Nonprofits that end up failing typically make two major mistakes.
First, they pour too much money into programs and not enough into overhead, which may help more people in the short term, but can create a “starvation cycle” where eventually the group can’t support its own growth. Second, they don’t save any money for unexpectedly lean times, which may arise particularly if some organization has made the first mistake, but also if there’s some other crisis in delivering aid, or if an expected grant fails to come through.
In recent years, sector experts have spoken out against both practices, touting the fallacy of the overhead myth (investing in operations actually builds later efficiency) and supporting the idea of a mandatory reserve. In the meantime, there’s even a nonprofit-specific bailout fund.
But a recent survey of 100 industry executives shows that not much has changed. “The core finding from this year’s report is that many nonprofits are struggling to achieve financial sustainability,” says Adam Cole, a partner and co-leader in nonprofit and educational practice at the BDO Institute for Nonprofit Excellence in an email to Fast Company. The proper name of that report is BDO Nonprofit Standards, an annual benchmarking survey to track progress within the sector.
Cole notes that about one-fifth of nonprofits are still underfunding infrastructure costs, including “new technology, employee training, and fundraising expenses” to put more money into programs. In this case, he considers the imminent danger threshold to be 90% to higher, compared to an industry average of 77%. “High programmatic spending can look deceptively positive on a statement of activities, but the model is unsustainable,” Cole adds.
While half of all groups want to expand their programmatic reach within the next two years, at least half also report not having enough reserves to cover six months of expenses. In fact, that number has grown from 40% to 51% within the last year. To restate the obvious: “Organizations missing this critical safety net are less prepared to weather future funding disruptions,” Cole says.
Other major concerns include fair compensation for employees, and the slow adoption of new technology that might make jobs easier and help track the impact of cause work. Over half of all respondents consider these pressing issues. “Without the resources to spend to stay current relevant to technology, it’s a real concern for nonprofits that they won’t be able to maintain their relevance,” adds Laurie De Armond, another partner and co-leader with the group. She adds that many executives aren’t yet taking cybersecurity issues seriously, which means both donor and recipient data may not be as well protected as it should.
Nonprofits may want to expand–and may even be doing so inadvisably–but they’re also ignoring one tool that could make this happen far more sensibly. According to the survey, 76% of nonprofits have no interest in merging with others in their cause area. “Mergers and strategic partnerships are often too quickly dismissed as options among nonprofit leaders when they could be the best choice for an organization to further their mission,” Cole says.