Myth #2: The 80/20 Rule is nonprofit wisdom

That is false

The Stanford Social Innovation Review calls this “The Nonprofit Starvation Cycle.” 

The myth of 20% spent on overhead comes directly from the CRA requirement (the charity law has had a substantial overhaul) with a disbursement quota of 80% to program. For decades charities have been dancing around that number, doing mathematical gymnastics to whittle their overhead (administration and fundraising) under 20%. In my past life, my job as creative director was dissected project by project to determine what parts contributed to education, communications and fundraising. 

Charities have nurtured and perpetuated this myth, comfortably doing the gymnastics year after year to prove to their supporters they are responsible stewards. Some have taken the leap into promising the donor that 100% of their donation is used to support program. These organizations, like Charity Water, raise specific donations from investment donors who allocate their donation specifically to administration, fundraising and communication. Your donation is tagged as administration free.  Most donors do not have the financial acuity or desire to actually figure out what that means, but they love it! 

Don’t get me wrong. You should be doing EVERYTHING you can to budget wisely, sustainably and with stewardship as your top priority. But you are wasting your donor’s money if you don’t steward their support, track financials accurately and evaluate program. 

I sat with the president of a private collage. He opened his computer to show me a video of the college. The laptop had definitely seen better days. The screen dangled precariously on one hinge. He spent about three minutes twisting it back and forth slightly to catch the electrical connection to light up his screen. About one third of the key caps were missing. 

When I asked him why he didn’t replace his laptop, he shared his philosophy of stewardship. Which, as it turns out, is to work inefficiently with the “best” discards he has. 

How much time does he waste in a day futzing with the broken machine, eking out its final currents? 

The scarcity model does not create a better nonprofit. It creates gaps, inefficiencies and serious loss of impact. 

But the reality is that charities annually augment the myth by twisting themselves into pretzels to make sure their annual report maintains the magic percentage. 

BUT… 

What if you spent 2% more and raised 50% more funds? 

I don’t want you to go crazy with the budget. You need to build a budget that grows your revenue – that’s what fundraising is all about. The balance of percent spent and revenue raised is very important. Like any business, there are times when the outlay of capital results in optimization of business costs and a long-term gain. 

When a nonprofit tells me they are going to reduce their mailing to save costs, I ask questions. While digital is efficient and does raise significant funds, especially in emergencies, it has no where near the power of mail, phone or in-person fundraising. When a nonprofit tells me they are going to cancel their direct mail program and replace it with email, I shudder. They will lose significant money. A few weeks ago a consultant phoned me to tell me she had to rejig a client’s fundraising plan because they didn’t have the money to do a mailout. 

When I looked at their numbers, they didn’t have the budget NOT to do a mail out. 

Your building, your website, your staff team, your donor management software all require an outlay of expense for long-term success. 

Successful non-profits play a long game. 

This past winter we’ve been mentoring a small – and I mean really small – non-profit. They have this amazing vision to open the doors to science and math education for kids in Ghana. And they are doing it with a total shift in educational approach. They are moving the desks aside and giving kids a hands-on experience with STEM (science, technology, engineering, math). They are preparing children for real-world experiences on the power of change. I love that they are changing the future for kids. 

They are a lean, mean machine, nickels grinding together in impossible budgets. 

But this year they did something they had never done before: they began to ask people for money (fundraising). They doubled their revenue. It’s still a weeny, teeny budget – but they doubled the power of work they could do in Ghana. More than that, they opened the door to big dreams. 

They dared to steward their small budget to include donor communication, staff and fundraising. And they came up winners! You see, they began to realize that when they invested wisely in activities that grew their donor support, they were able to expand their reach. Today they are looking to expand their program beyond Ghana – because they are growing!

In the past months I have been working with a client to write a book on philanthropy. One of the things we have been researching is the vision of major donors. It’s awesome to see. But the one thing that showed up over and over was the power of multiplication. Not one of the major donors gave out of their need, they gave out of their bounty. AND, most importantly, they made sure their asset base had the power to multiply even more by investing wisely. They used their money to make more money so they could do more good. 

It’s an amazing story of plenty! 

On the other hand, a small social service agency shut down most of their fundraising activities because they were cash strapped. So instead of stewarding donors, they clamped down. It makes me sad. The good work they are doing in their community may completely disappear because they are not investing in donor “stewardship.” (note: I define stewardship as growing donors’ investment in your cause, increasing their gift levels, interest in the issues and building their trust in you.)

The CRA recognized that the 80/20 rule was a myth—now charities need to catch up. We need to re-educate donors to look for impact: WHAT is my donation doing, not how much did you spend. It’s going to take years to reorient donors. In almost every donor survey we do, we have donors saying something like: “We prefer to give our donations to organizations that spend 15% or less on overhead.” 

I look forward to the day when donors say: “We look for organizations who have a powerful impact!”

Stewardship of financial resources and donors is critical to build a strong and healthy nonprofit. Nonprofits need to shift their emphasis on cost to outcome. Sadly, too many do not specifically articulate the outcome. Without defining success, they are unable to communicate impact. Sometimes I ask organizations what their goal is. Too often they laugh a little uncomfortably and tell me it depends what donors give. That’s crazy. The donor doesn’t understand the depth of the program like you do. It’s your role to educate them in positive communications. 

Overall there is a wide discrepancy in the way organizations report their costs/revenue. Larger organizations have more leverage to play with the numbers, creating that cost/program expenditure graph to meet donor’s expectations. 

Telling your donors the truth will not inhibit your relationship with them. They are asking for transparency. As communicators/fundraisers, it’s our job to tell the story of your work in ways that inspire donors and supporters. They are looking for a cause they can invest in. 

If you'd like a myth debunked let us know. Or talk to us here...we'd love to know what you think!

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