Nonprofit economics: Tips and wisdom from the pros

Everything goes back to the economy these difficult days, it seems. Last week I discussed the challenges facing the nonprofit sector in attracting strong leadership for the future.  Many of the challenges stem from the historic, and too often endemic, lack of resources among organizations in the sector.

This week I attended the Leadership Awards Ceremoney at Case Western Reserve University’s Mandel Center for Nonprofit Organizations. The keynote speaker was Jennifer Pryce, director of advocacy for the Nonprofit Finance Fund (NFF), a community development and financial institution that provides loan financing and financial advice to nonprofits nationwide. 

Since the ceremony took place on the day the president called for a $700 billion bailout of America’s financial sector, Ms. Pryce thoughtfully diverged from her prepared remarks to address the key issue of undercapitalization of the nonprofit sector. She offered tips for financial sustainability from the NFF’s long experience in the field.

Here are just a few takeaways from her remarks, paraphrased by me:

  • You can’t grow out of deficit without a new model of doing business and sufficient capital to bridge to a more sustainable business model. If you make widgets and lose $1 on every widget you make (read, operate programs at a loss), just making more of them means you will just lose more money.
  • Funders that only fund programs and don’t provide flexible operating support are part of the problem. They are complicit in promoting the undercapitalized nonprofit business model. Since funding never covers the whole cost of a program, organizations must take on debt obligations with every new project or program they launch. But since most funders only offer support for projects or new programs…it’s a vicious circle that can spin an organization away from its core mission.
  • It is perfectly OK for a nonprofit to make a profit! Organizations should look for ways to profit from their programming – or to develop related for-profit businesses that are in alignment with their mission. Community Wealth Ventures (a for-profit consulting service of the Washington-based Share our Strength nonprofit) is sponsored here by the Cleveland Foundation (contact Cleveland Foundation Program Officer Jill Paulsen to learn more.) CWV helps nonprofits explore the potential for income-generating programs or businesses.
  • The dream of nonprofits to own their own building can quickly turn into a nightmare. Organizations must ask themselves: Are we here to help children, produce opera, feed the hungry (fill in your nonprofit mission), or to manage real estate? Do we have the financial and human capacity to be in this alternative business as well as our core business? Too often, owning and operating real estate drains time and money that would otherwise be spent on programs and services. The increase in fixed costs limits financial flexibility and the ability to absorb risk.

Check out more financial wisdom related to the arts in a series of monographs authored by this excellent organization.