Public opinion supports that the more money given to a nonprofit that goes directly “to the cause”, the better the organization. While most nonprofit leaders would agree with this sentiment, the nonprofit sector is failing to make appropriate long-term investments in human capital, facilities and financial systems to maintain long-term operations. The nonprofit sector has fallen victim to the infrastructure starvation cycle, which begins with unrealistic expectations from funders about how much running a nonprofit should cost. Without allocating the appropriate financial resources to create sustainable infrastructure, nonprofits will fail. 

Ratings agencies have contributed to the public opinion that nonprofits who spend less than 35 percent of their costs on overhead or infrastructure are worthy of donations or are doing the most “good” with their funds by issuing stars, seals or other rewards for compliance. Studies confirm that underfunding overhead hurts nonprofits’ ability to deliver program services and achieve their missions. Infrastructure refers to systems and business processes like employee training and development, investments in technology, risk management and financial processes and capital projects. Closely tied to infrastructure, capacity-builders are specific non-profit organizations and consultants that support nonprofits in the creation of systems, industry best practices or teach specific skills which allow smaller nonprofits to excel in business operations and scale work appropriately.

Public opinion and donor expectations contribute significantly to the underfunding of infrastructure. Studies have shown that when given the opportunity, donors would rather give directly to program support than fund infrastructure regardless of how the money is spent. Donors are also known to respond negatively to nonprofits with high overhead costs. Research suggests an opportunity to influence public opinion and shift the narrative on the importance of infrastructure spending. A donor’s commitment to the particular cause has been shown to impact their willingness to cover overhead expenses, as does the transparency of the appeal. Donors who are more committed to a particular cause are willing to cover the costs necessary to provide the service or deliver the desired outcome. Nonprofit leaders must not delay in working to shift public and donor perceptions related to overhead spending.

4 ways nonprofit leaders can shift public expectations related to infrastructure spending: 

1. Transparent Communication: Nonprofits have credibility and need to effectively message their role in the infrastructure starvation cycle. Studies confirm the more a communicator has in the form of expertise, trustworthiness and authenticity, the more persuasive they are when attempting to use direct advocacy messaging.
2. Public Education: An informed public is the nonprofit sectors greatest ally. Nonprofits need to use data and outcomes driven information campaigns to address infrastructure related failings and educate the public on the benefits of investing in their leadership, staff and operational processes.
3. Rethink one ratio: Reliance on one ratio to demonstrate effectiveness will not allow for scaling, development or investment in the sector. Nonprofits should work with their board to message that a ratio does not communicate nuance, nor does it capture long-term financial strategy for programmatic development or infrastructure related investment.
4. Leverage Knowledge Networks: Joining membership-based infrastructure organizations at the state and national level solidifies a nonprofits’ commitment to building appropriate infrastructure, pool or leverage limited resources and establish best practices in their specific industry. Membership provides ongoing education and support in the form of training and knowledge sharing, incubator spaces and often grant assistance.

Nonprofits face challenges that are more complex than any one individual or organization can solve alone. Data suggests that 93 percent of nonprofits have budgets of less than $1 million a year and are operating with limited staff and resources. These organizations need assistance to learn the appropriate skills, update systems or invest in capital to fulfill their missions. However, the popular ratio used by watchdog agencies make organizations who stray outside of the acceptable spending cap open to concerns that they are mismanaging funds. It is time to challenge that one ratio is appropriate for nonprofit spending and shift the public perception of overhead and infrastructure funding as wasteful. The nonprofit sector is far behind the for-profit sector in creating a sector wide pipeline for talent, infrastructure investment and developing industry wide coordination and external relations functions. Nonprofits who have invested in infrastructure and capacity building are more resilient, impactful and agile when facing challenges. With appropriate investment in infrastructure, the nonprofit sector will be able to keep pace with growing demands for service, have the financial stability and effect positive change on the most vulnerable communities and populations they serve. 

Elizabeth Tam is a 2023 graduate of the Masters of Nonprofit Leadership and Management program at Arizona State University and a member of the Nu Lambda Mu Nonprofit Honor Society. She has more than 20 years of experience working in city government, nonprofits, and higher education administration. She currently serves as the Senior Director, ASU Los Angeles Operations and oversees ASU’s expansion and programs in California. 

Image by Lillian Finley

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