Strategic Analysis: The Intersection of Nonprofit Mission and Finance
If your organization is like most nonprofits, you offer a wide variety of programs to serve your constituents. These programs may develop out of community need, available grant funding, or sometimes as a pet project of a key stakeholder. As needs, funding, and stakeholders evolve, your programs should also change. Strategic analysis can help you evaluate your efforts to see which have the greatest impact and which should be discontinued.
The reluctance to eliminate programs has many sources, some of them emotional, and some strictly financial. But when the reasons are financial, they are often borne out of a misunderstanding of what it costs to run a certain program. A grant may cover the direct costs, so at first blush it appears that the program requires very few of your organization’s financial resources. However, direct expenses are only one factor in determining your true cost. There is always some level of administration and overhead, and it is only after these expenses are allocated that the true cost of your offerings can be measured.
Allocating overhead costs
Allocating overhead costs can be a true art form, but including some level of science in the process will encourage acceptance of the allocation throughout the organization. Whenever possible, your method should be supported by data, such as the number of transactions recorded for each program (from the finance department), the number of employees (from human resources), or the number of computers (from IT). Well-supported data paints a more accurate picture of costs than more simplistic methods, such as dividing overhead evenly between all programs or basing allocations on the percent of direct expenses.
Mapping impact and profitability
The profitability of each program becomes the foundation for a strategic analysis that measures the impact each program has on your mission. One of the easiest ways to complete this analysis is to plot programs on a graph where one axis represents profitability and the other, impact. Programs will fall into one of four quadrants: investing, supporting, mission, and re-evaluate.
These social enterprise programs offer the best of both worlds; they are profitable and advance your mission. You should cultivate these programs; they are self-sustaining and may also generate funds for other programs.
These activities generate profit but are not critical to your organization’s mission. Still, they are essential to your organization’s financial health because they provide funding needed to support other activities. Fundraising events, royalties, and space rental fall into this category.
These programs may be the very reason your nonprofit exists. They serve the needs of your constituents, but do not generate a profit. You must monitor these programs to assure that the losses they incur do not overwhelm your organization. Efforts should also be made to mitigate losses in these programs to the extent possible.
Eventually, a program may lose money and no longer support your mission. At one point, these programs were central to your organization’s work, but as times and needs have changed, they no longer serve that purpose. Eliminate or revamp these programs to continue enhancing your mission without creating a drain on resources.
By evaluating programs based on their profitability and their impact, you’ll have a better understanding of why you devote resources to different activities. It is often easier to terminate or transition long-time programs once their lack of mission impact and financial viability are highlighted. Although this decision is never easy, its long-term effects will help you better meet the needs of those you serve.