Report: Nonprofit “Starvation Cycle” Driven By High Program Spending

The need to keep a overhead expenses low, even with significant revenues coming in, remains a major pain point for nonprofits, according to a new report.

In Nonprofit Standards: A Benchmarking Survey  (opens in a new tab), the BDO Institute for Nonprofit Excellence reveals that, on average, 77 percent of nonprofits’ total expenditures go to support programs and services. It notes that Charity Navigator made a comparable finding  (opens in a new tab) that 70 percent of nonprofits spend at least three-quarters of their revenue on services.

“This type of high programmatic spending could mean that organizations are underfunding necessary infrastructure—new technology, employee training, and fundraising expenses—a phenomenon known as ‘the starvation cycle,’” the report says. “The prevalence of restricted donations could also be a contributing factor tovthe high program-related spending.”

At the same time, many nonprofits struggle to maintain sufficient reserves. Nearly a quarter of the 100 nonprofit organizations surveyed have less than four months of reserves available, and about 60 percent have a year or less. Larger nonprofit organizations generally have less robust reserves than their smaller counterparts. BDO noted that holding six months of reserves is generally considered “a prudent target.”

Upper-midrange organizations (those with revenues between $25 million and $75 million) are most likely to report challenges with liquidity, with 33 percent designating it a moderate or high challenge. That’s compared to a quarter of large organizations (with revenues above $76 million) and just 10 percent of smaller organizations.

BDO noted that organizations have different needs and should adapt their spending pictures accordingly.

“While organizations are under pressure to minimize overhead and prioritize programmatic spending, more isn’t always better, and the ‘right’ level of spending varies greatly by organization type,” the report states  (opens in a new tab) [PDF]. “Falling on either end of the spectrum—underfunding or over-allocating—can both be causes for concern.”

Other areas covered in the report include governance, board management, operations, employee satisfaction, and fraud management.

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