Starving Nonprofits

A recent article published by the Standard Social Innovation Review comes as no surprise to many nonprofit leaders and their staff. Described as the Nonprofit Starvation Cycle, Ann Goggins Gregory & Don Howard insist that many nonprofit organizations do not spend enough money on overhead. As a result, these organizations lack adequate infrastructure which includes information technology, financial systems, skills training, fundraising processes, and management capacity- all of which are essential for success.

Gregory and Howard describe the process as a vicious cycle which leaves nonprofits so hungry for decent infrastructure that they can barely function as organizations—let alone serve their beneficiaries. They describe the cycle in three-steps:

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 under-spending 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.

In addition to the funders’ unrealistic expectations, the nonprofit sector itself perpetuates the problem by continuously comparing organizations with the expectation that everyone arrive at a twenty-percent or better overhead ratio. Unfortunately, while twenty-percent may be an admirable goal it may not be practical. In the for-profit sector, highly-respected and successful companies and entire industries consistently operate with much higher overhead ratios. Realistically speaking, either a nonprofit organization will chose to misrepresent their numbers or they will settle into what is described as a “low pay, make do, and do without” culture.

Ben Paul, president of a Los Angeles nonprofit, told the authors… “Donors don’t want to pay for an organization’s rent, or phone bill, or stamps, but those are essential components of everyday work. You can’t run a high-performing organization from your car.

A copy of this article is available here.

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