The Good, The Bad, and The Ugly about Nonprofit Finance

The 17th century writer, John Bunyan, is often quoted as saying “You have not lived today until you have done something for someone who can never repay you.” The quote sums up the work of Not-for-profit “NFP” or “Nonprofit” organizations; they serve those who can’t, at the time of service, repay in whole or in part, the total cost of the benefit received. Therefore, nonprofits require funding from committed partners such as Trusts, Foundations, People (Corporations and Natural), and the Government to serve others. In reviewing annual surveys published by the Nonprofit Finance Fund ”NFF” for 2013-2015, I found that they are nonprofit finance challenges that will linger well into the future.

The Good

Nonprofits are a critical component of the fabric of many communities across the US and address most of the needs of communities. A 2005 report written by James Jennings of Tufts University notes that nonprofits and community-based organizations, “provide voice to collective interests and needs that may not be heard in electoral or policy forums --children and youth in need of assistance, homeless families and individuals, immigrants, and others.” Considering that the Tufts Study was done before the Great Recession, the need of nonprofit services is greater. 

The Bad

Over the three-year period, a majority of nonprofit respondents (71-88%), noted that private and government funding do not cover the full costs of providing services. Therefore nonprofits generally, are operating without all the financial resources required to deliver services to the community. In the 2013 survey, one respondent stated that nonprofits faced a “demand for expanded services with limited financial resources to support current/expanded services”. For example in December 2016, a North Dakota food pantry made a public call for additional funds because it did not have enough resources to fill in increase demand for services.

In fact, as a matter of tradition and practice, many donors only cover the program cost (for the services delivered), and not the administrative and operational cost. The practice of not covering the full cost is based on the “Overhead Myth”, which suggest that if the administrative and operational cost is a certain percentage or ratio to total expenses, the nonprofit is not effective in the services being provided. However, without the people, building, and equipment, there would be no place or no one to offer the needed service. In a February 2017 interview, with New York Nonprofit Media, Frederick Shack, the CEO of Urban Pathways, noted “every time I add a new program I’m taking a loss because I’m not being fully funded”. Vu Le, the Executive Director of a Seattle based nonprofit argues that nonprofits are to blame because by participating in the Overhead Myth, nonprofits are lending credence to the idea that program cost are good, and anything else is very bad.

Additionally, a comparison of the 2013 and 2014 survey results indicated a harmful trend of government agencies not reimbursing nonprofits for services rendered in a timely manner. In 2014, respondents noted that more than half of federal, state, and local government payments are 30-90 days late, or greater. 

Talk about tragedies! We all know that nonprofits are some of the first responders to community crises, and provide for those who have suffered loss, well before some government entities pick up the tab.

At least 40% of respondents reported a five-year decline in government funding. The reduction in government funding is a concern since nonprofits meet service needs that were traditionally covered by government entities. There are many reasons for delayed reimbursement, but the common view is that government bureaucracy is primarily responsible.          

The Ugly

The failure of funders to cover the full cost of programs, coupled with greater need for services in communities, have created ugly cash flow consequences for nonprofits. The 2013 survey indicated that 56% of respondents had less than three months of cash on hand to fund operations, including 8%, of respondents that had less than three months cash on had at the time of the survey. The trend continued through 2015, where 53% of respondents had less than three months of cash on hand to fund operations, including 12%, of respondents that had less than three months cash on had at the time of the survey.  Year after year, respondents expressed discomfort about discussing their financial concerns with donors due to apprehension about the potential outcome. More than 50 % of respondents were willing to have open dialogue about program expansion, while less than 80% felt uncomfortable discussing, cash flow needs, flexible / unrestricted capital, or developing reserves or rainy day funds.

This is a maddening situation. If corporations, (“Corporations are people, my friend.”) seek more money for survival and growth, why shouldn’t those entities, nonprofits, that serve the people in need, require less money to survive, and thrive? A cash flow crunch for nonprofits means that people who serve people in need, are flirting with the possibility of becoming needing the same services they provide. 

Solutions

The NFF offered suggestions for both funders and nonprofits.

1.   Nonprofits should ask for, and funders should consider funding the full cost of the programs.

2.   Social Service nonprofits should deploy cash flow management tools. While not suggested by the NFF, Social Service nonprofits should ask supporters to lobby local and state officials to develop efficient reimbursement systems, which include protocols to prevent fraud, waste and abuse.

3.   Nonprofits for should plan prudently for growth and change, and funders should consider providing more unrestricted or general operating funds.

Finally, let's support nonprofits, they fill the gaps of the social contract.

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Theon is a Principal Consultant at EICCIO Advisors, which helps nonprofits meet their audit, regulatory, and compliance requirements. If you would like to schedule a free, no obligation consultation, click here https://calendly.com/eiccio.

If you would like to expand your network, invite Theon, he is friendly.