Welcome to Research Friday! For this week's post, we welcome Angela Francis, Senior Associate, 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!

At Nonprofit Finance Fund (NFF), we use data and capital to drive our work with nonprofits and their funders nationwide. One source of data informing this work is our annual State of the Sector Survey. Earlier this year, nearly 2,000 nonprofit leaders completed the survey, and the results help us to better understand and communicate the economic reality facing nonprofit practitioners on the ground. In a previous Research Friday post, I covered some key survey takeaways on the increased demand for services in 2011, and how this is communicated to funders. This week, I want to delve a little deeper into the survey responses that we received in another key area: cash available to manage risk.

As we work with clients, provide workshops, and present on nonprofit finance issues, one question pops up again and again: how much cash cushion should a nonprofit have? One of my NFF colleagues recently explained why the answer is different for every organization and depends on a number of factors. As a rough benchmark, though, NFF recommends nonprofits should have enough cash to sustain operations for at least three months. Having less than one month of cash at your disposal is generally considered a cash crisis.

A more ideal situation is holding three to six months of cash, which makes it easier to start thinking long term and building up reserves: a rainy day fund, facility reserves, etc. Organizations with reserves are better prepared for an emergency (major building repairs, loss of a primary funding source, severe economic upheaval), and, in a crisis, it's more likely that they can continue providing their services uninterrupted.

Our 2011 survey asked, "How much cash (including reserves) does your organization have readily available?" Nationwide, 9% of the social service providers who responded reported having "0 months" of cash. Another 20% had enough to cover 1 month of expenses, while 34% reported that they had "2 - 3 months" of cash on hand. So the results seem to say that just about a third of social service agencies are experiencing a cash crisis, another third are managing, and the remainder has a very workable cash cushion.

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In practice, however, our consultants actually see a very different picture. While our survey asks about total cash, remember that many nonprofits receive temporarily restricted funds. This means that at least some of the cash reported by our survey respondents is likely restricted. Depending on restrictions, it's possible that management can access that cash for upcoming expenses, but it's also possible that management can't touch that cash for some time. When we consider only the cash that management has readily available for use, the reality is probably bleaker than the survey indicates.

In the field, NFF staffers see many nonprofit clients who have, on average, one month of cash on hand and between zero to one month of unrestricted liquid net worth. It can be a relief for our clients to hear they are not alone in having a sustained liquidity crisis; many of their peers are in the same boat. The real concern, however, is not what this cash crisis means for nonprofits but what it means for the communities and individuals we serve.

Think about it: if a large portion of our country's nonprofits have one month of unrestricted cash and zero months of unrestricted liquid net assets, they are operating with no room for error — a scary scenario for the millions of people who rely on the safety net of social and human services that nonprofits provide.

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What's more, our survey also shows that demand for services is rising year over year, and the resources available to fund this work are not keeping pace. Government funding continues to decline and private foundations are unable to fill the ever-widening gap. Amid these cuts in government funding, Steve Seleznow, President and CEO of the Arizona Community Foundation, sees a rapidly changing landscape for the provision of social services. Says Seleznow, "It's healthy for government to cut fat. It hurts to cut to the bone, but you can make do — however, governments are now amputating entire social safety net programs, and they'll never grow back."

If that isn't an incentive to change our practices, what is? Practitioners in the field continue to seek new methods for fundraising, but that's only half the battle (and it won't solve the perpetual cash crunch). In order to meet our long-term mission goals, we also need to reexamine our financial management strategies. Arizona's most vulnerable residents are counting on us.

Since 1980, NFF has worked to connect money to mission effectively, so that nonprofits can keep doing what they do so well. They are a CDFI providing nonprofits with loans and lines of credit; they 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 the survey overview here.

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