How to Stop the Nonprofit Starvation Cycle (Plus How to Avoid It!)
Organizations that invest in developing the fundamental systems, protocols, and processes needed to support key business functions are more successful than those that don’t. That’s a fact that traverses every industry, including the nonprofit sector. However, the impacts are arguably more severe for mismanaged nonprofit organizations.
Underinvestment in business infrastructure leads to a phenomenon known as the nonprofit starvation cycle, where organizations struggle to meet external expectations and attract further funding following a bout of underspending.
Is nonprofit starvation an issue for your organization? In this article, you’ll learn everything you need to know about the root causes and how to avoid and combat organizational starvation.
What is the Nonprofit Starvation Cycle?
Nonprofit organizations are under continual pressure to demonstrate their value. When they underspend on overheads to achieve what stakeholders perceive to be a ‘better’ result, the outcome is often a decrease in funding because donors expect them to be able to do more with less going forward. This downward trajectory is known as the nonprofit starvation cycle.
The nonprofit starvation cycle typically starts with keeping overhead costs as low as possible. No organization ends up in a starvation cycle on purpose. After all, spending on each individual program, service, or mission is usually carefully scrutinized. Rather, the failure to seek, allocate, analyze, and report indirect overhead costs creates the discrepancy between perceived spending vs. real-world results.
Overhead costs are by no means irrelevant to nonprofits as they comprise essential business functions. Therefore, mission success proves almost impossible when they go unreported - or don’t receive adequate funding, to begin with. Here are a few examples of how indirect costs can be crucial to a nonprofit’s success:
Recruitment - Without proper staffing, an organization's number of fundraising events is limited.
Technology – Without sufficient computers or data analysis software, nonprofits cannot compile reports and are left second-guessing campaign efficacy.
Finance systems - Maintaining transparency on how money is received and spent is one of the cornerstone principles of the nonprofit sector.
Fundraising - Fundraising is the lifeblood of nonprofits, so allocating resources for outreach and marketing is essential.
Staff training – Besides mission specialists, nonprofits need staff adept at accounting, fundraising, marketing, volunteer engagement, etc.
The result of underspending in any of these mission-critical areas makes it hard for nonprofits to meet their objectives. As a result, donor confidence drops, leading to a reduction in funding. This, in turn, reinforces the tendency of struggling nonprofit organizations to keep overhead spending low, which perpetuates further underinvestment and decline. And thus, the nonprofit starvation cycle continues.
Why Does the Starvation Cycle Occur?
While an overemphasis on overhead underspending is the ultimate cause of starvation, several contributing factors lead to the decision to cut back on overhead nonprofit spends in the first place. Let’s take a look at the most significant aspects in more depth.
Funders with Unrealistic Expectations
Many donors may have unrealistic expectations about the percentage of funds that should be spent on overheads. In 2012, a Grey Matter Research Survey revealed that givers felt 22% was an appropriate slice of the overall budget for overhead nonprofit spending. Flash forward six years, and the same survey question elicited a response of 19% or less. This demonstrates the perpetual nature of nonprofit starvation.
A further problem compounding starvation issues for struggling nonprofit organizations is that some donors want to see their money going directly to a cause rather than being used to pay rent and salaries or cover admin, technology, or reporting costs. This mindset puts even more pressure on organizations to keep overhead spending low – even if that comes at the expense of investing in critical areas like recruitment, staff development, and infrastructure.
Finally, many nonprofits feel pressured to demonstrate immediate results once they begin spending funds from their donors. The consequence? An overemphasis on short-term progress at the expense of long-term sustainability.
Internal Lack of Understanding
Without adequate spending on indirect overheads in the first place, nonprofits struggle to assimilate enough data and feedback to fully understand the importance of spending more on staff, technology, and internal administrative processes. For example, without adequate finance and reporting systems, organizations may never become aware of the true costs involved in delivering programs and services, leading to continued underinvestment and a repeating cycle of maladministration.
The longer the starvation cycle continues, the more normalized the situation becomes and the more difficult it is to escape. For instance, it’s not uncommon for nonprofit staff to become so accustomed to strained circumstances that they have trouble justifying much-needed investments, even when they are essential.
In any given starvation cycle, mismanaged aid usually plays a prominent role. That’s because the entire organization becomes less durable when nonprofits are prevented from investing in vital business functions like technology, software, and employee development and retention (even when they have the funds to do so).
One of the major issues is that donors can restrict funds by designating their contributions for a particular use. While in most cases, this comes from a place of good intention, allocating funds to specific purposes opens nonprofits up to financial mismanagement. Why? Because even when donations are allocated directly to mission-focused projects, this may not align with the organization’s actual needs in achieving a long-term impact.
In lean times (like economic downturns), when people have less to donate and fundraisers generate below-average revenue, nonprofits have to make tough decisions about allocating resources. More often than not, the result is to focus on short-term survival rather than long-term sustainability, once again forcing business development overheads to the back of the funding queue.
Many nonprofit organizations omit or misrepresent what they’ve spent on overheads to prove impact and satisfy donor expectations. The result is a prolonged (unrealistic) donor belief that similar results can be repeatedly achieved with little to no investment into business development overheads.
However, not all misleading reports are intentionally skewed. The very fact that indirect overhead costs like staffing, technology, and financial accounting processes are underfunded results in staff and systems that produce error-filled, inaccurate, and inconsistent reports.
How to Fight the Starvation Cycle
To avoid starvation, nonprofit organizations must focus on making additional investments in critical areas that enable them to allocate resources and deliver programs more effectively - even if that means increasing overhead costs exponentially in the short term. Only by building a strong foundation of infrastructure and systems can nonprofits improve their efficiency, effectiveness, and long-term sustainability. Ultimately, this is the only way to keep benefiting the communities they serve.
But precisely how can organizations combat the nonprofit starvation cycle? Here are some of the actions that struggling nonprofits should consider.
Ask How Nonprofit Leaders Spend
Unlike for-profit businesses, nonprofits are well-positioned to come together and address sector-wide issues that affect the vertical as a whole - like overhead underspending. By tapping into the insights from peers and industry leaders, struggling nonprofit organizations can get the guidance they need to:
Learn how successful nonprofits handle indirect cost allocation.
End the internal stigma surrounding necessary business expenses and additional overhead spending.
Build better relationships with donors who understand the importance of investing in infrastructure.
Make the organizational changes needed to support better spending best practices moving forward.
It might even be possible to partner with other organizations in the same predicament or seek mentorship from successful nonprofits with experience investing more funds into organizational infrastructure.
Ask Charities How You Can Help
Still trying to determine what changes are necessary to disrupt the nonprofit starvation cycle and push forward toward more impactful outcomes? Going directly to the funding source and asking will likely elicit the most actionable responses. Of the many metrics available, donors and donor charities are typically interested in these five areas of operation:
Fundraising Efficiency - The fundraising cost vs. the total dollar amount raised.
Operating Reliance – The value of donations deriving from unrestricted grants vs. restricted donations.
Program Efficiency - The split on spending between program expenses, overheads, and business development costs.
Donor Attrition – Donor retention, growth and decline rates, acquisition costs, and lifetime donor value, etc.
Social Return on Investment – The overall social impact value compared to the initial investment amount.
Encourage Charities to Invest in Organizational Infrastructure
Using the feedback garnered from its supporting charities, a nonprofit can build a strategy to better support its spending needs. Encouraging charities to invest in organizational infrastructure can be challenging. Still, there are several ways to highlight the importance of allocating resources to business overheads and development:
Build awareness – Educate donors about the importance of distributing resources more efficiently and investing in organizational infrastructure to achieve long-term sustainability.
Communicate clearly – By clearly communicating program goals, shifting the focus from costs to outcomes should be possible, freeing up more funding to spend on critical business development.
Showcase success stories – When nonprofits can demonstrate how investing in infrastructure has expanded reach, led to greater efficiencies, and improved previous outcomes, the need for less concentrated spending becomes clear.
Fundraise transparently – By openly seeking capacity-building grants, unrestricted donations, and donations specifically for infrastructure, nonprofits can help donors understand the importance of operational investments.
Share best practices – Investor confidence can be boosted by informing stakeholders about financial audits, leveraging technology to streamline processes, and ensuring maximum competency through staff training and development, etc.
Some of that might sound a bit complex, but with UpMetrics by your side, it needn’t be. We specialize in elevating how nonprofits use data to communicate with donors and drive positive change. Our nonprofit impact measurement solutions are specifically designed to provide both qualitative and quantitative data, allowing nonprofits to communicate their organizational needs more efficiently and demonstrate the impact of prioritized donor spending on non-mission-related investments.
Invest in Software and Technology
The concept of speculating to accumulate is often met with suspicion in the nonprofit sector. There’s an underlying assumption that spending on anything that’s not directly cause-related is somehow inherently dishonest. However, investing in support systems that drive efficiency, accuracy, and consistency is essential in fighting the nonprofit starvation cycle. Examples include:
Communications and marketing automation – For scheduling email marketing campaigns, social media posts, and sending text messages, etc.
Fundraising software – Dedicated fundraising software helps organizations run more effective campaigns and prove how donations are acquired.
Volunteer management tools – Providing digital ways to sign up and organize volunteers can significantly streamline operations.
Analytics and reporting – Transforming data streams into quantifiable information helps companies visualize and communicate their impact in measurable ways.
How UpMetrics Aids Struggling Nonprofit Organizations
Want to gain a more comprehensive understanding of what your data is telling you and make more informed spending decisions to stop the starvation cycle in its tracks? UpMetrics’ impact analytics platform is a powerful partner in helping organizations drive positive change. Uniquely designed to help the impact sector, our flexible data visualization tools enable you to see data with a fresh perspective and engage with donors in ways you may not have previously considered.
By streamlining your ability to collect, share, and use data, UpMetrics can assist you with:
Organizational Impact - Collect, manage, and visualize your organization’s data across teams and programs to drive learning, impact, and action.
Board Empowerment – Achieve organizational alignment by empowering your board with qualitative and quantitative data.
Fundraising Insights - Analyze your development data to better understand donor interests, behaviors, and giving trends.
Special Initiatives - Dive deep into specific programs and initiatives by collecting, isolating, and analyzing detailed mission data.
Stakeholder Feedback - Gather qualitative stories and quantitative data from stakeholders to drive learnings and strengthen your impact.
Community Indexing - Leverage community-level education, economic, health, and demographic data for deeper insights into community assets and needs.
With all the data you need located on one intuitive, cloud-based platform, it’s much easier to identify the drivers of positive outcomes, achieve transparency, and increase knowledge sharing across stakeholders.
Ready to stop your nonprofit’s starvation cycle for good by gaining the insights you need to take control of your spending patterns and policies? Contact our team today to learn more and discover the power of a partnership with UpMetrics!
Request a demo today.