What is the ‘Nonprofit Starvation Cycle?’

A nonprofit’s infrastructure—information technology systems, financial systems, skills training, and revenue-generating processes, among other critical overhead—isn’t all that different from a typical business’s. In both cases, those that continually invest in theirs are the ones that generally thrive.

Yet, most nonprofits don’t spend nearly enough on their infrastructure—even as it’s become clear that the results of doing so can be disastrous. Over the course of one five-year study, researchers at the Urban Institute’s National Center for Charitable Statistics and the Center on Philanthropy at Indiana University examined 220,000 IRS Form 990s and conducted 1,500 in-depth surveys of organizations with annual revenues of more than $100,000. Again and again, they discovered dysfunctional computers and staff that lacked the training for their positions.

Without working computers, program outcomes weren’t being tracked. And without adequately trained staff, the quality of the services suffered.

Why, then, do nonprofits continue to skimp on their infrastructure? There’s no single answer, but, rather, a series of them, what’s come to be referred to as the “nonprofit starvation cycle” by those who’ve studied the matter to great depths.

Here’s how the vicious cycle unfolds. Stage one: donors develop unrealistic expectations of what it costs to run a nonprofit. Stage two: nonprofits feel pressured to conform to those expectations. Stage three: Nonprofits respond to the pressure in one of two ways, either they spend too little on their infrastructure or they under-report their expenditures on tax forms and in their fundraising materials. That under-spending and under-reporting then perpetuates donors’ unrealistic expectations.

Gradually, donors will come to expect nonprofits to do more and more with less and less—a cycle that inevitably starves nonprofits.

Just how prolific is this behavior? In a recent survey by The BDO Institute for Nonprofit Excellence, 46% percent of organizations reported maintaining six months or less of operating reserves, with only 35% possessing over a year’s worth.

The survey, “Nonprofit Standards,” benchmarks 100 organizations by size: midrange (annual revenue of less than $25 million), upper-midrange ($25 million to $75 million), and large ($76 million and greater). The portion of organizations with reserves to last more than a year was greatest among the midrange organizations (50%).

No midrange organization reported having no reserves at all, but 7% of upper-midrange and 8% of large organizations did.

“The overall thread of the survey is that the nonprofit sector overall is struggling to achieve financial sustainability,” Adam Cole, partner and national co-leader of BDO USA’s Nonprofit & Education Practice, told The Nonprofit Times. “Most nonprofits are undercapitalized when compared to a commercial enterprise. This fact, combined with the current economics facing many nonprofits resulting in the reality of operating programs with razor-thin margins to meet programmatic mandates, creates liquidity issues.”