Latest / Nonprofit Launch Plan Podcast for Startup, Small, and Growing Nonprofits / Nonprofit Operations and Finances: When Fundraising Success Is Actually Hurting Your Nonprofit - The Hidden Risk of Restricted Giving
Transcript
- Matt Stockman (00:00) Let me start off with a sentence I hear nonprofit leaders say all the time. I hear this, we are raising money, we just can't pay our bills. Now, if that sounds confusing, it could mean that your nonprofit is dealing with one of the biggest challenges facing many small and growing organizations. That's too many restrictions on gifts and not enough funding for foundational behind the scenes operations. Programs are funded, the impact is expected, but your organization itself super under resourced, and you don't have the money to maintain operations. It's very common. And today I want to talk about why this is happening, why restricted giving is not necessarily the villain, and how you as a nonprofit leader can start shifting donor conversations in a healthy and mission aligned way. Welcome to the Nonprofit Launch Plan podcast for startups, small and growing nonprofits. This podcast is here to help you build your nonprofit from the ground up on a strong, sustainable foundation by providing clear frameworks and tools and real-world guidance, all the practical things you need that you can actually apply. I'm your host, Matt Stockman. I'm a nonprofit growth coach. And at Nonprofit Launch Plan, we believe that every successful nonprofit has to be operating at peak performance in six key areas in order to be successful. Those areas are leadership, fundraising, marketing, programs and services, operations, and finances. So on every episode of the podcast, we focus on the topic that is core to at least one of these six areas, helping you create lasting impact without unnecessary complexity. Now, before we dive into today's episode, if you or somebody you know is still in the dream phase of launching a nonprofit. I've got a special freebie. It's a PDF resource called From Dream to Action, your nonprofit pre-launch checklist, 10 essential steps for moving from nonprofit idea to impact. This tool will take you through 10 easy first steps to move your dream for a nonprofit toward a launch plan that actually gets your dream off the ground and gets you helping other people in solving problems in this world. This checklist walks you through your why, considering your first teammates, honing in on your beneficiary, choosing your nonprofit name, your IRS application, and a lot more. And there's an easy to do action step for each of the 10 things to consider that will bring your dream for a nonprofit into a much clearer focus when you've completed it. So if you want the free PDF from dream to action, your nonprofit prelaunch checklist, 10 essential steps for moving from nonprofit idea to impact, just email me at matt at nonprofitlaunchplan.com. matt at nonprofitlaunchplan.com or look for the pop-out on my website at nonprofitlaunchplan.com. Now, today's conversation sits right at the intersection of two of those six areas, operations and finances, because what we're really talking about is building a sustainable nonprofit that has got the right foundation to weather financial storms and to still be making an impact in 10 or 20 years after you're gone from there. So first, before we dive in, a definition. In today's episode, we're going to talk a lot about restricted gifts. Here's what that means if you've never heard something like that. A restricted gift is a donation that comes with donor-imposed rules about how the money can be used, limiting your organization's ability to apply it to general operations or emerging needs. Let me say that one more time, a restricted gift is a donation that comes with donor imposed rules attached to it about how the money can be used, which can limit your organization's ability to apply it to general operations or emerging needs. can mean money that is given specifically for stated program or an initiative. This can mean donations that are limited to equipment or supplies purchases. This can be gifts that are restricted to a certain time or a phase of work. This can be grants that exclude all administrative or operational expenses, meaning 100 % of it has to go to programs. Now, getting a restricted gift... can often feel like a win and it is a restricted gift is by no means a bad thing. And for new nonprofits in particular, it's quite a rush when you get somebody who has some capacity to give who finally gets excited about what you're doing and wants to help. They'll put restrictions on their generosity. But you're so excited about the attention, it can feel risky or even maybe a little ungrateful to push back a bit and that creates attention. The tension is this, you can't run programs without solid operations. You can't make a lasting difference in the world without solid operations. And you can't build a healthy nonprofit if most of your funding can't be used to keep the organization going and functioning. This is how a lot of nonprofits can end up cash poor while technically having money in the bank. When donors restrict gifts to programs only, what's left unfunded a lot of times is leadership time, staff administration, accounting and compliance, technology and systems, insurance, rent, professional services, strategic planning. You get the idea, right? All the boring stuff that is absolutely imperative for the operation proper. of a of those things look particularly exciting in a donor report, but every one of them keeps your mission being fulfilled and the organization headed in the right direction. Operations is not just extra overhead or waste. They are the foundational infrastructure that you need to fulfill your mission. This is the classic case of, the event that oxygen is needed in the cabin, put your own mask on before attempting to help others wear their masks. When operations aren't funded properly, because all the gifts are earmarked for a specific program or programs, you put your team at risk, and ultimately the people who you are trying to serve can suffer as well. And from a financial standpoint, heavy restrictions on gifts can create some real problems. For example, restricted funds can sit in accounts while unrestricted bills come due every month. I know of one church that has struggled financially for a long time. This is a 100 % true story. And yet they have an account with a handsome sum of money in it. I want to say it's close to a million dollars. But anyway, it's a lot, and that money was given with a specific restriction that the money was only to be used for paying for the lawn maintenance on the cemetery next door to the church. This gift was given by the family of somebody who was long ago buried in that cemetery, and obviously there's so much money in there, it will cover all the lawn maintenance for the next hundred years. And yet, the church is in danger of closing its doors. because they're not able to cover all their bills. A different version of the same sort of story happens at nonprofits all the time. All nonprofits are at risk of falling victim to it. And most of the time, it's not a financial leadership problem, it's a funding alignment problem. Why does this happen to begin with? And this is critical. Most donors are not trying to hurt your organization. They restrict gifts because they want clarity. They want confidence that their gift will make a difference. They may have seen nonprofits sort of misuse funds in the past. Restriction is a lot of times a trust issue or an understanding issue. It's not a generosity issue. And that means the solution isn't a quick one, but the best path forward for your nonprofit is trust building and education. So if this is the spot that you find yourself in, what do do? Saying yes to every restricted gift is not necessarily good stewardship. As the leader of your nonprofit, you've got a responsibility not just to deliver on the programs that you do, but to protect your organization, your people, your systems, everything that delivers those programs and those impact results. Building a sustainable operation isn't selfish, it's ethical, and it's excellent stewardship. If your nonprofit collapses under the weight of underfunded operations and not having the money in the bank to take care of the things behind the scenes that you need to take care of, the mission suffers and so do the people that you serve. and getting the offer of a six-figure gift as exciting and game-changing as that might be could mean that as the leader of the organization, you need to look seriously at what is being required should you accept that gift. And then really honestly examine if you can properly administrate it and steward that gift well. And if the restrictions are such that accepting could actually be hurting your organization by putting more stress or strain on your team, your volunteers and your operations, then they can handle, then you need to do one of two things. Either respectfully say thank you, but we're not in a position to. This time or. sit with the donor and have a heart-to-heart conversation about where your organization is at and where your concerns with taking the gift are. In other words, do some education work and some trust building. So how do we start the process of educating and building trust? Let me give you a few practical ideas. This is a process that will take time and it will be a conversation topic that you will have to revisit frequently, both internally with your team and externally with your donors. First, stop cutting corners when it comes to spending for operations. Remember, real lasting impact is possible when your team has the tools, the processes, and the foundation in place to do their best work. Don't overspend, but don't skimp out on what you need either. It can be really easy to skimp on operational things when you're really working with a tight budget and donations are just not flowing in as freely as you wish they were. But I wanna encourage you, don't skimp on this. Also, train your board about this topic and this approach and ask them to support you in this. Encourage them to speak with confidence to donors and business supporters about the benefit and the value of unrestricted gifts that can be used to fund foundational mission operations. and in all your communications, take the time occasionally to intentionally connect the crucial operational systems to the outcomes. Long time ago, one of my first ever clients was a family that was raising their own financial support to serve with a nonprofit mission organization in Africa. They had to raise all of their living expenses for a few years and build a monthly support base to several thousand dollars a month. this gentleman was an accountant and that was going to be his role in the field office in Africa. So very much behind the scenes, not really involved in the day to day of meeting the needs in the community, et cetera. So we built his entire fundraising framework based on the idea that if he was in the field office taking care of the administration of the finances and the accounting, That was saving the time of the field workers who could now be out in the villages doing the work rather than being stuck in an office filling in numbers on spreadsheets. So when we connected the benefit of solid operations to the impact of the organization, he actually got funded relatively quickly. And most importantly, you need to decide ahead of time what restrictions you can responsibly accept and which ones will cost your organization more than they're worth. This is a conversation to have with your board, not when there's a possibility of a big gift in question, because when a big gift is in question and then you're talking about it, you're naturally gonna try to figure out a way to say yes to the gift when maybe that might not be the best choice. So what if you get a call from a major donor today and they say, I've got a $50,000 gift I'd like to be generous and give to you, but there's some rules that go along with it. What do you say? Well, first, don't panic. Ask for clarification. What exactly are they saying? Ask some questions. After all, you want to make sure that you have the full picture of the situation and your curiosity actually indicates to the giver that you care and you're taking their generosity very seriously. In other words, you're building some trust. ask how much flexibility are they willing to allow and how the funds are used. For example, it is pretty customary that even with restricted gifts, those will allow for upwards of 7 % of the gift to be used for administrative costs. And if the program they are giving to needs to have operational support behind it in order to make the biggest impact, are they okay with the gift covering those kinds of costs too? Your clarifying questions are not only building trust, you're honoring the intention and the generosity of the giver, and you're actually educating them with your questions as well. Because the vast majority of people who give don't really give much thought to all the behind the scenes elements to your mission being fulfilled. So if you're engaged with a donor about a gift they'd like to make being restricted, here's a few sort of simple truths to communicate with them. Instead of saying, but we need some money for overhead, what if you said, when our operations are solid, that means that every program dollar is used effectively and responsibly. Instead of saying, would you consider giving unrestricted instead, What if you said, a gift towards operations or a gift to our general unrestricted fund allows us to respond to real needs as they are and ensures that your support has the greatest possible impact. We're just reframing the questions in a way that makes the giver the hero of the story. A theme you hear all the time if you listen to this podcast. Instead of saying, can't take restricted gifts, what if you said, hey, we're happy to have a conversation about your areas of passion. We want to honor that. We also want to be transparent about what it takes to sustain the work behind the scenes. Another example, this program exists because of strong systems and leadership and accountability. So when you fund operations, it's what allows that program to succeed long-term. These statements, they don't diminish the impact, they just help explain it and they position the giver as the hero in the situation. So if you are at early stage of building and growing a nonprofit, hear me say this clearly. You need flexibility more than you need restriction. Too many early young nonprofits build programs around restricted money instead of building funding around a clear mission and strategy. Healthy nonprofits that are going to last for a long time are built on operations that are resourced properly and that foundation protects and drives your mission rather than takes away from Even though it might feel like it is taking away from it in the short term. The goal is better aligned generosity because aligned generosity sustains your work long term. So if in some way or another, this conversation has surfaced some tension or clarity for you, that's probably a good thing. A simple next step for you is to take an honest look at how much of your funding is restricted and whether it truly matches your operational reality. And if you want help thinking through how to realign your funding model with your mission and your capacity where it is right now, that's exactly the sort of work I do with other nonprofit leaders and I'd love the opportunity to chat with you and find out more about what you're walking through and how I might be able to help your organization too. So before we wrap up the episode, again, if you or somebody you know still dreaming about launching a nonprofit, don't forget about the special freebie. It's a PDF resource called from dream to action your nonprofit prelaunch checklist 10 essential steps for moving from nonprofit idea to impact. There's an easy to do action step for each of the 10 things to consider that brings your dream for a nonprofit into a much clearer focus once you've completed it. If you'd like the free PDF, you can get it simply by emailing me matt at nonprofitlaunchplan.com, matt at nonprofitlaunchplan.com, or look for the pop out on my website, nonprofitlaunchplan.com. That's all for today's episode of the Nonprofit Launch Plan podcast for startups, small and growing nonprofits. Thank you so much for tuning in. Don't forget to subscribe so you don't miss out on future episodes. And if you found this helpful in any way, please consider sharing it with another nonprofit leader who you think might benefit. Until next time, thanks for watching and listening and keep making a difference.