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 financial data every day in our work with nonprofits and their funders. One source of data informing this work is our annual State of the Sector Survey. Throughout the year, I’ve been blogging about key trends from our 2011 survey, which was completed by nearly 2,000 nonprofit leaders nationwide. They told us about their organizations’ financial outcomes from 2010 and speculated on what 2011 would bring. As we look back on what was certainly a challenging year, I thought it would be interesting to revisit some of their expectations.

Nonprofit leaders told us about planned changes to their service offerings in 2011:

Although contributed revenue was generally down from public and private sources alike, a majority of nonprofits indicated that they actually planned to add or expand their offerings in 2011. Many anticipated expanding the geography they serve or partnering with another organization in order to meet the increased demand for their services. In fact, 88% of respondents indicated some sort of shift in their service delivery. But it wasn’t just program change; management steps and tough decisions were also required.

Nonprofits told us about their planned financial management actions in 2011:
 

Nonprofit leaders have learned to expect the unexpected. As a result, many predicted that they would engage more closely with their board and develop a “worst case scenario” contingency budget. If they were fortunate enough to have reserves, some groups planned to tap them. Many organizations decreased expenses. But some collaborated to manage their expenses and a third of organizations actually increased their expenses. Twelve percent even expanded their office or program space.

A big picture takeaway from both these charts: in response to the recession and significant shifts in funding, nonprofit organizations were planning to make some significant changes. In order to meet demand (or in some cases, survive), nonprofits planned to alter their staff size, their service area, or their business model — all scenarios that bring risk and uncertainty. Major organizational changes are often time consuming and expensive, but we also know from the survey that many nonprofits have virtually no cash cushion to support this change.

For this reason and many more, NFF routinely advocates that we change our “one size fits all” approach to the way we view money in the sector:

• Revenue is routine. Revenue covers the cost of providing a nonprofit’s normal services day in and day out.
• Capital is for one-time, extraordinary projects like building a new facility or investing in the planning and infrastructure necessary to make a new business model work.

To be clear, both types of money are necessary for organizations to deliver on their mission. But making a distinction is key because program funds alone will not support an infrastructure change, and often general operating support just closes the gap between revenue and the “full cost” of service delivery.

At NFF, we were thinking about these concepts quite a bit in 2011 and how they can be implemented by nonprofits and funders alike. If an organizational change is on the horizon, nonprofits should be able to talk with their funders about their true financial needs. Likewise, funders should recognize that all this change and innovation requires time and resources to materialize. It seems especially important to talk about these issues now if we are to better position ourselves in 2012. (Click here for more in-depth resources on the topic.)

So what will next year bring? NFF is now preparing to launch the new State of the Sector survey in January 2012. Stay tuned for updates on how to participate and tell us where your organization stands amid the ever-changing nonprofit landscape.

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.

• Nonprofit Mergers - When Churches Merge
• Research Friday: Strengthening the Economy through Civic Engagement