fiscal health & sustainability

It Matters … But Is It Working?

A White Paper Series on Our Region’s Nonprofit Sector

Fiscal Health & Sustainability July 2010

This white paper presents the perspective of The Philadelphia Foundation.

It draws from demographic research about the nonprofit sector in Southeastern Pennsylvania conducted by the Economy League of Greater Philadelphia.

____________________________________________________________________________________________________ The Philadelphia Foundation It Matters… July 2010

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The Philadelphia Foundation It Matters… July 2010 1

Executive Summary

Executive Summary Fiscal Health & Sustainability

This white paper examines several aspects of the fiscal health and long‐term sustainability of the Southeastern Pennsylvania nonprofit sector. A synopsis of key points follows:

Nonprofits have considerable economic impact on the region’s economy, complementing the important contributions to our community’s quality of life through the goods and services they provide. Given the scope and significance of the nonprofit sector, what happens to Southeastern Pennsylvania nonprofits has significant ripple effects for the entire region.

Many nonprofit organizations but in particular the subset of NPISH (Nonprofits Serving Individuals and Households) organizations operates under a mission‐based focus rather than under the market‐oriented management that characterizes for‐profit organizations. The key implication of this distinction between the two business models is a broken chain of End User feedback – a lack of data exchange flowing from the clients and recipients to members of the board of directors ‐‐ that has direct impact on nonprofit board decisions and that contributes significantly to the fragility of nonprofits during economic downturns.

While the nonprofit sector was fragile before the Great Recession, the economic slump has further imperiled the sector. Confronting this reality – recognizing that our community’s quality of life and social safety nets are threatened – demands some soul‐ searching and concerted action by the community as a whole.

These findings demonstrate the need to explore several specific tactics to ensure that the nonprofit sector remains dynamic and robust:

How to establish consistent and meaningful donor support – from all sources – for nonprofit general operating costs.

How to make capitalization the key financial metric to assess nonprofit fiscal health.

How to encourage board members to look at nonprofit decisions through a fiscal lens.

How to engage the community at large in holding nonprofit boards accountable in making intelligent and appropriate fiscal choices.

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It Matters…But Is It Working?


The Philadelphia Foundation commissioned a study by the Economy League of Greater Philadelphia to quantify and describe the nonprofit landscape in Southeastern Pennsylvania (Bucks, Chester, Delaware, Montgomery and Philadelphia counties). The data is posted on The Philadelphia Foundation’s website at www.philafound.org/nonprofitstudy2010. That research enabled The Philadelphia Foundation to begin framing a series of strategic questions about the sector’s contribution to the people of our region and their needs. These questions focus on the sector’s vitality, leadership, sustainability and future direction. As one of the oldest and largest community foundations in the United States, The Philadelphia Foundation has been committed to bolstering philanthropy and the nonprofit sector since 1918. With 800 component funds established by charitable individuals, families, businesses and organizations, we award about $20 million a year to nearly 1,000 organizations as grants and scholarships. This second white paper in our series explores the fiscal health of nonprofits and the implications of that on the regional economy. Our purpose is to frame relevant questions for and about our region’s nonprofit sector, report on what is known and what remains to be explored, and suggest directions forward. Further, these white papers are a call to action, inviting the region’s nonprofit sector, as well as government, the private sector, the media and citizens‐at‐large, to freshly articulate the role we need our nonprofit sector to play, and to reaffirm the support it needs to perform that role well. We see these white papers as a strategy in our role and larger mission to “build community,” and another step in realizing our vision:

…a flourishing Delaware Valley made up of safe, thriving and diverse communities, strengthened by a dynamic and robust nonprofit sector that is critical to our quality of life,

and that inspires civic participation through philanthropy. We invite your participation.

R. Andrew Swinney President, The Philadelphia Foundation

http://www.philafound.org/nonprofitstudy2010

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It Matters…But Is It Working?


Fiscal Health: Sustainability, Business Models, Processes

Strategic Themes and Questions Fiscal Health and Impact of Nonprofits on the Regional Economy (p. 4) What do we know about the fiscal contributions of nonprofits to the region’s economy? (p. 4) Can a Nonprofit Really Operate Like A For‐Profit? (p. 5) Market‐Oriented Management vs. Mission‐based Focus: How are the drivers for nonprofit performance fundamentally different from those of the commercial world? (p. 6) Operating Realities: How do the commercial and nonprofit business models differ and what is the impact of those differences? (p. 7) Effect of the Great Recession on Nonprofits (p. 11) How fragile were nonprofits before the Great Recession and how has it affected them? (p. 11) What are the stress points with continuing impact going forward? (p. 11) What is the impact on the regional economy when nonprofits are imperiled? (p. 13) Fiscal Health Tactics—Redefining the Roles (p. 14) What can nonprofit organizations do to strengthen their own sustainability and build their long‐ term capacity? (p. 14) What approaches can funders adopt to better serve the sector’s long‐term needs? (p. 16) What role do nonprofit board members play in ensuring that nonprofits have a solid financial footing? (p. 18) What role does the overall community play in holding boards accountable and ensuring the strength of nonprofits? (p. 20)

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Fiscal Health & Impact of Nonprofits in the Regional Economy Role of Nonprofits in the Region The Philadelphia Foundation’s Nonprofit Study conducted by the Economy League of Greater Philadelphia used IRS 990 filings to gather a range of financial data on nearly 7,300 nonprofits in the five‐county Philadelphia region that are required to file tax returns. Of these filing nonprofits, more than 5,000 organizations are classified as Public Charities, and more than 3,600 NPISH organizations exist to provide households and individuals with direct services (see glossary p. 24). The data documented that nonprofits in our region have considerable economic impact, complementing their important contributions to our community’s quality of life through the goods and services they provide. Key points are summarized below. Revenues and Assets: Public Charities had $36 billion in revenues and $64 billion in total assets in 2007; NPISH (Nonprofits Serving Individuals and Households) organizations had $9 billion in total revenues and $14 billion in assets. Spending: Public Charities in southeastern Pennsylvania spent more than $32 billion in 2007. The 3,600 NPISH organizations spent more than $8 billion. Between 2000 and 2007, spending grew 59%. Growth: Since the year 2000, the number of nonprofits in southeastern Pennsylvania has grown by about 40%. Between 2000 and 2007, Public Charity revenues grew by 68%; Public Charity assets grew by 61%. Employment: If the federal government were to count nonprofits as a unique and official economic sector, our nonprofit sector’s 242,000 employees and more than $11 billion in annual wages in 2007 would rank it as the third largest sector in the region. NPISH organizations make up about a third of that employment base, with more than 87,000 employees earning nearly $3 billion in wages. These employment figures, gathered from the QCEW (Quarterly Census of Employment and Wages), count only salaried employees and therefore do not reflect part‐time workers, contractors and volunteers. As a result, the actual number of workers involved in our region’s nonprofit sector is substantially higher. Sources of Revenues: Revenue for Public Charities in our region during 2007 came from two principal sources: Contributions, Gifts and Grants accounted for just under a quarter of total revenue (23.5%), while Program Services and Contracts accounted for two‐thirds of revenue (65.6%). The Program Services and Contracts revenue level reflects, in part, the scale and impact of the so‐called “Eds and Meds” cluster (see p. 29). Other revenue streams included Dues, Net Sales and Other Income at 7.2% of total revenues; Investment Income at 3.5%, and Net Special Events Income at 0.2%.

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At the end of this white paper, we present some additional summary information from this research and charts depicting the nonprofit sector in our region in terms of numbers of organizations and the relative scale of revenues and assets by sub‐sector (see p. 29).

Impact of the Fiscal Health of Nonprofits Because the nonprofit sector is large and diverse, it is important to be clear when speaking about the fiscal operating realities it faces. The Nonprofit Study focused on Public Charities, with some emphasis on NPISH (Nonprofits Serving Individuals and Households) organizations. Unless otherwise noted, we address NPISH organizations in this paper. Because of their size, many “Eds and Meds” – those institutions such as major colleges and universities and health care facilities such as hospitals and nonprofit clinics – typically operate under a separate set of fiscal parameters than those discussed here. Appropriately, avoiding operating deficits has been a key mantra – and a healthy one – in the nonprofit community for a very long time. Many donors demand a balanced‐budget track record as a key requirement for support, along with low overhead/general and administrative expense ratios. And many nonprofits will “do whatever it takes” to operate within those boundaries – at possible peril to their own long‐term survival, as we shall explain. Given the scope and significance of the nonprofit sector, what happens to Southeastern Pennsylvania nonprofits has significant ripple effects for the entire region. From a purely economic standpoint, threats to the viability of the nonprofit sector are threats to a sustainable regional economy.

Can a Nonprofit Operate Like A For‐Profit? For many years, there has been active debate around how to strengthen nonprofits, fueled by ongoing adoption of ideas and best practices from the commercial and corporate worlds. We know that many nonprofits seek to recruit to their boards business leaders and entrepreneurs whose business acumen – along with their largesse and passion for the nonprofit’s mission – are critical for building the organization’s fiscal health and sustainability. In addition, nonprofits have adopted many of the management principles developed by their for‐profit counterparts. These include implementation of sophisticated forecasting modeling tools and cost/revenue studies as well as embracing Sarbanes/Oxley‐like financial transparency policies. Many nonprofits also have implemented (within their resource limitations) technological enhancements used in the corporate sector, including on‐line purchasing (or acceptance of donations), social networking outreach, and database and program management software updates.

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Of course, even while employing these strategies, many for‐profits fail, and it is only reasonable to assume that some nonprofits also will fall victim to market forces, particularly in difficult economic times. The question, then, is not so much whether nonprofits should be run “more like businesses and less like charities” but why the nonprofit world is so much more fragile ‐‐ why nonprofits are more likely to be adversely affected than their for‐profit counterparts during economic downturns. The answer can be found in the distinctions between the financial structures of for‐profit and nonprofit organizations, in the contrast between “market‐oriented” management and a “mission‐based” focus. Better understanding of these differences will help our community appreciate the fragility of our nonprofit sector and more clearly determine where we can strengthen it.

Market‐Oriented Management vs. Mission‐Based Focus A December 2008 Harvard Business Review article – Delivering on the Promise of Nonprofits – by Jeffrey L. Bradach, Thomas J. Tierney, and Nan Stone, clarifies the differences between commercial and nonprofit organizations: the former focus on markets, the latter on missions.

The article notes:

In the business world, market forces serve as feedback mechanisms. Companies that perform well are rewarded by customers and investors; underperformers are penalized. Performance is relatively easy to quantify through quarterly earnings, ROI, customer loyalty scores, and the like. Moreover, such metrics can be calibrated and compared, ensuring that the companies producing the best results will attract capital and talent. Managers are encouraged to invest in the people, systems, and infrastructure needed to continue delivering superior performance. And internal feedback mechanisms, from up-to-the-minute operating data to performance reviews, keep everyone focused on critical activities and goals.

In the nonprofit world, missions, not markets, are the primary magnets attracting essential resources — from donors inspired by organizations’ audacious goals; from board members, who not only volunteer their time and expertise but also often serve as major funders; and from employees, who accept modest paychecks to do work they care passionately about. …

Assessing and comparing performance is also a more subjective and values-driven exercise for nonprofits than for companies. Given the diversity of the goals nonprofits pursue, there is no single quantitative or qualitative metric against which performance can be evaluated and ranked. Even when several organizations are aiming for the same goal — reducing school dropout rates, say — the absence of standard outcome measures makes it impossible to compare their performance.

Quirky, too, are the sector’s funding flows, which often fail to reward high performance and are seldom reliable enough to justify significant investments in organizational capacity. A nonprofit’s very success can provide an excuse for donors to stop giving, because the organization no longer “needs” their money. Both public and private funders overwhelmingly want to support programs (especially new

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ones) rather than overhead. So program proliferation trumps investment in existing programs, and the organization is strained on every front: Management ends up being undercompensated and overstretched. Operating systems and technology are often rudimentary.

This contrast in the business models of market vs. mission approaches is summarized below in Fig. 1. A more detailed exploration follows.

Fig. 1: Key Management Distinctions Between For‐Profit and Nonprofit Business Models For‐Profit Nonprofit

Board of Directors Elected by shareholders Members have a direct financial stake

in organization’s market success

Appointed by Board colleagues Members have alignment with

organization’s mission. May or may not be donors to organization, but have no direct financial stake in organization’s market success

Shareholders Fellow investors in corporation, with management authority over board

Members of the particular sector as well as the broader community who have no governance authority over the board

Relationship between Board, Shareholders and End Users

Direct connection No direct connection

Revenue Generated through purchase by End User of product

Generated through voluntary contributions of individuals, foundations and government

Market value of product/service

Set by End User based on competition with like products/services

Set by largesse of funder

Payment of expenses to create product/service

Mandatory for organization to continue in operation

Optional for organization to continue in operation

Impact of economic downturn

Based on forecast of the downturn’s impact, manufacture and delivery of product/service is adjusted, usually through cost reduction, pricing actions or increased marketing Boards may decide to merge operations, sell units or entire company or cease operations

Demand for service/product increases while funding sources decrease. Increased pressure placed on historically under‐funded operating costs and reserves Boards may be forced to make critical decisions on program, staffing and sustainability without appropriate evaluation and research on program effectiveness. There is limited ability to seriously explore strategic alternatives such as shared operations, joint programming, mergers or dissolution

Differing Business Models For‐profit business model Very simplistically, a for‐profit, public corporation is managed by a Board of Directors on behalf of shareholders. Both the Board of Directors and the shareholders have a financial interest in performance, and expect a personal return on that investment.

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In general terms, the corporation creates a product or provides a service, and competes in a marketplace where price, quality, cost and competition are key drivers. To perform well over the long haul, research and development must be funded and contribute to better products and services downstream. Ongoing market surveys are used to determine whether to increase or decrease production, with additional research used to determine ways to produce a more cost‐efficient, higher quality product/service to entice consumers from competitors. To respond to an economic downturn, a for‐profit entity forecasts the impact on its sales and adjusts the manufacture and delivery of the product/service, usually through cost reduction, pricing actions, and even increased marketing expense. Boards may decide to merge operations, sell divisions or the company as a whole, or cease operations as a means of protecting their investment. Consumers (End Users) also adjust, deciding on how necessary a product or service is during periods of lower income or financial uncertainty, and may defer discretionary purchases, change brands, or go without where necessary. Nonprofit business model Again very simplistically, a nonprofit corporation is managed by a Board of Directors. But unlike for‐profits, the Board members do not have an “investment” interest in the organization. (Although members often make substantial donations, they do not expect a financial return on those gifts). Shareholders include the community overall, specific populations served by the nonprofit, government, donors, and more – all of which have an interest in the organization but do not have governance authority. The organization produces a product (usually a service). But unlike a for‐profit, the End User (client/recipient) of the product or service is not the party paying for it (or if he or she does pay, it is typically at a subsidized rate). Most nonprofit revenue comes from foundations, individual donors, or government funds, often through contracts. As in a for‐profit model, the End User and the shareholders (the community) determine whether the product/service is a necessity or discretionary. But donors play a critical role in this decision as well, and this becomes very important in an economic downturn. Donors can specifically direct or exclude which expenses they wish to fund. For example, many individual donors and foundations will restrict their funding to program costs only ‐‐ they will not fund overhead, research or marketing. Since a nonprofit’s operations and cost structures are in some ways much more transparent than those of for‐profits, it is easier for the donor to be selective in how his or her contributions are used. As a result, many nonprofits find it

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challenging to earmark resources for marketing or research, and their operating budgets are slim.

A Broken Chain of End User Feedback Based on our decades of anecdotal experience with a broad array of nonprofits, it is the lack of feedback from the End User that has direct impact on nonprofit board decisions and that contributes significantly to the fragility of nonprofits during economic downturns. While this phenomenon has not been quantified or formally studied, we have repeatedly observed it in operation through extensive exposure to the Southeastern Pennsylvania nonprofit field. A graphic depiction of the contrast between the two models can be found in Fig. 2 and Fig. 3.

Fig. 2

The circular nature of the traditional for‐profit business model (Fig. 2), when it functions as designed, allows information obtained through ongoing funded marketing, production costs and research and development to be included in the final design of the product/service. The End User (consumer) provides feedback that aids the Board of Directors, Shareholders and Executive Staff in setting price, adjusting production and determining the direction of the corporation.

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Fig. 3

Fig. 3 shows the more linear nonprofit model in which information regarding the demand for and the quality of the product/service is not transmitted back to the Board of Directors or, in rare cases, is transmitted back sporadically in anecdotal form. In many if not all cases, it also is not transmitted back to those who pay for the creation of the product/services (the nonprofit funders.) Under the nonprofit model, the Board of Directors is not directly held accountable for the fiscal and overall success of the product/service of the organization. So while board members have been invested by the community in protecting the public good through their board role, there is no formally established cross‐check ensuring that they do so. The board member’s only “investment” in their service is their personal reputation and their only return on that investment is the recognition and satisfaction they gain from performing their board duties. Granted, they have shared legal exposure as part of their fiduciary role and the enhanced visibility that the new Federal Tax Form 990 reporting requirements brings when the organization succeeds or fails. However, this clearly is not as powerful an incentive for conscientious performance as being personally financially impacted by a for‐profit’s financial failure. Neither do the End Users (clients/recipients) have the necessary information to determine whether the product/service is effective in comparison with that of competitors. For example, which organization is most effective in helping victims of domestic violence or in aiding seniors in need of low‐cost health care? Lacking this data, the community (shareholders) does not fully function in the oversight role. Only in worst case scenarios – such as when it becomes clear that

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public funds have crossed legal or fiduciary misconduct trigger points – is there intervention through governmental bodies such as the state Attorney General’s office. The lack of critical feedback becomes further exacerbated when funders want to pay for specific programs rather than providing core operating support. The lack of core operating support leaves the organization unable to conduct research and evaluation of its existing programs, and the measurements it does obtain are anecdotal at best. The challenges of generating core operating support become further magnified in the often impossible struggle to build sustaining operating reserves.

Effect of the Great Recession on Nonprofits Pre‐Recession Fragility of the Sector Well before the Great Recession struck, more than one‐third of Public Charities in Southeastern Pennsylvania and 36% of NPISH organizations ran operating deficits in 2007. Nine percent of the Public Charities had liabilities that exceeded their total net assets in that year (the most recent year counted by the National Center for Charitable Statistics). Southeastern Pennsylvania Public Charities run on thin operating margins, particularly in the human services fields. The tightest margins were in the arts and human services groups. Of the five counties, Philadelphia organizations were in the red the most; among Philadelphia NPISH, more than 10% of health and of human services organizations had negative balance sheets.

Continuing Impacts of the Great Recession A number of regional and national surveys over the last 18 months have measured the impact of the Great Recession economic crisis on the nonprofit community. We analyzed a number of these, notably: Guidestar’s Eighth Annual Nonprofit Economic Survey “Down but Not Defeated”

December 2009 http://www2.guidestar.org/ViewCmsFile.aspx?ContentID=2590 Bridgespan Group’s “Managing in Tough Times: Survey Update November 2009” http://www.bridgespan.org/managing‐in‐tough‐times‐survey‐update‐november‐2009.aspx Nonprofit Finance Fund’s “2010 State of the Nonprofit Sector Survey” March 2010

http://www.nonprofitfinancefund.org/details/php?autoid=199 Greater Philadelphia Cultural Alliance’s “Survey of Regional Arts Organizations” April

2010 http://www.philaculture.org/news/8277/cultural‐sector‐survey‐reveals‐early‐signs‐optimism‐amid‐challenges Uniformly, this research depicts nonprofits as seeing lower grant, gift, and contract revenues – straining staff, programs and fiscal stability – while seeing increased demand for services, especially among human services organizations.

http://www2.guidestar.org/ViewCmsFile.aspx?ContentID=2590

http://www2.guidestar.org/ViewCmsFile.aspx?ContentID=2590

http://www.bridgespan.org/managing-in-tough-times-survey-update-november-2009.aspx

http://www.nonprofitfinancefund.org/details/php?autoid=199

http://www.nonprofitfinancefund.org/details/php?autoid=199

http://www.philaculture.org/news/8277/cultural-sector-survey-reveals-early-signs-optimism-amid-challenges


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A particularly sobering report was released by the National Council of Nonprofits in mid‐March 2010: State Budget Crises: Ripping the Safety Net Held by Nonprofits http://www.councilofnonprofits.org/sites/default/files/Special‐Report‐State‐Budget‐Crises‐Ripping‐the‐Safety‐Net‐Held‐by‐Nonprofits.pdf

A particularly sobering report was released by the National Council of Nonprofits in mid‐March 2010: State Budget Crises: Ripping the Safety Net Held by Nonprofits http://www.councilofnonprofits.org/sites/default/files/Special‐Report‐State‐Budget‐Crises‐Ripping‐the‐Safety‐Net‐Held‐by‐Nonprofits.pdf

The report argues that the economic slump has “pushed many nonprofits to the brink, threatening the social safety net nonprofits hold for their communities. This dangerous situation is being aggravated by actions taken by many state and local governments.” Some established (and emerging) fiscal practices by government agencies around service contracts with nonprofits are particularly alarming. Nonprofits were saddled with providing what amounted to unauthorized “loans” to help states manage their respective budget crises, which came in the form of delayed contracts, withholding of funds due for state “overhead” and “oversight” and delayed payments for services sometimes already being delivered under contract. The Philadelphia Foundation’s own informal survey, “How Greater Philadelphia Nonprofits Respond to the Economic Downturn,” parallels these results. The August 2009 survey drew responses from 75 local nonprofits of all areas of interest within the sector (arts and culture, education, environment, health, human services, public/community development and youth development) and a range of small‐ to large‐scale organizations (budgets of less than $100,000 to over $10 million). Asked about measures taken in response to the downturn, nonprofits most frequently cited reliance on credit and loans, followed by program cuts and staff layoffs. Among those organizations that self‐identified as financially sound, wage and hiring freezes were the most common approach, with layoffs of program staff, reduced working hours and service cuts also regularly cited. Quality of service was a major concern from all nonprofits, and in some cases, a waiting list for services had been implemented. While those results were based on a limited number of responses and may not be representative of the region as a whole, it was clear from them that ongoing economic concerns had negatively affected Southeastern Pennsylvania nonprofits. Clara Miller, President and CEO of the Nonprofit Finance Fund, describes the overall situation clearly: "We expect 2010 to be another treacherous year for many nonprofits that routinely take heroic measures to meet demand for services. The economic 'recovery' has not yet reached people in need, or the organizations that serve them. We must do more to repair the tattered social safety net."

http://www.councilofnonprofits.org/sites/default/files/Special-Report-State-Budget-Crises-Ripping-the-Safety-Net-Held-by-Nonprofits.pdf



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Miller further notes, “Nonprofits aren’t rolling over in the face of economic strain. The sector is filled with determined individuals and inspiring organizations focused on the most critical issues we face as a society. While the ‘coping mechanisms’ we’re seeing are encouraging, we also need to make fundamental changes to the way the sector is financed.”

Impact of Imperiled Nonprofits As we have noted, our research found that NPISH nonprofits (those delivering products and services directly to individuals and households) received over $9 billion in revenue in 2007, employed over 87,000 individuals and provided approximately $3 billion in wages. Services to the community were valued at over $8 billion. These numbers represent a significant impact to our region. An economic downturn decreases nonprofit revenue, which affects individuals and programs (in terms of reach and strength). Simultaneously, nonprofits experience reduced ability to have an impact for some of the neediest in the community. This sequence of events unfolds: The community‐as‐shareholder puts additional pressure on nonprofit organizations to

deliver more services/products. Falling tax revenues from growing unemployment and a decline in business create potential cutbacks in public services provided by city/state/federal programs. Constituents served by these programs look to human services nonprofits to be a safety net.

Revenues to nonprofits decrease in two important ways: foundations have less to give away if the market value of their portfolio decreases, and corporations and individuals give less if they themselves face financial challenges. In short, philanthropic giving becomes more “discretionary.”

At the same time, a nonprofit’s service/product may become more of a necessity for the client/recipient who benefits directly as well as for the shareholder/community that benefits indirectly through addressing key community problems (such as homelessness) and not having to entirely fund the solutions through tax revenues.

These dynamics put increased pressure on operating costs and reserves, which likely have been dangerously under‐funded over the last few decades. As a result, Boards are faced with critical decisions on program, staffing and sustainability without access to the appropriate evaluation and research on program effectiveness or the ability to seriously explore strategic alternatives. A few examples of the specific questions to which they may lack answers – and there undoubtedly are many others ‐‐ are: o What percentage of the total market of End Users are we reaching through the

product/service we provide? o What is the actual cost of providing the product/service to the End User? o Are we providing the product/service in the most cost‐effective fashion? o What options are available to reduce the cost of providing the product/service? o What tools would be most effective in generating additional revenue? o What are the costs/benefits of shared services, a merger or dissolution?

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The information needed to answer these questions is already important in a stable economy but is vital in times of great economic recession. The information needed to answer these questions is already important in a stable economy but is vital in times of great economic recession.

We know from our vantage point as a foundation grant‐maker that the stresses have never been greater on our nonprofit sector: financial reserves that helped some nonprofits weather the last 18 months have largely been exhausted, and fiscal realities in our region and at the state level portend an extended period of austerity and challenge. Confronting this reality – that our community’s quality of life and social safety nets are severely threatened by the fiscal fragility of our nonprofit sector ‐‐ demands some soul‐searching and concerted action by the community as a whole.

We know from our vantage point as a foundation grant‐maker that the stresses have never been greater on our nonprofit sector: financial reserves that helped some nonprofits weather the last 18 months have largely been exhausted, and fiscal realities in our region and at the state level portend an extended period of austerity and challenge. Confronting this reality – that our community’s quality of life and social safety nets are severely threatened by the fiscal fragility of our nonprofit sector ‐‐ demands some soul‐searching and concerted action by the community as a whole.

Fiscal Health Tactics For NonprofitsFiscal Health Tactics For Nonprofits Avoiding Slow Starvation: Investing in Infrastructure and Overhead

A very sobering assessment of the current “state of the nonprofit business model” comes from The Nonprofit Starvation Cycle in the Stanford Social Innovation Review (Fall 2009) by Bridgespan Group authors Ann Goggins Gregory and Don Howard. http://www.ssireview.org/articles/entry/1408/

The abstract pulls few punches:

A vicious cycle is leaving nonprofits so hungry for decent infrastructure that they can barely function as organizations — let alone serve their beneficiaries. The cycle starts with funders’ unrealistic expectations about how much running a nonprofit costs, and results in nonprofits’ misrepresenting their costs while skimping on vital systems — acts that feed funders’ skewed beliefs. To break the nonprofit starvation cycle, funders must take the lead.

The authors cite work conducted by the Urban Institute’s National Center for Charitable Statistics and the Center on Philanthropy at Indiana University by lead researchers Kennard T. Wing, Tom Pollack and Patrick Rooney. Their Nonprofit Overhead Cost Study http://nccsdataweb.urban.org/FAQ/index.php?category=40 was a five‐year project which examined over 200,000 IRS Form 990s complemented by some 1,500 surveys of nonprofit organizations. As might be expected, this research documented that nonprofit organizations that do not invest in infrastructure and appropriate overhead costs pay the price with inefficient operations, under‐trained staff, weakened program and service quality, limited evaluation capacity and staff leadership fighting crises instead of enhancing impact.

The authors describe the progressive effects of persistent under‐funding of overhead:

http://www.ssireview.org/articles/entry/1408/


http://nccsdataweb.urban.org/FAQ/index.php?category=40

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“The first step in the cycle is funders’ unrealistic expectations about how much it costs to run a nonprofit. At the second step, nonprofits feel pressure to conform to funders’ unrealistic expectations. At the third step, nonprofits respond to this pressure in two ways: They spend too little on overhead, and they underreport their expenditures on tax forms and in fundraising materials. This under‐spending and underreporting in turn perpetuates funders’ unrealistic expectations. Over time, funders expect grantees to do more and more with less and less — a cycle that slowly starves nonprofits.”

In other words, over‐reliance by nonprofits on just “keeping the lights on” is a short‐sighted strategy that steadily erodes the long‐term survival of the organization. As important as annual giving campaigns are in the fund‐raising practices of the nonprofit sector, developing a steady stream of sustained long‐term financial security deserves at least an equal – if not the greater – priority.

The Crucial Value of Capitalization More robust and realistic support for operating costs is only one dimension of the challenge nonprofits face. The nonprofit sector also needs to adopt capitalization as a key financial metric for long‐term sustainability. The problem is that many nonprofits are not only under‐capitalized, they do not even regard capitalization as their prime financial metric for overall fiscal health. Getting Beyond Breakeven: A Review of Capitalization Needs and Challenges of Philadelphia‐Area Arts and Culture Organizations, a 2009 study by Boston‐based consulting firm TDC commissioned by the Pew Charitable Trusts and the William Penn Foundation (http://www.tdcorp.org/pubs/capitalization_report.pdf), made a strong case that “capitalization matters” and, perhaps, matters most for nonprofit arts and culture organizations in the five‐county Philadelphia region.

It identified as needed resources: a capital replacement reserve to help organizations that have facilities maintain them, an endowment fund that generates investment earnings dedicated to ongoing costs, and risk capital that allows freedom to try new ideas and address environmental shifts that demand a change in strategic direction. The authors argue that three things appear to advance capitalization: Financial literacy that affords managers and boards an understanding of the organization’s

financial structure. Robust strategic business planning that establishes a feasible roadmap to sustainability

http://www.tdcorp.org/pubs/capitalization_report.pdf

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Incentives from boards and funders that recognize and support the results of such planning, and a common language for an informed discussion about capital needs.

Of course there are many additional steps that nonprofits can – and regularly do – take to put themselves on long‐term firm financial footing. A basic checklist of these tactics can be found in Appendix A (p. 26).

The Role of Funders in Ensuring Fiscal Health for Nonprofits

Those who fund nonprofits – both foundations and individual donors – may unintentionally undermine the very organizations they seek to assist when they “pay” for programs whose true operating costs are not fully included in the calculation, or when they place an emphasis on supporting only those aspects of the operation that are both highly visible and tangible in the short‐term.

The previously cited Harvard Business Review article “Delivering on the Promise of Nonprofits” which is further condensed below proposed several action steps worthy of additional consideration. The authors say funders must:

Shift their focus from costs to outcomes Clearly communicate their program goals to grantees, and insist on honest answers

to the question “What will it take to deliver these outcomes consistently, or to deliver these outcomes at an even higher level of quality or quantity?”

When feasible, help meet grantees’ identified infrastructure needs by making general operating support grants

Encourage open, candid discussions with their grantees about what they need to be effective

Commit to paying a greater share of administrative and fundraising costs when making restricted grants

Allow nonprofits receiving government grants to define their true overhead needs in grant applications and, so long as these needs are justifiable, pay for them

Encourage the development of a standard definition of the term “overhead” to foster transparent and accurate reporting

Accordingly, they add, grantees need to assist funders in this broad agenda in several ways:

Nonprofits must achieve an understanding of their real overhead costs and real infrastructure needs

Staff leadership must “speak truth to power” by sharing those real numbers with their boards and “engage board support in communicating with funders”

Board members must encourage staff “to develop strategies that explicitly recognize infrastructure needs,” focusing on “how investments in infrastructure will benefit the organization’s beneficiaries, rather than reduce costs”

Overall, “organizations must attempt to educate their donors”

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The authors conclude by outlining “How Donors Can Help Nonprofits Achieve Results,” from which we excerpt this key theme:

Realize that everything takes longer and costs more. Like nonprofits, philanthropists have an alarming tendency to underestimate what it costs to produce results. Instead of placing appropriately sized bets on well‐defined strategies, donors often spread too little money among too many recipients. Sophisticated donors recognize when nonprofits are ripe for deeper investment in the form of more money over longer periods of time.

The article is available for a fee at HBR: http://hbr.org/2008/12/delivering‐on‐the‐promise‐of‐nonprofits/ar/1

In its 2009 report Criteria for Philanthropy at Its Best: Benchmarks to Assess and Enhance Grantmaker Impact, the National Committee for Responsive Philanthropy (NCRP) lays out a range of funding guidelines as it attempts to answer the questions: What differentiates an exemplary foundation from the rest of its peers? What can foundations do to improve their relevance to nonprofits, the economically and socially underserved Americans and society as a whole?

NCRP set out to establish “the first ever set of measurable guidelines that will help foundations and other institutional grantmakers operate ethically and maximize the impact of their dollars.” While some of these benchmarks have raised eyebrows and active comment, we find the discussion supporting NCRP’s “Criterion II: Effectiveness” to be clear‐headed however one reacts to the specific percentage targets: Criterion II: Effectiveness — At A Glance A grantmaker practicing Philanthropy at Its Best serves the public good by investing in the health, growth and effectiveness of its nonprofit partners. a) Provides at least 50 percent of its grant dollars for general operating support b) Provides at least 50 percent of its grant dollars as multi‐year grants c) Ensures that the time to apply for and report on the grant is commensurate with grant size.

General operating support is fundamental to enhancing grantee impact; it provides organizations with the flexible funding they need to achieve their missions effectively. In the aggregate, only 16 percent of grant dollars is provided for general operating support. But 125 exemplary foundations (15.5 percent of our sample) provided at least 50 percent of their grant dollars for general operating support, meeting the benchmark for Philanthropy at Best.

http://hbr.org/2008/12/delivering-on-the-promise-of-nonprofits/ar/1

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Multi‐year funding also is crucial for the health, growth and effectiveness of nonprofits. This funding allows grantees to respond to crises and opportunities, maintain staff continuity and organizational leadership, overcome unforeseeable challenges and improve planning. Disappointingly, more than 40 percent of foundations in our sample did not provide any multi‐year grants. Leading the field, however, 132 foundations (16.3 percent) provided 50 percent or more of their grant dollars as multi‐year grants. This is the benchmark for Philanthropy at Its Best.

Applying for and reporting on grants primarily facilitates accountability, but these activities also can help grantees

clarify their thinking and improve their work. However, too often, applications are needlessly complicated and evaluations are not used appropriately, creating significant burdens for grantees. Exemplary grantmakers understand the important concept of the net grant and ensure their application and reporting requirements are proportional to the grant size and useful for all parties.

Because grantmakers rely primarily on grantees to carry out their charitable purposes, exceptional funders engage

nonprofits in meaningful partnerships, which help both parties advance their missions and contribute to the public good. This creates an environment of trust and maximizes the social benefit of philanthropy. Grantmakers committed to true partnership provide sufficient overhead in project grants, fund capacity building and leadership development, and interact with grantees in respectful and responsive ways as part of enhancing effectiveness.

Adapted from Criteria for Philanthropy at Its Best: Benchmarks to Assess and Enhance Grantmaker Impact, National Committee for Responsive Philanthropy, 2009 The Philadelphia Foundation has demonstrated its own commitment to the principles of long‐term sustainability for the nonprofit sector since 2007 through dedicated funding for initiatives such as strategic planning, organizational restructuring and financial assessment. Our discretionary grantmaking strategy provides both general operating support and grants that build the long‐term capacity of regional nonprofits (for a more thorough explanation, see Appendix B, p. 27). Given the current challenges faced by our nonprofit sector and the importance of helping it achieve sustainable business models, we know our funding resources will need to be complemented by that of others to support creation of viable and effective partnerships. An examination of available programs for sustaining financial support of our region’s nonprofits, their scale and their alignment to this need should be a priority for the community as a whole.

The Role of Board Members in Ensuring Fiscal Health for Nonprofits Board members play a critical role in “speaking truth to power” through direct communication with donors about the fiscal realities nonprofits face. Boards must also challenge and empower staff to recognize when to say “no” (and then say it) when donor requirements and demands may compromise mission, program integrity, or organizational sustainability. In its study on capitalization commissioned by the Pew Charitable Trusts and the William Penn Foundation, the Boston‐based consulting firm TDC elaborated on the inherent issues with both candor and a call to action that we affirm:

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“As we spoke with organizational leaders, we heard that trustees often are not focused on capitalization and that funders often do not offer rewards and incentives that foster healthy capital structures. The incentives that funders currently do provide, which assure that strategic plans and balanced budgets exist, do not go far enough. If they are not asked for evidence of an integrated capitalization strategy, organizations fall back to a balanced‐budget stance, since this is already difficult enough to achieve. The lack of incentives also adds a level of uncertainty. Many of the organizations we spoke with were afraid to talk to funders and donors about undercapitalization because they worry about being perceived as weak and, ultimately, ‘unfundable’...

“...In TDC’s view, addressing this challenge must be seen as a shared responsibility across the sector, from funders, boards, and staffs. While technical assistance and robust resources have progressed us forward, this study has shown that educational interventions cannot get us all the way to our desired outcome of sustainable organizations. The system needs to support the fruits of this work. Organizations have met difficult goals and are ready to go to the next level through honest, productive conversations with boards and funders that recognize the issues and design meaningful, achievable solutions.”

From our perspective, boards need to regularly review and be particularly clear on the incentives and directives in place that drive or weaken an organization’s fiscal sustainability.

As we noted in Governance: Bench Strength, Capacity, Renewal, our first white paper in this series, board members have an obligation to be engaged, informed and appropriately trained about the responsibilities of their role to ensure the public good. It is incumbent on organizations to broadly search for those who can bring expertise and clarity to board governance.

Ensuring that the organization looks at its overall results through a fiscal lens is just one part of the board member’s role in that regard. Boards also need to determine how to close the gap in the feedback loop within their specific sector, so they have the data needed to make the strategic and sometimes difficult decisions required to address the community need that the organization serves. The tactics for generating this information will be specific to an individual organization. What is important is that board members begin to raise the questions that will lead to providing the necessary answers. This approach is needed not just on the level of individual organizations, but sector‐wide. We call upon board members throughout the nonprofit community to talk with each other regarding long‐term sustainability measures for their organizations. These conversations are challenging, complex and essential if nonprofits are going to achieve their rightful place at the table when the region’s future is under consideration.

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The Role of the Community In Ensuring Fiscal Health for Nonprofits In our nonprofit business model, we deliberately referred to the broader community as shareholders, because it is with the public that responsibility for the ultimate success of the conglomeration of organizations known as nonprofits lies. It is the community that needs to hold boards accountable when they fail to live up to their responsibility to be engaged and informed and to ensure the public good. It is the civic duty of community members to keep the focus on narrowing the gap in the feedback loop so that board members can make intelligent and appropriate fiscal choices. There is much to think about on ways the community could more effectively hold board members accountable for performance of these roles. Among the possible questions:

What information would community members need access to, beyond the IRS Tax Form 990, that would inform their oversight?

Would any community structures be needed to assist in this civic duty, and if they were created, what legal empowerment would they exercise?

What mechanisms could be developed to disseminate information about the relative performance of nonprofit boards?

How can the most effective boards receive appropriate community recognition as examples to emulate, and how can their methods be shared with the broader community as best practices?

Nonprofits are, at their essence, community benefit organizations – agencies that take on roles distinct from those of government and the corporate sector, but no less essential to the region’s economic vitality and quality of life.

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If we believe that nonprofits are essential to the quality of life we enjoy, then together, we must address certain areas to ensure their long‐term sustainability. We close with a summary of areas for further engagement by nonprofit boards, staff and donors and by the community at large:

Areas for Discussion, Research, Planning, Action How can the community address the immediate imperative to establish consistent and meaningful donor support – from all sources – for nonprofit general operating costs?

This will require a fresh start by boards, staff and donors in terms of establishing baseline support requirements and metrics, evolving donor expectations, empowering staffs and educating the community at large.

How can the community move forward in making capitalization the key financial metric we use in assessing nonprofit fiscal health?

As a community, we need to freshly examine current incentives and directives around financial metrics in place and their impact on sustainability.

How can the community best support formal and informal collaboration among nonprofits – ranging from shared back‐office services to joint programming to mergers – during these tough economic times?

We need to assess the capacity‐building and technical assistance programs in place to assure they are aligned and strong enough to support serious exploration and action around such collaboration.

We have made further work around these themes a strategic priority for The Philadelphia Foundation. We invite members of the nonprofit sector and our community overall to join us.

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Sources Bradach, Jeffrey L., Thomas J. Tierney, and Nan Stone. “Delivering on the Promise of Nonprofits.” Harvard Business Review, December 2008 Goggins, Ann Gregory and Don Howard. “The Nonprofit Starvation Cycle.” Stanford Social Innovation Review Fall 2009 http://www.ssireview.org/articles/entry/1408/ Greater Philadelphia Cultural Alliance. “Cultural Sector Survey” (web announcement). April 9, 2010. http://www.philaculture.org/news/8277/cultural‐sector‐survey‐reveals‐early‐signs‐optimism‐amid‐challenges

Guidestar. Down but Not Defeated: Results of GuideStar's Eighth Annual Nonprofit Economic Survey, December 2009 http://www2.guidestar.org/rxa/news/articles/2009/down‐but‐not‐defeated‐results‐of‐guidestars‐eighth‐annual‐nonprofit‐economic‐survey.aspx

National Committee for Responsive Philanthropy. Criteria for Philanthropy at Its Best: Benchmarks to Assess and Enhance Grantmaker Impact, 2009 http://www.ncrp.org/files/publications/paib-fulldoc_lowres.pdf

National Council of Nonprofits. State Budget Crises: Ripping the Safety Net Held by Nonprofits March 16, 2010, http://www.councilofnonprofits.org/sites/default/files/Special‐Report‐State‐Budget‐Crises‐Ripping‐the‐Safety‐Net‐Held‐by‐Nonprofits.pdf

Nonprofit Finance Fund. 2010 State of the Nonprofit Sector Survey, March 2010. http://www.nonprofitfinancefund.org/details.php?autoID=199

TDC Group. Getting Beyond Breakeven: A Review of Capitalization Needs and Challenges of Philadelphia‐Area Arts and Culture Organization, 2009 http://www.tdcorp.org/pubs/capitalization_report.pdf Tuck, Alan; Ann Goggins Gregory and Sarah Sable. Managing in Tough Times Survey Update November 2009. Bridgespan Group http://www.bridgespan.org/managing‐in‐tough‐times‐survey‐update‐november‐

2009.aspx




http://www2.guidestar.org/rxa/news/articles/2009/down-but-not-defeated-results-of-guidestars-eighth-annual-nonprofit-economic-survey.aspx

http://www2.guidestar.org/rxa/news/articles/2009/down-but-not-defeated-results-of-guidestars-eighth-annual-nonprofit-economic-survey.aspx

http://www.ncrp.org/files/publications/paib-fulldoc_lowres.pdf




http://www.nonprofitfinancefund.org/details.php?autoID=199

http://www.nonprofitfinancefund.org/details.php?autoID=199





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Additional Recommended Reading

Cortez, Alex; William Foster and Katie Smith Milway Nonprofit Mergers and Acquisitions: More Than a Tool for Tough Times, Bridgespan Group, February 2009 http://www.bridgespan.org/uploadedFiles/Homepage/Articles/Mergers_and_Acquisitions/091702‐Nonprofit%20Mergers%20and%20Acquisitions.pdf

La Piana, David. “Merging Wisely.” Stanford Social Innovation Review, Spring 2010 http://www.ssireview.org/articles/entry/merging_wisely/

Miller, Clara. “Truth or Consequences: The Implications of Financial Decisions.” The Nonprofit Quarterly, Summer 2008 San Francisco, CA. Mayor's Community‐Based Organizations Task Force Report. Partnering With Nonprofits in Tough Times. April, 2009. http://www.sff.org/about/whats‐new/documents‐whats‐new/04.24.09%20CBO%20Task%20ForceReport%20Final.pdf

San Francisco Foundation. Nonprofit Transitions Fund (web announcement). September 2009. http://www.sff.org/about/whats‐new/nonprofit‐transitions‐fund‐supports‐intentional‐change‐applications‐due‐october‐26th

State of the Sector Briefing: Funders, Nonprofits and 2010. Associated Grant Makers (AGM); the Boston Foundation, Massachusetts Nonprofit Network, Third Sector New England, and United Way of Massachusetts Bay & Merrimack Valley http://www.agmconnect.org/StateofSectorJan122010.aspx.

The Foundation Center. Doing Good With Foundation Assets http://foundationcenter.org/gainknowledge/research/pdf/pri_directory_excerpt.pdf The Fourth Sector (website) http://www.fourthsector.net/learn/fourth‐sector University of Delaware Symposium. The Future of the Nonprofit Sector in Delaware and the Nation, March 2010 http://www.udel.edu/partnerships/pdfs/Partner_NonprofitAgenda210V8.pdf Wing, Kennard T. Introducing Lean for Nonprofits, Philadelphia Social Innovations Journal, February 2010

http://www.bridgespan.org/uploadedFiles/Homepage/Articles/Mergers_and_Acquisitions/091702-Nonprofit%20Mergers%20and%20Acquisitions.pdf

http://www.bridgespan.org/uploadedFiles/Homepage/Articles/Mergers_and_Acquisitions/091702-Nonprofit%20Mergers%20and%20Acquisitions.pdf

http://www.ssireview.org/articles/entry/merging_wisely/

http://www.sff.org/about/whats-new/documents-whats-new/04.24.09%20CBO%20Task%20ForceReport%20Final.pdf

http://www.sff.org/about/whats-new/documents-whats-new/04.24.09%20CBO%20Task%20ForceReport%20Final.pdf

http://www.sff.org/about/whats-new/nonprofit-transitions-fund-supports-intentional-change-applications-due-october-26th

http://www.agmconnect.org/

http://www.tbf.org/

http://www.tbf.org/

http://www.massnonprofitnet.org/

http://www.tsne.org/

http://www.supportunitedway.org/

http://www.supportunitedway.org/

http://www.agmconnect.org/StateofSectorJan122010.aspx

http://foundationcenter.org/gainknowledge/research/pdf/pri_directory_excerpt.pdf

http://foundationcenter.org/gainknowledge/research/pdf/pri_directory_excerpt.pdf

http://www.fourthsector.net/learn/fourth-sector

http://www.fourthsector.net/learn/fourth-sector

http://www.udel.edu/partnerships/pdfs/Partner_NonprofitAgenda210V8.pdf

http://www.udel.edu/partnerships/pdfs/Partner_NonprofitAgenda210V8.pdf

http://www.philasocialinnovations.org/site/index.php?option=com_content&view=article&id=118:introducing-lean-for-nonprofits&catid=19:disruptive-innovations&Itemid=30

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Glossary 501(c)(3) organization: To be tax‐exempt under section 501(c)(3) of the Internal Revenue Code, an organization must be organized and operated exclusively for exempt purposes set forth in section 501(c)(3), and none of its earnings may inure to any private shareholder or individual. In addition, it may not attempt to influence legislation as a substantial part of its activities, and it may not participate in any campaign activity for or against political candidates. Includes private foundations and public charities (see below). Filing nonprofits: NPOs that file a Form 990 annually. Most nonprofits file tax returns. However, religious congregations, organizations grossing less than $25,000 annually, and standalone entities that are subsidiaries (included on another organization’s return) are not required to file. Filing nonprofits exclude these exceptions. Five‐county region: Bucks, Chester, Delaware, Montgomery, and Philadelphia counties.

NCCS (National Center for Charitable Statistics): The national clearinghouse of data and research on the nonprofit sector in the United States. http://nccs.urban.org/

NPO (NonProfit Organization): NPOs include many federal tax classifications, the most familiar of which are 501(c)(3) for charitable organizations, 501(c)(4) for advocacy organizations, and 501(c)(6) for trade associations. However, nonprofit status is a matter of state, not federal, law. Most federal tax‐exempt organizations are nonprofit organizations and file federal tax returns. Organizing as a nonprofit organization at the state level does not automatically grant the organization exemption from federal income tax. NPISH (Nonprofits Serving Individuals and Households): A subset of Public Charity devised for this research. NPISH organizations provide services directly to persons and households rather than to other organizations. NPISH is defined by The Philadelphia Foundation and the Economy League as all Public Charities:

Minus hospitals and higher education institutions

Minus NTEE Minor Groups of Health Care, Medical Research, Philanthropy, Science and Technology, Social Science, Public and Societal Benefit, Religion Related, Mutual and Membership Benefit, and Unknown

And minus types of organizations that provide services to other nonprofit organizations and not to households or individuals.

NTEE (National Taxonomy of Exempt Entities): The most widely accepted classification of nonprofit organizations.

http://nccs.urban.org/



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Private foundations: One of two types of 501(c)(3) under the federal tax code. (The other type is a Public Charity.) Typically, an organization that has a single major source of funding (usually gifts from one family or corporation rather than funding from many sources) and has as its primary activity the making of grants to other charitable organizations and to individuals, rather than the direct operation of charitable programs. Public charity: One of two types of 501(c)(3) under the federal tax code. (The other type is a Private Foundation.) Generally, public charities are those that (i) are churches, hospitals, qualified medical research organizations affiliated with hospitals, schools, colleges and universities, (ii) have an active program of fundraising and receive contributions from many sources (e.g., the general public, governmental agencies, corporations, private foundations, other public charities), (iii) receive income from the conduct of activities in furtherance of the organization’s exempt purposes, or (iv) actively function in a supporting relationship to one or more existing public charities. This study examined only those Public Charities that file a federal tax return (the Federal 990 form). QCEW (Quarterly Census of Employment and Wages): This U.S. Bureau of Labor Statistics program publishes a quarterly count of employment and wages reported by employers covering 98 percent of U.S. jobs, available at the county, MSA, state and national levels by industry. http://www.bls.gov/cew/

http://www.bls.gov/cew/

http://www.bls.gov/cew/

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Appendix A: Fiscal Tactics for Nonprofits to Consider

To make their operations more fiscally effective and efficient, nonprofits may explore the following approaches: Shared Services

Partner with another nonprofit The partnership may be program‐related, or fiscally oriented, such as outsourcing a particular function, but by working together, nonprofits build cooperative relationships that could enhance current delivery of services and that could lead to a longer‐term beneficial arrangement.

Collaborate on shared services Particularly on initiatives that are not directly related to the providing of services, nonprofits can outsource functions, including back office (accounting, benefits management and payroll processing), which could reduce costs, increase efficiencies and allow core staff to focus on mission‐related activities.

Raising Revenue

Actively seek operating funds Educating board members and donors as to the need for operating expenses “without strings” can ensure a reliable revenue stream. Some nonprofits do this through their annual fund campaigns.

Actively avoid short‐term funding with “strings”

Emphasize planned giving The importance of having “dollars in the pipeline” is key to the long‐term survival of nonprofits.

Emphasize endowments

Think outside the box about potential revenue streams Creative exploration of ways to provide supplemental income can reduce reliance on government support or donations that are vulnerable to market conditions

Controlling Expenses

Review overhead

Regularly view operations with regard to their cost‐effectiveness It is vital to look at whether the cost is proportional to the benefit.

Fiscal Management Oversight

Have transparent business practices Practices such as external audits generate transparency that resonates with prospective donors and catch potential problems when they can be corrected.

Tap into business expertise of board members, volunteers and supporters Long‐term Sustainability

Emphasize strategic planning

Focus on building the capacity of the organization

Develop – and fund ‐‐ a research and development program Beyond its use for planning and review of program effectiveness, the data gathered can be used to market the nonprofit.

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Appendix B: Discretionary Grantmaking by The Philadelphia Foundation

The Philadelphia Foundation uses two grant programs to support supporting the development of well‐run, well‐staffed, well‐governed organizations that take the time to evaluate their work and plan for their future:

Organizational Effectiveness Grants are designed to strengthen and improve the business and operational practices of nonprofit organizations in Bucks, Chester, Delaware, Montgomery and Philadelphia counties. General Operating Support Grants are funds that are unrestricted for use by high‐performing nonprofit organizations. These funds may be used for all mission‐related activities, including contributions to capital campaigns and endowments.

We focus our criteria for general operating support grantees based on high performance standards within five lifecycle stages and across four organizational capacities: Lifecycle Stages Core Program Development: A stage at which organizations have developed a set of programs that are central to mission success and have begun achieving a consistent level of desired results for those being served. Infrastructure Development: A stage at which organizations that have developed an organizational infrastructure necessary for supporting core programs and are growing to scale. Mission Impact: A stage at which organizations are achieving mission impact through programmatic offerings and organizational leadership and evidence of strategic partnerships, advocacy efforts, and collaboration. Transition/Renewal: A stage at which an organization is either undergoing a significant leadership transition, constituency or contextual shift that necessitates the reevaluation of its organizational structure, mission, and purpose. Dissolve/ Merge: A stage at which organizations that due to mission drift, or becoming irrelevant in their current context, may become ready to dissolve. Alternatively, these organizations may be better served by merging with another, healthier organization in order to make better use of their resources. More at: https://www.philafound.org/ForNonprofits/DiscretionaryGrantmaking/tabid/237/Default.aspx

https://www.philafound.org/Portals/0/Uploads/Documents/Public/High_Performance_Standards_for_Nonprofit_Orgs.pdf

https://www.philafound.org/Portals/0/Uploads/Documents/Public/High_Performance_Standards_for_Nonprofit_Orgs.pdf

https://www.philafound.org/ForNonprofits/DiscretionaryGrantmaking/tabid/237/Default.aspx

https://www.philafound.org/ForNonprofits/DiscretionaryGrantmaking/tabid/237/Default.aspx

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s/29

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2007

Asse

ts:

$5.8

5BRe

venu

e: $

2.4BPublic

/Soc B

enefit

646

Org

s/53

2 NP

ISH

2007

Asse

ts:

$3.4

BRe

venu

e: $

869M

Art

s, C

ult

ure

82 O

rgs/

72 N

PISH

2007

Asse

ts:

$132

MRe

venu

e: $

116M

Inte

rnatio

nal

173

Org

s/14

1 NP

ISH

2007

Asse

ts:

$582

MRe

ven u

e: $

196M

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Nat

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ities

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the

purp

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and

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hnol

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ial S

cien

ce, P

ublic

and

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etal

Ben

efit,

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late

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utua

l and

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bers

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fit, a

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of o

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izat

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that

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vide

ser

vice

s to

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er n

onpr

ofit

orga

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tions

and

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hold

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indi

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Environment

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prof

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y To

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with

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tJa

nuar

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10

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1808

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PISH

2007

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ts:

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1BRe

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4.29

B

Hu

man

Ser

vice

s

Health

786

Org

s/24

5 NP

ISH

2007

Asse

ts:

$19.

1BRe

venu

e: $

16.2

B

Education

938

Org

s/64

6 NP

ISH

2007

Asse

ts:

$27.

6BRe

venu

e: $

11.9

B

610

Org

s/29

1 NP

ISH

2007

Asse

ts:

$5.8

5BRe

venu

e: $

2.4BPublic

/Soc B

enefit

646

Org

s/53

2 NP

ISH

2007

Asse

ts:

$3.4

BRe

venu

e: $

869M

Art

s, C

ult

ure

82 O

rgs/

72 N

PISH

2007

Asse

ts:

$132

MRe

venu

e: $

116M

Inte

rnatio

nal

173

Org

s/14

1 NP

ISH

2007

Asse

ts:

$582

MRe

ven u

e: $

196M

-N

TEE:

Nat

iona

l Tax

onom

y of

Exe

mpt

Ent

ities

-Pu

blic

Cha

rity:

501

c3s

whi

ch r

ecei

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iver

se s

ourc

es-

NPI

SH (

Non

prof

its S

ervi

ng I

ndiv

idua

ls a

nd H

ouse

hold

s):

A su

bset

of

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ic C

harit

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vise

d fo

r th

is a

lman

ac. N

PISH

org

aniz

atio

ns p

rovi

de

serv

ices

dire

ctly

to p

erso

ns a

nd h

ouse

hold

s ra

ther

than

to o

ther

orga

niza

tions

. For

the

purp

ose

of th

is a

lman

ac, N

PISH

wer

e de

fined

by

The

Phila

delp

hia

Foun

datio

n an

d th

e Ec

onom

y Le

ague

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ities

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hig

her

educ

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n in

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tions

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usN

TEE

Min

or G

roup

s of

Hea

lth C

are,

Med

ical

Res

earc

h,

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nthr

opy,

Sci

ence

and

Tec

hnol

ogy,

Soc

ial S

cien

ce, P

ublic

and

Soci

etal

Ben

efit,

Rel

igio

n Re

late

d, M

utua

l and

Mem

bers

hip

Bene

fit, a

nd

Unkn

own,

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usty

pes

of o

rgan

izat

ions

that

pro

vide

ser

vice

s to

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onpr

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tions

and

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to h

ouse

hold

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indi

vidu

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iona

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onom

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rity:

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c3s

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bset

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lman

ac. N

PISH

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ns p

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de

serv

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dire

ctly

to p

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ns a

nd h

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hold

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ther

than

to o

ther

orga

niza

tions

. For

the

purp

ose

of th

is a

lman

ac, N

PISH

wer

e de

fined

by

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Phila

delp

hia

Foun

datio

n an

d th

e Ec

onom

y Le

ague

as

all P

ublic

Char

ities

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us h

ospi

tals

and

hig

her

educ

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n in

stitu

tions

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Min

usN

TEE

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or G

roup

s of

Hea

lth C

are,

Med

ical

Res

earc

h,

Phila

nthr

opy,

Sci

ence

and

Tec

hnol

ogy,

Soc

ial S

cien

ce, P

ublic

and

Soci

etal

Ben

efit,

Rel

igio

n Re

late

d, M

utua

l and

Mem

bers

hip

Bene

fit, a

nd

Unkn

own,

-Min

usty

pes

of o

rgan

izat

ions

that

pro

vide

ser

vice

s to

oth

er n

onpr

ofit

orga

niza

tions

and

not

to h

ouse

hold

s or

indi

vidu

als.

Environment

Tota

l Org

s

NPIS

H

Tota

l Org

s

NPIS

H

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