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June 14, 2010

overhead and the nonprofit business model

(On an AirTrain flight, Logan -> BWI): If you're a nonprofit that tries to run solely on grants and contracts from the federal government and foundations, you basically can't make it work. The grants and contracts will cover your expenses for funded projects, plus an appropriate share of overhead (also known as facilities & administration costs). But those revenues cannot be used to cover the cost of grant-seeking, which is time-consuming work, especially since no fundraiser succeeds with more than one proposal in three. Also, the grants and contracts basically will not cover R&D or public relations. But you cannot run a nonprofit enterprise without spending significant funds on development, R&D, networking, and PR.

Many nonprofits survive (and even flourish) by adding profitable fee-for-service work or by soliciting private donations by mail, in person, or in annual banquets. Those are appropriate strategies, but they can detract from an organization's mission if, for example, it starts serving clients who can pay its fees, or if its energies go into private fundraising.

Overall, I think Dan Palotta is right in his book Uncharitable: How Restraints on Nonprofits Undermine Their Potential. It's too common to view all "overhead" in the nonprofit sector as waste, whereas R&D and development are treated as investments in the for-profit world. If the government and foundations want to help build and sustain institutions that do good in the world, they should be willing to pay the real cost of business, not just the itemized cost of each particular project.

June 14, 2010 8:58 AM | category: none



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