Why Are Most Nonprofits Terrible With Money?

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Nonprofits are essential organizations in any civilization. These social entities provide essential services, taking up the slack where government is lacking.

Even so, they don't always manage their money well. Granted, there are some institutions that get it right, but the vast majority often have to go back to their donors with the begging bowl, hoping for more.

So, what can be done about this predicament? Well, fortunately, this post can help. It looks at some of the reasons why nonprofits struggle with money and what can be done about it.

Public Pressure
Ironically, public pressure is one of the fundamental reasons many nonprofits are terrible with money. Donors often insist that these entities have specific expense ratios, causing them to skimp on investments they need to thrive long-term.

Public pressure can also come from outside of the direct ecosystems. Media hit pieces on wasteful charities aren't always helpful, and the so-called “problems” they discover are often simply operational necessities.

Dealing with this problem requires focusing on outcomes more than expense ratios. Charities with expenses of 20% can sometimes be more effective than those with 10% because their organizational structure means they can deliver more real-world benefits to people.

Burnout Leading To High Turnover
Another issue you sometimes see in non-profits is burnout leading to high turnover. Many staff feel so stressed by their heavy workloads that they eventually run out of energy.

Of course, this process can have effects on the financial performance of the entity. Losing institutional knowledge is costly, and it often takes charities a long time to get to their minimum efficient level.

So, what are the solutions? Well, they're all the usual things HR departments talk about like giving people more holiday and permitting greater autonomy. However, it also includes providing a career track and ensuring that you offer adequate compensation. Maintaining sound financial practices is essential.

Cultural Resistance
You also get some non-profits that have trouble with cultural resistance to financial investment. A lot have a “scarcity mindset” where the goal is always to spend as little as possible.

This resistance comes from a belief that most economic activity is wasteful and that it is usually unhelpful. Charities often struggle to muster the internal desire to launch elaborate marketing campaigns or interventions that are likely to make a real difference to their outcomes.

For this reason, it is a good idea to have business-minded people in the senior management team. While charities aren't businesses, they often require someone with a practical and incisive mindset to get things done.

If the rank and file are skeptical of spending, provide data to back up your decisions. Show them why it makes sense and why it should be done.

Lack Of Financial Expertise

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A lack of financial expertise (or knowledge of how money in organizations really works) can be another reason for poor money management. Some charities don't have anyone at all. Staff are spread too thin, and too focused on the operational side of the enterprise.

That's where nonprofit accounting software can help. These tools simplify the tax reporting and cash flow forecasting process, allowing charities to see where they stand.

The trick, again, is to help the organization avoid the idea that spending on financial management is wasteful. Just as in any regular business, it is an essential pillar of operations and required for long-term success.

Over-Reliance On Short-Term Funding
Another common issue is the over-reliance on short-term funding. Many charities and nonprofits live month to month, hoping that they can do enough to get through to the next funding cycle.

This hand-to-mouth practice creates all sorts of problems for non-profits. Many can't make long-term plans, and service provision is haphazard, which is downright detrimental for many projects.

Unfortunately, this problem is one of the most challenging to resolve. Often, it requires wholesale rebranding of the charity effort.

The first step is to rethink how the charity structures its projects. Many non-profits make sure that they have the money to see their current projects through the rest of their term before launching new ones. The idea is to ensure that services get provided, even if the flow of money suddenly stops.

The next step is to find regular donors or subscribers instead of focusing as much on charity fundraising events. These are less random and allow nonprofits to build up money more consistently than they would through conventional events.

It also helps to improve governance to the point where relying on short-term funding is no longer possible. Even small changes can have a profound effect.

Funding Restrictions
Funding restrictions (sometimes imposed by donors) can also have a profound effect on charities. Rules may prevent them from adjusting their spending away from programs to administrative costs.

Unfortunately, while these dictums are meant to ensure fair play, they can also hamper non-profits wanting to expand or those dealing with challenging, multi-level, complex situations.

Funding restrictions are by their nature arbitrary. But convincing those pushing them to drop them is often much more difficult than many charities imagine. Non-profits often get stuck in a low productivity rut that prevents them from reaching their targets.

To deal with funding restrictions, renegotiation with donors is often necessary. Telling them when you need to increase the expense ratio and how it will improve outcomes can help improve the money situation. Those supporting the non-profit are much more likely to accept changes if they see real movement in the ground.

Lack Of Resources
Lack of resources is another reason most non-profits run into money difficulties. Tight budgets can make it hard to actually build up the financial expertise required to run a non-profit well in the first place.

Unlike for-profit businesses, nonprofits can't raise prices to deliver more revenue for their operations. Rather, they have to go to donors, and these individuals may not understand the challenges of running a non-profit or social organization.

Again, this problem is fairly intractable for most charities. Lacking resources is a significant issue.

The best way to deal with this problem is to use triage. Only focusing on the projects with the highest return is often the best way to ensure things get done. Once you have a few of these under your belt, you're then in a much better position to go back to donors having proved what you can do.

Lacking resources can also be improved by going to the government. Public bodies may be able to offer grants to help smooth over your income during challenging times, particularly if you are providing important work for the community.

Mission-Driven
Finally, being too “mission-driven” is another reason many nonprofits are terrible with money. Always focusing on the purpose or the destiny of the organization can undermine it.

It's no secret that many people working for charities are idealistic. They want to improve the world and see voluntary support as the way to do it.

But sometimes, this desire can be at the expense of bringing in the necessary finances, leaving many projects on ice, and causing some to fail entirely. Staff and board members are more interested in their direct impact than they are on the money situation in the background.

Because of this, it is important that nonprofits think to some degree about their financial situation. It doesn't have to be all-encompassing, but there should be an ethos that encourages using money well and balancing the books. The alternative is creditors moving in and stripping the organization of assets before shutting it down permanently.