Tuesday, August 3, 2010

Nuts and Bolts: Maintaining Nonprofit Infrastructure

Salaries and benefits, facility costs and maintenance, fundraising expenses, technology upgrades - these are the nuts and bolts of running a nonprofit organization.

Nonetheless, most nonprofits fail to consistently plan for and fund basic overhead costs - for these reasons:
  • Government contracts generally allow grantees to use no more than 15% for operations, finances, human resources, fundraising, and facility costs.
  • Foundations are just as rigid, allowing on average 10-15% for overhead.
  • Nonprofits must prove, based on IRS Form 990 information, that overhead and fundraising costs are low in order to receive funds through United Way.
  • Most available grant funding focuses on time-specific projects, rather than ongoing operating expenses.
  • According to the Better Business Bureau's Wise Giving Alliance, more than half of adults feel nonprofits should spend less than 20% on infrastructure - and the majority often makes choices based on this assumption.
On top of this, the current recession has forced many organizations to cut back even further in order to maintain programs. A survey of 100 executive directors across the country by the Bridgespan Group found that 56% were planning to reduce overhead spending.

There's nothing sexy about ongoing operating expenses yet no organization can exist without the funds to pay for them. And failing to designate money for overhead can be devastating:
  • Your key staff people become stressed out, overworked, and underpaid
  • Staff salaries lag behind the market, leading to sticker shock when someone leaves
  • Your staff is not trained in up-to-date procedures and technology
  • Your buildings, fixtures, and furniture deteriorate
  • Your essential technology - computer hardware and software, copy machines, phone systems - dates from the dark ages
But faced with pressure to meet the demands and expectations of funders and donors, nonprofits consistently make do with less, in fact making a point of how little they spend on basics - while under-reporting administrative expenses on 990's and fundraising materials. Thus, supporters and funders don't know what it truly costs to run a successful organization (note that overhead rates in the for-profit world average around 25%). It all becomes a self-perpetuating cycle.

How can nonprofits buck this trend? To begin with, start speaking the truth about the actual costs of doing your good work. Advocate with funders and donors about the importance of basic expenses as the foundation for accomplishing your mission. Evaluate if it even makes sense to apply for a grant, especially given potential reporting and audit costs attached. See if you can negotiate with foundations about their expectations. Factor in realistic overhead expenses in any grant application and all budget projections. Be sure to include line items for technology, facility, and salary upgrades in your annual budget and strategic plan. And work towards developing relationships and strategies with individual donors to encourage and value unrestricted giving. Educating your donors about how investment in infrastructure benefits the organization's clients could be the most important thing you can do to further your good work.

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