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May 27, 2010

Kresge Foundation Gets it Right—Nonprofits Need Working Capital, Not More Bricks and Mortar

I’m sitting down to write my monthly column on the nonprofit sector and I’m thrilled to be writing about the changes at the Kresge Foundation. In a major turnaround in its philosophy of philanthropy, Kresge has acknowledged that arts and culture nonprofits need working capital—not more bricks and mortar. For years the foundation has provided matching fund grants for capital projects. As with many well-intended efforts, Kresge encouraged nonprofits to expand when they often did not have the financial capacity to support the expansion.

As I write in my forthcoming book, More Than Just Money: Practical and Provocative Steps to Nonprofit Success:

Over time, the costs of operating a building and of running the programs in the building are vastly higher than the construction cost. Too often new facilities have turned a fiscally sound institution into one that is continually strapped for cash.

Kresge has responded to this problem by shifting its program to fund working capital reserves and reserves for building maintenance and repair. Hooray! The cutbacks and stress that culture currently faces is due in large part to the absence of reserves to cushion the decline in revenues. Remember, there has not been a decade without a recession in the past and current centuries. For-profit companies maintain large pools of cash; why else do reports of losses in a quarter come out routinely without accompanying crisis actions? Nonprofits have gotten into the habit of expanding their programs when the economy is strong and contracting them when the economy sinks.

That stress should be avoidable, and Kresge’s focus on supporting operating and maintenance reserves is welcome. This follows the Boston Foundation’s announcement last year that it is shifting much of its grant program to general operating support. This movement is a long overdue acknowledgement that maybe nonprofits know their business as well or better than the foundations—and the foundations are willing to place their trust in the spending judgments of the nonprofits they support.

You should learn more about these dilemmas in modern philanthropy. In More Than Just Money, I devote ten chapters to challenges in philanthropy. Thinking this chapter might be helpful?  Visit www.LinkingMissiontoMoney.com to register to become notified immediately when the book becomes available.