Welcome to Research Friday! As part of a continuing weekly series, each Friday we invite a nonprofit expert to highlight a research report or study and discuss how it can inform and improve day-to-day nonprofit practice.

At Nonprofit Finance Fund (NFF), we use data to help us understand and communicate the financial reality facing nonprofit practitioners on the ground. In previous Research Friday posts, I reviewed key findings from our annual Sector Survey on increased demand for social services and the cash crisis facing providers. This week, in honor of Domestic Violence Awareness Month, I’ll examine the impact of these issues on a specific subsector: Domestic violence service providers in California.

With support from the Blue Shield of California Foundation, NFF recently released Navigating a New Course, a report on the challenges these organizations are facing. Although this study focused on California service providers, anecdotal evidence suggests that domestic violence organizations throughout the country are confronted by similar challenges. The report was primarily informed by two sources:

1. Financial data showing trends from the field. In 2009, we conducted a broad financial overview of 70 domestic violence (DV) service providers, which was followed by a comparative financial analysis of 18 organizations in 2010.
2. Lessons learned from our work with agencies in the field. At present, we’ve conducted one-on-one consulting engagements with over one-third of the state’s DV programs.

When combined, the quantitative (financial) and qualitative (lessons learned in practice) data tell a powerful story, and the report’s findings come as DV providers brace for additional government funding cuts. So, what impact will these cuts have? To understand this, it’s important to acknowledge the way that this funding shapes an agency’s program decisions.

For example, most California DV organizations provide shelter and related support services, which are funded primarily through government sources—typically about 75% of their total revenue. Between 2000 and 2008, this revenue mix provided stability and the opportunity to grow, due to gradual increases in overall government funding. The caveat: in order to be eligible for this funding, DV agencies must provide their clients with access to emergency shelter (among a long list of other services). So, for reasons that are driven by their mission and their funders, the “shelter-based” business model has come to dominate this sector.

Unfortunately, the shelter-based business model is a highly inflexible one: most DV organizations’ assets are tied up in facilities, with very little cash on hand to manage risk. What’s more, housing-related services are expensive to operate, but government funding restrictions make it very challenging for organizations to make the necessary facility investments, create reserves, or even build a modest cash cushion to better manage risk.

But “risk” is now around the corner, and DV service providers are anticipating further cuts to their primary funding sources. Logically, this will require a reduction in expenses—but what is left to cut? NFF estimates that government funding has been reduced at least 10% from 2009 levels. As a result of the California budget crisis in 2010, many DV organizations laid off staff or closed temporarily.

An equally dire choice would be to cut back on one of their most costly program expenses—emergency shelters—but funder requirements prevent it. Emily Upstill, Senior Associate at NFF, summarizes the problem: “In my work with these organizations, I repeatedly hear from their management teams that even if they could justify cutbacks to the shelter from a mission perspective, the funding constraints make it unthinkable.” And it’s just as unthinkable to offer holistic wrap-around services or focus more on violence prevention, even though sector veterans know that these approaches are necessary.

DV organizations must now develop new models of sustainability to ensure the availability of the critical resources they offer. A clear look at the pros and cons of the current funding structure is a good first step, and NFF’s new report can help us to understand the many ways that public (and private) funding for this work could be improved. In addition to its observations on California’s DV sector, the report includes an in-depth case study on the Center for Community Solutions, an organization that has grown to serve more than 23,000 adults and children each year through its work to heal and prevent relationship and sexual violence.

The last decade brought growth, a merger, a facility acquisition, and resulting cash flow constraints to the Center for Community Solutions—and, in many ways, it serves as a mirror for the business challenges faced by their peers in the DV sector. Though based in California, their example is applicable to social service agencies nationwide because it demonstrates that a well-capitalized balance sheet is not a direct outcome of program growth. Rather, a strong balance sheet requires long-term strategic planning by nonprofits and more flexible funding sources in support of this critical work.

Throughout October, NFF will continue to write about the financial issues facing the Domestic Violence sector at our blog, Social Currency.

Angela Francis is a Senior Associate, Pacific Northwest & Southwest at 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.

• Research Friday: Out-of-School Time Programs for Latino Youth
• Research Friday: Expect to Find the Unexpected!