The Nonprofits Assistance Fund (NAF) and the Minnesota Council of Nonprofits (MCN) earlier this month co-sponsored a conference on nonprofit finance and sustainability. The fifth annual event was a sellout that attracted 500 nonprofit leaders eager to learn more how their organization’s finances play a role in maintaining accountability and sustainability.
Kate Barr is the executive director of the Nonprofits Assistance Fund, a Minneapolis-based Community Development Financial Institution. Barr’s organization provides direct and bridge financing to nonprofits, and also offers consulting, training and online learning services.
Many of the loans have gone to Minnesota’s charter schools. Barr estimates that the NAF has made loans to 72 of the approximately 160 charter schools in Minnesota. Initial loans were used to fund start-ups but now the NAF is making loans to schools that are growing and expanding and to support healthy enterprises.
Barr says that knowing and measuring outcomes is critical to a nonprofit’s sustainability and that financial and outcomes reporting are related. She says it’s time for nonprofits and their donors to look at those overhead costs not as an expense but as “core mission support.”
Q: What were key takeaways from the conference?
A: That the conference was sold out this year is takeaway in itself, demonstrating that nonprofits are committed to building solid business models to achieve their missions. There was a clear call throughout the day to eliminate any silos that may exist between the finances and mission work of nonprofits and to refine processes to communicate both money and mission results.
Since the conference is presented jointly with the Minnesota Council of Nonprofits, I also asked Jon Pratt from MCN this question. We agreed that there’s a high level of interest among nonprofits in system and process improvements for their organizations, and a big appetite for ideas from other organizations, fields and disciplines. These are good signs of a healthy, engaged nonprofit sector moving forward — which continues to grow as a share of the economy.
Q: Your keynote speech at the conference was on the “overhead myth.” Can you explain that concept?
A: This is the nonprofit equivalent of an urban legend — the belief that the percentage of expenses directed to costs that are categorized as “overhead” is a meaningful measure of the efficiency or effectiveness of a nonprofit. In reality, this is a technical financial reporting rule that applies only to nonprofits — not business or government — that doesn’t tell us anything about how well a nonprofit does in serving its community. The expenses that are accounted for as overhead are critical functions for a nonprofit, such as governance, strategic planning, accounting and development. Unfortunately, the overhead myth is so widespread that this ratio has become a benchmark for donors and charity watchdogs to evaluate nonprofits.
Q: What are the practical implications of that concept to smaller nonprofits?
A: The overhead myth can actually damage nonprofits, especially smaller nonprofits, with the urge to cut overhead costs so that they can report a very low ratio. Since this is a percent of total expenses, the arithmetic works against small nonprofits. It creates a conundrum: We all want nonprofits to have solid accounting systems, to develop strong boards and to evaluate the impact of their programs, but then we penalize them for reporting the very real costs of growing and maintaining an effective nonprofit. I’m one voice in a chorus who has been encouraging the nonprofit sector to rally together to educate our supporters about this, and to find better and more meaningful ways to communicate effectiveness.
Q: What are keys to a nonprofit’s sustainability?
A: First, what is sustainability for a nonprofit? In our view, it’s the ability to attract the resources needed to carry out mission-focused activities in the present and to develop the organizational and financial capacity to be effective in the future. While there are many factors to consider, it comes down to three components. Most important is to deliver great programs that are effective and relevant for whoever or wherever the nonprofit works. Second is to be attentive to maintaining the business model that works for the nonprofit. Conversations about nonprofit finance are often focused on the income and questions about how to attract more donations or grants, but business models are much more than income. What does it cost to deliver great programs, what is the infrastructure required to support development, program, organizational health and accountability? What capital is needed for buildings, technology and working capital? And finally, for nonprofits to be sustainable in the future, they have to be ready and able to adapt to changing times in their community, in the economy or policy environment, and to market shifts.
Q: How important is it for nonprofits to measure the impact of their work?
A: Effective nonprofits develop a process to understand and evaluate their success. Identifying how and what to measure, and determining useful benchmarks, can be very complicated. We often say that nonprofits have a “double bottom line.” Measuring the financial bottom line is usually much more straightforward than the mission bottom line. Even with that complexity, it’s important for nonprofits to gather information, track progress, make course corrections and measure for success.
Q: What should individual donors consider when they assess where their charitable dollars go?
A: For me it boils down to three questions: Do you care about the cause or the mission that the nonprofit is addressing? Does the information you have give you confidence that the nonprofit is effective in its work? And do you believe that the people leading the nonprofit are capable and trustworthy?