Financial Hurdles Non-Profits Must Overcome

The Financial Hurdles Non-Profits Must Overcome

Because of the nature of their business practices, nonprofits encounter numerous financial hurdles throughout their existence. Regardless of how solid their management is, many nonprofits will struggle with financing even their general operations. From restrictive grant supports to a lack in resource management, many nonprofits spend more time trying to patch together funding instead of putting them into their advocacies.

This isn’t even talking about the paperwork yet. Nonprofits have to go through a mountain of highly complicated, confusing, and even redundant paperwork just to apply, secure, and report on grants. Many nonprofits can also suffer a decrease in growth, primarily because any grant they receive is focused on delivering on their organizational promises rather than investing in growing their organization as a whole. While service should trump investment, the latter is essential to the continued existence of nonprofits, a reality that is, unfortunately, ignored by many.

All of these factors create nonprofit organizations that sugger from high personnel turnover, a lack of growth, a decrease in the delivery of service, and even burnout in the founders, who might be disheartened to continue their noble pursuits.

This isn’t just empty rhetoric: more than 40% of nonprofits in the country failed to thrive after 3 years of their founding. In fact, 1 out 4 nonprofits only have cash-on-hand to last them a month, sometimes even less. This financial instability stems from the reasons above, and more, and unfortunately reveal a bleak reality about the industry: many nonprofit organization are struggling. From basic costs and upkeep, to organizational infrastructure and investment, our country’s nonprofit organizations are failing.

While grantmakers can relieve these difficulties, often times they can cause it too. Here’s how:

High Restrictions on Funding

An overwhelming number of grantmakers prefer to provide resources to nonprofits that focus on a direct and immediate delivery of their programs or services. This makes sense in a way: you want your money to go where it’s promised. Unfortunately, however, restricting the use of grants to just the programs and services that nonprofits champion can leave the organization itself into ruin. Because all of the funds go to service, there is nothing left to improve operations and infrastructure, nor to upkeep facilities or support volunteers.

These high restrictions on funding can cripple a nonprofit and make them less effective at fulfilling their organizational promises, which is the exact opposite of why grants are given in the first place. Grantmakers must make concessions with their funding and either allow a portion of their donation to be used in improving the organization, or provide a separate fund that the organization can use outside of their program or service delivery.

Ideas of Growth and Sustainability

Misalignment in Ideas of Growth and Sustainability

To nonprofit organizations, sustainable growth means having sufficient capital to begin with that will supplement their received funding, which can then help them grow year after year. However, to most grantmakers, sustainable growth means nonprofits should pay for their own operational costs outside of their donated dollars.

This cognitive dissonance between both sides creates a situation where grantmakers will only provide limited grants that will not help sustain nonprofits specifically because they don’t think they have an active role, or in some cases are not interested, in keeping them alive. Nonprofits classify grantmakers like these as “buyers”: companies that are only interested in “buying” a nonprofits good cause to further their own, but in reality, are providing grants that are so meagre it can barely sustain service or program delivery, let alone sustainability.

But nonprofits also recognize a different kind of grantmaker: the “builder”. Builders, although rare, are essential in keeping nonprofits alive and thriving because they’re focused on helping “build” the organization in order to maintain their growth. Often, grants from builders are restricted for two uses: growing the organization by directly investing in key infrastructures such as management or upkeep, and direct support of their services or programs.

Too Many People to Please

Diversifying revenue is essential for the growth of any company, and the same holds true for nonprofits. However, the more sources of revenue means an increase in management challenges, alignment of visions, resource dependency, and many more challenges.

Having “too many masters” can mean that nonprofits will spend more time trying to meet the requirements of multiple grantmakers rather than their organizational promises. This can paralyze the nonprofit and root them to the ground and prevent them from delivering their services or programs.

But for nonprofits, diversifying their revenue sources can mean they lose a grantmaker in the process. This idea of pleasing “too many masters” creates a system where nonprofits must rely on one grantmaker at a time. Unfortunately, this piecemeal model of securing revenue that is customized for an individual grantmakers vision, requirements, and strategies creates a hindrance to the growth of nonprofits.

But there is a way around it. In a study by the Bridgespan Group of nonprofits that grew $50 million over the course of 30 years, they found that nonprofit organizations can achieve significant growth by following two things:

  • Raising funds from a single source (whether its corporate, government, or charity)
  • Investing in an organizational infrastructure that maximized the efficiency of their fund security system

Granted, not every nonprofit wants to grow that much, but the lesson is clear: while diversification of funds can help an organization, the nonprofit must be more intentional in seeking out grantmakers and not just take on any grant from a grantmaker that they might not necessarily align with. For grantmakers who want to support nonprofits, the lesson is also clear: create more flexible grants that will allow the nonprofit they are funding to secure other (albeit still reputable and in line with their vision) sources of revenue. Grantmakers should also consider covering a portion of the operational costs of nonprofits, if only to offset the potential losses the organization will incur.


Grantmakers and Nonprofits Need to Help Each Other

At the end of the day, nonprofits and grantmakers need to have each other’s backs: grantmakers need to provide grants that are flexible and provide nonprofits with a way to effectively operate, and nonprofits need to invest in building their organization. Only then can nonprofits grow their organization and reach more people with their services or programs.

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