The Resilience Mythos, and Related Nonprofit Financial Misdirections

The concept of “nonprofit resilience” has become controversial for a number of reasons, harkening as it does to a return to a norm or former state that may forever be gone. Additionally, there are a number of pat prescriptions for resilience that are neither altogether useful or appropriate to what we really need in order to achieve sustainability and prosperity for our organizations and communities. How useful is fund diversity, for instance? How much do we need in reserves? Is earned income the real cash cow? Or maybe that’s not the point.

The Resilience Mythos, and Related Nonprofit Financial Misdirections

The notion of “nonprofit resilience” is not without controversy. Among other definitional problems, the term suggests the crises that we are facing are time-limited and that the task at hand when besieged with disaster is simply to return to “normal” along with the operating environment. It also carries the implication that nonprofits are primarily responsible for their own survival, continuing to serve their communities in the face of even the most profound shocks. These kinds of assumptions, which fall far short of the particular era we are in, has led to a never-ending search for the right amount of financial reserves to help you survive over an extended period should regular resource streams to be disrupted. Is it three months’ worth? A year’s?

The search for right-sized reserves is, in the end, perhaps a necessary but profoundly insufficient response to an environment that is increasingly unstable and unsustainable. But it is hardly the only faulty notion we look to regarding s0-called resilience.

Xintong Chen studied nonprofits’ recoveries from Hurricane Katrina in “Nonprofit Financial Resilience: Recovery from Natural Disasters,” published in VOLUNTAS: The International Journal of Voluntary and Nonprofit Organizations. She asserts that recovery for these nonprofits is slow, generally taking three to five years or longer. Not only does she bust some myths about nonprofit resilience, but she also makes some suggestions about preventing unnecessary failures in times of crisis.

Myth Check #1: Most existing literature, Chen observes, tends to assume that commercial revenue in nonprofits is “associated with low levels of insolvency risk, funding disruption risk, growth in revenue and higher resiliency during downturns.” But when it comes to commercial revenue and fees for service, Chen found the benefits are sensitive to the settings in which they are placed. During many disasters, she says, “Nonprofits that depend upon commercial revenue recover slower than nonprofits that rely on other types of revenue in terms of asset recovery.”

Myth Check #2: Chen also finds that diversity of revenue alone does not help with organizational resilience; rather, “portfolios should be chosen based on the specific conditions of the organizations such as the nature of their services.” This point has been made before, but many continue to refer to diversity in and of itself as a hedge against destabilization.

Chen acknowledges in her study that natural and economic disasters have different impacts on nonprofits, though the pandemic contained elements of both. She concludes with several insights for practitioners: “First, it may take years for nonprofits to recover from a significant disaster, so nonprofit managers should consider long-term recovery plans, and nonprofit funders should consider offering long-term support. Second, a higher equity ratio helps nonprofits achieve total expense recovery.”

This means nonprofit funders and policymakers should consider giving nonprofits more flexibility in building unrestricted equity instead of forcing them to spend only on specific programs, especially during the disaster recovery period.

Chen’s recommendations are interesting in light of the measures taken by government and private institutional funders during the pandemic. In government’s case, nonprofits saw a number of special grants pools appear at almost every level. These were somewhat familiar and dependent on social capital. But the biggest single source of essentially unrestricted revenue to nonprofits during the pandemic were the Paycheck Protection Program loans. The PPP may have been unfamiliar, but it was exactly the right measure at the right time for the sector as a whole.

Takeaway: It takes from three to five years for a nonprofit to recover from a disaster — sometimes longer, depending upon the circumstances. That’s not even discussing the time frame for using the moment for transformative rebuilding.

Takeaway: The first-of-its-kind PPP program and the willingness of private funders to derestrict their grants made an enormous difference to the effectiveness and equilibrium of many nonprofits in 2020 and beyond. How nonprofits used that unrestricted equity — the tactics, the strategies, and the real-world effects — is something the Financial Commons forum means to make more transparent.