Are unsustainable financial models impeding nonprofit recovery?

Last week we described a new study exploring the impact of the recession on the predicted wave of nonprofit executive turnovers.  According to Daring to Lead, many nonprofit leaders held on to jobs they’d planned to leave before the financial crisis, but projected turnover remains high and few organizations are prepared to manage a leadership transition.

The problem is bigger than the position, says Daring to Lead. The authors warn that in addition to the looming leadership gap, we should be concerned with the endemic problem of unsustainable nonprofit financial models. The recession, they say, has shed light on an old problem: nonprofits hold up our country’s social safety net without adequate financing.

The study, which is focused on leadership and the experience of nonprofit executives, suggest there is a direct link between ED success and happiness and the financial state of their organizations. And given that the vast majority of nonprofits suffered major funding cuts in the recession, it’s no secret that anxiety and burnout are through the roof.

Sector leaders have long been calling attention to the problem, and Daring to Lead makes a point to connect its financial and leadership dimensions. With half of nonprofit leaders reporting less than three months of cash in reserve, how can we expect even the most talented among them to create impact and lead strategic growth? Chronic financial instability frustrates leaders and leaves organizations without the resources to “take risks, underwrite growth, or invest in their own capacity beyond what they can get existing funding streams to pay for.”

Unfortunately, Daring to Lead doesn’t explore alternatives to the unsustainable models the authors blame for burnout. But elsewhere in the sector, efforts are underway to demonstrate how “philanthropic equity” is needed to run sound businesses, grow to meet changing community demands, and invest in new programs and services.

The problem, say many in the field, is that under the current model, nonprofits are expected to operate without growth capital, making sound financial practices nearly impossible. The current system makes nonprofits supplicants to their funders, surviving year after year with minimal cash reserves and no capital to diversify and build their operations.

The Nonprofit Finance Fund (NFF) has long been at the helm of trying to shift perceptions about effective financial models.  Working with the Edna McConnell Clark and other foundations and partners, NFF is now piloting philanthropic equity projects that support nonprofits in running equity campaigns and creating more sustainable revenue models. To help support the equity model, NFF developed a new accounting methodology that tracks growth capital separately and doesn’t count it toward general revenue. As capital is used, the funds shift back into the revenue line, allowing money going to build the organization’s platform to be separately accounted for.

You can read about the model and NFF nonprofit equity projects in the NFF Capital Partners 2010 Performance Report, or learn more about how nonprofit leaders are coping with financial strain in Daring to Lead.

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