The business model of nonprofit organizations is flawed

Letter published in Cape Times, 23 May 2008.

I concede with Shelagh Gastrow (New Faces of Giving, 21 May 2008) that it is difficult for nonprofit organizations to find the funding they need to fulfill their purpose, and to sustain their operations while complying with their donors requirements.

However, it must be emphasized that the business model embraced by traditional nonprofit organizations has some fundamental flaws.

Few nonprofit organizations realize that they are competing for a share of limited funding and that in order to attract funders they need to be strategic about their approach to fundraising.

Many nonprofit organizations rely on per-project funding from their donors. These organizations often struggle to maintain a constant flow of project funding to cover their operating costs. It is a case of too many projects and their current infrastructure can’t deliver without finding additional funds to upgrade, or too few projects and the cost of their infrastructure is either not covered or is loaded into each project using up cash prematurely and giving donors headaches.

Relying exclusively on donations limits organizations’ ability to scale up operations and increase impact as their ability to do this depends on the amount of donations they’ve been able to secure. Furthermore, once these organizations have increased the scale of their operations, it becomes very challenging to keep finding the donations needed to maintain their current level of work. It can become almost counter-productive for nonprofit organizations to strive for economies-of-scale.

Reliance on donors encourages passivity and a tendency to wait for donations, as opposed to a more entrepreneurial approach of going out and selling the outcomes they create in the world.

Most nonprofit organizations fail to maintain donor’s loyalty and end up losing donors to “more attractive” causes. The “attractive causes” are those that market themselves successfully and demonstrate their social impact. I believe it is these and other factors that make nonprofit organizations struggle financially.

To safeguard their existence, nonprofit organizations should start adopting the mindset of “earning income”, even when that income takes
the form of a “donation”. Perhaps even start thinking in terms of making a financial profit as well as the social profit that they are
already making. I would even venture to say that nonprofit organizations have a moral duty to their cause to earn a financial profit in order to manage their risk and expand their work. They need to begin to embrace the concept of the “social enterprise” and discard the misnomer of the “nonprofit organization”.

How do nonprofit organizations start to earn an income?

  • They can start or invest in a social purpose business, or choose to become one themselves They can put a profit margin or markup when writing proposals or quotes, which is reasonable particularly where they are competing with businesses for contracts.
  • They can focus on raising donations from donors that more flexible about how or when they are spent. These funds can be put
    aside for strategic as opposed to everyday expenses.
  • They can use existing overheads, within reason, to generate additional income.

Nonprofit organizations can act as consultants to businesses and government. Better-equipped organizations can also manage projects or
even businesses on behalf of these organizations. There is plenty of opportunity for entrepreneurial nonprofit organizations.

Marcus Coetzee is a business strategist who helps leaders to think clearly about the future. To find out more about how he can help you, call 0828799131 or visit Marcus Coetzee.co.za.

Cultivating strategic clarity.

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