The #1 issue for almost half of the nonprofits included in a national survey is “achieving long-term financial sustainability.” The most common responses for what they need to achieve long-term financial sustainability, are: “more revenue,” “more grants,” or “more general operating support.” If only we had more income … if only.
If only it were that clear or simple. The definition that we use for nonprofit sustainability is “the ability to carry out activities that will achieve your mission while also developing and maintaining capacity for mission relevance in the future.” The financial strategies that lead to sustainability include funds for current programs and activities, resources for adaptability, and structural investments for a long-term mission horizon. That takes more than “more revenue”; it requires capital. Nonprofits often consider capital only when they’re planning a capital campaign for buildings or endowments. But in the last few years a broader understanding of capital has emerged in recognition of the multiple and complex capital needs of nonprofits.
There is no perfect definition for the term capital in this context. There is, however, a clear distinction between capital and annual operating revenue. Operating revenue is made up of the funds that are contributed to, or earned by, a nonprofit and then used to pay the costs of delivering program services and managing the organization. Money in and money out. Annual operating revenue is great, wonderful, and essential. But it’s not capital.
Capital is made up of resources that are available for a nonprofit for other uses, including:
Flexibility: such as working capital to manage the cyclical cash flow of different revenue sources; to manage the timing of activities; or to plan for technology purchases and upgrades.
Resilience: such as cash reserves to weather an unexpected revenue delay, downturn, or surprise building repair; internal opportunity reserves to invest in an innovative program, expand development capacity, or test a new strategy.
Durability: such as building reserves to maintain and upgrade facilities; internal opportunity reserves to invest in major changes to the organization’s strategy or structure; or board endowment to provide ongoing funding for a permanent and mission critical program.
What kinds of capital, and how much, does a nonprofit need? As in life, it all depends – on the organization’s goals, size, structure, and opportunities.
These concepts and the terminology of nonprofit capital have been gaining traction thanks to great research and groundwork by leaders in the field. We’re fortunate to have one of these leaders as the keynote speaker at the 4th Annual Nonprofit Finance & Sustainability Conference on March 5th. Rodney Christopher, Director of the Capital Deployment Team at the F. B. Heron Foundation, will be addressing the conference on “Capitalization: A Delightful Journey, Not a Static Destination.” Rodney is an author of “The Case for Change Capital in the Arts,” among other reports. Capital will also be one of the themes in a session that I’ll be leading, “Do Your Strategic Plan and Your Business Model Get Along?”
If it’s time for your organization to understand and explore how capital can help “achieve long-term financial sustainability,” don’t miss this year’s conference.