Liquidity and Common Sense

(2-10-10) I recently attended a session led by Clara Miller of Nonprofit Finance Fund on capitalization. NFF has spent years working with nonprofits as lenders and advisors on financial systems and practices. They are part of a handful of knowledgeable experts in the arts and finance. Much of what Clara said rang a bell with me. After spending twenty-five years working with small and mid-sized arts organizations myself, it was nice to have confirmed that what I thought was good common sense, was actually important nonprofit business practice. A few issues were endowments, liquidity and administrative support.

For many years, arts groups were encouraged by funders and consultants to establish an endowment. For some organizations, especially large institutions with buildings, professional development staff and appropriate donors, endowments made perfect sense. But for many groups who were struggling to raise their operating budgets each year, endowment campaigns always seemed wrong to me. Putting resources into endowment fundraising while not being able to sustain operating or annual campaigns at a satisfactory level just never made sense. (Or maybe it does and I’m not seeing it.)

The reality for many groups, living season to season, is that they need liquid assets that can be used at any time to supplement revenue downturns or fundraising gaps. So cash reserves become a much greater need than endowments. From a funder’s perspective, this means we should be asking organizations how they are “saving money.” Is it built into their annual budget? The phrase “nonprofit is a legal structure not a business practice” kept coming up at the capitalization session by NFF. Most nonprofit leaders, like myself, matured in the environment of “zero” based budgeting… meaning you have to spend all you make. Both public and private funders promoted this practice. So the message was “profits are undesirable.” Add to that, the general rule that “we don’t fund administration.” So now we have a business that can only break even, at best, administered by a bare bones staff that have done too much, for too long, with too little (causing great turnover.) Seems like the ingredients for a perfect storm to create an under-capitalized sector.

To be honest, these were the practices of twenty years ago and the funding community has moved beyond “no administration and no profits” to looking more holistically at the organization, its product, its constituents and its environment. But maybe we haven’t come far enough. Maybe the call for new business models is really a call to more appropriately analyze and invest in the model we have. I know only enough here to be dangerous. Like many of us, I can ask the questions. Hopefully, together, we can come up with the solutions.

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