Nonprofit Transparency - Often Opaque

By Janet Brown from her blog Better Together

“Relevance” and “transparency” are two words I use frequently when talking with staff or board members of grantmaking and nonprofit arts organizations. Both are core values needed to foster arts participation in our communities and prosperity for artists and our organizations. This blog focuses on transparency...financial transparency.

Because of power dynamics, it is very difficult to get away from the parent-child model in grantmaking. To change that dynamic to a partnership takes a gifted, experienced funder working within a funding organization that embraces the concepts of investing in an organization’s mission and trusting the group’s ability to fulfill it. For nearly fifty years, this parent-child relationship has discouraged transparency and honest conversations about failure or success between granters and grantees. As we move forward, funders and arts organizations are taking strides to be more transparent in their communication and reporting structures.

In our daylong Conversations on Capitalization and Community workshop for funders, we examine how operational norms within the nonprofit arts sector have changed over the past forty years. The purpose of these workshops is to discuss how organizations of all scopes and sizes can be encouraged to have the cash needed to fulfill their missions – that is our definition of capitalization. Institutional grantmakers have considerable influence on the behavior of nonprofit organizations even though the actual size of their grants, for mid-sized and large arts groups especially, might be a small percentage of the overall budget. So when we ask for a break-even budget, we are encouraging organizations to think short term about their finances and discouraging them to budget for a surplus.

Surplus in the nonprofit world is not an evil word. A surplus supports artistic freedom, fosters the organizational flexibility needed to recover from a loss in income or an unexpected expense, and provides risk or change capital for innovations. But on their financial forms funders ask most organizations to “break even.” Organization managers are so programmed to “make sure they see we need their money,” some break out in a cold sweat when the year-end financials show a bottom-line profit. Then discussions begin as to how they can either spend this money or designate it so that funders still perceive the organization as “needy.” The opaqueness begins.

In order to stop this dancing back and forth, granters and their grantees can have an honest discussion about how the organization is capitalized. What we learned from the recent recession is that a majority of our organizations do not have sufficient money in cash reserves, and some have negative net cash assets. To put it plainly, they have no savings account, which means no liquidity. Fine to have a restricted endowment; but if you can’t pay the light bill or the staff, restricted funds are not helpful. Of course, an organization can go through the nightmare of unrestricting their long-standing endowments. Or maybe an endowment wasn’t right for them from the start. (That’s for another blog post.)

In order for us all to be more transparent in our conversations and transactions, there must be mutual trust between granter and grantee. First, the granter needs to understand the grantee’s finances (even that total net asset line on the balance sheet) and listen carefully to the explanation of profit or loss over a 12-month basis. Granters need to ask the right questions, which might include:

1. How did you get the deficit? When during the 12 months did you recognize you wouldn’t meet your budget and how did you adjust expenses for that?
2. How wonderful, you have a surplus. Congratulations! Will these monies go into a cash reserve? Can you show me your board-approved cash reserve policy so I understand how you are building these funds, what liabilities they are covering, and what risks/opportunities they might enable?

I’ve sat on many grant panels, coached many organizations in financial stress, and for almost four decades, run solvent nonprofit organizations. Three things always arise to get in the way of transparency and financial health:

1. Panelists or funder trustees who say, “They don’t need our money.” In this way, we’ve encouraged deficits and punished organizations with cash or operating reserves. There isn't a well-managed arts group who is fulfilling their mission with good leadership that doesn't “need our money.”
2. Organizations that say, “We are so poor we can’t save money.” This is when I become a Suze Orman impersonator, wagging my finger and saying, “I don’t care if it’s $5, $500, or $5000; every organization can save money.”
3. “Our surplus went into our next season, either providing a better product or paying our people more.” (This is great…but if there was surplus to do this, a bit of it should have gone into the cash reserve.)

Simply put, if an organization doesn’t have some savings, it is trapped in a month-to-month mentality, unable to do anything real about its situation. Being transparent about debt or surplus with funders means candid and courageous discussions on the part of the organization, as well as flexibility and encouragement from granters. This includes a review of the business model and the local nonprofit marketplace, and a practical approach to matching mission to capital. But all too often, we see this as a 12-month problem and we solve the problem by raising the fundraising income line for next year. As we all know, sometimes that magic works, but most of the time, it doesn’t.