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program expenses

Breaking Freeing of the Nonprofit Overhead Trap

Note: While I’m off during the holidays I wanted to provide some archive blog posts that you might enjoy. A version of this post originally appeared on the Social Velocity blog in November 2011.

It’s that time of year when donors make key decisions about their end of year giving. But a post on the Social Earth blog advising donors about questions they should ask nonprofits perpetuates thinking that actually hurts, rather than helps the nonprofit sector. The author asks “How do you know where your charitable dollars are going? Are they going to the cause you want to support or are they going to administrative and fundraising expenses?” In reinforcing old, and destructive binary thinking about program vs. overhead expenses, the author is doing nonprofits and their donors a real disservice.

The author lists 4 key questions she thinks every donor should ask of the nonprofits they consider donating to:

As various charities vie for your charitable donations, there are many questions you can ask them directly, including:

  1. How much goes to the cause? How high are their expenses?
  2. How efficient is their fundraising? What is their cost-per-fundraised-dollar ratio?
  3. Is the charity run properly? How efficient and effective is their human capital? Management team?
  4. Do they even need your money? Will your money just be lying around in their reserve?

I think questions #2 and #3 are excellent, but questions #1 and #4 perpetuate thinking that holds the nonprofit sector back.

Let’s start with Question #1: “How much goes to the cause? How high are their expenses?”

As I’ve written before, the distinction between program (or “cause”) and administrative expenses is meaningless at best, and destructive at worst. If a nonprofit organization is creating change, then everything they do is in support of that change. How can a program run if there is no financial engine (fundraising) to fund it? If there is no building or space to house it? If there is no financial management or regular audits? If there is no regular evaluation of whether the program is making a difference? How can you possibly separate “program” from “overhead?” We must move beyond this distinction and encourage nonprofits to raise (and donors to give) more capacity capital, or the money that nonprofits so desperately need to create effective and efficient organizations.

Question #4 “Do they even need your money? Will your money just be lying around in their reserve?” is equally troublesome.

This question reinforces the backward notion that nonprofits should not have a reserve fund. As I (and others) have written before, we have to get away from the nonprofit taboo that operating reserves are wrong. Nonprofits cannot plan for the future, have a sustainable financial model, experiment with program changes, take risks, or any of the other things that are absolutely necessary to creating social change, without some operating reserves. If nonprofits are continually forced to go month to month without any cushion they will never emerge as strong, sustainable organizations capable of creating lasting change.

We must move away from thinking that encourages nonprofits to scrape by without the tools and infrastructure they desperately need. We must stop measuring nonprofit performance with meaningless financial metrics and instead evaluate nonprofits on their ability to deliver change. If a nonprofit is creating real change, does the minutia of how they spend money really matter?

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Financing Not Fundraising: 5 Lies to Stop Telling Donors

In part 11 of our ongoing blog series, Financing Not Fundraising, I’m talking about being brutally honest with your donors. If nonprofits are going to truly break free from the vicious fundraising cycle, they must find the courage to tell funders how it really is. And since board members are a nonprofit’s closest supporters and (I hope) donors, you need to stop telling them these lies as well.

If you are new to the Financing Not Fundraising blog series, the series is about how nonprofits must break out of the narrow view that traditional FUNDRAISING (individual donor appeals, events, foundation grants) will completely fund all of their activities.  Instead, they must create a broader, more strategic approach to securing the overall FINANCING necessary to create social change. You can read the entire series here.

If you want to learn more about how to apply the concepts of Financing Not Fundraising to your nonprofit, check out the Financing Not Fundraising On Demand Webinar Series

If you want to break free of the exhausting cycle of fundraising, a key step is to start being brutally honest with funders. Here are the top 5 lies you have to stop telling donors:

  1. X% of your donation goes to the program
    The distinction between “program expenses” and “overhead” is, at best, meaningless and, at worst, destructive. You cannot have a program without staff, technology, space, systems, evaluation, research and development. It is magical thinking to say that you can separate money spent on programs from money spent on the support of programs. Donors need to understand, and you need to explain to them, that “overhead” is not a dirty word. A nonprofit exists to deliver programs. And everything the organization does helps to make those programs better, stronger, bigger, more effective.

  2. We can do the same program with less money
    No you can’t. You know you can’t. You are already scraping by. Don’t accept a check from a donor who wants all the bells and whistles you explained in your pitch, but at a lower cost. Explain the true costs, including administrative costs, of getting results. Politely, but firmly, explain to them that an inferior investment will yield an inferior result. If they simply can’t afford the price tag, then encourage them to find fellow funders to co-invest with.

  3. We can start a new program that doesn’t fit with our mission or strategy
    Yes that big, fat check a donor is holding in front of you looks very appealing. But if it takes your organization in a different direction than your strategy or your core competencies require, accepting it is a huge mistake. Nonprofits must constantly ensure that money and mission are aligned. Otherwise the organization will be scattered in countless directions with an exhausted staff and confused donor base. Don’t let a donor take you down that road.

  4. We can grow without additional staff or other resources
    Nonprofit staff truly excel at working endless hours with very few resources. They have perfected the concept of doing more and more with less and less. But someday that road must end. Nonprofit leaders have to be honest with donors when their staff and resources are at capacity. Because eventually program results will suffer and the donor will receive little in return for their investment.

  5. 100% of our board is committed to our organization
    If that’s true, then you are a true minority in the nonprofit sector. Every nonprofit board I know has some dead  wood. Members who ignore fundraising duties, don’t contribute to meetings, miss meetings, take the organization on tangents are always present. It’s a fact that funders want to see every board member contributing. But instead of perpetuating the myth that 100% is an achievable reality, be honest with funders. Tell them that you continually analyze each individual board member’s contributions (financial, intellectual, time) and have a clear plan for addressing deficiency, including: coaching, peer pressure, training, asking for resignations. Getting to 100% is probably never realistic, it is far better to demonstrate that you are tirelessly working toward 90%.

Stop the madness. We need to stop telling funders what they want to hear and then cursing them behind their backs when they set  unrealistic expectations. Funders must be made to understand the harsh realities of the nonprofit sector if they are ever to be expected to help bring change.

If you want to learn more about applying the concepts of Financing Not Fundraising to your nonprofit, check out the Financing Not Fundraising On Demand Webinar Series, or download the Financing Not Fundraising E-books.

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Overcoming the Bias Against Nonprofit Capacity

It amazes me how much the funder, government, and even sometimes nonprofit leadership, bias against nonprofit capacity building holds the sector back. It seems like such a simple thing: in order to get more results you need to devote time, energy and resources to organization building.  In order to find the resources required to deliver programs, you need to invest in fantastic fundraisers.  In order to track program results, you need a system which includes technology and staff. In order to have a fantastically talented staff, you need a human resources function that takes the time to vet great candidates. A nonprofit cannot exist on direct program dollars alone.

The idea that the vast majority of nonprofit funding should go to direct program expenses is ludicrous.  Why is there even a distinction between program and non-program expenses?  Doesn’t a nonprofit exist to deliver programs?  And doesn’t that mean that everything they do helps to make those programs better, stronger, bigger, more effective?  Why is capacity such a dirty word?

I met with a nonprofit Development Director earlier this month who has had a really hard time convincing their CEO and board to let them spend money on a donor database and some fundraising materials. Yet, at the same time the Development Director is expected to raise millions of dollars in revenue. That sounds completely crazy, doesn’t it?  But in the world in which I work that is often the rule rather than the exception. Infrastructure, capacity, fundraising, marketing, and operations dollars are somehow bad, dirty, not necessary, dismissed.

Which is why the recent article in the Stanford Social Innovation Review by Bridgespan Group’s Ann Goggins Gregory & Don Howard was such a breath of sanity-infested fresh air. If you are nonprofit staffer, board member, donor, or volunteer, I really encourage you to read the whole article.  They have studied what they call the “Nonprofit Starvation Cycle”–nonprofit organizations’ continual drive to do more and more with less and less– and come up with a path out of the insanity.

What seems like such an obvious statement, its almost a truism–“Organizations that build robust infrastructure—which includes sturdy information technology systems, financial systems, skills training, fundraising processes, and other essential overhead—are more likely to succeed than those that do not”–is so often overlooked by nonprofit organizations.   But I think most nonprofit leaders would tell you that they would love to spend money on infrastructure, that they absolutely understand the return on investment, but funders and board members have a hard time allocating money to those projects.

In their work with nonprofits at Bridgespan Group, Gregory and Howard uncovered three reasons for this inability to build capacity in the nonprofit world:

  • Funders have unrealistic expectations about how much it costs to run a nonprofit
  • Nonprofits need to conform to these unrealistic expectations in order to receive funding
  • Nonprofits underreport infrastructure expenditures on tax forms and in fundraising materials

The end result is a vicious circle where few fund or spend money on infrastructure in the nonprofit space: “This underspending and underreporting in turn perpetuates funders’ unrealistic expectations. Over time, funders expect grantees to do more and more with less and less—a cycle that slowly starves nonprofits.”

The solution, Gregory and Howard argue, is to begin at the source of this vicious cycle: the funders.  They argue if funders can be educated about the true costs and infrastructure necessary to build organizations to solve social problems, then we can break out of this destructive cycle. I strongly agree with that. It is difficult for nonprofits to turn to the hand that feeds them and tell them that they need more in order to do more, but such conversations are absolutely critical if we are to get beyond the starvation cycle.

But funders aren’t the sole impediment. Gregory and Howard argue that nonprofits play a part in this dysfunctional view of capacity, and there are a number of things that they can do to turn things around.  Nonprofit leaders should analyze their real overhead costs and infrastructure needs, educate their boards about these real needs and then engage their board in communicating these needs with funders.  And board members are just as culpable. They must encourage nonprofit leaders to develop strategies to address their true infrastructure needs and then take responsibility for encouraging funders (often board members’ friends and colleagues) to be realistic about what is required to make the nonprofit highly functioning.

I actually think that funders are much more receptive to these capacity conversations than some nonprofits give them credit for.  My work at Social Velocity is all about organization building, and I often encourage nonprofit leaders to tell their board members and their closest donors what they really need to succeed.  I have found that those donors who really believe in an organization will understand when a compelling case that it takes resources to take an organization to the next level is put before them.

I think the bottomline is that we have to stop playing games. Stop underreporting infrastructure costs, stop telling funders its ok to ask nonprofits to do more with less, stop telling the public that direct program costs are better than indirect program costs, stop telling boards of directors that its ok to ignore infrastructure needs. It’s a difficult conversation, there is no doubt, but what’s the alternative? We all know how a starvation cycle ends.


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