Illustration by Yuxin Qin
The 2018 State of the Sector Survey from the Nonprofit Finance Fund found that 86% of nonprofits saw increasing demands for services and 57% would not be able to meet those demands. Investments in capacity building infrastructure can ensure that nonprofits can meet this demand while growing sustainably.
The Council of Nonprofits defines capacity building as “whatever is needed to bring a nonprofit to the next level of operational, programmatic, financial or organizational maturity, so it may more effectively and efficiently advance its mission into the future.” Nonprofits can build capacity through investments in infrastructure. Infrastructure has three main components: administrative (technology, systems, and software), human capital (people, paid and volunteer, and their knowledge and experience), and financial capital (money for short- and long-term operations).
From the funder’s perspective, the components not directly related to program delivery are many times labeled “overhead.” The problem of overhead funding has been a decades long issue within nonprofits. Gregory and Howard conceived the cycle of nonprofit starvation. The cycle begins with funders that can have unrealistic expectations about what nonprofits should be spending on overhead. On average, funders allow 10-15% of funds to go towards overhead, but most nonprofits need to spend at least 20% for effective program delivery, according to the Bridgespan Group (PDF).
Funding is competitive, so nonprofits need to stay within those guidelines or risk losing out on funding awards. This creates pressure for the nonprofits to conform to the funders’ expectations. In turn, they compensate by using their financial capital reserves to cover the expenses that funders will not. Nonprofits then misreport their finances on documents such as the IRS Form 990. This makes it difficult to get an accurate picture of what a nonprofit’s finances look like. Those missing cash reserves mean that infrastructure investments are neglected. This leads funders to further think that nonprofits can operate within those guidelines, and the cycle continues.
Although work is being done across the sector to mitigate the effects of the nonprofit starvation cycle, including reducing the emphasis on overhead, large scale change has yet to be seen. The following recommendations have been identified to help nonprofit leaders create a plan to convince their funders to make investments in capacity building infrastructure projects.
1. Calculate true costs
Nonprofit leaders should know the full cost of doing business. The full cost of a program may not be clear for organizations that pull from multiple pots of money to cover overhead,. Full cost includes all costs related to programs, as well as the infrastructure that ensures effective program operations.
2. Pinpoint the right funder
Nonprofits should consider the right person or foundation to approach. This could be a major donor that the organization has a strong relationship with, feels connected to the mission and understands how an infrastructure upgrade could advance the organization. If it is not the right time to approach a major donor, there are foundations and other organizations that offer funding specifically for infrastructure projects and general operating support. For example, the William and Flora Hewlett Foundation offers grants for organizational effectiveness.
3. Change the language
Nonprofits should consider the language they use to describe traditional “overhead” terms, which can be renamed to be more descriptive of their function as well as specifically describe how these components contribute to mission to connect the dots for funders. For example, human resources hire effective staff, ensure proper training, and provide payroll and benefits, all of which allow direct service staff to be successful in their implementation of programs.
4. Be transparent
Although competition for funding can make it feel risky for certain nonprofits to be completely transparent, reporting accurate financial information can build trust between organizations and their funders. Funders need to have the most accurate picture of what is going on to know where the funding is needed and that the organization will be able to use those funds effectively.
Nonprofits provide essential services to communities. There is increasing need and nonprofits cannot keep up. Proper infrastructure is essential to build capacity. Nonprofit starvation keeps funders from understanding the full scope of needs, but nonprofit leaders can use tools to help funders understand their infrastructure needs.
Emily Wojcik Grunspan is a graduate of the Master of Nonprofit Leadership and Management program at Arizona State University. Emily’s educational background in the sciences coupled with her love of museums led her to work in informal science education and outreach in the nonprofit sector. She recently relocated from Arizona to Ontario, Canada.