This post is adapted from a chapter in Nonprofit Sustainability: Making Strategic Decisions for Financial Viability, by Jeanne Bell, Jan Masaoka, and Steve Zimmerman and reprinted with permission from the authors. Steve Zimmerman will be offering the keynote address at MANP’s Nonprofit Finance Conference on December 5, 2017! There is still time to register.
What is Sustainability?
Most of us in the nonprofit sector are familiar with setting programmatic goals. For instance, we might set a goal of reducing high school dropout rates by 10% in our community, or a goal of increasing the quality of the observations of one hundred amateur astronomy clubs. Nevertheless, we often aren’t sure what our financial goals are, or even what they should be. If the financial goal in a for-profit company is to maximize profit, should our goal as a nonprofit be to have $0 profit? Or should the goal be to grow an endowment of $10 million, or to have a surplus of 5%, or a deficit of no more than $50,000?
In classical economics, the answer to this question is that the financial goal of a nonprofit is to ensure that it has adequate working capital; that is, its financial goal is to have enough money to do its work over the long term. Today we often use the term sustainability for this goal.
But the term is used in different ways to suggest various things. Foundations and social entrepreneurs often describe a plan for sustainability as one that relies on earned income rather than on donations (although both earned income and donations can support long-term financial viability). When strategic plans are said to include goals for sustainability, what is often meant is that the plans include the goal of developing a more diversified income base. And environmentalists describe sustainability in terms of practices that are nonpolluting and that conserve energy and natural resources.
We like the United Nations’ definition of sustainability: doing what is required “to meet the needs of the present without compromising the ability of future generations to meet their own needs.” And we like the Wikipedia definition of sustainability: “the capacity to endure.”
Here are two ways of thinking about sustainability in a nonprofit context:
1. Sustainability encompasses both financial sustainability (the ability to generate resources to meet the needs of the present without compromising the future) and programmatic sustainability (the ability to develop, mature, and cycle out programs to be responsive to constituencies over time).
2. Sustainability is an orientation, not a destination. Sometimes the phrase “sustainable business model” sounds as if it refers to a place that, once reached, will allow the organization to generate financial resources on an ongoing basis while the board and staff sit back, relax, and watch it happen.
But what is sustainable today may be unsustainable tomorrow. Funding streams dry up or shift focus; programmatic practices evolve; client populations change. We never arrive at a mix of programs and revenue streams that can be described as permanently sustainable. But we can always be heading in the right direction.
In practice, achieving sustained financial stability and mission impact means having leaders make major decisions while holding both objectives — as well as those two objectives’ deep interconnectedness — front and center at all times.
What do we mean by the term interconnectedness? Consider the example of a community center that cannot simply discontinue its annual neighborhood festival because of skyrocketing city permit and security costs. It has to consider the degree to which the community depends on the festival to promote local business and improve trust among neighbors. It also has to consider how its funders in city government would react to the festival’s cancellation, given how much the funders use the festival as a venue for showing local responsiveness. There are simply no major decisions that do not have simultaneous, intertwined implications for mission and money.
We suggest these guidelines:
- Sustainability has financial sustainability at its core. Nonprofit emphasis on real-world impacts and on mission alignment is fundamental, but the separation of impact goals from financial goals and strategies has been a deep flaw in both business planning and strategic planning within the nonprofit sector. Financial sustainability is not only a legitimate goal; it is a necessary, intrinsic, core goal.
- Recognize that today’s nonprofits have hybrid revenue strategies. Nearly all nonprofits now are hybrid organizations rather than traditionally funded charities: they combine donations, earned income, contracts, grants, and other income types. As a result, different financial goals must be set for different types of income streams, and they must be managed in significantly different ways.
- Develop an explicit nonprofit business model statement. Every nonprofit has a business model, whether or not it has articulated its strategy as such. Each program and fundraising line must be managed individually, but this must be done in the context of an overall integrated business strategy. Leadership’s role is to develop and communicate that overall strategy as one that brings together all the activities — which will have different financial goals — into a viable business model.
- Affirm continuous decision making. Today’s nonprofits face constantly changing situations that require decision making and choice making at all levels of strategy. The global economic crisis has underscored the reality that the environment changes in unexpected and unpredictable ways. Internal changes — the departure of a key staff person, for example, or a program’s becoming stale — also demand decisions. In addition to detailed projections, leaders need a compass to support constant decision making.
Traditional strategic planning might be likened to looking at a road map, choosing and a destination, and setting out on the route. Today’s continuous strategic decision-making might be more like sailing into the unknown, tacking towards the pole star and changing course as winds and tides demand. Embrace the journey. The world is in our boats.