enterprise while serving even more people.

This balancing act becomes increasingly difficult when organizations experience upheaval—whether due to a recession, the loss of a funding source, or unexpected expenses. Yet even smaller changes, such as a program expansion, can quickly overwhelm a nonprofit operating on paper-thin margins with no cushion to absorb the risks and expenses associated with growth. In Arizona, 35% of our survey respondents reported having less than 1 month of cash on hand (10% had none), which is fairly consistent with results nationally.

Nonprofits put their long-term mission in jeopardy by repeatedly agreeing to do more with less. So why do we do it? Often, perceptions about support from major funders will influence a nonprofit's management strategies and how it addresses challenges. This year, our survey asked nonprofit leaders to indicate what topics they felt comfortable discussing with their funders, with the option to "check all that apply."

A resounding 58% of respondents nationally, and 55% in Arizona, feel comfortable talking with their funders about program expansion, a generally positive topic. But can we talk candidly about our options to support that growth financially? The survey primarily says no:

• 23% of national respondents were comfortable talking about their working capital needs.
• 21% can voice cash flow concerns with funders.
• 5% feel able to discuss their debt burden.

Nearly a quarter of respondents perceive that their funders are not "willing to have an open dialog" on any of these topics! This is an area where both grantees and their funders could aim to make great strides in 2011. Especially now, when it seems like increased demand and decreased funding availability are the new standards. (When we asked nonprofits if it felt like the recession was over, nearly 90% said "no.") After the next round of projected government funding cuts, will we continue to ask nonprofits to pick up the slack, expanding their services without a solid plan for funding the full cost of these operations? Or will we start having tough conversations about the limits of an incredibly resilient and resourceful sector?

In reference to a nearly insurmountable financial challenge from 2010, one respondent shared that, "We survived almost 4 months without our major income source from the [local government] by laying off 2/3 of the staff and operating on minimal expenses. Our laid off staff put in over 1000 hours of volunteer time during that period… " Although stories like these are incredibly inspiring, we know that sweat equity is not sustainable; nonprofit professionals can not be volunteers on a permanent basis.

If we are serious about achieving the outcomes sought by nonprofits and their funders, we must engage in a more realistic dialog about capital and capacity—and it's up to grantees and funders alike to make these conversations less daunting and more common.

About Nonprofit Finance Fund: Since 1980, NFF has worked to connect money to mission effectively, so that nonprofits can keep doing what they do so well. We are a CDFI providing nonprofits with loans and lines of credit; we also organize financial training workshops, perform business analyses, and offer customized consulting services to nonprofits and their funders nationwide. In addition to the State of the Sector resources linked above, you can download our survey overview here.

About Angela Francis: Angela Francis is the Senior Associate for the Pacific Northwest & Southwest Markets at Nonprofit Finance Fund.

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