Do The Opposite?
Some might say I’m contrarian. Some might be right. In keeping with what some people think, try this on…
Charities need,
- More debt
- Less revenue diversification
- Less leanness (i.e., they need bigger reserves)
- Higher overhead
This isn’t contrarian for the sake of it. Consider that the opposite of what I’m prescribing is (more or less) the recipe the rating overlords (Charity Navigator, Charity Watch, BBB Wise Giving) recommend. You’re almost guaranteed high ratings if you have less debt, more revenue diversification, more leanness and lower overhead.
Said nobody ever, “Gee, I think I’ll start a charity to make a difference in the world and my path to success will be matching the fiscal probity of watchdogs and regulators”.
You know what else you get if you put your charity on the path to fiscal leanness?
A hell of a lot smaller impact on your mission.
Researchers used data from 1982 to 2012 and compiled from various IRS sources comprising roughly 130,000 charities to affirm this contrarian view. More specifically,
- Having a higher overhead generates 15% more program spend over 10 years. It’s true that the first few years of more overhead show a negative impact but this trends to flat and then big, positive returns from more overhead.
Major Takeaway: Minimizing fundraising ratios leads to inefficient revenue generation, which in turn has a negative effect on program spend.
- Having less revenue diversification results in 17% more program spend over ten years. It turns out chasing individual donations, grants, member dues, program service revenue and corporate dollars is hard to do well.
Major Takeaway: Your charity probably isn’t big enough to specialize in lots of different funding models. Pick one or two and excel at it, you’ll make more money in the long run.
- Maintain above median level reserves yields 32% more spending on programs. The initial effect in the first few years is negative, almost by definition. But, the upside is significant as retained profit (i.e., reserves) allow nonprofits to expand service delivery or grow infrastructure.
Major Takeaway: A dollar under a mattress is useless and there are a tiny sliver of really rich charities with massive reserves and absolutely no plan to use it other than to grow more reserves. These groups should be publicly shamed and have their status revoked. However, the vast majority of charities grossly underinvest in themselves with reserves. Putting today’s dollar into program may seem noble but it’s wildly short sighted if that same dollar could be invested in the business to permanently shift your capacity to do more up a notch.
- Having an above-median interest expense ratio contributes about 11% to program spending over 10 years. Debt is often good.
Major Takeaway: The vast majority of charities have no debt on their books. They think this is a good thing. They’re wrong. It’s odd since every single board member and senior exec runs their personal household with debt to finance their house, car, boat, whatever. Debt is using other people’s money to grow.
Heck, really rich people and those in finance don’t even call it debt, they call it leverage. Leverage is good. It’s gets you where you want to go much, much faster. This is what UNICEF did that Roger wrote about on Wednesday.
Kevin
5 responses to “Do The Opposite?”
Behavioral Science Q & A
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I love this, and it’s so true. It reminds me we often act with a lot of common sense in our personal lives. Our board members act with common sense in their professional lives. We know about debt, and taking considered risks in our portfolios in order not to stagnate, and investing in education, and saving for a rainy day or future big purchase… and so on. Yet, somehow, when we cross the threshholds of our nonprofits we tend to immediately take off our common sense hats. Too many years of having the overhead myth and starvation complex drilled into us, not to mention the way the charity overlords rate us (I had a big argument with them about this early in my career, but it was like talking to a brick wall.) Anyway… thanks for always bringing such clarity. And for all your common sense!
Thanks Claire and Bob for the comments. I’ll amplify the Walmart adage by citing a Walmart competitor, Dollar General. This is one of the more profitable, multi-billion dollar, private companies in the US. Their strategy for success was multifaceted but all of it was doing the opposite of Walmart. For example, the founders (brothers) location strategy was “we’re going to be where they ain’t”. The ‘they’ in this case was all the big, huge footprint, box stores (Walmart and Kmart). Their footprint is much smaller and these stores are found in low density (rural) settings. They have a fraction of the skews of a Walmart.
Doing the opposite of success isn’t failure, it’s often a path to greater (or different) success.
Kevin you have hit on a great topic. My emphasis, is these self appointed regulators established standard for nonprofit completely out of thin air. Again, nonprofits face possibly well meaning men and women who limit opportunity for growth. Educating your Board and America of the irrelevance of these organizations gives you the opening for your suggestions.
Board members are taught nonprofit enterprises are “different” and should be treated “differently” No they aren’t they are businesses that provide valuable services to their constituents (customers). Sam Walton taught me 30 years ago, when everyone is moving in one direction, OPPORTUNITY frequently lies in the opposite direction. If we are smart we are fundraising we are assembling resources strategies. Look what happened to KMart???
In individual or donor terms:
Good luck ever owning a house, if you commit to zero debt.
The public pressure on organizations to not spend a dime on investment or staff or administration is HUGE. At least the conversation has started to make the case for nonprofits investing to advance their missions, but donors ultimately still want $8+ of their $10 gift going to program expenses…
Kevin, I’m always looking to cite the research. Could you please share the studies. I know the 2007 study from Bridgespan “How nonprofits get really big.” It showed then that diverse income sources were not the revenue model of the organizations that had grown to over $50 million from being founded after 1969 (to blow up even more widely held beliefs, individual income was the primary source of funding for only 6% of those charities.) https://www.bridgespan.org/bridgespan/images/articles/how-nonprofits-get-really-big/How-Nonprofits-Get-Really-Big.pdf I’d love to get my hands on newer studies.