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We need to rethink how the non-profit sector is financed

Shelagh Gastrow

Why should non-profit organisations be expected to operate any differently to private businesses when it comes to covering overheads? Increasingly, philanthropic funders are building into their grants a cushion for funding operating expenses – and this is the right way to go.

In 2013 a new TED talk by Dan Pallotta burst onto the non-profit and philanthropy scene. Entitled The Way we Think about Charity is Dead Wrong,, he criticised the double standards that applied to the financing of for-profit companies and non-profit organisations.

He pointed out that non-profits are generally rewarded for their frugality and penny-pinching, especially when it comes to their overheads, while for-profits are given significant resources to attract the best staff, capital for long-term planning and funding for marketing etc.

At the same time, the outcomes of business are essentially making money, whilst non-profit outcomes are based on different values and seek social change. Frequently, it is the very people who own or benefit from business who are the most critical about non-profit expenditure.

What is being lost in the focus on low overheads and “prudent” use of funds – this is the key issue of whether the organisation has made an impact. There are many organisations that keep their overheads low and are also totally unproductive. Hence, the frequently-asked question “What percentage of my donation goes to the community?” is not the correct question to ask an organisation. It asks nothing about what the organisation does or the impact it makes.

Core costs are actually part of every project or programme cost. They may not produce a particular activity, but they are vital to the delivery of the project. Core costs include, inter alia, the cost of oversight and management, governance, staff development, IT equipment, software and databases, rentals and utilities, supplies, printing and stationery, marketing and communications, training and fundraising.

Donors around the world have started to ask themselves whether they should be investing more in non-profit overheads to ensure sustainability, confidence and improved effectiveness. Recently two philanthropic foundations in the United Kingdom have come out publicly to state how they fund organisational core costs and the benefits of doing so.

In February 2019, the Peter Cundill Foundation announced that going forward, its grants would involve unrestricted funding to non-profit organisations. This essentially means that the foundation will be funding causes that it supports and that the recipient organisation can use those funds as required.

Donors tend to fund specific projects or programmes rather than the whole organisation and prefer to avoid the question as to where the money comes from for general expenses, limiting their contribution to overheads at a basically useless 10% administration fee. Can we imagine any business surviving with a 10% budgetary overhead?

Having run an organisation that received unrestricted funding, I am aware of the significant advantages of such funding. On a practical level, the organisation becomes more efficient. Besides the delivery of specific programmes, organisations battle with a range of issues such as ageing IT systems, the inability to develop, update and enhance staff skills and myriad maintenance requirements to ensure efficiency can be managed.

Unrestricted funding allows an organisation to be more flexible, and to respond quickly to the communities and environment in which it works. It also enables organisations to be more innovative which is necessary in a fast-changing world, especially working in the civil society space.

However, in order to build trust between the donor and the grant recipient, there are some essential elements required such as open doors, transparency, accountability and regular reporting, ongoing relationship-building, a clear strategy, efficient financial management and good governance. Donors should always undertake a level of due diligence when it comes to grantee governance, leadership, finances and preferably undertake site visits to the programmes and communities served.

The Peter Cundill Foundation views the advantages of unrestricted funds in very practical ways including repeatable reporting, simplified accounting, reduction in the complexity of reporting, lowering of audit and fundraising costs. The issue of flexibility is also mentioned as an advantage in that “if an organisation is well run, money is allocated to where it’s needed to maximise impact and that may change within a grant cycle”.

In particular, the Peter Cundill Foundation points out that unrestricted funding also helps to reduce “Mission Creep”, where organisations move away from their objectives to follow any offered funding that will keep them afloat and helps the organisation to think beyond short-term funding concerns to a longer-term vision.

The Esmée Fairbairn Foundation in the UK also provides core funding for its partner organisations. It’s Chief Executive, Caroline Mason, says that “our job is to back remarkable organisations and people that are passionate and professional. We want to provide them with the right resources and believe that they know what that means”.

Of their active grants, 64% (totalling £92.7-million) provide for core or unrestricted funding. They see the benefits of this kind of grantmaking as strengthening and stabilising organisations, strengthening human resources, governance and management, enabling organisations to invest in what are often “neglected core functions” such as communications and allow for the piloting of innovative approaches to address social problems.

Essentially, it is impossible to divorce overheads from projects.

When a donor indicates that they will not make a contribution to salaries, that includes the people undertaking the oversight of the project and the reporting. Those functions need to be funded.

When a donor requests an independent evaluation of a project to assess its outcomes and impact, that requires financial resources.

When a donor calls the organisation, someone is answering the switchboard and when a report is produced, it is done so on a computer by an employee sitting at a desk on a chair using software and electricity.

When accountability is expected, audited financial statements and annual reports cost money.

It is simply not feasible to separate project and core costs and, in reality, every project should be making a contribution to all organisational overheads, not merely a 10% administration fee (whoever invented that?).

 

Shelagh Gastrow

Shelagh Gastrow provides advisory services to the philanthropy sector, higher education advancement and non-profit sustainability. She works with individuals and families on how to integrate their wealth and their values into meaningful and effective philanthropy. From 2002-2015 she was founder and executive director of Inyathelo and focused her efforts on strengthening civil society and universities through programmes to develop their financial sustainability whilst promoting philanthropy in SA. Her work has gained public recognition locally and internationally. http://www.gastrow.co.za

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