Building Capacity is Essential

Nonprofit capacity building is one of many steps we can take to address racial equity and economic disparity. Unfortunately, nonprofits are continuously encountering obstacles that make it difficult for them to build capital, develop organizational capacity, and remain sustainable. This is Part 1 of an ongoing series on nonprofit capacity building. We will begin by contextualizing obstacles and how they contribute to inequity. Then, we will highlight an organization that has been able to navigate through Covid-19 due to its investment in systems. Finally, we will conclude our series with an overview of how to balance the sustainability of the organization with its mission. 

Nonprofit Capacity Building Funding Obstacles 

Funders often mistakenly assume that organizations are going to be able to operationalize programs with the existing organizational infrastructure that they have in place. They are not accounting for the following: 

• The start-up costs needed to train or recruit staff,  
• The costs associated with the development of policies and procedures that are needed to support the work, 
• The time and costs associated with the internal redistribution of work that must occur in an organization, and 
• How much work is involved in supervising the implementation phase of a program. 

The thinking has been in the past that nonprofits should be able to offset these costs on their own. If they can’t, then another organization with a stronger infrastructure will do so. Inevitably, the big challenge here is that there is no one else or there are very few funders who are willing to pay for unfunded administrative costs. This leaves organizations, especially smaller nonprofits, in a fix. 

Moral Dilemmas Nonprofits Grapple With

The funding structure, as it is set up now, creates significant obstacles to building the organizational systems and the nonprofit capacity needed to advance the mission of organizations in a sustainable manner. Organizations must make tough decisions when funders don’t consider what it takes to operationalize a new initiative by underfunding the scaling of an initiative, the program itself, or the administrative costs. During normal economic times, if the funding meets a need that the constituents are facing and there is no viable funding alternative, administrators are put in a position in which they must choose between the needs of community members or implementing sound fiscal practices to ensure the sustainability of their mission.

More often than not, organizations opt to take the hit by underfunding their administrative costs. Only organizations with unrestricted funding can adequately absorb these costs without having a finding in their annual audit. Ironically, GAAP violations that are reflected in an audit can make it harder for the organization to find funding or supporters in the future. This decision can ultimately destabilize an organization. In a time of crisis, as is happening now, many nonprofits are forced to shut their doors.

Investing in Nonprofit Capacity Building Is an Investment in Equity

It is easier for larger organizations to build reserves and unrestricted funds because of their years in existence and the connections they have built throughout that time. They have been cultivating big donors for years. Furthermore, those relationships began during a time when there was less competition for funding than today. These organizations also have well-established records with government, philanthropic, and government funders that are equally difficult to break into when an organization has a smaller budget or has not been in existence for decades. 

Additionally, leaders from under-represented communities of color or who do have these well-established connections with wealthy donors find it difficult to break into the funding and donor monopoly that older organizations maintain. As a result, nonprofits from under-represented communities start off their fundraising initiatives with a lot of grit, but they end up tapping into an under-resourced network of supporters. Consequently, they cannot generate the needed capital to build the organizational capacity outside of their grants, so they cannot build the capacity needed to be sustainable in the long term.

Inevitably, if funding opportunities do not integrate capacity-building dollars across the board, these smaller nonprofits and organizations led by people of color will always be on the verge of going out of business. In times of crisis, like recessions or the existing pandemic, they will shut their doors altogether. This leaves us with a brain drain and decreased community representation.   

There are many that argue that this is a positive thing because it weeds out duplication of services and it provides funding for programs that are already strong. However, the nonprofit industry benefits from the diversity of all types. Different size organizations provide multiple benefits to different constituents. Small-scale organizations are nimbler and can provide more innovative interventions to harder-to-reach populations. Mid-sized organizations are more likely to have stronger connections with communities while balancing the ability to be nimbler. Large organizations with strong fiscal and administrative systems are better capacitated to provide complex, one-stop-shop, and large-scale services in one place. However, they are less flexible and adept at innovation due to their size.

This narrative that smaller organizations should be weeded out creates funding systems that are driven by a misguided community-building approach. According to this line of thinking, efficiency has greater value than equity and functionality. The result is that nonprofits are pushed into assuming more risk than is reasonable while cementing racial and economic inequity across communities. According to Race to Lead, compared to their white counterparts, Executive Directors and CEOs of color, report smaller organizational budgets. They also do not have access to financial support from a variety of funding sources, such as foundations, government, and individual donors.  Thus, not investing in building the capacity of smaller organizations translates into the dismantling of essential social safety nets that have been built by local community leaders in the most vulnerable areas.  

Not Investing in Capacity Building Puts the Nonprofit Industry at Risk 

Irrespective of your size, all nonprofits in the third sector are vulnerable to crisis due to the fact that the nonprofit industry is fraught with risk at multiple levels. Nonprofits are constantly evolving into different iterations of themselves. Each adaptation they have to make because of new funding requirements, new programs, and shifts in their board membership forces organizations to reinvent themselves. Numerous external political, economic, and social factors over which nonprofits have limited to no control over, also force organizational change. Sadly, the end result is that the organizations that are able to withstand these ups and downs of the nonprofit cycle are the ones that have been able to invest in strong organizational systems that build capacity.

Nonprofit Capacity Building Creates Better Organizations

In our research, here at Capacity Building and Policy Experts, we have also found that organizations with stronger and more robust infrastructures are more likely to engage in decision-making that creates a better environment for employees and reflects the values that employees want to see in the organizations they work for. These include: 

• Opting out of funding opportunities that aren’t right for the organization, 
• Guarding against lowering standards of care, and 
• Less employee overtasking.

Nevertheless, vulnerability to risk is present irrespective of whether an organization has been preemptive in the creation of a robust nonprofit infrastructure or if there have been limited investments in building the capacity of the organization and the staff.

Get the Message Out to Funders

During this period of time, when funders are interested in supporting organizations impacted by Covid-19 and nonprofits are repurposing their grants or asking for operational support, it is important to communicate the importance of integrating capacity-building dollars into all funding opportunities to help build long-term resilience in the nonprofit sector. 

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