Re-Think Fundraising: Business for Mission (BFM)

In the opening Summary of Research Findings of “Charitable Giving Report: How Nonprofit Fundraising Performed in 2012,”[i] the author(s) state: “Overall giving is not likely to increase significantly until there is sustained growth in new donors, non-profits rebuild their multi-year donor base, and overall donor retention improves.”  While overall giving increased that year, the trending is not generally favorable to a quick fix. Most of this is due to a myriad of surrounding circumstances. Blackbaud researchers also state that there is an overall decline in the number of donors, donors are aging, government support of non-profits is declining, donors and watchdogs are demanding greater accountability, service demands are rising, revenues have barely recovered to pre-recession levels, expenses are up, and the number of non-profits continues to increase.[ii]

Let’s recap some critical data points:

• Decline in number of donors
• Decline in government support
• Service demands rising
• Expenses rising
• Number of nonprofits rising

Any reasonable assessment of these points casts something of a pall over fundraising prospects looking forward.

Mitigating Factors

There are two additional considerations that create a rather staggering big picture.

Employment Issues

Add to all these a disturbing fact: the number of jobs for development directors at non-profit organizations far outstrips supply. In part this is due to the demands of the employer looking for experience with securing “large donations” or multi-year experience in successful grant writing. There are only X number of people with that experience already and, given the increasing size of the demand market (number of charitable organizations) and the traditional low wages afforded to nonprofit employees, it seems unlikely the demand will be met any time soon. Retention rates for key development staff is also a bit scary in that the average length of service is only 16 months[iii] and general staff turnover rates are somewhere between 20-25% annually (including part time staffers).[iv] The most-cited reason for leaving is for higher wages.[v] Give your employee the experience they need to move on then give their replacement goals that were even greater than last years’! Recruitment, selection, training, and human resource administrative costs associated with new hire acquisition and orientation are staggering.

Overhead Costs

The giving well is by no means running dry.  BUT: The National Center for Charitable Statistics reports that there are 1.4 million nonprofit entities in the United States. Collectively they receive about $1.6 trillion annually, of which 72% is from service fees (tuition, is a great example), 22% from contributions, gifts, and government grants, and 6% from “other income” (like rents).[vi] That means, $352 billion of revenues requires some form of donor solicitation or grant proposal. The generally accepted industry standard on fundraising costs is roughly 20%, putting the cost to raise funds somewhere in the neighborhood of $70 billion. On the upside, nonprofits supply 10% of all jobs and 9% of all wages.[vii]

Both of these – employment issues and overhead costs – add to the inefficiency of a “non-productive” industry (one that does not offer products or services at a profit, or even a financial breakeven). One has to wonder if there is not a better way.

A Modest Proposal

No, I am not going to suggest that we eat the children. But I am going to propose we look at modifying a model that already exists, just that we do it in a more direct and intentional way. Nonprofit universities have monies held in endowment funds. These funds are created to pay for specific functions of the university, such as departmental funding, specific professorships, or scholarship programs. Typically, money is donated and then invested in the stock market. A portion of the residual income from the stock portfolio (typically up to a 5% return) is allocated to pay for those functions. To endow a doctoral program at one institution requires a endowment gift of $10,000,000 which can predictably return $400,000 annually to fund two “chairs” (professorships), student scholarships, and program overhead costs. The remaining portion of residual income from endowed funds is rolled over to continue growing the fund. Of course, fund managers, usually an outside brokerage house for smaller institutions or whole internal departments in larger institutions (like Harvard or Notre Dame), are amply compensated from the residual income as well.

But the point is, these nonprofits own stock in for-profit businesses. And so can most, even if their total “endowment” is a bit smaller than Harvard’s $30 billion.[viii] While state laws differ (and I am not qualified to give legal advice in any locality), most states have a way to incorporate for-profit businesses as a subsidiary of a nonprofit or private individuals can incorporate then donate the new business’ stock.[ix]

Overcoming the “Mixed Model” Objection

When conversing with non-profit leaders, I often hear the comment, “I don’t know anything about running a business.” Nonsense. Other comments tend to be along the lines of unuttered disdain about mixing business and charity. If we understand the etymology of the word charity (fundamentally meaning kindness), there is nothing more charitable than meeting the pecuniary needs of individuals and communities – exactly what business does as it pays for everything . . . EVERYTHING . . . whether the foods we buy and the rents we pay, or tuition for our children’s education, or the gifts we give to support our local churches and food banks, and even the taxes we pay to provide public schools and roads and police protection. There is nothing more charitable than giving someone a job.

What these non-profit leaders tend to ignore is they are already operating on the same exchange-based model as for-profit business owners. They are simply operating under different terminology. Both for-profit and non-profit corporations have revenue (whether from sales, grants, or gifts). They both have expenses. They both pay salaries. They both have some objective bottom line(s), whether in dollars or other goals accomplished. They conduct marketing or outreach via advertising or awareness campaigns and appeals to generate their revenue and to offer their goods and services to targeted customer demographics or “clients.” They both deliver goods or services to their communities. The “business” models look very much the same when you break down their tax returns and reporting to the IRS, whether an 1120S or a 990. The operating principles involved are universal. Even households operate fiscally on this same model: income, expenditures, objectives.

To move away from the idea that non-profits should not “become businesses” or be in business, I prefer to introduce the idea that all institutions – whether for-profit, non-profit, religious orders, families, hospitals, universities, you-name-it – operate on the same exchange model. That is, every institution serves defined purpose(s) and tends to serve it / them in ways that are more similar than dissimilar.

Advantages of Non-Profit Ownership of Businesses

When Wal-Mart comes to a small town, everyone is excited that they will gain access to a broad range of products at low prices. They buy into a value perception that, in the long run, does not hold up.[x] Small businesses, owned by local non-profits, offer several advantages to the non-profit and its immediate community.

Local Impact

The three greatest impacts of local business ownership by a non-profit are local control as to how the business profits are spent, local job creation (especially living wage jobs in management and production roles), and capital retention (money staying in the community longer to fund more local charitable work or to fund greater local economic development). A small business owned by a local non-profit benefits from the vested interest of the community (as well as the highly interested non-profit board and staff) in seeing the business succeed as it provides jobs, tax revenues, goods and services, and charitable funding simultaneously.

Wal-Mart – Item 1: A new Wal-Mart in a small town tends to replace dozens of the living wage jobs of local business proprietors with just two, the Wal-Mart store general manager and the pharmacist. Non-profits owning small local businesses can help stabilize local living wage job markets.

Financial Impact

As noted above, the average cost-of-fundraising nationally is 20% of revenues. That means that one of every five dollars that comes in the door is spent to go find the next five dollars. With the revenue stream of a business flowing in the door, the non-profit can eliminate this expense. Business profits can be paid in monthly dividends directly to the charitable organization, tax free and with no labor overhead or office expense attached. In effect, the fundraising staffers are middle men reducing the efficiency of resource utilization of the non-profit.

The other middle man who can be eliminated is the broker managing the stock holdings, the endowed funds typically invested in a stock portfolio and spread across diverse companies, of the non-profit. A sub-committee of the non-profit board can be established, especially utilizing those members from the business community, to coach, generally monitor, and inform strategic decision making. It is best if this group is heavily weighted toward those who have started or own small businesses. Corporate types can advise larger businesses on the specifics of their specialization but tend to not fully understand the multifaceted role of the entrepreneur / small business operator.

Wal-Mart – Item 2: The capital grown from business profits, previously spread over many small local businesses and spent or re-invested in the local community, becomes a capital drain as the profits of the Wal-Mart are siphoned off to Bentonville, Arkansas where corporate executives make big salaries and the charitable choices of giving back are made at long distances from where the money was actually earned.

Market Fluctuations

When the market collapsed the first time in the early 2000’s, I was working for an academic institution. Almost overnight, the value of their endowment, held in a traditional portfolio and managed by an outside firm, dropped by something on the magnitude of $40 million dollars, a full third of the portfolio value.

Local non-profits, buying existing or creating new small businesses, can pick and choose businesses that tend to be recession proof, or at least recession resistant. Stock portfolios tend to follow the overall market but some businesses are relatively immune. Thrift and resale stores (and discount retailers like dollar stores) serve a charitable function as a viable alternative for those in lower income classes. During economic downturns, thrift stores tend to thrive as a broader range of higher income clientele resort to higher value / discount purchasing.

There are several other categories that would be among the best choices to protect cash flow / non-profit revenues against market fluctuations. People always have to eat. Grocery and cooking-related businesses tend to hold their own. Food is always in demand but as people spend less to eat out they will look for specialty foods and even cooking utensils and classes to fuel their new found draw to cooking at home. Healthcare, including long term care for the elderly, is a stable model. And there are many other products and services – gasoline, auto parts and repair, used cars, accounting services (including tax preparation, bookkeeping, and payroll services), childcare, computer repair, funeral services – that do not suffer the demand losses of other products – fine dining, luxury items, real estate, etc. – during economic downturns. Surprisingly there are some businesses that weather recession better than you might expect that may not come instantly to mind – donut shops, discount movie theaters, laundromats, and waste collection services.

With local charities invested in local businesses, appeals to the community can even be made to support these businesses during economic downturns and “donors” turn into customers who get tangible value in return for doing business to support the charity.

Conclusion

Any fundraiser can tell you that fundraising is getting more and more difficult every year. The limited pools of funds and donors available for appeal are faced with the ever increasing awareness of far greater needs than can ever be met and more hands out standing at the door. Many major donors, whether individuals or foundations, have already targeted where their giving is going to go. They too suffer portfolio depletion during downturns and giving drops substantially.

The best hedge against the shrinking pools and increasing demands is to create new wealth, generate new capital, and add to local job pools. Non-profit operators, especially churches, have yet to actualize and empower the multitude of gifts, talents, and resources sitting every week in the wings waiting for the opportunity to be more than just a checkbook to fund charitable activities. Business people want to be involved, have much to give in time and talent, and could possibly be the best long term solution to the crushing charitable needs of a broken world.

Work and exchange (business) were designed into creation as blessings and even divinely defined characteristics of what it means to be human. The Church especially has the opportunity to witness to the world that profits are not evil but can be intended for good. Rather than funding exotic mansions, vacations, and high fashion, business profit can be redirected to serve God and humankind intentionally by creating business ownership and management under the auspices of non-profit charities. Small business investment in impoverished areas, whether domestic or global, will also prove to be the smartest “aid” in the decades to come.

[i] MacLaughlin, Steve, presenter. “Charitable Giving Report: How Nonprofit Fundraising Performed in 2012.” Charleston, SC: Blackbaud, Feb 2013.

[ii] Chardon, Marc and Hal Willams. “The Imperfect Storm.” Charleston, SC: Blackbaud, Aug 2012.