When it comes to nonprofit fundraising, all donations are not created equal
In recent years, many nonprofits have experienced a surge in donor engagement — through campaigns like DonorsChoose.org and other crowdfunding initiatives, more individual donors are interacting directly with nonprofits than before.
Despite this apparent increase in donations, nonprofits nationwide still cite funding as their primary need, and many remain dangerously close to financial insolvency. The Nonprofit Finance Fund says that regardless of their current financial situation, nonprofits universally reported that long-term financial sustainability was a top challenge.
A major part of the financial challenges nonprofits face lies in the type of funding nonprofits receive, whether from an individual donor, government grant, or a foundation.
Only 20% of nonprofit funding in the US is “unrestricted,” meaning that the use of funds is not limited by the donor and is instead at the discretion of the nonprofit’s leadership to spend the donation as they see fit. When nonprofits apply for funding, they’re usually required to fill out very specific budgets indicating the expense line items they intend to use the funds for. Sounds simple, but a study by the Bridgespan group found that indirect costs, meaning those general expenses that are not directly attributed to a specific program or service line, made up between 21 percent and 89 percent of direct costs.
What every Fundraiser dreams of: Unrestricted, ongoing funding
Enter the holy grail of nonprofit funding sources: the multi-year unrestricted grant. With this, foundations or other funders commit significant capital over several years, giving the nonprofit an infusion of capital that can be absolutely transformative for an organization used to operating without any surplus. Here’s why:
- Multi-year grants have many benefits, the most obvious being increased organizational capacity, and sustainability. By having access to a pool of unrestricted funds, nonprofits are able to make more significant capital investments without needing to see immediate return, giving them the kind of runway that we’ve long understood is healthy for startups and private-sector companies, but continue to limit the philanthropic sector.
- Multi-year funding also fosters increased transparency and accountability between funders and nonprofits. Free from the burden of the application cycle, nonprofits can communicate the implementation and impact of the granted funds, and foundations can better perform good grant stewardship practices and become better partners in the implementation of new projects.
If multi-year grants are great for both nonprofits and funders, why aren’t there more of them? The biggest obstacle nonprofits face to finding and attracting multi-year-friendly funders lies in their reporting.
Funders want more data than nonprofits are able to provide
In order to ensure that their money will be well-spent, funders (from one-time donors to perennial supporters) seek indicators that the programs and services run by the nonprofit are actually making a difference in the cause they care about. Organizations like Guidestar and Charity Navigator are examples of the insatiable desire of nonprofit supporters to analyze and compare the efficacy of nonprofits, even those operating in extremely diverse geographies and addressing drastically different issues.
The top reporting challenge named by nonprofits surveyed by BDO was the “absence of a consistent framework for measuring and recording impact.” Combined with a lack of human resources to gather data and the inability to easily gather reportable statistics, impact and outcome measurement reigns as a primary obstacle for nonprofits — not just in their ability to attract sustainable funding, but also in their ability to track how effective their work is, and adapt according to what they find. The UN Foundation’s Project 8 is a great example of one of the ways nonprofits are leveraging analytics – it’s a partnership that leverages data anaytics to help predict future human and health needs.
The discrepancy between what funders ask from nonprofits and what nonprofits are able to provide is only growing. Over half (55%) of organizations indicated that their funders are requiring more information than they had required previously, making securing funding more difficult each year. In fact, more than half of funders require outcome data from their grantees, but less than 70% ever cover the costs associated with measurement, leaving nonprofits with a heavy burden of data collection and analysis, and limited funds to actually do the work required.
Nonprofits that can prove outcomes get more funding
For nonprofits that are able to successfully implement a data analysis strategy and create reports that clearly track outcomes, the funding benefits are apparent. The Center for Employment Opportunities (CEO) has made significant investments in its data infrastructure, providing them the outcomes-based evidence they needed to attract their first state-sponsored social impact bond. This report by the Aspen Institute outlines the direct relationship between CEO’s capacity to prove the effectiveness of their interventions and their ability to attract increased funding toward their programs.
If tracking and reporting data is the ultimate lever in organizations’ ability to attract better funding, where can nonprofits start? First, start collecting data. Having a centralized data repository is vital in being able to have statistically significant data to draw from, and to extract and analyze that data later on. Most nonprofit technology is a point solution, not a platform. Explore how to tell the difference.
We put together 5 Impact Reporting Tips to help advise nonprofit leaders about where to begin. Empowering nonprofits with the technology they need to catch up to the reporting needs of funders will be a slow process, but those that adapt the infrastructure and processes that make reporting more accessible will ultimately be more competitive and attractive grantees, and will be better able to implement programs and services that maximize the mission they’re looking to accomplish.
Want to think bigger? Learn how to connect the dots from your programs, to your impact, to telling your story with this Connected Nonprofit e-book.