General operating funds, admin expenses, and why we nonprofits are our own worst enemies

Jun 4, 2014

From Vu Le’s blog Nonprofit With Balls



This week I was on an NDOA panel to discuss the importance of unrestricted funds. I was there with another nonprofit leader as well as two funders, and all of us, everyone in the room, agreed that general operating funds are awesome. General operating funds are like Tyrion Lannister of Game of Thrones, or Darryl Dixon of The Walking Dead, or, you know, Sophia from The Golden Girls: It is flexible, it is adaptable, and that’s why it gets stuff done.

For years I have been railing against restricted funding to anyone who would listen. I wrote a piece imagining what it would be like if a bakery ran with the same funding restrictions as a nonprofit: “I need a cake for some gluten-free veterans. I can pay you only 20% of the cost of the cake, and you can only spend my money on eggs, but not butter, and certainly not for the electricity; you have to find someone else to pay for the oven’s electricity. Also, you need to get an accounting firm to figure out where you’re spending my money, but you can’t use my money to pay for that service.” (Read the full post: “Nonprofit funding: Ordering a cake and restricting it too“).

It has gotten ridiculous: “We’ll pay for wages, but not payroll tax. We’ll pay for payroll taxes, but not food for the kids in your program. You can use these funds to hire tutors for your program, but you can’t pay them for hours they spend on lesson planning.” The amount of time and energy we nonprofits spend trying to figure out which funder is paying for what part of which program under which phase of the moon could be better spent actually helping people, improving outcomes, expanding programs, etc.

We nonprofits all know how crucial flexible funding is. Luckily, a few funders also get the importance of focusing on the outcomes and allowing us nonprofits the flexibility to do our jobs, because at the end, what really should matter is how good the cake is and whether the gluten-free veterans are happy with it. This allows the bakery to thrive and to focus on making more and better cakes. For my own organization, unrestricted funds have rescued more than a few great programs that restricted funds would have unintentionally helped destroy.

“Is there a trend toward more unrestricted funds?” the moderator asked, to which a funder on the panel replied, “There is certainly more talk. But little action.” Everyone looked sad. I ate my roasted vegetables and charmoula sandwich in silence.

Here’s the thing, the funding power dynamics make it very difficult for us nonprofits to be able to provide feedback or pushback. We can’t bite the hands that feed our clients. But funders who don’t get it are only a part of the problem. We nonprofits ourselves are unintentionally our own worst enemies. Even the most well-intentioned of us say and do things that perpetuate this myth that overhead is bad. We can’t expect funders and donors to support administrative expenses when we unconsciously demonstrate a disdain of it also. We must own our part of the problem and be a part of the solution. The revolution must start with us. After talking with the other panelists and consulting with nonprofit warrior (and my boss at Blue Avocado), Jan Masaoka, here are things we need to do:

Stop saying “100% (or 98%, or 95% or whatever) of your donations go into programming.” This usually happens at annual fundraising events during the raise-the-paddle or fund-the-need part of the event. It implies that programming expenses are good, and anything else is no good, very bad, like funding terrorism or buying rocks to throw at the elderly or something. I recommend not saying anything at all. It should be obvious that 100% of donations are being used to support the organization and its work. Or call out the importance of funds to support infrastructure. We need to stop reinforcing donors’ philosophy that only program expenses are legit. The next time you attend a fundraising event that says “100% of your donations…,” forward them this blog post. Or, raise your paddle and then loudly proclaim, “I want my donations to support administrative expenses!”
Publically recognize funders who support general operating funds. There are some awesome funders who support unrestricted grants. But they are outnumbered and sometimes looked at funny, like that kid on the playground whose family does not own a TV (“Haha, Timmy’s family reads books and plays board games together after dinner. Weirdos!”) We need to frequently and vocally recognize them. The more we do it, the stronger their influence on their peers will be. These are our strongest allies, like Unmi Song of the Lloyd A. Fry Foundation or Paul Shoemaker of Social Venture Partners. Call them out at your annual event. Say something like, “We want to provide special recognition to XYZ Foundation for understanding the importance of providing general operating funds. Without unrestricted funds, our organization cannot run its programs.” Speaking of this, I want to recognize VFA’s funders in this area, Social Venture Partners, the United Way of King County, the Seattle Foundation, and the Medina Foundation, without whom we would not have been able to serve the thousands of people we have been serving. Seriously, my organization, VFA, would not be where it is without your support all these years. (And heck, this blog wouldn’t exist).
Stop using the term “overhead” or “indirect.” We need to change these crappy words and phrases with all the negative connotations. “Overhead” sounds like something you want to remove from your face: “Blemish-B-Gone, guaranteed to get rid of blackheads, whiteheads, and overheads in just three days and keep your skin looking youthful and radiant.” “Indirect expenses” also sucks, since it implies that these are wasteful, unnecessary spending not directly related to programs. Even “administrative expenses” has developed a negative connotation. From now on, in all our annual reports and in general, let’s call it “critical infrastructure” or “core support” or “Things We Need in Order to Do Our Jobs and Make the World Better Dammit” (TWNODOJMWBD)
Stop artificially deflating numbers and apologizing for percentage spent on critical infrastructure. Really, your organization only spends 10% on core support? This number depends on your definition of these various categories, as well as how clever your bookkeeper and Treasurer are. We all spend a lot of time allocating rent, insurance, fundraising, and other “non-program” expenses across different programs. And we should spend some time, since they are necessary to run those programs. But if they can’t be neatly allocated across programs, just record accurately and move on. There are more important things to do than relearn algebra and calculus so we can reduce our percentage. The more we time we spend competing with one another to see who can have the lowest percentage, the more we as a field lose. It sets unrealistic expectations among funders and donors. If anyone asks why your admin expenses are 25% while so-and-so organization only reported 15% on their annual report, just say, “There is no standardized way to calculate admin expenses, so the comparison is meaningless. Plus, we strongly believe that investing in critical infrastructure like staff development leads to much better outcomes.”
Stop seeking the approval of charity watchdog organizations like Charity Navigator, Charity Watch, and Better Business Bureau/Wise Giving Alliance. I know, they just released a joint letter debunking the Overhead Myth, which is great and very timely. But until they figure out a way to accurately measure organizations’ effectiveness, their rankings are misleading and distracting. Do not waste time and funding trying to get their seals of approval. I hear from Blue Avocado that if you want a “BBB Accredited Charity” Seal, your organization has to pay $1,000 to $15,000 a year. THAT, ironically, would be an indirect expense, and anyone who pays for this seal with donors’ money should be hissed at with much scorn and derision.
Write in a line-item for reserve funds in your organization’s operating budget. How much you need varies from organization to organization (maybe start with 5 to 10% of your revenues). But the presence of some reserves protects our organization, especially when the nonprofit funding system is so nebulous and unstable. Build in a line for reserves, and if anyone whines about it, explain why it’s important and ask them to support it or else to stop asking about sustainability.
Push back, and be willing to lose a funder. We have to take more risks, you guys. Sometimes, telling the truth or refusing to break down our expenses and forcing people to focus on outcomes, or refusing to accept funds to do things that would ultimately cost us more than it brings in revenues, may cost us a funder or donor, but this short-term sacrifice may be far better for our organization and for our sector in the long run.
For too long, we nonprofits have been fuming during happy hours about restricted funding. It is frustrating that people don’t understand how critical things like rent and insurance and electricity and computers and professional development and staff time are to our mission. It is insulting that people think we nonprofits would run amok and buy gold-plated business cards encrusted with Swarovski crystals if left unchecked (that’s ridiculous; we all know that those crystals would scratch up our smart phones). It is annoying and sometimes aggravating having to constantly figure out who is paying for what. But we can no longer just fume among each other and with a few funder allies. I’m looking forward to a day when all funding is unrestricted and we can all just focus on outcomes and impact. But in order to get there, we ourselves need to stop perpetuating donors’ and funders’ propensity to restrict funding. It’ll be tough. Like Sophia from the Golden Girls says, “Fasten your seatbelt, slut puppy. This ain’t gonna be no cakewalk!” But we’ll get there if we do our part and keep at it.