0.13 Chapter ten: the complexities of nonprofit financing  (Page 4/10)

The relatively low percentage of revenue available to pay for unrestricted gen­eral operating expenditures in this instance is not at all unusual for a modern non­profit institution. In recent years, funders have increasingly tended to make restricted grants, and often only to fund new programs and initiatives. As all non­profit managers and trustees know, this trend is fraught with danger.

First, it can be difficult to ensure that total expenditures on a restricted pro­gram do not exceed the amount of money provided by a grant. Managing a re­stricted grant will use time and facilities that may not be fully covered, even if there is an allowance for indirect costs. Sophisticated cost accounting allocation esti­mates are required to get it right. Anything short of superior management of such a grant can end up costing an institution more money than it brings in.

Even if an institution is extremely well managed and has tight financial con­trols, restricted grants can encourage institutional growth or special projects that cannot be sustained. A recent report on the Society's library documented numer­ous examples of cataloging and preservation initiatives that had been started with targeted grants but could not be completed due to lack of funds.

The Society has also exhibited clearly the most profound problem related to the distinction between restricted and unrestricted income: when funders want to provide only restricted grants, there may be no way to pay for the basic costs that keep an institution alive. This problem generally becomes even more pro­nounced when an institution begins to encounter financial difficulty. Typically, donors are unlikely to offer unrestricted funds to institutions perceived to be in trouble because of a very real fear that the funds will serve no long-run purpose. Of course, this sequence of events represents a vicious circle: the institution got into financial trouble in the first place because of a lack of unrestricted resources.

Cash is king

This study has documented numerous ways in which nonprofits differ from their for-profit cousins, but a fundamental need they both share is the need for cash. In the corporate world, it is not losses that put companies out of business but rather a lack of cash to pay creditors. For nonprofits, it is usually a lack of unrestricted funds to pay employees that closes the doors. For nearly a year leading up to the closing of the Society in February 1993, its leaders desperately searched for cash that would enable it to stay open. First, a $1 million loan was secured from a pri­vate foundation, funds subsequently rolled over into a debt assumed by several members of the board. Later, a $1.5 million loan was negotiated with Sotheby's. Meanwhile, the Society removed all board-designated restrictions from funds and applied for cy pres relief from the courts in order to use certain special funds. As long as the Society was able to find cash, it could remain open. The Society's story implies that nonprofit institutions need to be every bit as expert, if not more so, at managing cash flow as their for-profit counterparts.