Soundly managing your hard-earned dollars involves three steps.
We discussed the first two steps in my last post and the third step is addressed below.
3) Use the knowledge gained in step two to legitimize funding for programs and overhead. Low levels of overhead funding leave nonprofits financially vulnerable. Many lack cash reserves, making it difficult for them to build a financial safety net for periods of low revenues or to deal with unexpected expenses without having to rely on credit. In other words, the highest-quality programming is directly linked to how well the indirect costs are funded.
Make a strong case
Because many nonprofits lack basic financial systems, they aren’t accurately representing their true costs. This incomplete picture nonprofits give to foundations perpetuates a negative cycle where funders consistently underestimate the cost incurred in running a nonprofit organization, which in turn, puts pressure on nonprofits to under-report their overhead costs or risk alienating their funders.
Government funders are particularly guilty of perpetuating this cycle. Sixty percent of 33,000 nonprofits surveyed by the Urban Institute reported the limit for overhead costs set by their government contracts was 10 percent or less of the overall operating expenses. This is in stark contrast to the estimated 17 to 35 percent of overhead expenses that may be necessary to support a strong administrative and management infrastructure.
While funders play their role in this cycle, nonprofits still have an opportunity to break it. Organizations need to make the essential case for investing in capacity building, not only in the capacity to deliver systemic outcomes, but in the far-reaching and long-lasting capacity of the people and systems they use to implement these game-changing programs. Consider enlisting the help of a financial consultant who can help you further solidify your case with forecasting, cost-cutting analysis or custom financial models, which can stabilize your funding picture and instill confidence in your donors.
Most nonprofits are desperately raising money inside a funnel. While an overwhelming amount of attention pours into rigorous grant applications and lavish individual donor cultivation plans, only a trickle of thought typically goes into sound financial and management planning. Until you’ve developed a rolling plan for legitimizing and managing the funding you’ve worked so hard to cultivate, stop fundraising in vain. Otherwise, your organization will always be thirsty.