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Public and Donor Expectations Can Restrict Nonprofit Spending and Growth
In his presentation at the 2016 CLA Foundation Conference, activist and fundraiser Dan Pallotta shared an observation: It is acceptable for commercial businesses to invest large sums of money in growth and finances, but it is often taboo for nonprofits to do the same with charitable donations. Pallotta has witnessed that nonprofits are expected to direct revenue differently than their for-profit counterparts, even though they require funds for salaries, advertising, fundraising, and other activities, just like for-profit enterprises.
If donors and the public continue to focus on how much of their money is contributed to the cause, rather than investing in the organization as whole, many nonprofits will be unable to grow and expand their mission.
Disapproval of incentives
As he did in a 2013 TED Talk called, The Way We Think About Charity Is Dead Wrong, Pallotta’s presentation at the conference gave numerous examples of what he describes as different standards regarding spending in nonprofit and for-profits. As an example, for-profit entities are allowed to motivate their key personnel with money and other rewards, but nonprofits are unnecessarily vilified for using similar incentives. In many cases, he believes that this imbalance could force some of the greatest minds of our generation to choose between entering the workforce to do well for themselves or to do well for others.
Limited advertisement, fewer donations
The imbalance continues throughout the nonprofit community’s operating model. Pallotta says charitable organizations are expected to limit their advertising budgets and encouraged to rely on cheap or donated methods to promote their cause. Nonprofits often refrain from using donations for advertising, and consequently, charitable giving has been stalled at 2 percent of gross domestic product since the 1970s.
Money spent on fundraising often grows the revenue base of a charity and increases the services it is able to provide to the public, heightening the overall impact on society. But when nonprofits launch fundraising campaigns, there is an expectation to see at least a 70 percent return on investment within a shorter time frame than their for-profit counterparts.
Pallotta believes the fear of failure can stifle innovation within the charitable community and lead to nonprofits sticking with outdated revenue models. As a result, between 1970 and 2009, only 144 nonprofits reached the $50 million dollar revenue mark, while more than 46,000 for-profits achieved that milestone.
Neglected overhead costs
The giving public often focuses on the distribution of charitable donations, taking note of the percentage of their money that goes to a nonprofit’s cause. However, focusing on the contributed amount that goes to overhead costs does not highlight the nonprofit’s effectiveness; overhead costs are not only necessary but important in the growing of an organization. Resistance toward donations funding the nonprofit rather than the cause keeps many would-be contributors from ever writing the check.
Redefining charitable donations
Pallotta is challenging all donors and the public to think more critically about how they evaluate nonprofits. As professionals and grant makers in the nonprofit industry, we must help move donation focus away from statistics related to overhead and fundraising and focus on outcomes. Such a shift is necessary to propel social change.