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The Fundamental Flaws in How We Finance the Nonprofit Sector

NFF SurveyToday the Nonprofit Finance Fund (NFF) released the results of their sixth annual State of the Nonprofit Sector survey and the data underlines a growing crisis in the financial sustainability of our nonprofit sector.

56% of nonprofit leader respondents reported that they were unable to meet demand for their services in 2013, this is the highest rate since the survey’s inception six years ago. And the scary part is that this inability to meet demand is not because of a temporary down period in the economy, but rather because of deeper dysfunctions in how we funnel money to the sector. As Antony Bugg-Levine, CEO of NFF put it, “The struggles nonprofits face are not the short-term result of an economic cycle, they are the results of fundamental flaws in the way we finance social good.”

The survey gathered responses from more than 5,000 leaders from U.S. nonprofits of all sizes, domain areas, and geographies.

The top challenge by far for nonprofit leaders, with 41% of them reporting it, is “achieving long-term financial stability.” And this is evidenced in several ways:

  • More than half of nonprofits (55%) have 3 months or less cash-on-hand.
  • 28% ended their 2013 fiscal year with a deficit.
  • Only 9% can have an open dialogue with funders about developing reserves for operating

These struggles with financial sustainability stem in large part from a lack of understanding among funders of the true costs of social change work. Roughly 53% of nonprofit respondents’ funders rarely or never fund the full costs of the programs they support. And for approximately 24% of respondents their government indirect cost rate (the amount government allows for indirect, or “overhead” expenses) declined over the last 5 years, while about 47% of respondents are subject to a government indirect rate of 9% or less. That is nearly impossible.

For the first time, the survey included questions about impact measurement, a growing interest among funders, ratings agencies and others in the sector. But these questions just further underline the financial Catch-22 in which nonprofit leaders find themselves. 70% of nonprofit leaders report that half to all of their funders want to see proof of the impact of their programs, but 71% of nonprofit leaders also report that funders rarely or never fund the costs of impact measurement.

At the end of the day, government and private funders are putting greater demands on nonprofits whose services are increasingly needed, all while funding is becoming more difficult to secure. It’s a vicious downward spiral.

More than ever this survey demonstrates a need for the nonprofit sector and those who fund it to take a hard look at how the social sector is financed. We are not sustainably financing the social change work we so desperately need. And if we don’t address that, the downward spiral will simply continue.

Here are some fundamental changes to the financing of the nonprofit sector that I’d like to see:

  • Government must move to a more reasonable indirect rate. No one can deliver an effective program with only 9% allocated to administration and other “overhead” costs.
  • Funders who want to see impact measures need to step up and fund the work and systems necessary to make it happen.
  • Nonprofit leaders and funders need to have more open and honest conversations about the hurdles standing in the way of the work.
  • Nonprofit leaders need help figuring out sustainable financial models.

In the six years of NFF’s comprehensive and unparalleled view into the world of nonprofit leaders the story is not getting better. Let’s hope this data serves as a wake up call for the social sector. We must collectively realize that if we really want social change we have to figure out how to finance it effectively and sustainably.

 

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Financing Not Fundraising: Assess Your Nonprofit’s Financial Model

moneyI am amazed by the reaction of some nonprofit leaders when faced with a budget shortfall. Some simply shake their head in innocent confusion, some blame an “inexperienced” development director or a “checked-out” board, and others throw together a knee-jerk fundraising event in order to stem the tide.

But a much better approach, when you don’t have the money your nonprofit needs, is to step back and assess the viability of your nonprofit’s overall money function, which is the topic of today’s installment in the ongoing Financing Not Fundraising series.

If you want greater, more reliable funding for your nonprofit, you must get strategic. And the first step to any real strategy is analysis.

Instead of viewing the money that flows to your nonprofit as a side note, or worse, a completely uncontrollable force, you must view money as a very necessary and integrated function that is just as important as your nonprofit’s programmatic function. And in order to determine how well your money function operates and how to transform it, you must assess it.

A transformative financial model assessment uncovers how all aspects of the organization contribute to or detract from money flowing through the doors. It analyzes the financial impact of 7 areas of the organization, like this:

  1. Strategy
    Does your nonprofit have a long-term strategy that integrates money, programs and operations? Does your strategy help articulate the value your nonprofit provides the community in order to compel outsiders to invest? Does your strategy include measures for whether that value is actually being created?

  2. Mission and Vision
    Does your nonprofit have clear, compelling vision and mission statements? The two statements are not “nice to have” marketing language, rather they articulate the very essence of why your nonprofit exists. Does your vision paint a bold description of the social change you seek? Does your mission describe the day-to-day work towards that vision?

  3. Board and Staff Leadership
    Does your board have the skills, experience and networks necessary to execute on your strategic plan? Are they engaged and invested? Are they actively connecting the organization to people, resources, partnerships? Does your staff have the knowledge and experience necessary to make money flow? And are they structured and managed effectively?

  4. Program Delivery and Impact
    As a nonprofit you have two sets of “customers.” Those you serve (or your “clients”), and those who fund those services (or your “donors”). Without a compelling and effective delivery of services to clients, donors won’t fund those services. Is your nonprofit strategic about which programs to grow and which to cut? Do you measure the effect of your programs on clients? Are your programs financially viable, or are too many of your programs mission-rich, but cash-poor?

  5. Marketing and Communications
    Do you make a compelling case for your work and for support of it? Once you’ve made the case, are you using the right marketing channels (website, social media, events, email, etc.) to attract and engage your target funders, volunteers, advocates, board members and other supporters?

  6. External Partnerships
    In order to move the mission forward and in order to attract funders, volunteers, advocates you must be strategic about building alliances that make sense. Do you have the necessary external relationships to execute on your strategy? Are you constantly working to strengthen or grow the right partnerships in the right ways?

  7. Financial Model
    And only now do we look specifically at money. Because without all the previous elements (thoughtful strategy, compelling vision and mission, strong leadership) money simply will not follow. Does your funding mix fit well with your mission and core competencies? Are there other revenue streams that make sense to pursue? Are there fundraising activities that are actually costly rather than profitable?

When money isn’t working the way you want it to, don’t stick your head in the sand. Wrest the money sword from the beast of chance by taking a hard look at your nonprofit’s money function.

If you want to learn more about the Financial Model Assessment I provide clients, click here. And if you want to learn more about the Financing Not Fundraising approach, download the newest e-book in the Financing Not Fundraising series, Financing Not Fundraising volume 3.

Photo Credit: Pen Waggener

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Can We Move Beyond the Nonprofit Overhead Myth?

mythEver since last year’s Letter to the Donors of America from GuideStarCharity Navigator, and BBB Wise Giving Alliance there has been a growing movement to debunk the “nonprofit overhead myth,” the notion that donors should evaluate nonprofits based on the percent they spend on “overhead” (fundraising and administrative) costs.

More and more articles (a most recent one here) are cropping up explaining the overhead myth and highlighting donors who overcame it. And even fundraising journal Advancing Philanthropy is devoting their entire Spring issue to the topic.

But at the same time we have very obvious examples of the continuing strength of the overhead myth. The latest is nonprofit darling Charity:Water, which is often held up as the gold standard of innovative fundraising and nonprofit strategy, claiming that 100% of their donations go “directly to the field.” And thus the overhead myth lives on.

Will we ever be rid of the idea that nonprofits can somehow achieve a nirvana where very little (or no) money goes to boring things like salaries, technology, infrastructure, fundraising, leadership development, planning, R&D?

I wonder if we could gain more traction by talking less about the negatives of an overhead myth and talking more about the positives of nonprofit organization building.

For example, one of the things that is often considered “overhead” and rarely gets funded is nonprofit leadership development. But in the for-profit sector, leadership development is viewed as an incredibly important and worthy investment. According to a recent article by the Foundation Center, the business sector spent $12 billion on leadership development in 2011, whereas the nonprofit sector spent $400 million, or viewed another way, businesses spent $120 per employee on leadership development, whereas the nonprofit sector spent $29 per employee.

And leadership development can have such a positive return on investment. A stronger nonprofit leader can:

  • Recruit, train and manage a more productive and effective staff
  • Engage a more invested board of directors
  • Use money and other limited resources more strategically
  • Open a nonprofit to bigger and better networks
  • More effectively manage to outcomes
  • Create an overall more highly performing nonprofit

So what if we refocused the overhead myth discussion on the power of nonprofit organization building? Beyond leadership development, investing in nonprofit organization building means money for things like: talented, effective fundraising staff; smart long-term planning; performance management systems; effective technology.

At the core, organization building is about creating a smart, strategic nonprofit that can actually realize the outcomes it was set up to achieve. Organization building can make the difference between a nonprofit that is just getting by and a nonprofit that is actually solving problems.

If you want to learn more about funding nonprofit organization building, download the Power of Capacity Capital E-book or the Raising Capacity Capital Webinar.

Photo Credit: liquidnight

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How Convincing is Your Nonprofit’s Fundraising Ask?

beggingTired of the endless fundraising circuit, nonprofit leaders sometimes get frustrated when prospective donors won’t invest in their nonprofits, like this executive director:

“Here’s my problem…It’s obvious these people have money, they just don’t want to share it with us.”

What this executive director fails to realize is that the burden to connect the dots for donors lies squarely on her shoulders. It is up to nonprofit leaders to articulate – in a compelling, inspiring way – how their nonprofit is creating a solution to an important social problem, and why donors should care about and invest in that solution.

A Case for Investment can help you do just that.

Now more than ever, nonprofits are struggling for funding amid growing competition and diminishing available dollars. At the same time, burgeoning interest in performance management and impact investing have focused more donors on the outcomes their investment in a nonprofit will bring.

Donors, especially major donors, are less likely to give to a nonprofit because the organization “does good work” and more likely to give because a nonprofit demonstrates how it creates a solution to a social problem the donor cares about.

Those nonprofits that want to continue to attract and grow philanthropic investment must create a compelling, thoughtful argument for why a donor should give to their organization. This argument is called a “Case for Investment.” Driven by a thoughtful combination of data and emotion, a good Case for Investment can help a nonprofit communicate and connect with their target donors much more effectively.

The Case for Investment Step-by-Step Guide can help you create your nonprofit’s case.

case for investment guideAs one nonprofit executive director who used the Guide put it:

“I am using it as a catalyst to create a branding campaign with my Marketing Committee. Of course, this will be used for fundraising and grant writing as well. We really needed the framework to build value for our donors, volunteers, and clients.”

A good case for investment is the fundamental building block from which all donor communications, marketing materials, grant proposals, website language, and more is born.

The Case for Investment Step-by-Step Guide is broken down into ten sections:

  1. Why Create a Case for Investment?
  2. How to Use This Guide
  3. The Need
  4. Solution
  5. Impact
  6. Financial Model
  7. Strategic Direction
  8. Resources Required
  9. Social Return on Investment
  10. Next Steps

In each section there is a series of questions, which you will answer. Your answers to these questions become the basis for your final Case for Investment. Examples of other nonprofit’s cases for investment are highlighted in each section, allowing you to see how others have made their arguments.

The Case for Investment Guide is one of six guides in the Social Velocity Step-by-Step Guide Series. You can learn more and download this and other guides here.

Photo Credit: JHall159

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Philanthropy, Government, and Nonprofit Excellence: An Interview with Daniel Stid

Daniel StidIn today’s Social Velocity interview I’m talking with Daniel Stid, Senior Fellow at the William and Flora Hewlett Foundation. Daniel serves as an advisor to Foundation president, Larry Kramer, leading the exploration of a potential Foundation initiative to support and improve the health of democracy in the US. Before joining the Foundation, Daniel was a longtime consultant and strategist to governments, nonprofits, and for-profit organizations, including as a partner in The Bridgespan Group’s San Francisco office, where he co-led the organization’s performance measurement practice.

You can read past interviews in the Social Innovation Interview Series here.

Nell: You moderated a panel at the recent After the Leap conference about government and performance management. Government has a long history in the outcomes space, but there was some controversy at the conference about whether government can really lead this new movement. What role should government play in this new push toward nonprofit performance management?

Daniel: Yes, my Twitter feed was blowing up during that session with people adamantly saying that government couldn’t lead this push, it had to be nonprofits! To my mind this controversy misses the point. It presumes a hierarchy – that leadership is lodged in one place, and that it is exercised in one direction. The fact is that if we are going to make this “leap” happen, we need distributed leadership in multiple places: in government agencies, in operating nonprofits, in foundations, among researchers and program developers.

A great example is the Teen Pregnancy Prevention program administered by the Office of Adolescent Health in the federal department of Health and Human Services, the implementation of which I recently wrote about with some former colleagues at The Bridgespan Group. The Office of Adolescent Health administrators demonstrated leadership in conceiving and developing a bold and thoughtful program; the researchers and purveyors involved demonstrated leadership in creating evidence-based solutions and effectively supporting their implementation; and front line agencies demonstrated leadership in implementing these interventions with fidelity. What makes this program so compelling is that it has been animated by multiple forms of leadership that are networked and reinforcing each other across sector lines. I believe this same pattern occurs in most other situations where social change is happening at a large scale.

Nell: Your charge as a senior fellow at the Hewlett Foundation is to help explore how the foundation can “support and improve the health of democracy in the United States.” There have been some criticisms lately that philanthropy has moved away from supporting democracy and instead sometimes enhances wealth inequality. What are your thoughts?

Daniel: Insofar as this occurs, I believe this an inadvertent effect from the standpoint of individual donors. Most people want to give to something they can point to and/or that they can have affiliation with – hence the contributions of many donors to hospitals and arts organizations and universities, or to the schools that their children attend. This is straightforward and understandable. You can readily see and appreciate and be associated with what you are getting for your contributions. And it is philanthropy. We shouldn’t presume that all philanthropy can or should be geared toward reducing inequality. That is not the point of philanthropy in a free society. (Now whether all philanthropy needs to be and should be subsidized by the tax code is another question; I am on the record as saying it is high time to revisit the charitable deduction.)

The kinds of interventions that stand a chance of alleviating inequality – e.g., support for high quality early education, or effective teen pregnancy prevention – entail large-scale systems change and diffuse and uncertain impact for people typically living in very different communities from the philanthropists who are in a financial position to support them. They are for that reason a riskier philanthropic proposition. But many individual donors and foundations are making these investments anyway, and I bet we will see more of them do so as the evidence-base supporting solutions to inequality continues to be solidified.

Nell: Moving nonprofits to a performance management system will be costly. Do you think government can and should foot that bill, or can philanthropy? How do we create and fund the infrastructure necessary for this movement to truly succeed?

Daniel: Really good question! I don’t think that we can count on government to do it – for all of government’s resources relative to those of philanthropy, it is extremely rare that a government program will have the political and policy degrees of freedom, let alone the budget, to invest in nonprofit capacity in any sustained way. And the age of austerity we are in will only worsen this shortfall. To me this is a critical role for philanthropy to play. Just a portion of the billions that philanthropy puts to work in the service of education, health and human services, youth development, etc. could help assess and put to much better use the hundreds of billions that federal, state and local governments do across these areas.

Typically foundations see their role as scaling up initiatives that government can then “take out” and fund directly, freeing up the foundations to move on and fund their next ventures. Foundations should stay engaged rather than moving on and, by investing in the infrastructure and measurement capacity that government cannot pay for, help society get the most out of the far greater levels of government spending. Rather than seeking to “leverage” other foundations, to use some jargon, foundations should in effect be seeking to “leverage” government funding by increasing its impact.

Nell: Should every nonprofit work towards articulating and measuring outcomes, or does it primarily apply only to social service and education nonprofits? Is there a way for arts and cultural organizations, for example, to move toward outcomes management?

Daniel: I think every enterprise – whether it be a profit-seeking business, a government agency, or a nonprofit, whether it is producing cars and trucks, health and human services, or  arts and culture — should seek to get better at what it does. I found Jim Collins very persuasive on this point in his “Good to Great in the Social Sector.”

The desire to improve, to get better at things, is woven into the human psyche, and when this desire is given full expression, by individuals and the organizations they work in, so is our humanity. Whether this quest involves “outcomes” and “measurement” as we conventionally define them depends on context. It may well involve tracking audience surveys and visitor numbers and assessments by informed critics. But it may also involve a troupe rehearsing until it feels it finally has its performance nailed, or a museum director continuing to refine interpretive material that she thinks visitors are struggling to understand. Those behaviors reflect a relentless quest for outcomes in their own right. At the end of the day, performance measures are merely proxies to help us assess our progress toward what we are working towards: an underlying excellence. The excellence itself is really the point.

Photo Credit: Hewlett Foundation

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10 Great Social Innovation Reads: December 2013

Town2In my eyes, December was about three main things: the After the Leap conference about moving nonprofits to manage to outcomes, predictions about how the social sector will evolve in 2014, and the impact of the second annual Giving Tuesday. Added to the mix were some demonstrations of the growing wealth inequality (a prediction for 2014 from many) and a dash of controversy about the beloved TED Talks. It all made for a very interesting month.

Below are my picks of the 10 best reads in the world of social innovation in December. But please add to the list in the comments.And if you want to see more of what catches my eye, follow me on Twitter, Facebook, LinkedIn, or Google+.

You can also find the list of past months’ 10 Great Reads here.

  1. I already linked to several people’s great 2014 prediction pieces in my 5 Nonprofit Trends to Watch in 2014 post, but Tom Watson’s Trends and Collisions That Will Challenge the Social Sector in 2014 in Forbes is particularly thought-provoking. He takes what he calls a “meta approach” by analyzing themes from big social sector thinkers and “adding a few morsels to the stew.”

  2. One of the predictions on both my and Tom’s list was that the growing wealth inequality will become increasingly obvious. Robert Reich helps this trend by providing a scathing critique of modern philanthropy, arguing that it is becoming less about solving wealth inequality and more about reinforcing it: “Fancy museums and elite schools…aren’t really charities…They’re often investments in the life-styles the wealthy already enjoy and want their children to have as well.” And Peter Capelli, writing on the Harvard Business Review blog, seems to agree, but on the corporate side. He takes issue with “companies that pay poverty-level wages or thereabouts to their employees [while] spend[ing] a good deal of effort to be good corporate citizens in other areas.”

  3. Some people claim the second annual Giving Tuesday was a great success with a 90% increase in day-of online donations over last year, but others, like Michael Rosen, argue that Giving Tuesday is not actually channeling new money to the sector.

  4. The first-ever After the Leap conference in December promoted nonprofit performance management. Perhaps the high point of the conference was Nancy Roob’s (head of the Edna McConnell Clark Foundation) stirring keynote pushing both foundations to fund outcomes management and nonprofits to demand it. The Stanford Social Innovation Review did a great interview with her where she makes many of the same points, and an interview with Mario Morino, the main organizer of the conference.

  5. Writing in The Guardian, Paula Goldman from Omidyar Network discusses how, with impact investing, the blending of social and profit motives is really starting to take hold: “Fifteen years from now…We’ll look back on a host of innovations benefitting millions of disadvantaged people – in education, in healthcare,…in solar lighting—and will have a hard time remembering the day when people viewed charity and business as working towards opposite goals.”

  6. Leon Neyfakh writes a fascinating expose in the Boston Globe about donor advised funds, which he claims is “where charity goes to wait.” $45 billion—more than the endowment of the Bill and Melinda Gates Foundation – currently sits idle in donor advised funds and that amount is growing fast. A huge financial opportunity for the sector.

  7. The Center for Effective Philanthropy released a new study about how much impact foundation CEOs think their philanthropy has had. Philanthropy heavyweights Paul Brest and Lucy Bernholz each give their take on the study’s findings.

  8. I have loved writer Steven Pressfield since I read his fabulous The War of Art last summer. His blog about the creative process is a fount of knowledge and inspiration. His post in December about envisioning and embracing the future in your industry applies to nonprofits too.

  9. The idea of networked approaches to social change has been around for several years and is gaining momentum. Writing in the Nonprofit Quarterly, Mark Leach and Laurie Mazur describe “the power and promise of networked approaches to social change…creat[ing] a force larger than the sum of their parts.” Definitely a trend to watch.

  10. And finally, I love it when someone steps back and asks some hard questions about something that everyone else assumes is amazing. Benjamin Bratton does just that about the beloved TED Talks, which he claims “dumb-down the future.”

Photo Credit: Imperial War Museums

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How to Move Your Nonprofit Board from Fundraising to Financing

boardroomNote: I was asked to write a guest post for the Nonprofit About.com site about how to move a nonprofit’s board of directors from fundraising to financing. An excerpt of this blog post is below, and you can read the entire post on the Nonprofit About.com site here.

 

Nonprofit boards of directors are notoriously fundraising averse.

There are often countless excuses nonprofit staff and their board members give about why some board members should be excused from fundraising. Some of the most popular excuses include:

  • “We want client representation on our board, but our clients don’t have money.”
  • “Some board members aren’t good at fundraising.”
  • “We want board members with program expertise to focus on mission, not money.”
  • “Some board members are uncomfortable with asking for money.”

Fundraising is hard, I get it.

But it is absolutely critical that the entire board of a nonprofit understand how fundamental money is to the work — without it, nothing else matters. And you simply cannot understand something that you only observe from afar.

Which is why I strongly believe that every single board member should fully understand and contribute to how money flows to the organization. The board cannot argue that money is the purview of only the staff; money HAS to be part of the board’s job. Until the entire board really participates in making the financial engine run, they will be unable to have substantive conversations about how to raise or spend that money.

I know that this is a fairly controversial view, but perhaps it would be less controversial if we moved away from fundraising for nonprofits and worked to finance nonprofits instead. Just changing the terms can make a huge difference for a board.

We have to recognize that fundraising is a broken model. Most nonprofits chase low-return fundraising efforts that keep them from achieving financial sustainability. Instead nonprofits and their boards must together create and execute on an overall strategic financial model for the impact they want to achieve.

And in so doing, perhaps we will find that nonprofit boards become much more effective, willing, and confident contributors to financially sustainable nonprofits.

A financing approach that effectively involves the entire board looks like this…

You can continue reading the entire article on the About.com site here. And to learn more about moving your nonprofit board from fundraising to financing download the Financing Not Fundraising, vol. 3 e-book.

Photo Credit: ShellVacationsHospitality

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10 Most Popular Posts of 2013

UnderwoodKeyboardAs 2013 comes to a close, and we all head off for some much deserved rest and relaxation, I wanted to thank all of you wonderful Social Velocity readers. You are an inspiring group of people working tirelessly to make this world a better place. I am very thankful to be able to work and interact with you all through the Social Velocity blog.

Before I take a break from the blog until January, I want to provide a list of the ten most popular Social Velocity blog posts from this year in case you missed some of them. You can also read the 10 Most Popular Posts lists from 2011 and 2012.

I wish you all a peaceful and relaxing holiday season. I look forward to talking and working with you in 2014. Happy Holidays!

The 10 most popular Social Velocity blog posts of 2013 were:

  1. 5 Nonprofit Trends to Watch in 2014
  2. 5 Taboos Nonprofits Must Get Over
  3. Why Your Board Should Raise 10% of Your Nonprofit’s Budget
  4. 5 Reasons Your Nonprofit Isn’t Raising Enough Money
  5. Addressing the Nonprofit Fundraising Elephant in the Room
  6. Find and Keep a Great Fundraiser
  7. 5 Questions to Get Your Board Moving
  8. Getting Real About Nonprofit Overhead Costs
  9. NextGen Donors and the New Golden Age of Philanthropy
  10. The Nonprofit Sector Needs to Get Over the Fear Thing

And if you want to make sure not to miss a single post in 2014, sign up for the Social Velocity e-newsletter (and download a complimentary copy of the Financing Not Fundraising, vol. 1 e-book in the process).

Photo Credit: Wikipedia

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