Nonprofits need computers and training, too!

You might have worked in a nonprofit where it seemed that no expense was too small to justify being made. Where the furniture discouraged sitting, the computers were too old to be donated, and the professional development budget was nonexistent.

If you haven't read the ten year old article, "The Nonprofit Starvation Cycle," I recommend checking it out now.

The authors conclude "that a vicious cycle fuels the persistent underfunding of overhead."

The first step in the cycle is funders’ unrealistic expectations about how much it costs to run a nonprofit. At the second step, nonprofits feel pressure to conform to funders’ unrealistic expectations. At the third step, nonprofits respond to this pressure in two ways: They spend too little on overhead, and they underreport their expenditures on tax forms and in fundraising materials. 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.

Have you been in a nonprofit that was using computers older than the ones your parents use? Or that didn't provide regular training for staff and assumed they all knew how to do whatever was asked of them? Or that regularly asked professionals being paid $100,000 to do work that any college student could do, and probably quicker?

Overhead rates across for-profit industries vary, with the average rate falling around 25 percent of total expenses. And among service industries— a closer analog to nonprofits—none report average overhead rates below 20 percent.

Yet, despite that data, grantors typically expect nonprofits to spend much less than 20 percent on overhead costs. In fact, in a national study of 820 nonprofits, "only 20 percent of the respondents said that their grants include enough overhead allocation to cover the time that grantees spend on reporting."

The authors of the study conclude hopefully, recommending that the place to focus, for both funders and the nonprofit organizations, is on impact. Each nonprofit measures impact differently, and each knows whether or not it is succeeding. The percent of money spent on overhead isn't a good proxy for success. Instead, such measures incentivizes doing things the hard way, with outdated and ineffective tools, thereby limiting the potential contributions of team members, and skewing everyone's understanding of the real costs of providing quality services to individuals and communities.

So, to help your nonprofit be more successful, take some time to look at the real numbers and the current and potential impact you could have. What are you really spending on overhead? What impact are you getting with that investment? Can you determine how much more impact you could have by adjusting your investments? How much unwanted turnover would you prevent, for example, with an increase in funding for tools and professional development for your team members?