The Financial Health of the Nonprofit Sector

What is the financial health of the nonprofit sector and how do arts organizations compare with other nonprofits? A year-long study of the financial health of Illinois state's nonprofit sector — including the arts — provides a tool to begin answering such questions.

Completed in December 1998, Illinois Nonprofits: Building Capacity for the Next Century is a joint study by the Illinois Facilities Fund and the Donors Forum of Chicago. It defines financial health in a broad enough way to use it as a surrogate for general organizational effectiveness. The study provides both tools for evaluation and strategies for foundations to help grantees build financial management capacity. Many of the findings are common among all types of organizations, but the data is presented both generally and then by field, so that similarities and differences are clearly described.

Arts organizations comprise 10.9 percent of nonprofit organizations in the state, and 12 percent (54/441) of the respondents. Following are some highlights of responses from arts organizations.

Arts organizations:

• employed a median of three full-time equivalents — the smallest of all respondents
• spent a median of $256,300 in 1996-97 — the smallest of all respondents
• received the highest percentage of their income from earned revenue (median = 39 percent) and from foundation and corporate grants (median = 17 percent)
• reported the largest percent of respondents (31.4 percent) that have “chronic financial problems, but expect to survive”
• reported the highest percentage of respondents (six percent) whose facilities are “unacceptable”
• spent more than any other group on their most recent facility-related project (median = $78,500, mean = $4,443,794)
• planned to spend more than any other group on major future capital projects (median = $2 million, mean = $6 million)
• cited the number one challenge as “shortage of income to meet expenses”

Most of the general findings also have relevance to arts organizations and their supporters.

Key Finding #1 A Fragile Financial Cycle. Nonprofit organizations are experiencing a fragile financial cycle with shrinking financial margins, more deficits, increased cash flow problems, and pressure to do more with less. Obviously, different strategies are needed for organizations of different sizes and fields of service, but some steps are necessary and effective for all. These include increased financial education for both board (with designated finance committees) and management, improved financial planning short and long term, and better cash management. Recommended strategies include integration of financial and program planning, goals and benchmarks for developing reserves, and written board financial policies. Foundations are encouraged to fund capacity-building efforts that will help nonprofits overcome the fragility of this financial cycle and to support organizations rather than simply programs. Both actions would help develop a nonprofit infrastructure.

Key Finding #2 Changing Sources of Support. Although this trend is felt most urgently in fields that were more deeply dependent on government support than the arts were, the recommendations about examining and balancing revenue sources are still relevant. Only about one third of agencies had development directors (37 percent of arts organizations). Having development officers on staff resulted in greater confidence about financial health and a more diverse funding mix. Managers and boards are advised to invest in building fundraising capacity to diversity revenue sources and periodically to conduct rigorous analysis of the sources of revenues and the balance among them. Funders are likewise urged to invest in the infrastructure that helps nonprofits to diversify funding sources by supporting requests to fund development directors, technical assistance, and management training in revenue development. Cooperation between foundation and grantees in setting goals for evaluating these grants is particularly important.

Key Finding #3 Facilities Pressure. Respondents reported high levels of recent and planned facility-related activity. Sixty-five percent carried out some facility-related project in the last year. And while more than half report plans to do so within the next twelve months, there is no indication that respondents currently have the resources to execute their plans! Public and private resources for capital projects are scarce and many agencies don't have access to financing. The report stresses that boards and managers must recognize that facilities play a major role in the delivery of programs and services, and must be considered an integral component of financial health. Management should have a facilities master plan based on needs and priorities. Foundations are urged to look at capital investments as a form of capacity building and to support both capital requests and professional assistance to grantees who are planning facilities work. The report enumerates an excellent series of questions as a form of self study for both management and funders in evaluating projects and requests for support.

Key Finding #4 Bracing for the Future. The nonprofits are aware of the challenges they face. Survey results reveal that some of the mechanisms to help nonprofits build capacity are in place. The authors conclude that nonprofits are fundamentally resilient, creative, and resourceful. Respondents typically recognize the changes they need to make internally, but do not always have the skills and resources necessary to make those changes. The report's conclusions about the grantor-grantee relationship are worth quoting in full:

Private foundations are encouraged to survey their current grantees about the nonprofits' most significant capacity-building needs. As foundations continue to identify new program priorities for the grantmaking, capacity building awards pertaining to financial health and viability should be a high priority for resources... As nonprofits explore numerous organizational changes or strategic alliances that may ultimately improve their capacity, funders should demonstrate a commitment to help with such transitions and experiments. The grantmaker-grantee relationship should be flexible enough during this phase to engage in honest dialogue about options without the threat of loss of support. Once again, this points to the importance of supporting organizations rather than just programs and services.