This blog is part of a series, in Part 1 we discussed a high level overview of The Non-Profit Starvation Cycle, and in Part 2 and Part 3 we discussed Steps 1: Unrealistic expectations of Overhead Costs and Step 2: Pressure to Conform to Expectations of the Non-Profit Starvation Cycle. In this post, we’ll discuss Step 3: Cut Overhead Costs and/or Under-report Expenditures.
From the previous two steps we’ve seen that non-profits are put under a lot of pressure to conform to unrealistic expenditures of grant money from funders. This overwhelming pressure leads many non-profit organizations to under-report their expenditures or cut back on overhead costs.
According to a Non-profit Overhead Cost Study, 75%-85% of the organizations were incorrectly reporting the costs associated with grant money. They also found that one in eight organizations reported no management or general expenses – none! Non-profits incorrectly report costs for several reasons, but a big reason they do is to match the guidelines set out to them by their funders – they fear that if they don’t meet the specified guidelines they’ll lose future funding. A second reason this practice has become so common is that the penalties for incorrect reporting for a non-profit are rarely enforced and are usually only put into effect if an organization deliberately fails to file a form altogether. From the non-profit organizations perspective, improperly reporting these expenses is likely to have few, if any, consequences.
Besides under-reporting, non-profits also try to conform to funder expectations by cutting overhead costs. Some of the first things cut back on are staff and staff training, updating hardware and updating software. The first issue is, by not hiring enough staff or providing sufficient training your staff get bogged down trying to learn old systems themselves while already being overworked due to understaffing. Second issue is, by not updating your software and/or hardware you are left with inefficient, usually manual, time-consuming processes.
Research shows that non-profits are reporting overhead costs of 13 – 22 percent, when actual overhead costs are 17 to 35 percent. This discrepancy in reporting versus actual is concerning. How could there be such a disconnect between spending guidelines from funders versus what non-profits really need to spend on overhead to operate effectively?
I’ll cover this in the next part of this blog post series when I discuss Step 4: Reiterate Funders Unrealistic Expectations to do more with less followed by, Step 5: The cycle repeats and slowly starves non-profits where I’ll also discuss what grantees can do about the non-profit starvation cycle.