Charities following widely accepted norms for nonprofit financial management generally perform worse than those embracing other approaches. This is the main – and maybe surprising – finding of a new study which i conducted with Thad Calabrese, another nonprofit management scholar.
We analyzed data spanning more than 30 years from 4,130 charities engaged in from arts and culture to health insurance and education. We reviewed only nonprofits that received the vast majority of their income from donations. The charities we studied were relatively large, spending an average of US$19 million each year. In comparison, about two-thirds of all charities that file tax returns have annual budgets under $500,000.
We discovered that charities that don't embrace some common financial norms end up spending about 53% more income to succeed their missions on the 10-year period than other charities. Examples of these norms include getting revenue from a variety of sources, avoiding debt and scrimping on expenses like it and office space that are referred to as overhead costs.
The norms we studied have the less-is-better variety. For instance, conventional wisdom holds that fundraising costs ought to be to a minimum to prevent creating an impression that donor money is being wasted. However, the desire not to invest in fundraising may lead to less money being offered to spend in the future.
Why it matters
Evaluating how well a given charity operates is hard and expensive. But donors want assurances that they are being responsible when they give money away. One important way that charities can signal their trustworthiness is through their financial reporting.
Several organizations offer tools to help the public identify donation-worthy charities by looking into making charity financial information easier accessible. Websites for example Candid, open990 and ProPublica provide visibility into nonprofit financial management practices.
Other websites go further by offering their own evaluations of charities. Typically these evaluations incorporate financial norms such as the ones that we studied. For instance, to earn their highest recommendations, Charity Navigator, CharityWatch and provide.org impose various limits on fundraising expenses. The underlying assumption is apparent: the less spent on fundraising, the greater. Charities that flout such norms may risk damaging their reputations and losing supporters.
Donors are to be cautious; fraud and abuse do occur. But, as our research suggests, some nonprofit management practices that help charities look more trustworthy may potentially reduce their impact.
What other scientific studies are being done
Ours is one kind of several studies conducted recently that reevaluate the conventional wisdom concerning how nonprofits ought to be run.
Another research team assessed the wisdom of the guideline that charities should maintain as little as three months' price of financial reserves. They found no evidence supporting it. On the contrary, they discovered that having so very little cash on hand could endanger many organizations.
Likewise, scientific study has fact-checked the conventional wisdom that minimizing overhead makes nonprofits perform better. They've found it doesn't.
Maintaining multiple funding streams, such as by collecting donations, earning cash through sales and attracting federal government grants, is another commonly accepted financial practice. Unfortunately, this method isn't just as conducive to growth as commonly assumed.
What still isn't known
It remains to be seen whether organizations with smaller budgets may also fare best by bucking nonprofit financial management norms.
And we discovered that various kinds of charities may be affected differently by adhering to various financial norms. Following the conventional considering nonprofit financial management might be beneficial for some organizations while being harmful for other people.
The available evidence indicates that assessing a charity's worthiness isn't as straightforward as be it following any particular rulebook.
This article is republished in the Conversation. Browse the original article.
