Finance

Pretty Bad Best Practices

In our experience here at Propel Nonprofits (formerly Nonprofits Assistance Fund and MAP for Nonprofits), most nonprofits are really good at following rules. And yet, when we give presentations encouraging them to step up their game by having reserves and being innovative and strategic, we hear time and time again, “That all sounds great, and we’d really love to do those things, but we can’t. We don’t have the flexibility.”

These folks are doing everything they’ve been told to do. They apply for grants, they balance their budgets, they meticulously manage their accounting and financial reports…they follow all the nonprofit rules of thumb. The problem is that some of the rules are terrible.

Call them rules or “best practices”—these are the guidelines that have been laid out for nonprofits to follow, whether in the arts or social services, and they set nonprofits up to never be able to get ahead. Turns out they’re pretty bad best practices. (I love this phrase but can’t take credit for it. I first heard it from Clara Miller, President of F.B. Heron Foundation.)

This is an important message for nonprofit leaders to hear: if your nonprofit is struggling to achieve financial breathing room, flexibility, and stability, it’s not your fault. You’ve been doing exactly what you were told to do. But the rules didn’t set you up for success.

Consider this your permission to question the rules as you’ve learned them, and invent new ones that serve your organization better.

Here are a few of the “best practices” that don’t serve nonprofits as well as advertised.

1. Budgets should always be balanced
There’s a prevailing myth that a nonprofit’s input should always exactly match their output, that having a profit is not OK. The truth is that having a surplus is the only way you’ll ever have reserves. Many nonprofit leaders believe if they achieve break even, or the hoped-for zero at the bottom of the spreadsheet, that means they had a good year. But that’s also a great way to ensure you’ll never have any breathing room.

2. Overhead should be as low as possible
There’s an ethos of self-denial among nonprofits that suggests it’s inappropriate for them to spend any money on their own capacity. But capacity, including leadership, systems, and infrastructure, are the very things that give nonprofits the ability to fulfill their missions. (For a short video we made on how to rethink overhead, click here.)

3. Limit grant applications to a project’s direct costs
Many grant application guidelines encourage applicants to include only direct expenses for a project itself (i.e. in the case of an afterschool program, the direct costs would include the teachers, curriculum, and snacks.) But that program also depends on the organization paying their rent, insurance, and executive director. Allocating and including parts of other costs in grant budgets recognizes the true cost of the program and strengthens the organization  and the programs.

4. Own a building and have an endowment
As nonprofits move through the years, there are certain rites of passage that seem to signify that they’ve become a bona fide “grown up” organization. Two of those are owning their own building, and establishing an endowment. But we’ve all seen instances in which acquiring a building, and all the related ongoing costs and obligations, led to financial problems for a nonprofit and weakened their ability to fulfill their mission. And an endowment is money you can never touch, when what you need is cash.

While none of these “best practices” is inherently evil, or was designed to intentionally befuddle and mislead nonprofits, it’s clear that there’s no one set of rules that is right for every nonprofit.

But in order to counter them, you first need to be familiar enough with them to talk about them, so you can answer a grant panel (or your own board) about why you’re deviating from the “best practices.” Just respond that you’re following some “better practices” that will set your nonprofit up for stability and success.

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