Philanthropy & Funding

What Nonprofits Need

Three things that funders can learn from Nonprofit Finance Fund’s 2013 State of the Sector Survey.

For the first time in the five years of Nonprofit Finance Fund ’s annual State of the Sector survey, more than half of nonprofits—52 percent of the 6,000 organizations around the country who responded—report being unable to meet demand. And the picture is even worse for nonprofits serving poor communities—almost two-thirds of these organizations report being unable to keep up. We are failing to maintain the social safety net for those who need it most.

Expecting donors to pay for the rising costs of service delivery and to make up for government cuts is not going to work. Instead, many of our private foundation partners are thinking about how to give more smartly to maximize the impact of their support in the current environment of scarcity and adaptation. The Bank of America Charitable Foundation—the survey’s sponsor—is among those funders.

For the Foundation, supporting Nonprofit Finance Fund’s survey makes sense on a number of levels: It delivers value to the sector, advances the field, and indirectly benefits those who depend on nonprofits for services. In addition, it is a robust resource for funders and can help when evaluating grant support. The survey has validated Bank of America’s own philanthropic strategies, and has helped shape its perspective and practices as a foundation.

Here are our three main takeaways from the survey for nonprofit funders:

Change costs money. Many nonprofits barely break even—even in the good years. Few have the resources they need to adapt to new economic realities. Instead, they keep trying to do more with less and maintain services for those in need. At the same time, we also know that traditional foundation support and government funding is stressed. But the truth is we cannot ask organizations to make substantive changes without the necessary resources to evaluate new opportunities, explore new funding or revenue sources, or even responsibly transition or close programs that no longer meet the changing needs of those they serve. It’s significant that this year’s survey found that over the next 12 months, almost two in five respondents plan to fundamentally change the way they raise and spend money. This represents an incredible sector-wide shift and can’t happen without broader financial support.

There is no silver bullet to address the fact that 42 percent of nonprofits report that they do not have the right mix of financial resources to thrive and be effective in the next three years. However, funders can support organizations as they make the changes required to increase organizational impact and make progress in addressing critical social needs. In fact, because charitable foundations don’t have anywhere near the resources required to pay outright for the rising costs of social services, driving strategic adaptation by providing flexible funding is a particularly compelling opportunity.

Nonprofits need reserves. One in four nonprofits reported having less cash than they would need to stay afloat for 30 days. While any business would find this downright scary, nonprofits are often dissuaded from carrying reserves that could cause potential supporters to draw the conclusion that they don’t need additional funds. This line of thinking is detrimental to the organizations and those they serve, as well as to funders.

Operating in a constant state of financial emergency is harmful to organizations, and ultimately, risky for the people these nonprofits serve. Financial health can and should include healthy reserves, and funders should encourage nonprofits to engage in financial planning and reward those organizations that are committed to building a reserve.

It’s time to talk. Donors and the nonprofits they support need to be able to have an open dialog about an organization's full financial picture. While not all foundations will support all needs, it is a bad sign that many nonprofits don’t feel comfortable talking to their funders about basic financial needs. The survey reaffirmed that nonprofits believe donors most want to hear about expanding programs, and little else. While 54 percent of the nonprofits in the survey said they were comfortable talking with funders about program expansion, very few believed their funders were open to discussions on other core elements of their financial health such as facility reserves (12 percent) or debt (6 percent).

Many nonprofits operate under tremendous pressure to chase available funding, even if it means changing what they do or how they do it to meet grant guidelines. If funders are going to reconsider their role in supporting positive social outcomes, the first step is listening to what organizations truly need.

We can’t keep up with the running social sector tab without reconsidering how we as funders and nonprofits work together, where philanthropic dollars can best be applied, and what new ideas, partners, and money will be part of future solutions.

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  • BY David Geilhufe

    ON June 6, 2013 09:01 AM

    52 percent of respondents can’t meet demand.
    Operational excellence drives both throughput and effectiveness.
    Nonprofits can’t afford to invest in operational excellence since meeting demand does not actually drive additional revenue (i.e. there is no financial ROI to investments in operational excellence).

    When I lay these things out in sequence, I get very depressed about institutional funding of nonprofits… funders already don’t like funding organizations for multiple years. They like restricting their funding.

    So what is the most social impact you can create with one year, restricted funding?

    It’s not funding an additional teacher to serve 30 more kids. It’s making an investment in operational excellence that allows you to serve 30 more kids, reduce overall operational costs, and invest that cost reduction in maintaining the IT/operational investment that allowed you to serve 30 more kids.

    David Geilhufe

  • BY Ron Wudarsky

    ON June 7, 2013 06:00 AM

    Have to agree with David.  The vast majority of foundations (being private or corporate) are interested in short-term, program-specific, restricted funding opportunities.  A very good presentation by Dan Pallotta on YouTube, should be a must at board meetings of funding organizations (see:

  • BY Jeremy Parrott

    ON June 12, 2013 04:08 PM

    Great article…great comments…

    “We are failing to maintain the social safety net for those who need it most.”

    Unlike for-profits, when nonprofits compete against each other for funding nobody wins. The reason why it doesn’t work is because there are no standardized performance metrics that quantify social impact. Instead, to receive money, nonprofits are making arguments and providing relative metrics spun in their favor… In other words, it’s a marketing game…not a game of social impact.

    Our nonprofits is focused on solving this problem. Bravo to you and your readers for publicizing this issue.

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