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Nonprofit Finance Fund
Welcome to Research Friday! As part of a continuing series,we invite a nonprofit scholar, student, or professional to highlight current research reports or studies and discuss how they can inform and improve day-to-day nonprofit practice.
Conducted in January and February 2013, Nonprofit Finance Fund’s 2013 State of the Sector survey assessed the financial and management challenges facing 5,983 organizations across the country. As income disparity continues to grow, many nonprofits are struggling to meet overwhelming community need amid the stark realities of funding cuts. Many are recognizing that this dynamic may be here to stay.
When NFF began this survey in 2009, many of our clients were in “triage” mode: they were dealing with mission and finance-related emergencies, relying on short-term coping strategies—like reserve depletion and staff furloughs—to make ends meet until the financial crisis was over. Five years later, temporary stimulus funding has come and gone, replaced instead by ongoing cuts to government funding. Organizations reliant on government funding continue to experience a “death by a thousand cuts,” says NFF client Sharon Stapel, Executive Director of the New York City Anti-Violence Project. “In isolation, the cuts may seem small,” says Stapel, “but over time, they speak to a larger, more serious trend that will have an impact on the health, happiness, and safety of our communities.”
Short-term, Band-Aid strategies are no longer tenable for our communities or the organizations that serve them. Increasingly, government-funded organizations are switching gears: from that of reaction, to adaptation, innovation, and action—whether on a small or large scale. Below, we highlight some of the prominent trends.
Revenue diversification: Myth vs. reality
With declines in government funding, many that have historically relied on this source are looking to tap new sources of funding, from individuals, events, foundations and corporations. Other organizations are exploring the development of earned revenue ventures to supplement their income. And many organizations are turning to their boards. Says one survey respondent, "Our greatest challenge is building a strong Board of Directors that is willing to fundraise for the organization. We are overcoming this challenge by rolling long-term members off of the Board and rebuilding from a small group. Anyone who joins the Board now has clearly defined roles and willingly makes a personal donation in addition to actively fundraising."
But there are major hurdles in this race toward diversified funding. Fundamentally overhauling a business model can be risky and expensive. For an organization that has traditionally been in the business of managing contracts and reimbursements, tapping into new revenue streams will require new skill sets and systems (translation: time and money). What’s more, the costs of developing new revenue streams come well before the payoff, particularly with earned revenue ventures.
Our previous post explored the complexities of government contracts, including reporting requirements, payment delays, and redundant systems. This is a challenge for both nonprofits and government officials. Given the complexity of the problem, many states and cities have found that the best solutions involve highly collaborative task forces that bring together nonprofit experts, policy makers, and public servants who are all dedicated to producing substantial change. States including Hawaii, Illinois, New York, Maine, and many others have developed task forces on government contracting. One example of an outcome of these efforts is New York City’s HHS Accelerator program, which aims to streamline both reporting and data collection for organizations seeking or receiving government contracts. (For core principles of these task forces and recommendations on what makes them work well, see this study by the Council of Nonprofits, available at govtcontracting.org.)
Innovators around the world are developing cost-effective solutions that can deliver better social outcomes. Many of these efforts hinge on preventive programs that can reduce the long-term burden on public resources by stopping costly social problems in their tracks. Explains one survey respondent: "More than 15% of [our county's] population currently lives in poverty. Our community cannot afford even one more homeless family; it is more proactive and cost-effective to focus on prevention than to deal with the trauma and social consequences once a family becomes homeless. The cost of homelessness for one person can exceed $37,000 per year with ER visits, public assistance programs, law enforcement and more... Comparatively, the preventative services provided through our agency cost far less; on average, $400 resolves a family's rent and/or utility crisis."
Pay for Success (PFS) financing has emerged as one strategy that ties government payment for programs to long-term outcomes. In the basic PFS model, private investors provide capital to build programs that (1) primarily focus on prevention or early intervention and (2) can prove their impact. If the program succeeds, the government pays the investors back with interest, funded from the savings realized by taxpayers due to using a cost-effective approach. While Pay for Success financing is still in nascent stages around the world—and its success is still uncertain— it will be one strategy in a growing movement that focuses our money and efforts toward the most effective solutions.
Shock absorbers: Building a resilient sector
Many investors, including NFF, provide working capital loans and lines of credit to help nonprofits bridge payment delays. As discussed previously, challenges caused by payment delays have given rise to an entire sector dedicated to helping organizations build capacity to absorb the shock and smooth out these erratic payments.
But when organizations are already fragile, responsible lenders are simply not able to provide traditional loans. Instead, many lenders are getting creative. They are developing more integrative loan programs that combine different types of financing. Some are building in safety mechanisms that add an extra cushion so organizations aren’t left stranded when they’re most in need. Others are combining capital with capacity building supports. To work well, however, these complex financing structures demand intensive, highly motivated collaboration between banks, funders, and nonprofits. To date, only a handful of these creative partnerships have made it to the finish line, but we expect to see more come to fruition as the ideas gain momentum and begin to show signs of success.
These are just a sampling of the solutions that we've seen, and we’ll continue to explore more in future posts. What's worked for your organization? What hasn't?
Anjali Deshmukh is a director and Angela Francis is a manager at Nonprofit Finance Fund (NFF). A 501(c)(3) nonprofit, NFF pushes for improvement in how money is given and used in the sector. Since 1980, we have worked to connect money to mission effectively, so that nonprofits can keep doing what they do so well. NFF provides financing, consulting, and advocacy services to nonprofits and funders nationwide.
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Read Angela Francis and Anjali Deshmukh's "Research Friday: Government contracting in the new normal."