Don’t Overlook Your Nonprofit’s Infrastructure Needs

By Lauren Frary, Director of Strategic Business Transformation, SAX LLP

When it comes to operations and infrastructure, nonprofits need to think more like a for-profit corporation — for the good of the organization and the cause it supports.

The course of my professional career has allowed me to work both within the nonprofit sector and with the for-profit business sector that supports them. This opportunity to see these sectors from the inside has provided some insight into why many nonprofits (regardless of size) struggle with the business side of the organization. Certainly, it is understood that a nonprofit’s priority is the mission/vision for the communities it supports; however, I would argue that without proper financial and business practices the mission will cease to have any impact.

I have seen several trends that have led to the diminishing and degradation of a nonprofit’s objectives, and I am not alone in this experience.

“A common thread through many nonprofit organizations is lack of comprehension regarding the fact that while their mission and methods may differ from the business world, they are indeed a business,” Brain K. Cloar, Ph.D., in his article, “Your Nonprofit Should Mean Business,” said. “Too many times, those who lead, operate and volunteer for a nonprofit organization get so caught up in either the idea of ‘nonprofitness,’ or so mission-focused, they either lack the ability or refuse to understand the fact they are also a business.”

Infrastructure Is Essential Investment

An organization’s infrastructure is a key area for investment. Often nonprofits feel conflicted about investing in infrastructure (specifically personnel and technology) as there is concern that this investment may shift the percentage of the charities’ funds going to general and administrative costs (aka “overhead”). This is often a discussion that centers around the charity watchdogs and their rating systems, which generally favor a lower administrative expense percentage.

In addition, many funders also favor a lower overhead cost — assuming that lower overhead costs mean more funds go directly to programs and community impact. However, this is not necessarily the case.

“Organizations that build robust infrastructure — which includes sturdy information technology systems, financial systems, skills training, fundraising processes and other essential overhead — are more likely to succeed than those that do not,” Ann Goggins Gregory and Don Howard, in the publication “Essential of Social Innovation,” said.

The unrealistic expectations of funders and charity watchdogs creates a situation where nonprofits do not invest appropriately in their infrastructure and then subsequently fall behind in their ability to sustain or even grow their organizations. Then funders continue to expect the organization to do more with less resources. Goggins Gregory and Howard call this the “nonprofit starvation cycle,” a term that is being widely used in the nonprofit sector.

If the typical small business spends about 30% on overhead, should that not be the same for a nonprofit? This is a much more realistic expectation that allows for organizational growth while still allocating the majority of funding to programs and community impact.

How do we break the cycle? I believe that this is part of the advocacy that needs to take place going forward. Nonprofits need to communicate with funders what is most important — the impact and outcomes of their work, not the costs. The conversation needs to change, and the funding needs to support both programs and the infrastructure needed to execute the goals and objectives of those programs. Specifically, there must be investment in technology, including artificial intelligence, as well as staff recruitment and retention.

Technology is no longer a nice-to-have, but it is an essential part of any organization’s (especially nonprofit’s) ability to run efficiently and effectively. Technology — ranging from accounting software to program dashboards — provides a streamlined administrative function and, in the end, saves time and effort, which can be dollarized to demonstrate the cost savings. Investing in your workforce is the most effective way to ensure the quality of your programs and ability to execute your strategic goals. High-quality employees should be compensated appropriately as quality staff means quality outcomes for the organization, populations served and the community as a whole.

Of course, having a strong infrastructure must be supported by other factors for a nonprofit to succeed. Cloar and I agree on some trends that contribute to poor business practices including:

  • The lack of a strong leader. A strong leader should effectively manage and steward the organization’s funds, balance the budget, ensure internal controls and compliance, and exercise strong leadership.
  • The lack of a strong foundation. So often, nonprofits start off as small, grassroots organizations looking to make the world a better place. This is great in the beginning, but as the organization grows, the roles must also expand and qualifications of those holding positions must also expand.
  • Accountability. This includes being able to let go of the people who are not serving the organization well. Clear communication about performance is crucial and when that falls apart, so does accountability.

It is important to note that the nonprofit is charged with holding the public’s trust and will use its resources to the benefit of its mission, individual service and communities. By not holding people accountable (including leadership), the nonprofit sector risks losing the trust of those who ultimately provide the funding for the organization.

By strengthening these three areas, a nonprofit can pivot into an effective and efficient organization that positively and significantly impacts our communities.

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