The Spring 2005 issue of the Nonprofit Quarterly features an outstanding article by Clara Miller, President and CEO of the Nonprofit Finance Fund, that points out the insanity of many of the rules and practices that govern nonprofit finance. She doesn't just criticize--she also suggests a number of solutions--but she's particularly good when she's taking on the status quo, such as when she mocks donors who refuse to pay for overhead:
It’s a little like this. ...[Y]ou’re the owner of a restaurant. Your paying guest comes to pay the bill, offers a credit card, and prepares to sign the charge slip. But before signing, the guest says, “I’m going to restrict my payment to the chef’s salary. He’s great, and I just want to make sure I’m paying for the one thing that makes the real difference here. I don’t want any of this payment to go for light, or heat, or your accounting department, or other overhead. They’re just not that important. The chef is where you should be spending your money!”
The irony for the field as a whole is that a technique meant to control costs actually undermines efficiency and program quality. The inability of nonprofits to invest in more efficient management systems, higher skilled managers, training, and program development over time means that as promising programs grow, they are going to be hollowed out, resulting in burned out staff, under-maintained buildings, out of date services, and many other symptoms of inadequately funded "overhead."
She concludes with a concise set of admirable recommendations for change [empasis mine]:
Nonprofits need to make profits, just like their for-profit counterparts, or their enterprises falter. This alone would improve things. Behind nonprofits’ difficulty pricing their services to cover their costs is a wider struggle for resources. In government contracting, for example, for profits now price to cost plus profit, and generally enjoy better business terms. The for-profit and nonprofit government contracting rules should align with respect to pricing, profit margins, growth capital, overhead, and other well-known and accepted aspects of business operations.
The focus on overhead or fundraising cost rules of thumb for nonprofits is generally misplaced. It doesn’t get at the productivity of the organization with respect to mission, and ignores the nuances of a variety of business types and stages of development. Delta Airlines has a different cost structure from e-Bay’s; and the Boys & Girls Clubs’ is different from Compumentor’s. Let’s be intelligent about their financial needs.
More and more diverse scrutiny from government and other funders will create more transaction costs in an industry already carrying an overly high level. This will burden large and small alike, making small, innovative, and efficient organizations experience an infusion of cost just as growth is proceeding, and increasing the length of the already long climb to scale. Funders can go a long way toward lowering transaction costs for themselves and their grantees via small modifications to the way they do business, and by taking on the formidable task of tracking program and mission productivity—rather than questionable financial indicators—field-wide...
For all donors, unrestricted grants are the most positive financially and should be the rule and not the exception. This is because anything else, generally speaking, creates cost for the recipient. There may be exceptions, and giving unrestricted funding does not mean that funders cannot or should not be actively involved in communicating with the recipient about plans for the funds, budget, and program strategy. However, anything but unrestricted grants generally creates cost within the grantee’s operation.
With self-discipline and a little creativity, we can improve the business environment for our sector, creating a more intelligent, nuanced system of finance for "social enterprises," and nonprofit services. This will work better than the current approach, which substitutes well-meaning but counterproductive rules of thumb for sensible, informed financial practices. And it will allow us to power sustainability, management improvement, and innovation in the sector by leveraging appropriately some effective and time-tested rules of business.
clara miller nonprofit finance fund nonprofits nonprofit finance nonprofit quarterly
