Funders’ Unrealistic Expectations

Donations made to a nonprofit organization are typically tax- deductible to individuals and businesses that make them, and the nonprofit itself pays no tax on the received donations or on any other money earned through fundraising activities.

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Nonprofit organizations are sometimes called NPOs or c 3 organizations based on the section of the tax code that permits them to operate. Examples of nonprofit organizations include hospitals, universities, national charities, churches, and foundations. A nonprofit must serve the public in some way, whether through the offering of goods, services, or a combination of the two.

They're also required to make financial and operating information public so that donors can be informed about how—and how well—their contributions have been used. Nonprofits may also exist to collect income to dispense to other qualifying charities. Once registered and running, the organization has to maintain compliance with the appropriate state agency that regulates charitable organizations. This often requires a dedicated CIO and accounting team.

Researching a Grant for a Non-Profit Organization

NPOs cannot be political, which helps explain why so many of them actively seek a non-partisan tone in their communications. There are c groups that can engage in these activities, but not c 3 organizations. While some not-for-profit organizations use only volunteer labor, many large or even medium-size non-profits are likely to require a staff of paid full-time employees, managers, and directors.

Despite having special tax advantages in other respects, nonprofits typically must pay employment taxes and abide by state and federal workplace rules in the same way as for-profit organizations. Nonprofits are allowed to provide assets or income to individuals only as fair compensation for their services. Indeed, the organization must explicitly state in its organizing papers that it will not be used for the personal gain or benefit of its founders, employees, supporters, relatives, or associates. There are, however, key distinctions between the two types of enterprise.

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Yet foundations are quite variable in their indirect cost allowances, with the average ranging from 10 percent to 15 percent of each grant. These rates hold true even for some of the largest, most influential U. And foundations can be just as rigid with their indirect cost policies as government funders. For example, when one Bridgespan client added up the hours that staff members spent on reporting requirements for a particular government grant, the organization found that it was spending about 31 percent of the value of the grant on its administration. Yet the funder had specified that the nonprofit spend only 13 percent of the grant on indirect costs.

Most funders are aware that their indirect cost rates are indeed too low, finds a recent Grantmakers for Effective Organizations GEO study. In this national survey of grantmaking foundations, only 20 percent of the respondents said that their grants include enough overhead allocation to cover the time that grantees spend on reporting. Not only do funders and donors have unrealistic expectations, but the nonprofit sector itself also promotes unhealthy overhead levels.

In this context, nonprofits are reluctant to break ranks and be honest in their fundraising literature, even if they know that they are fueling unrealistic expectations. They find it difficult to justify spending on infrastructure when nonprofits commonly tout their low overhead costs.

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Grant Research Tools | National Council of Nonprofits

This constellation of causes feeds the second stage in the nonprofit starvation cycle: pressure on nonprofits to conform to unrealistic expectations. This pressure comes from a variety of sources, finds the Nonprofit Overhead Cost Study. The survey found that 36 percent of respondents felt pressure from government agencies, 30 percent felt pressure from donors, and 24 percent felt pressure from foundations.

Every aspect of an organization feels the pinch of this culture. In our consulting work with nonprofits, for example, we often see clients who are unable to pay competitive salaries for qualified specialists, and so instead make do with hires who lack the necessary experience or expertise.

Similarly, many organizations that limit their investment in staff training find it difficult to develop a strong pipeline of senior leaders. These deficits can be especially damaging to youth-serving organizations, notes Ben Paul, president and CEO of After-School All-Stars, a Los Angeles-based nonprofit organization that provides after-school and summer camp programs for at-risk youth nationwide.

Meanwhile, without strong tracking systems, nonprofits have a hard time diagnosing which actions truly drive their desired outcomes. Take the case of a well-respected network of youth development programs. Poised for a huge growth spurt, LGON realized that its data systems would be hopelessly inadequate to accommodate more clients. An analysis showed that program staff spent 25 percent of their time collecting data manually. One staff member spent 50 percent of her time typing results into an antiquated Microsoft Access database.

Staff members can become so accustomed to their strained circumstances that they have trouble justifying even much-needed investments in overhead, our interviews revealed.

The Effectiveness of Nonprofit Lead-Organization Networks for Social Service Delivery

Upon examination of more than , nonprofit organizations, researchers found that more than a third of the organizations reported no fundraising costs whatsoever, while one in eight reported no management and general expenses. Further scrutiny found that 75 percent to 85 percent of these organizations were incorrectly reporting the costs associated with grants.

Our study of the four youth-serving nonprofits likewise reported discrepancies between what nonprofits spent on overhead and what they reported spending. Although they reported overhead rates ranging from 13 percent to 22 percent, their actual overhead rates ranged from 17 percent to 35 percent.

Many factors support this underreporting of nonprofit costs.

The Effective Organization: Five Questions to Translate Leadership into Strong Management

According to a survey conducted by The Chronicle of Philanthropy in , a majority of nonprofits say that their accountants advised them to report zero in the fundraising section of Form For example, nowhere does the IRS explicitly address how to account for nonprofit marketing and communications. As a result, many organizations allocate all marketing and communications expenses to programs when, in most cases, these expenses should be reported as administrative or fundraising overhead.

Government agencies likewise have varying and ambiguous definitions of indirect costs. There is some good news. Currently, the U. Foundations and government funders must take the lead because they have an enormous power advantage over their grantees. This Indian NGO has done lot of charity work aiming at bringing socio-economic change in rural India. Come and join us at Kusum Trust Foundation. To learn more about the use of cookies, please read our privacy policy.


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