The pride of Milwaukee is now buried under $28 million in debt after spending heavily under the spell of the Field of Dreams mantra: "If you build it, they will come," an attitude plaguing all too many nonprofits today. This spurred the venerable museum to open stores across the state of Wisconsin, buy a 50 percent stake in an IMAX theater, open a new butterfly house and launch splashy new exhibits. The institution even started selling chocolate bars made from the cacao derived from another of its acquisitions—a rain forest in Costa Rica.

The increasingly common spectacle of a nonprofit flameout like that of the Milwaukee Public Museum is at one end of the spectrum. At the other end are thousands of cash-starved nonprofits quietly withering and even dying with little or no fanfare. As different as they may seem at first blush, both extremes illustrate the same point: It is a devilishly difficult balancing act that allows nonprofit managers to maintain quality and service levels while operating a business that the commercial sector will not and cannot take on. Always delicate, that balance is virtually impossible to strike in the absence of accurate financial information that can be readily understood by management, board and funders alike.

Getting such information is often complicated. Most executives in the nonprofit world are focused on mission—not on capital structure, revenue strategy, lines of business analysis or cash flow. Nonprofit accounting itself tends to obscure rather than clarify. Board members are often awash in extensive spreadsheets and unfamiliar financial terms. Of the museum debacle, an auditor for Milwaukee County told The New York Times: "A lot of information they were getting was modified, adjusted, confusing. The weekly financial reports . . . were 80 columns wide, but the three numbers you’d need to really get the picture weren’t there."

Most executives in the nonprofit world are focused on mission—not on capital structure, revenue strategy, lines of business analysis or cash flow.

What nonprofit managers, board members and funders require—but often do not get—is both access to capital itself and, even more importantly, access to easily understood, timely financial and capitalization information, viewed in a context of mission and capacity metrics. We have learned a lot about this at Nonprofit Finance Fund, where we have spent 25 years making loans, largely unsecured, to nonprofits. Our success—450 loans totaling $155 million with a write-off rate of less than 0.3 percent—gave us some insight into developing a financial analysis system that takes the nonprofit audit process beyond its traditional limits.

Capital Clues
Our analysts sort audited information (preferably at least five years’ worth) and re-present it in graphs and charts that board members and staff can scan. These track trends, profitability and liquidity and reveal the relationship of finance and liquidity cycles to programs.

The symptoms of undercapitalization found most frequently in our reviews include:

• The Milwaukee Museum syndrome, or program plans that call for expansion in the absence of sufficient operating surpluses to finance growth.

• Equally troublesome as a cash shortage is having cash but being unable to use it where and when it is needed because of the unique nonprofit phenomenon of restricted donations.

• Using unrestricted net assets as a measure of operating viability. Some programs may have negative liquid assets while showing positive unrestricted net assets.

• Structural operating deficits that are obscured or even deliberately hidden because of growth, access to reserve funds, endowments or the inappropriate or premature use of restricted liquid assets.

These are do-or-die days for America’s nonprofits. Even the best and most high-minded organization operates in a state of uncertainty, teetering on the knife’s edge of success or failure. But nonprofits increasingly understand there is such a thing as a nonprofit business, with its own rules and dynamics. The growing acceptance of that reality is good news for the rest of us. We get to live in a world of hardier nonprofits that can grow faster, survive longer and use dollars more efficiently to accomplish the good works that make our communities better places to live.

Art by Matt Mahurin.

Clara Miller is president and CEO of Nonprofit Finance Fund, based in New York.