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Changing Nonprofit Finance: The Other Side of the Story

By Nell Edgington



Continuing my argument from previous posts here and here about how nonprofit finance must change, today I want to focus on the other side of the story: how nonprofit organizations themselves can be smarter about funding.  I want to explore a couple of ways that nonprofits are inefficient in generating revenue.

First, foundation funding.  The Foundation Center has been compiling a detailed list of various foundations’ responses to the economic downturn.  This is interesting and helpful to a point.  But the vast majority of nonprofit organizations probably will never receive a grant from any of these foundations anyway.  In fact, according to Giving USA’s annual survey of nonprofit charitable contributions, foundation funding made up only about 12% of the $306 billion that nonprofits received in charitable contributions in 2007.  And if you look at the overall sources of revenue for the nonprofit sector, earned income and government funding make up a much larger piece of the overall revenue picture than charitable contributions.

Foundation funding is a small piece of the entire nonprofit revenue landscape.  So I’m not sure why some nonprofit organizations spend so much time and money hiring grantwriters, going after long-shot grants and worrying about the state of the foundation community.  Nonprofits would be better served to take a more holistic view of their revenue engine and opportunities for growth.  Is earned income a possibility?  Can they tap into more individual giving, which makes up 82% of the charitable giving pie?  Instead of hiring a grantwriter, how about hiring a seasoned revenue generator who has experience and results in all aspects of revenue creation, who could take a look at the assets (relationships, donor base, mission, services, etc.) a nonprofit has and how they could be translated into a more diversified and sustainable funding mix.  Such a person would cost more than a grantwriter, but the return on the investment would be far superior.

Which brings me to one of the favorite and lowest ROI fundraising activities in the sector:  events.  Galas, fun runs, parties seem to be a staple of the nonprofit sector, but are they really generating much net revenue?  Indeed, the net revenue of nonprofit events is often not calculated.  That is to say, when you factor in the direct (food, band, decorations) and indirect (staff time, value of board/other volunteer time, etc.) costs of the event, what is the true profit?  I think most nonprofit fundraisers would be surprised.  And there are two other drawbacks to events.  First, there is an increasingly competitive landscape for events.  Each weekend in my city there are several nonprofit fundraisers.  How many invitations must philanthropists get per month?  Surely they are exhausted by it.

But secondly, and even more disturbing, is that events move a nonprofit away from their core mission, their reason for being and thus their reason for raising funds. Instead, the nonprofit asks their donors to focus on the party and what’s in it for the attendees.  Through a gala, a nonprofit teaches its donors not about the important change the organization is creating, but rather that the organization exists to provide them a good time.

In order to transform how nonprofits are financed and thus to increase our effectiveness and productivity at solving problems, two things have to change.  First, the legal and financial structures that hold nonprofits back from innovating, growing and becoming sustainable must change.  And second, nonprofits themselves have to be smarter about using the tools they do have more effectively.  They must calculate the return on investment of the revenue generating activities they undertake and discard those that are no longer productive.

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About the Author: Nell Edgington is President of Social Velocity (www.socialvelocity.net), a management consulting firm leading nonprofits to greater social impact and financial sustainability. Social Velocity helps nonprofits grow their programs, bring more money in the door, and use resources more effectively. For more information, check out Social Velocity consulting services and clients.

Monday, February 23rd, 2009 Fundraising, Nonprofits

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3 Comments to Changing Nonprofit Finance: The Other Side of the Story

Filatore
March 26, 2009

I think your comments about grants are especially correct. I see many overworked and underfunded nonprofits exerting waaaaaaaaaaay too much time chasing unrealistic grants. It reminds me of the studies proving that lower income persons spend proportionately more of their income on lottery tickets–instead of doing the hard work of making relationships with our donors, we’d rather do endless paperwork on a longshot chance of “easy money”

Nell Edgington
March 26, 2009

Thanks for the comment Filatore.

Jim Miller
March 28, 2010

Small donations are great. The Humboldt Area Foundation is a master at bringing millions to its funding operations. Yet, all of the news for non-profits is the greatly decreased funding by gifts. The only way out of this mess is for non-profits to engage in for-profit businesses and pay taxes to the IRS.

Most non-profits lack the ability to run a for-profit business, having depended so long on hand-outs. Rather than run a business, the non-profit can use its donor base to solicit investments in a revolving fund which is, in turn, used to fund start-up worker cooperatives. No free lunch. The worker cooperative must pay interest on loans and split some of the profits with the equity investors. Hence, each new co-op adds to the income stream in favor of the charity.

The new “kid on the block” is the L3C limited liability, social benefit entrepreneurial enterprise. This type of enterprise needs low cost financing from the start-up stage to the point of profitability. Please visit my blog to read all about how this type of financing can go a long way to solving the funding of 501.c.3 charities: MUTUAL AID SOCIETY OF AMERICA, INC.
103 Methodist St., Cecilia, KY 42724
Ph. 270-307-4857; fax. 270-862-4379
email: jimmiller5417@gmail.com

Here’s my earlier post in case you missed it;

March 27, 2010

Re: Offer of collaboration

Dear Folks,

On behalf of Mutual Aid Society of America, Inc., I would like to engage your organization in a cooperative project well suited to both our missions. The general goal is to improve the quality of life in rural America for its least economically able people. This goal can be met by attaining these objectives:
Form a new corporation or empower an existing one to offer organizational and funding support to worker cooperatives. This corporation has or would obtain 501.c.3 status and also qualify as a U.S Treasury certified community development financial institution. It will establish several “bridges” in aid of its mission.
Form one or more limited liability companies as social benefit entrepreneurial enterprises which become qualified L3C entities with the IRS.
Create a campaign for the issuance of notes by the L3C corporation, 100% of the proceeds of which are used to fund start-up worker cooperatives.
Assist the L3C in applying for funding from private foundations and government entities.
Provide professional services to each start-up, including legal, accounting, tax, marketing, securities, banking, and dispute resolution for as long as needed.
Liquidate the notes by using the revenue from interest on loans and/or dividends on equity investments in the worker cooperatives.
Form and fund a Community Development Credit Union.

The model for this form of non-profit funding has been implemented by Cooperative Fund of New England which formed a subsidiary, The Creative Capital Fund of New England, http://coopcapital.coop/coopcapital which will invest 100% of the proceeds in start-up worker cooperatives. The Prospectus is at: http://coopcapital.coop/coopcapital/prospectus .

The funding is exempt from securities regulations and is not backed by insurance against loss. The use of First Loss Notes, earnings and reserves against loss, protect, to some extent, the Second Notes. The proceeds represent a “blind pool” from which the Board of CCF can draw for loans or equity type investments in worker cooperatives.

Much of the historical background and articles on worker cooperative and rural economic status is on the MASA website at: http://masallp.wetpaint.com/ I’ve started a new blog to which I have copied many of the relevant articles: http://mutualaidsocietyofamericainc.blogspot.com/. My comprehensive resume may be viewed at: http://algaloildiesel.wetpaint.com/page/JAMES+E.+MILLER+–+COMPREHENSIVE

Please acknowledge receipt of this email and, if your organization is interested, please respond by email so I can pass it along to my associates. Thanks,

Sincerely yours,

James E. Miller, BA, BS, JD

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