In the nonprofit business, not all money is created equal
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Jan Harada, Executive Director
The fuel that powers the engines of charity is the same as that which runs any other enterprise: money.
Nonprofit organizations, after all, are businesses. It’s true, their primary mission is to feed the poor, or heal the sick, or save the environment — all of which cost money. Just like everyone else, though, they also have to pay for rent, utilities, insurance, salaries, benefits and supplies. That also takes money — money that is increasingly tough to come by.
For most nonprofits, funds tagged for specific programs account for the bulk of the organization’s revenue. This is what buys the food for the poor, medicine for the sick or educational programs on the environment.
But these program funds rarely pay for staff training, or new technology, or program innovations, or even building maintenance. In fact, program funds operate much like pass-throughs; they help the public without providing much underlying support to the charitable organization itself. That support requires a much rarer kind of money. In the nonprofit sector it’s called organizational support, administrative funding, operational funding, unrestricted funds or overhead. Businesses know it as “working capital.”
Whatever you want to call it, it’s scarce and getting scarcer.
To understand the importance of unrestricted funds, you have to poke around in the Byzantine world of nonprofit finance. More often than not, that starts with government.
“We know that, if you look at the total revenue in the not-for-profit sector, well over half that money is coming from government sources,” says Kelvin Taketa, president and CEO of the Hawaii Community Foundation. For health and human-services agencies, that number is even higher. The bulk of government support isn’t in grants or charity; it comes in the form of inflexible contracts. Agencies like Child and Family Services and the Waikiki Health Center, for example, are paid a fee to provide services to their clients. Such fees often add up to most of the agency’s income. But again, this is money for specific programs.
While government contracts usually allow some overhead costs, they tend to be stingy and difficult to justify. As a result, the complexity of calculating overhead costs in government contracts is one of the biggest challenges nonprofits face as they seek adequate unrestricted funds. According to Norm Baker, vice president of community building for Aloha United Way (AUW), part of the problem lies in the contracts themselves. “The federal contracts vary, going from allowing absolutely no overhead,” he says, “to ‘you have to demonstrate how that overhead expense applies to that program.’” The complexity of the process tends to shut out smaller organizations that lack sophisticated accounting departments.
Baker also notes that part of the problem is in the nature of nonprofit accounting. “What is really overhead in a nonprofit is a question that’s not well-defined,” he says. “So, the talk about overhead rate is a very tricky subject. What makes the nonprofit accounting system so difficult to understand is that it’s exactly the same as the medical system.”
In other words, it’s essentially a third-party payer system — with all the complications that entails. It’s a devilish way to earn your working capital. Even for relatively large organizations, the effort that goes into accurately including overhead in government contracts is a burden.
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