Nonprofit Funding Model Shortcomings

How to create the ideal nonprofit model is one of the most discussed and analyzed areas in the nonprofit field. There are varying perspectives regarding the best approach to engage in fundraising and achieve sustainability. For example, some development experts will advise nonprofits to, “Think like a business”. Unfortunately, this advice does not take into consideration the hybrid characteristics of the nonprofit corporate structure, where nonprofits have characteristics from both the private and public sectors. 

Others recommend that the nonprofit funding model should be diversified, especially when organizations are primarily reliant on government funding. Regrettably, there are currently no funders that have stepped up to replace government resources. Furthermore, there is a growing body of literature from researchers that suggests that nonprofits that diversify funding often don’t increase the amount of funding they receive. Instead, they merely shift their resource-gathering efforts to securing other sources in similar amounts.

Other researchers suggest that nonprofits should fundraise according to one of the 10 fundraising models that are most aligned with their specialty.  There are also consultants that advise nonprofits to focus primarily on pursuing donations from private donors. However, private donors who can provide large gifts take years to cultivate and are very difficult to find. 

Nonetheless, in a  study conducted by Paulina Alvarado Goldmanfrom Capacity Building and Policy Experts, LLC, and Rider University, nonprofits identified the following characteristics as essential in an ideal nonprofit funding model for programs: diversified funding, multiple-year contracts, flexible funding that adapts to changing circumstances, and unrestricted funds that allow organizations to adequately cover all costs. 

Nonprofit Funding Model Strategies

Below are some fundraising strategies many nonprofit organizations pursue when developing their nonprofit funding model: 

• Entrepreneurial ventures (e.g., flea market, selling products, kitchens, marketing, etc.), 
• Foundation grants, 
• Government grants or contracts,
• Corporate foundation grants, 
• Investments, 
• Endowments, 
• Legislative funds,
• Private donations from large donors, 
• Pledge drives, 
• Events, 
• Purchases of products with a portion going to the organization, 
• Inheritances, and 
• Endorsing products and giving the logo

Misguided Accountability Measures

Many funding sources have integrated into their nonprofit funding models accountability systems that are fraught with fundamental misunderstandings about the nonprofit corporate model. Some of these misguided policies that private, public, corporate, or philanthropic funders, impose through contracts, guidelines, procurement policies, and/or fiscal manuals include, but are not limited to the following: 

• Placing limits on the types of organizations that can compete (e.g., only organizations with the programmatic and fiscal infrastructure can compete); 
• Placing limits on eligibility requirements to programs so as to limit the number of people who can be served;
• Placing caps on administrative or programmatic costs;
• Placing caps on the implementation time frame of interventions for complex social and economic issue;
• Eliminating the types of eligible costs a government agency/ funding source will pay for (e.g., administrative costs, utilities, space allocations, administrative salaries, materials, etc.);
• Placing conditions on reimbursements for work that has been completed (e.g. submit documentation, proof of work, receipts, sign-in sheets, case notes, reports, etc.); and
• Placing cost sharing expectations on nonprofits, such as the absorption of start-up costs, training for new mandates and mandated software, and absorbing the rising costs of various types of insurance.

Consequences of Well-Intended, but Misaligned Nonprofit Funding

Many of the accountability measures found in nonprofit funding models actually undermine the infrastructure of the organizations they aim to support. They do so by wearing away at the internal controls of the organization and often create counteractive circumstances that foster the kinds of problems that funders are trying to prevent. 

In the same study conducted by Paulina Alvarado-Goldman in 2017, some of the unintended consequences of the misaligned accountability measures in nonprofit funding models include, but are not limited to: 

• Nonprofit managers and workers are impeded from maximizing the benefit to clients, which results in disparities across programs and services;
• Funding goes to programming, but there is insufficient funding for administrative costs like “keeping the lights on”;
• Cumbersome reporting requirements by government funders are too resource intensive; 
• Costs to cover meeting the regulatory requirements are not fully covered, which cause cash-flow or liquidity issues;
• The organizational infrastructure that protects nonprofits from financial mismanagement is undermined;
• Financial instability forces some nonprofits to eliminate services, and, in some cases, service providers for entire regions have closed down;
• Nonprofit boards and leaders are forced to triage priorities with respect to their employees and quantity of services; and
• Nonprofits struggle to align their cultural norms and values with providing services and remaining fiscally solvent.  

For more articles that discuss insufficient resources to cover all nonprofit expenses, please look below.

Ideal Nonprofit Funding Model

The study also found that nonprofits believe an ideal nonprofit funding model for programs includes diversified funding, multiple-year contracts, flexible funding that adapts to changing circumstances, and unrestricted funds that allow organizations to adequately cover all costs. They attributed their recommendations to the following management and service delivery issues that nonprofits currently grapple with:

* Multiple-year grants that afford organizations the ability to work without having to worry about fundraising and with greater stability and continuity;

* Funding should be continued for existing programs instead of being defunded because they are not new initiatives;

* Funding should be available to fully-fund operating costs to ensure optimal services and prevent cash-flow issues;

* The ideal mix would be government and private money, which would allow for initiatives to be supported, when funding sources dry up; and

* Funders should manage funded projects with flexibility, rather than rigid micromanaging, which can hamper service deliver.

Nonprofit Funding Collaboration Framework

Nonprofits noted that an ideal funding model could be achieved through more collaboration, coordination, and communication with nonprofits on funding formulas, operationalizing programs, measurement outcomes, and the reporting that is needed. Other strategies that were identified in the study include:  

* Sufficient flexibility during the program implementation that allows service delivery to adapt to changing circumstances;

* Outcome measurements should be realistic with respect to the time frame it takes to solve a social issue; 

* Research grants should be made available beforehand to ensure the viability of an initiative and to engage in better planning;

* Funders should tap into the expertise of nonprofit professionals to ensure a better design of funding parameters; 

* Grants should fund entire programs;

* Nonprofits should not be asked for matching funds because they drain the little resources they have; and

* Best practices identified by funders should be shared with nonprofits through webinars and events.

Conclusion

Existing nonprofit funding models with misguided accountability measures can negatively impact organizational infrastructures and inhibit nonprofits by undermining the systems that protect against financial mismanagement and corruption. Funders that shift towards a more collaborative design framework with nonprofits would allow organizations to better focus on their missions, rather than devoting so much time to ensuring liquidity and sustainability. 

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