Changing Times Call For Foundations To Try New, Innovative Approaches To Sustain Nonprofits

by Mike Gallagher for the CMF NewsWire
Posted: 10/2/2008

More and more, foundations and other nonprofits are being asked to support critical services and programs as state and federal government spending gets slashed for those efforts as elected officials grapple with ongoing fiscal shortfalls.

The continuing plight of Michigan’s nonprofits – and those across the U.S. – is staggering at a time when both the public and private sectors are expecting them to pick up the proverbial slack, says one nationally renowned nonprofit financial expert.

At last month’s Detroit Area Grantmakers meeting, Clara Miller, president and CEO of the Nonprofit Finance Fund (NFF), told foundation leaders it is a time for a new way of thinking as the philanthropic sector “is not impervious to the impacts of a structural deficit.”

NFF, created in 1980, is a national leader in financing nonprofits and improving their capacity to serve their communities. It is headquartered in New York with offices throughout the U.S.

During her speech entitled “Friendly Funding Practices for Unfriendly Times,” Miller suggested that everyone should ask the following questions about the nonprofits they serve, whether as funders or employees:

• Does a diversified revenue base make for a more profitable – and thereby sustainable – nonprofit?
• Does government funding create big financial problems?
• Does owning a facility improve an organization’s financial health?

“The answer to those questions is ‘not necessarily,’” said Miller.

Learning New Rules

In a recent study, NFF analyzed IRS Form 990s from 1,085 youth-serving organizations in five states with annual expenses of greater than $1 million.

“Not surprisingly, what we found was that conventional (business and marketing) wisdom often falls short of describing reality and may lead organizations and funders to make strategic errors that undermine organizational effectiveness for decades,” she said.

For-profit businesses can quickly and efficiently raise large amounts of money to fund growth and innovation by tapping equity capital – money that people invest in a company in return for ownership and a share of the profits, noted Miller.

“The nonprofits have no corollary, making it difficult, costly and time-consuming to raise money. Nonprofits, however, can create their own version of equity capital and, just as important, develop an equity approach to doing business.”

If management is part mystery and part art, it is also part basic science and arithmetic, said Miller.

“In the for-profit world, obey the ordinary rules and the ordinary results will follow. Flout them and no amount of vision or art will save you. But step into the nonprofit sector and you enter a new and irrational world where the rules, when they apply at all, are reversed and the science turns topsy-turvy.

“Yet at a time when both government and philanthropy are placing substantial bets on the virtues of business and free markets – swept up by venture philanthropy, market-based strategies, social enterprise and earned-income models for the delivery of public services such as education and healthcare – it would seem more timely than ever for the looking-glass universe of nonprofit management to be revealed.

“To the extent that government, philanthropy and the for-profit sector rely on nonprofits to tackle many of our society’s greatest challenges, and are investing public and private funds to that end, it is important to understand some principles of the sector, noted Miller.

“Price does not always cover costs. In the nonprofit world, you do lose a buck on virtually every widget (or guest at the nonprofit hotel). And no, you don’t make it up in volume in the nonprofit sector either. The difference is, you keep doing it!”

Also, foundation and other nonprofit managers need to start thinking in terms of “minimizing transaction costs” and start thinking in terms of “net grants,” said Miller.

“If you (foundations) are giving a large amount of money, keep it simple what you tell your grantees to do with it,” she said. “Many times there is a cost component to the rules a foundation puts on those they are helping. Rules are good up to a point. But let’s not make them use up a significant portion of this valuable money on administrative versus program costs.”

Another rule, according to Miller, is “Don’t put your cash into a building when you are about to enter a period of financial uncertainty. Keep cash available.”

When asked if she ran a nonprofit would she consider accepting real estate gifts in these troubled economic times, Miller cautioned, “Look that gift horse in the mouth very carefully. All these types of gifts come with many costs and issues.”

Additionally, in a warning to foundations, Miller added, “Be careful as foundations what you are providing to your grantees as they are essentially fragile nonprofit organizations. Let’s be honest, some (nonprofits) may be over their heads in terms of being able to meet all the criteria they promise as a way to obtain those funds. Be smart. Perform due diligence. Provide adequate oversight.”

Foundations Must Ask Tough Questions

DAG moderator Elizabeth Sullivan, vice president of community investment for the Community Foundation for Southeast Michigan and chair of NFF, said, “There are many issues we are facing in the nonprofit community. We hear every day about struggling organizations that many of us have supported.

“Many (nonprofits) are facing financial ruination,” added Sullivan. “We’ve known and have worked together for a long time on the issues that the local sector faces: our nonprofits are under-endowed; they are under-supported by public funding; and most are too under-staffed to support sustainable private fundraising programs.

“And while the competition for charitable dollars has increased, so too has the targeting of these resources leaving both funders and nonprofit organizations struggling to find new ways to address their community needs,” added Sullivan.

There are hard questions every foundation leader needs to asks, she notes.

“There have been calls for new social innovation, social entrepreneurship in the nonprofit sector, but how as funders should we evaluate these efforts? How can we best support the sector in these valuable times? And what beyond funding can grantmakers do to support and encourage each other in thinking differently about our work? We are all looking for solutions.”