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.