The Ever-Elusive Unrestricted Dollar
One of the biggest sources of stress and uncertainty in the nonprofit sector is ensuring sufficient funding to cover operational costs. Operational costs, or “overhead”, are all of the costs associated with keeping the doors open and the lights on in an organization: staff, equipment, supplies, rent, etc.
The vast majority of funding sought by and given to nonprofit organizations is restricted funding. The term means exactly what it looks like: funding designated for a specific purpose. And in most cases, the purpose is programmatic, not overhead. Donors are keen on supporting the mission of the nonprofits they contribute to, but in most cases this translates into support for the most visible and/or public aspects of the organization that donors see or experience: the programs. What donors, grant funders, and corporate sponsors don’t see — and therefore don’t typically want to support — are all of the other things required to ensure an organization’s programs run smoothly. Yep! The overhead.
Restricted funding is wonderful for enabling organizations to accomplish their activities and programs. It is necessary and important, and worth every ounce of energy that goes into raising it. However, restricted funding does absolutely nothing to help a nonprofit stay alive. So, you might ask…how is a nonprofit supposed to sustain its programs if it shuts down because it can’t sustain its operations??
Enter the ever-elusive unrestricted dollar. The absolute most important funding in every nonprofit budget, and the absolute most difficult funding to secure. Unrestricted funding (also referred to as operational funding) is what allows organizations to meet payroll, purchase equipment & supplies, and also build reserves for long-term sustainability.
Studies have shown that less than 20% of all funding received by nonprofit organizations is unrestricted. What does this mean? This means that organizations that may be swimming in money for their programs & activities can simultaneously be starving to death because there’s insufficient money available to cover operational costs. The inexperienced nonprofit leader might make the mistake of thinking it’s ok to move money allocated for programs to other purposes. But, don’t even think about it…that would be both unethical and illegal according to nonprofit laws and regulations.
So, what is a nonprofit leader to do? How can we manage sustainable organizations with so few unrestricted dollars coming in to support operations? Here’s a few tips from my own experience:
Ask For It. The first and foremost thing that nonprofit leaders can do to increase unrestricted funding is to ask for it. Don’t get so caught up in raising money for your programs that you neglect the need for operational support. Sure, it’s true that the majority of funders will be most interested in helping your programs thrive, but my rule of thumb is that you’ll never receive unrestricted funding if you never ask for it. So, consider broadening your approach to asking for funding. Whether you’re writing a grant, soliciting a company for sponsorship dollars, or talking to an individual donor prospect, always look for opportunities to bring operational support into the conversation. The fact is it takes a healthy organization to sustain healthy programs, so don’t be afraid to make this case to your funders.
Require It. For many small or mid-sized nonprofits, the concept of a “gift fee” might be foreign. A gift fee is the portion of a gift or grant that is assessed by a nonprofit to provide unrestricted funding for the organization’s overall operations. Gift fees (or assessments, as they are also referred to) have been around for years, and even though some contributors balk at the idea of “paying” to donate to a nonprofit, these assessments are standard practice in large nonprofits and should be far more common in small nonprofits than they are. Gift fees, which typically range between 3% and 10%, become reliable sources of unrestricted funding by forcing funders to participate in sustaining the organizations whose programs they want to support. But please, before you start carving off slices of grants and calling them gift fees, be sure you’ve established a formal Gift Acceptance Policy that details the types of gift that you will accept and the parameters under which acceptance will occur. Your gift fee should be clearly defined in a Gift Acceptance Policy, and then implemented with confidence and consistency.
Budget and Spend Wisely & Transparently. One of the primary misconceptions about unrestricted funding in the donor community is that nonprofits use it frivolously. And, I imagine this is true in some nonprofit organizations who may not have a great handle on their budgeting and spending processes. But, for the responsible nonprofit leader who wants to expand overall organizational support, there’s no better way to counteract misconceptions than by being transparent with the external community about how organizational funding is put to use. If your board is not already reviewing and approving an annual operating budget, start now. If you’re not already making financial information available to the public, either by posting your audits & tax returns on your website or by creating and distributing an annual report, make 2021 the year you start doing so. And, if you’re not sharing success stories about organizational improvements that have been made with unrestricted dollars, try it out.
The moral of the story is this: YES, unrestricted dollars are the most elusive of all funding for a nonprofit to secure. YES, they are the hardest dollars to raise yet the most needed for overall organizational health and sustainability. YES, some donors and funders are adamantly opposed to anything but restricted support. All of these things are true.
But, you know what else is true? You must put a focus on ensuring that unrestricted operational dollars are coming into your organization or simply put, your organization will not survive.
P.S.: Friends! There’s only a few days left until my Nonprofit Business & Philanthropy Chat. Thursday, Feb. 11 at 4pm (PST). If you haven’t already registered, now’s the time!
