In 2009, Ann Goggins Gregory and Don Howard published an article in the Stanford Social Innovation Review that changed the way nonprofit organizations and funders think about spending. They also coined a new term – the nonprofit “starvation cycle.” The starvation cycle begins with funders’ unrealistic expectations about the costs of running a nonprofit, which puts pressure on nonprofits to conform to those unrealistic expectations. This leads to reduced spending on overhead and underreporting of expenditures on things like tax forms, financial statements, and fundraising materials. This perpetuates funders’ unrealistic expectations, and ultimately results in funders expecting grantees to continually do more with less, hence the term “starvation cycle.”
Due to the extreme pressure to allocate more funds directly to programs, studies have shown that the starvation cycle results in a chronic shortage of liquidity and reserves, and a lack of investment in technology, fundraising, and employee development. These things are all necessary to successfully carry out an organization’s mission and program objectives, and as the pace of technological development continues to increase, it will become even more important for nonprofits to make the necessary investments in infrastructure and employees.
So how much should your organization spend on programs? There are no set rules regarding overhead spending, but recent reports have noted that most organizations allocate over 80% of expenditures towards programs. In their article, Gregory and Howard suggested that taking action against funders’ unrealistic expectations is the most effective way to disrupt the starvation cycle. With the new nonprofit reporting model taking effect this year for most organizations, now is the perfect opportunity for nonprofits to communicate their funding and liquidity challenges to funders via their financial statement disclosures.
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Material discussed is meant for informational purposes only, and it is not to be construed as investment, tax, or legal advice. Please note that individual situations can vary. Therefore, this information should be relied upon when coordinated with individual professional advice.