Resource Allocation

What are the standards?

A common question we hear among Executive Directors is “what percentage of total expenses should be tied directly to the program?”. While asking the question illustrates that these leaders have a strong sense of stewardship to the organization’s donor base, there is not a simple answer. There are several factors that come into play; such as the type, size and location of the organization. Given the myriad of organizations that represent the nonprofit world, there is not a ‘cookie cutter’ standard that applies to all nonprofit organizations. The nonprofit sector is far-reaching and diverse, encompassing organizations that are small, all-volunteer groups that serve a local community to those that employ hundreds of employees and work all over the world. Depending on the category/segment the organization operates in, some nonprofits are highly regulated and must comply with health and housing codes or accreditation standards, while others choose to ascribe to principles of practice on a voluntary basis, driven simply out of the desire to be an accountable and ethical organization. Even if your nonprofit is not required to adopt standards of conduct, you may decide to aspire to certain principles of practice that will help your organization operate legally, prudently, and ethically.

Watchdogs- Who are they?

The IRS does a great job serving as the governing body over nonprofits. It does not, however, have a standard for the allocation of resources. Some critics of the required 990 argue that the way the questions are written yield legal requirements for tax exemption rather than best practices. Although this may be the case, the public document opens the door to charity watchdog groups. A watchdog group’s mission is to help donors make informed giving decisions. The top three groups that we have found to be the most thorough are: Charity Navigator,  BBB Wise Giving Alliance and The American Institute of Philanthropy. We will take some time going through each group and how each watchdog breaks down its methodology of ranking/ratings a specific charity. It is a worthy exercise as understanding where the analysis is coming from aides in the clarification of the allocation of resources, which is typically the donor’s largest gripe.

Charity Navigator (www.charitynavigator.org)

This watchdog has an extremely thorough analysis process. Firstly, the site breaks down each organization into a broadly defined category and then more narrowly defines its cause.  For example an animal rights group would be defined first into the category of ‘Animal’ and then further defined in the ‘Animal Rights, Welfare, and Services’ group. This provides a closer apples-to-apples comparison. Creating this breakdown is only the first step in Charity Navigator’s analysis. The site uses a rating system where it rates charities by evaluation two broad areas of financial health: organizational efficiency and organizational capacity.

Organizational efficiency focuses on the day-to-day operations. Nonprofits that are more efficient spend less money to raise more and fundraising efforts fall in line with the scope of the respective program. The organizational efficiency is gather by the analysis of the following: program expenses, administrative expenses, fundraising expenses and fundraising efficiency. Program expenses should encompass the majority of the organizations total expenses, as after all charities exist to provide programs and services. Charity Navigator simply divides a nonprofits program expenses by its total functional expenses. The higher the percentage, the stronger the ranking; however, it is important to note that having a 99.9% ratio should raise some red flags. Administrative expenses are a necessity, but can also serve as a bone of contention for some perspective donors. While it is important to recognize that successful organizations in any sector must recruit develop; and retain talented people. The salaries paid to the talented staff should be reasonable and in line with the organizations total functional expenses. Once again a ratio is drawn from the admin expenses to total expenses. The final piece of the organizational efficiency puzzle is related to its fundraising activities. It goes without saying that nonprofits must spend money to raise money. It is important to view the fundraising expenses of an organization over the total expenses to be sure a reasonable portion is spent on this area. Another key point within the discussion of fundraising is monitoring its efficiency. Charity Navigator calculates how much an organization spends to garner $1 of contributions by dividing fundraising expenses by the total contributions received.

Organizational capacity involves the sustainability of its programs and services over time. Although this type of analysis is important when painting the entire picture of a nonprofit organization, for the purposes of this resource we are focusing on the allocation of resources. Is it worth including this piece??

BBB Wise Giving Alliance

BBB Wise set up its own standard of accountability for nonprofit organizations. The group has as many as 2,000 national charities that are listed on its web site. It is important to note that each nonprofit organization provided the information voluntarily in an effort to become more transparent. In our discussions with the watchdog group, it noted that these standards were developed with professional and technical assistance from representatives of small and large organizations, accountants, grant making foundations, corporate contributions officers, regulatory agencies, research organizations and the Better Business Bureau. The group also commissioned significant independent research on donor expectations to be sure the views of the public were represented. With a wide perspective, BBB Wise has created a standard of accountability.  Organizations that comply with the groups standards have provided a level of transparency in that they meet the basic standards that the BBB requires in the following categories:

• How the organization is governed.
• How money is spent.
• The truthfulness and accuracy of representations.
• The willingness to disclose basic information to the public.

In discussing the allocation of resources specifically, BBB Wise notes several standards that apply directly. Of the standards it uses to put its stamp of approval on a nonprofit organization there are three that directly apply to the use of funds:

• Standard 8: A nonprofit should spend at least 65% of its total expenses on program activities.
• Standard 9: Spending should be a maximum of 35% of related contributions on fund raisings, where related contributions include donations, legacies, and other gifts received as a result of fund raising efforts.
• Standard 10: Organizations should avoid accumulating funds that could be used for current program activities. To meet this standard, a nonprofit’s unrestricted net assets available for use should not be more than three times the size of the past year’s expenses or three times the size of the current year’s budget.

According to BBB Wise, an organization that does not meet the above three standards may provide evidence that demonstrates that its use of funds is unreasonable. Although there may be extenuating circumstances that may place pressure on these ratios, such as the higher fund raising and administrative costs associated with a newly created organization, it is important to be aware of where your respective numbers fall, as that which is monitored has a tendency to improve.

Falling into Compliance

Now that it is clear what the standard is, many nonprofits struggle with falling into the range of compliance. The best way to get there is through accurate cost accounting. There are three categories that are important to highlight when discussing cost accounting:

• Variable costs: change fairly uniformly.
• Fixed costs: remain unchanged regardless of whether the activity level increases or decreases
• Step-Variable costs: have elements of both fixed and variable costs.  Step variable costs are costs that stay fixed over a range of activity and change after this range is exceeded.

(An in depth discussion of this can be found in our resource Cost Decision Making)

The key point is that a nonprofit should know how to properly allocate salaries, supplies, etc. while keeping a close eye on where money and resources are being spent. After having accurate and reliable cost accounting, monitoring the ratios highlighted in the watchdog groups will aide an organization’s ability to better serve its mission. Familiarizing oneself with this accounting and cost management will allow an organization to know which levers to pull to meet the standards, making the day-to-day decisions on spending qualitative spending decisions.

A True Nonprofit

The idea of resource allocation comes down to the definition of a ‘true nonprofit’ in that the organization spends everything it can on a program, a small percentage on administrative expenses without leaving any profit. This does not mean having exorbitant salaries, big offices, expensive chairs, etc. to be sure there is nothing left on the bottom line. Donors do not want to pay these items. Donors trust that when they give to an organization their money is spent directly on running the program, not buying lavish items to decorate the office. The reason this is important to address is donors want to know where their money is being spent, as they want to give money to save lives. The Giersch Group way of reporting and understanding the balance of resources is how many lives were saved or how many souls were saved, etc. At the end of the day, what a donor really wants to know is that even if an organization does not end up with money left over, is the nonprofit taking more money than it needs for administrative or fundraising purposes.

Articles for Further Reading

1. “Email Fundraising for Nonprofit Organizations: A Traditional Marketing Powerhouse” http://www.oklahomantraditional.com/Websites/oklahomantraditional/Images/Email-marketing-fundraisers.pdf
2. “Adventures in Email Fundraising” http://www.idealware.org/articles/adventures-email-fundraising
3. “Online Fundraising: A Startup Guide” http://nonprofit.about.com/od/onlinefundraising/tp/onlinefundraisinghub.htm
4. Effects of Online Service Providers for Nonprofits on Fundraising Markets: An Economic Analysis http://www.igi-global.com/viewtitlesample.aspx?id=37596

For more information, please visit the Giersch Group at http://www.gierschgroup.com/ or contact us at prosper@gierschgroup.com