Posted , by Kaitlin Padden Robb, Consultant. Topic: Nonprofit Management.

Too many nonprofits are rewarded for how little they spend, rather than for what they get done. This is the double standard that author, activist and fundraiser Dan Pallotta called out during his recent visit to Hampton Roads. (I highly recommend watching his TED talk). His presentation about “The Overhead Myth” got our sector buzzing…

Dan asserted that morality is getting confused with frugality. Charities, he said, should be rewarded for their big goals and big accomplishments, even if that comes with big expenses. Most businesses operate under the basic understanding that “it takes money to make money.” Well, it also takes money to make social change. Yet in our world, nonprofits are restricted from behaving like a business.

And what comes to mind when nonprofits think of the word “restricted”? You got it—restricted funds. These are the dollars that writer Paul Shoemaker goes so far as to rename “quite damaging dollars (QDDs)” in a recent Stanford Social Innovation Project article. The article suggests that to function more like a business, nonprofits need working capital (aka unrestricted funds): “The lack of unrestricted funding has persisted for decades, and if we don’t change our funding practice, we will continue to fall short or take too long to reach the height of our aspirations”

Restricted dollars restrict access to working capital. They rarely allow for investment in infrastructure or administration, and they prevent responsible organizations from effectively reacting to changing market conditions. Keep in mind that, as Shoemaker points out, “unrestricted absolutely does not imply unaccountability.” Nonprofits still need to report on impact and where dollars were used.

So what approach should you be taking as a nonprofit?

1. Instead of asking for dollars to support a specific program, ask for dollars to support a specific outcome
2. Encourage potential donors to measure impact, not overhead; remind them to only give to organizations they trust to effectively manage their investments
3. Strive to act and perform like a business—which means investment in staff (to recruit and retain top talent), infrastructure and fundraising
4. While some donors will want to contribute to designated programs or capital investments, you should also be soliciting unrestricted gifts you can leverage to become a higher preforming organization
5. Just like a business, you need strategic plans for growth and access to dollars that allow you to execute these plans (FACT: These plans cannot be developed in a one-afternoon board retreat… they take time and investment in order to be meaningful)

Related Curtis Group blog posts:

Dispelling the charity overhead myth
July 8, 2013

Restricted gift dilemma: the importance of shooting straight with your donor
February 29, 2012

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