Three reasons why nonprofits struggle to make ends meet

It isn’t easy running a nonprofit, whether it is an arts program or a homeless shelter. The mission always seems to outstrip the money available to pay for it. Here are three big reasons why you as a nonprofit leader might be spending so much time on the financial knife-edge. The good news is that two of these three are under your control.

1. You don’t have a firm grip on what it really costs your organization to do all the different things you are doing. Maybe you know your obvious direct costs, for example, salaries for the frontline staff doing the work. You’ll know some of the big indirect costs: rent, insurance, maybe IT equipment and services. But there is a whole lot more that is harder to pin down, especially to the point where you can allocate these costs to particular programs and projects and specify them for funders in grant requests.
2. You don’t ask funders to pay what it really costs your organization to do the work in question. Once you have figured out what the work costs, you still need to screw up the courage to ask funders to cover it. This is no easy thing when so many funders blithely say they don’t pay overhead or will only pay an arbitrarily low and flat rate like 10%.
3. You have documented what the work costs, and you ask funders to pay for it, and they still nickel and dime you on overhead rates. This can happen. It is a barrier. But it is a barrier that you should only hit after you clear the two hurdles noted above. You have the power to clear those first two on your own. As you clear them, you build up momentum that will help you with third hurdle. Even if some funders won’t ultimately pay what it takes, you have been candid and straightforward on your side of the table. That sends a good message. And you have gained the clarity you need to make an informed decision on whether you can afford to take the money they are offering. The right answer in some instances may be no.

The point of all this is that despite the challenges, you retain the initiative as a nonprofit leader seeking to fund your organization’s mission. As a first step, make sure you know what your true costs really are. Knowledge is power. My former colleagues at the Bridgespan Group have a free, online toolkit to help you figure this out: http://www.bridgespan.org/Publications-and-Tools/Strategy-Development/Nonprofit-Cost-Analysis-Introduction.aspx#.VvEh25p-zCQ