Return on investment (or ROI) is no doubt a key metric (and usually the only metric that matters) to business investors. As an outsider to a company, an investor hands over his surplus cash to the owners of that company in the hopes that he will get something greater in return. A little money and a lot of faith are involved in such transactions. Stock traders do it all the time. Investors in privately held companies do it, too. And so do donors and funders of nonprofits. But their ROI is not monetary since donors do not receive consideration for their donations. Their ROI is measured in impact. They ask the nonprofit, “How many people were served by this program?” “Are more kids going to college?” “Are more low-income people receiving medical treatment?” “Are the beaches cleaner this year?” Donors want to see that their money is making a difference in the community.
Naturally, the traditional approach has been for donors to fund specific programs and for specific time periods, which accountants refer to as restricted net assets. However, having too much money tied up in specific programs can be harmful to the long-term sustainability of the nonprofit. Nonprofits are businesses, too. Not every dollar goes directly to a program. They need to pay their administrative staff, they need to keep the lights on and they need to buy office supplies. Nonprofits also need to invest in growth and innovation. Accountants commonly refer to these types of expenses as “overhead.” And overhead has always been a bad word in the business world. Everyone wants to keep their overhead down. It seems counterintuitive that a private foundation or individual donor would want to fund a cost that is (seemingly) trying to be reduced or limited in some way. And furthermore, there’s no ROI to the donor, at least not on the surface. But the fact is that the nonprofit must survive in order to deliver its programs and serve the individual clients or the community who depend on it.
Nonprofits depend on unrestricted funding to pay for its general operations, especially those that do not charge their clients for their services, or have no clients. Fortunately for these nonprofits, there has been a recent trend of private foundations giving more unrestricted grants, or at least attaching an unrestricted piece to a larger program grant.
The Weingart Foundation, recognizes this need, as evidenced by their FY 2016 Program Plan.
The Nonprofit Quarterly also discusses the importance and recent trends in funding a nonprofit’s cash reserve, another important component of long-term growth and sustainability, here.
One thing we can learn from all this is that we might need to take a step back sometimes and realize that overhead costs help nonprofits have the impact that they do.