Recently, I’ve started to see renewed push-back from donors about their gifts to charity. If you participate in nonprofit groups, I’ve heard some exasperated nonprofit executives and fundraisers speaking about donors demanding to know how much of their donations are going directly to programs. This debate and discussions have been going on for a long time. I thought we were heading in the right direction, but apparently, many donors and the public still don’t understand.

For years, there has been a back and forth between nonprofit leaders and major donors about expense ratios. In the digital age, general donors and volunteers have gotten into the discussion demanding on social media that charities publish how much of the monies they receive go directly to programs. The implication is clear. Donors, even smaller gift supporters, don’t want a dollar of their money going to pay for operational costs such as rent, lights, infrastructure, and worst of all––salaries!

It’s as if the push by Dan Pallotta and others, including me, to stop the insanity of telling nonprofits they have to continue to suffer what Stanford Social Innovation Review coined the “nonprofit starvation cycle” has not changed a lot of donors’ minds.

Why the Expense Debate is a Problem

The problem with this particular debate is that frequently the supports asking it aren’t evaluating the right information, don’t accept that nonprofits are businesses or have not done proper due diligence.

  1. Many times donors who ask this question have not reviewed the financials of an organization.
  2. I would venture to say that most donors do not know how to effectively read the financials of a nonprofit, especially the IRS 990 report.
  3. Candidly, it’s ridiculous to think that nonprofit businesses don’t need any money for operations and salary. Granted, keeping the lights, investing in digital technology or paying salaries are not as exciting as knowing that your money is directly going to help a child, but it’s much tougher to save that child or accomplish any mission if there are limited resources to do it.
  4. There’s a misconception about the meaning of the IRS designation around “nonprofits.” Nonprofits are businesses. The difference is that nonprofits don’t have shareholders and they receive tax-deductible donations. They are allowed to make a profit, but that profit is to be reinvested into the organization. It does not go to shareholders.
  5. Depriving charities of nonprofit money continues to perpetuate the reality that exists of hundreds of thousands of nonprofits that make less than $100,000 a year and can never grow beyond that or become sustainable because donors believe they are supposed to miraculously somehow have all money go to direct program costs.

This tension in the nonprofit sector also creates situations where nonprofit leaders place operating money into budget lines related to programs (where they may not belong). That then skews the financial reporting that nonprofits do and reporting of proper ratios. And, then you may have instances where a donor who knows financial reporting and nonprofit financial management challenges charity executives because reporting appears incorrect or even dishonest when in reality donors are helping to create this environment.

What Donors and the Public Have to Understand About Nonprofits

Donors have to understand that nonprofits are a business. On the other side of the coin, nonprofit leaders and fundraisers also have to make a clear case to supporters about what it takes to run a nonprofit business. Shying away from it so as to not upset donors is doing a disservice to your organization and the mission you serve. It’s essential that donors understand:

  • It takes money to grow an organization to be sustainable so it can better do its mission.
  • It takes money to hire excellent people who are well educated, experienced, informed and qualified to do the work. You don’t want your organization to have to rely on a revolving door of average workers who are looking for their next opportunity. You want a talented and committed team.
  • It takes money to promote your nonprofit business. There’s a perception that a lot of the things that happen in the digital world are free. But, you can look like a million books, or you can look as if you run your nonprofit on a shoestring budget, which doesn’t garner confidence. Also, pay to play social media is here. Posts that placed organically (i.e. not paid) have a reach of approximately 1 percent. If you want to grow your nonprofit brand, you have to pay to sponsor posts, especially on Facebook.
  • It takes money to build the infrastructure needed for a nonprofit that can make an impact at a significant level. That means, your organization needs computers, software programs, telephones or mobile phones, paper, mailings, event planning funds, etc.

If your donors are asking you about what percentage of their funds are going to operations and what goes to programs, make it a point to inform and educate them. There’s plenty of excellent information to help you address the issue head on. Lowering expense ratios to unrealistic levels (e.g. zero percent goes to overhead) is not the answer. It takes everyone in the philanthropic sector to continue to inform and educate donors and the public.

 

Author of “Not Your Father’s Charity: How to Dominate Your Fundraising to Create Your Success” (Free Digital Download)

 © 2017 Wayne Elsey and Not Your Father’s Charity. All Rights Reserved.