Critics argue that nonprofit health is not the point, social impact is. But in my work, I am finding that an opportunity—I dare say an imperative—exists for philanthropy and nonprofits to discuss proactively and openly the importance of enterprise success in addition to the importance of evidence of programmatic success.
The rhetoric and practice around “funding what works”—scaling the impact of programs that have proven success rates—runs the risk of perpetuating a nagging problem for the nonprofit sector: excellent programs cannot exist without healthy organizations. Just as the iPad would not likely be a success without Apple,* a program that achieves greater health outcomes cannot succeed without a strong organization that creates, administers, markets, delivers and improves that program. The difference is, we all accept that Apple is an enterprise, which builds the cost of these functions into its product pricing. It is understood that profitability is a pre-requisite to healthy growth.
The fact is that nonprofits are also enterprises. Many funding and management practices—some of which aim to be best practices—do not embrace this and the nonprofit sector struggles because of it.
|“The fact is that nonprofits are also enterprises.”|
Funders who seek to pay for scaling the impact of proven nonprofit programs have increasingly made several types of effective flexible capital grants available. In addition to the money, these funders typically provide access to capacity building support to help grantees strengthen their organizations. But strengthening isolated functions such as fundraising, leadership development and financial systems, while clearly important, is not the same as building a healthy enterprise.
My colleagues at Nonprofit Finance Fund (NFF) have long argued this point, and we have found increased receptiveness from both nonprofits and foundations to considering the importance of the “enterprise” or business underpinnings of a nonprofit organization. On a related front, folks in the field are advancing the notion that nonprofits suffer from a starvation cycle due to “the Overhead Myth”, and they are making real strides addressing the importance of having adequate revenue to pay for the full costs of delivering services while maintaining an appropriate infrastructure.
If our goal is to achieve lasting social and cultural impact through nonprofits, we must help those organizations maintain the resources to stay with it for the long haul. We must make it a priority to be clear and realistic—as well as bold—about what it takes to ensure that nonprofit enterprises are capable of delivering on the track record and promise of evidence-based programs. These organizations should not be continually threatened by boom and bust funding cycles and the ability to hire great talent should not be crippled by the fear of funding pools running dry in the blink of an eye.
When it comes to enterprise health and success, there are two especially important elements–sufficient reliable revenue (earned and contributed, as both are essential to the business model of the lion’s share of nonprofits) and a strong balance sheet built by annual surpluses. In my experience, it is a rare philanthropist or nonprofit leader who gets jazzed about either. While I would not argue that revenue and balance sheets are more important than measuring and achieving social impact, I am confident that failing to pay real attention to nonprofits as enterprises will reliably undermine impact efforts over time.
As a result, flexible capital grants should be used with an explicit expectation that they will be invested by nonprofits in ways that will address revenue and balance sheets supporting the long-term operations of the enterprise. It is for this reason that Heron refers to its philanthropy as Enterprise Capital Grants. In future posts, I will say more about reliable revenue and strong balance sheets and how capital can be used to address them. For now, I wish to put out to the field a call for responses to the question: Are we focusing enough on enterprise when we seek to increase the impact of evidence-based programs?
Read more reflections from Heronites on aspects of our work and many of the reasons we do it.
*A hat tip for this analogy to Jodi Sturgeon, president of Heron grantee Paraprofessional Healthcare Institute, as quoted in a May 2013 Chronicle of Philanthropy article.
Rodney Christopher is currently a senior fellow at Heron. For 15 years at Nonprofit Finance Fund, he served as trainer and consultant to more than 400 nonprofits and 80 grantmaking foundations. His clients were in 30 states and across subsectors including human services, arts & culture, education and community development.