Monday, December 17, 2012

Finding funding for nonprofit administrative costs

Every nonprofit is familiar with the capital campaign that seeks to fund some bricks-and-mortar goal. In this post, I propose that you research, design and implement a campaign that has fund-raising for “soft” capacity building as its goal.

What is the definition of “soft” capacity?  To put it simply, it’s the money used to pay the bills and fund administrative costs. It’s the money that buys software, ink, and toilet paper, or pays administrative salaries.

Far too many nonprofits try to pretend that they are somehow able to fund administrative expenses without actually asking for the money to do so.  They try to “sell” their programs and hope that some of the money will slop over so they can pay the phone bill. That’s the accepted model, and it’s one that I spend hours helping clients design, simply because they can’t or won’t acknowledge that if they had better infrastructure, they would be far more effective in accomplishing their mission. Even if they do acknowledge it, they can’t find a way to get funders to support these “non-program” costs.  

If your nonprofit operates in that mindset, I really can’t blame you. There is an obsessive focus by grant makers and even major donors on reducing the percentage of the acquired funds spent on overhead, so that the nonprofit can say, “92% of all money raised goes directly to the service recipients”. Even worse, the nonprofits themselves actually try to run their business that way. The idea of strategic and financial planning/forecasting just never enters into their plans for survival.

Trying to pretend that purchasing toilet paper and printer ink isn’t a part of your service delivery is like trying to pretend that being bitten by a rattlesnake won’t affect your health. In both cases, the outcome could be fatal.

Sometimes, these costs can be allocated directly to a specific program. One mistake I see often is underestimating the cost of putting on an event. Many times, the nonprofit will report that they raised X dollars, yet at the end of the year, there was much less than that actually used as program input.

Let’s examine a typical nonprofit fundraising strategy, the “event”. The nonprofit decides to hold a fundraising dinner at a local hotel dining room. The planning committee sets a gross target of say, $25,000. They factor in the cost of the physical venue, the cost of printing the invitations, and the food costs at $10,000, and project a net “profit” of $15,000. The plan is to sell 25 tables at a cost of $1,000 per table, to arrive at a 33% profit. Putting it another way the nonprofit expects $1.50 in revenue for every $1.00 spent. Unfortunately, that projected $10K is NOT the true cost of the event. What about the “soft” overhead?

What percentage of the executive or program director’s time was spent in planning meetings, donor meetings to encourage attendance, or perhaps media interviews? There is a tendency to say “well, we have to pay them anyway, so what’s the difference?”. If the person makes say, $75,000 a year, and they spent 100 hours on this event, then the event portion of their salary was $3606, not including their per hour benefit costs. What is the cost of volunteer time? The national allowable rate for calculating the value of volunteer hours is in the $20/hour range.   If five volunteers spent 20 hours each on the event, that’s another $2,000. What about the cost of the office staff’s hours specifically used for the event?

The point here is, these costs are directly chargeable event production costs. They do affect how much money can go directly to programs. You do have to pay these costs. They are the reason why when you report to donors on program dollars, you can’t account for $15,000 that actually bought dog food, filled food boxes, or purchased coats.

To arrive at a true adjusted net income, you have to consider these costs. Just using the examples above, your $15000 net return is now $9394. Divide the net cost ($15606) by the net revenue, and it cost your organization $1.66 for every $1.00 of revenue raised. You must either to increase the per-table cost, or sell a lot more tables. It could be that you might actually decide that this event just isn’t worth your investment.

You must find a way to involve your board, your donors and grantors, and the community in a more effective survival strategy. In future posts I’ll offer some suggestions to accomplish that. 

Rebecca Lee Baisch
Cloudlancer Writing Services

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