Budgeting for non-profits

A few years back NPO finance expert, Clara Miller, wrote a NPQ piece on the seemingly irrational set of expectations philanthropists, donors, and government place upon non-profits. The article, “The Looking-Glass World of Nonprofit Money: Managing in For-Profits’ Shadow Universe,” is making it’s way around the internet again and is certainly worth a second look.

Budgeting for non-profits

At a time when both government and philanthropy is enamored with the concept of “venture philanthropy”, it is ironic that non-profits are expected to thrive under an entirely different, some would say opposite, set of rules. Some examples follow:

Consumer buys the product/service?

  • YES for business.
  • (Usually) NO for non-profit.

Price of goods/services must cover cost and produce profits.

  • YES for businesses, else the company folds
  • NO for non-profits.

Overhead is considered a cost of doing business, and varies with business type and stage of development.

  • Obviously YES, for business
  • Definitely NOT for non-profits.

In business, demand is consumer driven, and price points set by market conditions. Irrational as it may seem, almost the opposite is the case in the nonprofit sector.

Miller offers the following analogy as a for profit equivalent:

 …Let’s imagine a hotel where guests arrive needing a room for the night, but most lack the money to pay for it. Before you check them in (you’re the desk clerk as well as the owner; it’s a low-overhead hotel) you need to make sure there’s someone else who is willing to pay for their rooms. Luckily, a variety of people and organizations are willing to pay for these guests. However, each has a different idea about what the guests really want, how much the room should cost, even whether some guests should be able to stay or not. You get on the phone for several hours, making deals and ensuring that there’s someone to pay for the guest’s room, that all the guests will be served, and, to the guests themselves, that the rooms will be OK.” 

The non-profit model obviously places unreasonable financial burdens on an organization, stifles innovation, and can even threaten the sustainability of the organization itself. 

What can be done? Miller argues that unrestricted funds should become the sector norm, not the exception. Because, says Miller, “anything else, generally speaking, creates cost for the recipient.” 

This is not to say that unrestricted funds are always appropriate, or that funders should not be actively involved in planning and strategy.“With self-discipline and a little creativity, we can improve the business environment for our sector, creating a more intelligent, nuanced system of finance for ‘social enterprises’ and nonprofit services.”

Read the entire article on the Nonprofit Quarterly website. 
Clara Miller. "The Looking-Glass World of Nonprofit Money: Managing in For-Profits’ Shadow Universe." NPQ. (Dec 21, 2005)