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Is Your Nonprofit Hiding a Secret?

Nonprofit budgets

Have You Had This Experience?

When a local family foundation grants you $15,000, everyone’s thrilled, right?

When you’re drafting a Facebook post with a “Donate Now” button, do you have trouble finding a need?

And, when your 2018 audit reveals your non-profit netted $50,000, you’re not concerned that your board will think you’re flush with cash, are you?

True Fundraising Examples

These fundraising experiences result from our tendency in nonprofit management to underestimate the true cost of producing outcomes.

Last fall, Nonprofit Quarterly ran an article entitled, “Why Funding Overhead Is Not the Real Issue: The Case to Cover Full Costs.”

“Now more than ever,” author Claire Knowlton wrote, “as the call to achieve high standards of outcomes-based measurement grows, we must hold ourselves to an equally high standard of understanding nonprofits’ full costs.”

My Experience

The day I received the family foundation grant, coincidentally, I ran into the director who managed the program. He clasped his chin with one hand, looked up slightly, and said, “Hmmm…I’m not sure how we’ll spend that money.”

I was shocked. The department was running a deficit, and although there were restrictions on the gift, the donor had given us latitude to meet existing needs.

Inaccurate Assumptions About Donors Lead to Underestimating

The inaccurate assumption by professional fundraisers and volunteer board members that philanthropy shouldn’t cover operating costs or essential salaries is not new. Nearly a decade ago, the Harvard Business Review in “Delivering on the Promises of Nonprofits,” cited this example:

“Financial clarity often leads to surprising insights. For example, a youth-development nonprofit launched a culinary enterprise, which involved building a commercial kitchen and hiring local kids to work in it. Believing that a bottle of salad dressing cost $3.15 to produce, the organization sold it for $3.50, yielding a putative 35-cent profit.

“However, that estimate captured only direct expenses. When indirect expenses such as the kitchen manager’s salary, facility expenses, and organizational overhead were appropriately allocated, the cost shot up to $90. What looked like a money maker was in fact a dramatic money loser.

Three Steps to Uncovering the Real Costs of Promised Outcomes

Here, I’m suggesting that you assess true costs to produce outcomes in much the same way for-profit companies assess the cost to produce a new product:

1. Include operational costs in your estimates.

For example, you’re already paying rent, utilities, salaries, and insurance, so the tendency of non-profit leaders is to discount these essentials. I call this error “the assumed.”

Instead, allocate operating costs across programs based on the percentage of time, space, and personnel required to meet each program outcome.

In some cases, you may not be responsible for all funding. I formerly worked with social workers whose salaries were paid by the parent organization. Therefore, when a generous philanthropist opened a patient assistance fund, we devoted our time and resources to increasing the number of people served. We did not fund program salaries.

2. Regularly highlight for the board your organization’s unmet needs.

Always, I’m an advocate for optimism, but I’m also a realist who believes that most board members frame their expectations based on paid staffs’ reports.

So, while it’s wonderful that the income statement is in the black, if you have an old roof or a leaking AC unit, let the board know. When you prepare for risks, respect for your leadership increases, and your board better understands the true cost of promised outcomes.

3. Project “What if?”

After you’ve framed your budget conservatively, project what your organization could achieve “if” you raised more money.

  • A private school could offer more scholarships.
  • A counseling center could offer services to more low-income clients.
  • Or, a land trust could pay more per acre and improve their chances of winning a competitive bid.

Here’s the good news.

All around us, donors have a growing awareness that meaningful outcomes depend on a healthy operation.

Start today with your largest program and assess its true cost. Not only does this exercise strengthen your leadership, it also helps you assess which programs the community and your donors find valuable enough to fully fund.

Want a professional perspective on your project? Contact Phoenicia.

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