Public Org Final Paper
- 1. Charli Barrera Nonprofit Organizations: Lets Talk Money and New Ways to Fundraise PADM 5310 December 2, 2014
- 2. Nonprofit organizations were created to serve the public. The government cannot take care of all our needs so nonprofits work hard to make sure the public’s needs are met. They generate profits for a mutual benefit rather than an accumulation of profit for business owners and investors. There are two different categories of nonprofits, member serving and public. “The nonprofit sector is a collection of entities that are organizations; private as opposed to governmental; nonprofit distributing; self governing; voluntary; and of public benefit” (Luckert, Learningtogive.org). According to the Internal Revenue Service (IRS) there is around 1.5 million nonprofit organizations registered as tax exempt. Millions of other formal and non-formal nonprofit organizations exist but are not registered with the IRS because their total revenue is under $5,000. Nonprofit organizations in America have a combined revenue of approximately $621.4 billion, which represents around 6.2% of the nation’s economy (Luckert 2014). Over the years nonprofit organizations have grown rapidly making funds scarce. They must work harder in order to acquire funds because the “competition” increases to grow everyday. There are many different forms of nonprofit organizations, charities, foundations, social welfare or advocacy organizations, professional and trade organizations, and religious organizations. No matter what kind of aid or help is needed there is more than likely some sort of organization set up already. These organizations are very important to the people receiving the services. Especially if it is a special healthcare related organization for example, St. Jude’s Hospital for cancer research or The Wounded Warrior Project for wounded veterans. Everyday organizations like these are helping patients and families recover from a desperate time of need. The nonprofit sector is evolving rapidly as organizations expand their focus on efficiency, sustainability, and accountability (Suarez 2011,307). Nonprofit organizations work
- 3. hard to raise money in order to keep helping the public. One of the main problems they encounter is acquiring funds to keep their organization alive. The purpose of this paper is to analyze different techniques nonprofit organizations use to acquire money for their organizations. I will also talk about new ways researchers are experimenting with acquiring funds to raise money and awareness for nonprofit organizations in the future. Not all acquired funds can go directly to the public. Just like in a business there are so many different demands that need to be met before they can distribute the funds to the cause. The majority of all the funds come from government grants, government-paid program services revenues, and public donations (Gaver and Im 2014, 1). So it is crucial for these organizations to keep close tabs on how much money they have and where it is most needed. Where Funds Come From As mentioned above nonprofit organizations rely on outside funds to keep them up and running. A sample of 105,400 nonprofit organizations found that roughly 60 percent of funding comes from program services, 20 percent from public contributions 10 percent from government grants and the remainder from investment income and other miscellaneous sources (Gaver 2014, 3). Depending on where the organization receives the majority of their funding is where they will get the most scrutiny. For example if most of the funds come for government grants, the organizations board members will be forced to keep detailed record of where excess money goes. Restrictions are also high when money comes from stakeholders that donate large sums of money to the organization. Like the government, stakeholders want to make sure the money is going to the right people and parts of the nonprofit organization. Though money that comes from investment incomes gives the board more leeway on where the money can go and who gets the
- 4. excess of the funds. (Graver 2014, 2). Nonprofit organizations have both negative and positive relationships with their boards. The boards of directors in nonprofit organizations are typically responsible for fundraising and development, setting staff compensation, finance, budget, and accounting, investment management, and finally financial statement audit (Primoff 2012, 51). Graver and Im found that increased board oversight is associated with lower agency costs, but there is question about their effectiveness as a governance mechanism (Graver 2014, 2). The more government funding that is provided the more professionalized the board becomes, meaning that community representation and knowledge of local needs decreases (Suarez 2011, 309). If a problem arises and no one can identify who exactly caused the problem, then it is the board that is at fault. “Nonprofit laws generally impose three fiduciary duties on board members, a duty of care, a duty of loyalty, and a duty of obedience” (Primoff 2012, 51). Graver and Im’s analysis broadly suggests that excess compensation is lower in nonprofit organizations that derive a greater proportion of their revenues from government grants, government-paid program service revenues, and public donations. There is also some evidence that more reliance on investment income is associated with higher excess compensation (Graver 2014, 15). In a study done by David F. Suarez, he suggests that management strategies in nonprofit organizations are extremely relevant for attaining more government grants and contracts (Suarez 2011, 308). The more a nonprofit organization collaborates with and networks with other nonprofit organizations the more the government will be willing to get involved. Nonprofit organizations have a difficult time balancing their overall mission with their overall margin of
- 5. revenue. This is why it is so important for nonprofit organizations to become strategic in their spending and how they grow their overall funds. Another positive of networking and having the government involved in your nonprofit organization is that you will have access to policymakers and the political process (Suarez 2011, 309). It will make it easier to advocate for policy changes or legislative changes for the nonprofit organizations cause. This can also increase the nonprofit organizations credibility and make more people aware resulting in donors. Nonprofit organizations are encouraged to collaborate and create alliances with other organizations, but sometimes it is not necessarily worth it nor will it help in getting more government funding. The strategies and planning that go into creating a collaboration between two different nonprofit organizations takes money and a lot of time (Suarez 2011, 320). It involves doing projects together and taking into consideration the other nonprofit organizations culture and policies. Professionalism is also an important aspect when it comes to receiving government funding. The negative to this is that it takes away from nonprofit organizations outreach into the communities. Volunteers do a large part of a nonprofit organizations workload. They need their help in order to survive and make sure as much funding goes directly into the cause. The recession that occurred in 2008 in the United States also had a major impact on nonprofit organizations. Funds went extremely down and many nonprofit organizations suffered immensely. Natural disasters also contribute to decreased funds, for example nonprofits in New Orleans are still recovering from the aftermath of hurricane Katrina. Many of the large companies they leaned on for support left the area leaving them short on funds they were use to having (Besel, Williams, and Klak 2011, 57). Even today they are currently working to become more sustainable without all the resources they had in the past. Government funding plays a large
- 6. role in nonprofit organizations in terms of the different regions of the United States. Though for many nonprofit organizations, government funding remains to be a top financial contributor. Mangers in the higher areas of government funding have reported that a formalized relationship with a government institution was more important than the securing of government funds for their sustainability (Besel 2011, 58). Managing Funds Nonprofit organizations are similar to businesses in the private sector. Funds that are allocated need to be disbursed through the business in order to keep it going. Money needs to be disbursed to employees, as well as having a budget for projects and marketing in order to raise more money. According to the Better Business Bureau (BBB), they require nonprofit organizations to spend at least 65% of its total expenses on program activities (give.org 2014). In terms of fundraising nonprofit organizations should spend no more than 35% of related contributions. Every nonprofit organization must make available complete annual financial statement prepared in accordance with generally accepted accounting principles (give.org 2014). Depending on the different total annual gross income each nonprofit organization must complete audits in order to be the BBB standard. Regina Herzlinger identifies the problem in nonprofit budgeting is not technique but those of management (Herzlinger 1979, 67). The primary issue is that managers in nonprofit organizations instinctively respond to the budgeting process in a participatory and consultative manner, but budgeting involves trading off and limiting activities (Herzlinger 1979, 67). The money that nonprofit organizations receive tends to have limitations on where it can be used. Public donors and government keep restrictions on where the money can be spent. This creates
- 7. another obstacle for board member and managers to deal with when planning the budget. Auditing is a big part of nonprofit organization management. In past years we have seen a lot of abuse take place with funds in a nonprofit organization. For example in 2003 Brian P. Morley and Jacquelyn Allen-MacGregor pleaded guilty embezzling checks totaling $1.9 million from United Way in Lansing, Michigan (Strom 2003). Prior to this occurrence former United Way president, William Aramony, served seven years in prison for fraud worth over $1.2 million Strom 2003). Not to mention other numerous pyramid scams within nonprofit organizations costing millions of dollars. All these past abuses have caused nonprofit organizations to meet specific audit standards to make sure it does not happen again. “Apart from organizational size and financial stress, the complexity and resource-dependency of the nonprofit are significantly associated with audit fees” (Vermeer, Raghunandan, and Forgione 2009, 290). When using a direct measure of audit quality, results find that there is a positive association between auditor size and audit quality in nonprofit organizations (Vermeer 2009, 290). Both audit committee quality and the presence of internal auditing show a positive association with audit fees, suggesting that audit committees and internal auditors are complements rather than substitutes for other monitoring mechanisms in the nonprofit sector. The resource dependency theory is used to explain differences in audit fees. The various different needs of resources are a large determinant of the nonprofit organizations decisions and actions. Specifically the difference in the composition of resources are associated with differences in the demands placed on external auditors (Vermeer 2009, 291). The majority of outside resources and donations accepted by the nonprofit organization lead to more audit engagement and higher audit fees.
- 8. Nonprofit organization boards are faced with the many challenges of an ailing economy and the increased concern, voiced by legislators, regulators and other stakeholders, that they are not fulfilling their fiduciary duties (Primoff 2012, 48). “As a result, nonprofits have a growing need for certified public accountants, attorneys, investment professionals, and other experts to provide guidance on fiduciary financial management” (Primoff 2012, 48). It is now a standard that all financial matters in a nonprofit organization stay transparent. New Ways to Fundraise As mentioned throughout this paper, acquiring funds for nonprofit organizations is a challenge. It is important that new ideas and projects are created to keep awareness alive to support the organization. In today’s world, social media is a growing attraction for fundraising. The most recent example of successful fundraising took place this summer for the amyotrophic lateral sclerosis association (ALSA) challenge, better known as the ALS Ice Bucket Challenge. This challenge required that participants have to nominate their fellow friends and family before having a bucket full of ice and water poured on to them in a video posted to different social media platforms to promote awareness. The ALS Ice Bucket Challenge spread like wildfire and trended for over a month with the help of hundreds of celebrities and leaders in communities around the world. Once the challenge was over the ASLA reported to have raised over $100 million (Diamond 2014). The only problem with social media is that things can be taken out of context and create negative publicity instead of positive. We have seen celebrities and private companies receive backlash for posts made on social media accounts. “‘The ALS Ice Bucket Challenge worked because it hit a sweet spot: Accessible and fun; an understandable, compelling cause; and
- 9. “networked social proof.”’” (Diamond 2014). Every year Internet marketing is growing as a source of income for nonprofit organizations. In an article by Richard Hoefer he identifies three techniques nonprofit organizations can use when marketing online. The first is affiliate marketing; this is a process by which an organization drives traffic from its Web site to another organizations Web site to promote a product or service for a percentage of the sale price (Hoefer 2012, 361). The benefit of affiliate marketing is that the nonprofit organization can focus on advertising one or a few products at a time instead of an entire commercial entity. For example, if there a book that could give the buyer a better understanding of an organization then the nonprofit organization would want to affiliate with the bookseller to receive a percentage of the sale. The second form of Internet marketing is online donations and memberships. Nonprofit organizations can have online donations sections within their website. In 2008 researchers found that an average of $7 billion were generated from online donations in various nonprofit organizations (Hoefer 2012, 362). The majority of Americans pay their bills online with credit and debit cards, so it makes sense that the public sector allows people to donate this way making it convenient and easy. One downside to this technique is that in order to process online payments an added processing fee is added. This fee will either come out of the donation itself or charge the donor a percentage more. These fees create a negative association with online donating because people do not want to have to pay the extra percentage. A way around this is through membership subscriptions. Donors can become a member of the nonprofit organization and agree to donating a certain amount every month. This makes it easier for donors to give money because instead of a large one time donation is separates payments into small amounts throughout the year. (Hoefer 2012, 363).
- 10. The final technique Hoefer suggests is information products. They can be written, oral, or in video format and made available online for consumers to gather information (Hoefer 2012, 364). Before the Internet nonprofit organizations were limited on how they could provide information, they had to depend on physical products like books, tapes and reports. This helps save time and money by allowing nonprofit organizations to advertise on a precreation basis, so only if sufficient interest exists will they make the information product (Hoefer 2012, 364). The negative to this is that most nonprofit organizations but hire outside creation teams or have the information product donated. These extra expenses require that the nonprofit organization have a well put together information product to make up for the expense. Not only is it important to attract new donors but it even more important to keep them. Nonprofit organizations need to do more to shower attention on first time and small donors (Blum 2014,1). Small gestures of appreciation go along way when thanking new donors, for example, customizing thank you notes and phone calls send positive messages to encourage long time participation. With the economy always changing it is not smart for nonprofit organizations to rely too much on big donors and new supporters (Blum 2014, 1). “In 2012, organizations reported that fewer than 39 percent of their donors who has given the year before supported them again, a retention rate much lover than in 2005, when more than 46 effect of all donors gave again the following year to organizations” (Blum 2014, 1). Not retaining donors is costing nonprofit organizations, a fall report shows that for every $100 charities raised in 2012, they lost $96 from donors who gave less or stopped giving altogether (Blum 2014, 1). Conclusion Nonprofit organizations can continue to learn and expand with the help of the community
- 11. and donors. Without the help of nonprofit organizations persons and families in need could not survive. It is said that running a nonprofit organization is much harder than running a business in the private sector due to the added requirements that need to be met with receiving funds from outside sources. Volunteers and social media are also great tools that nonprofit organizations use to receive help and provide viable information to obtain more donors. With over a million nonprofits there is sure to be something that will inspire you to donate and get involved. Even if you don’t have much time to participate even the small time you take to explore websites and make small donations can make a huge difference.
- 12. References Besel, Karl, Charlotte Lewellen Williams, and Johanna Klak. 2011. “Nonprofit Sustainability During Times of Uncertainty.” Nonprofit Management and Leadership 22(1): 53-65. Better Business Bureau. 2014. http://www.give.org/for-donors/the-care-we-put-into-our-reports/ Blum, Debra E.. 2014. “Nonprofits Shift Focus From Chasing New Donors to Building Loyalty.” Chronicle of Philanthropy 26(10): 1. Diamond, Dan. 2014. “The ALS Ice Bucket Challenge Has Raised $100 Million and Counting.” Forbes http://www.forbes.com/sites/dandiamond/2014/08/29/the-als-ice- bucket-challenge-has-raised-100m-but-its-finally-cooling-off/ Gaver, Jennifer J. and Mary S. Im 2014. “Funding Sources and Excess CEO Compensation in Not-for-Profit Organizations.” Accounting Horizons 28(2):1-16 Herzlinger, Regina. 1979. “Managing the Finances of Nonprofit Organizations.” California Management Review 21(3): 60-69 Hoefer, Richard. 2012. “From Web Site Visitor to Online Contributor: Three Internet Fundraising Techniques for Nonprofits.” Social Work 57(4): 361-365 Luckert, Kate 2014. “Nonprofit Organizations (Definition and Examples)” http://learningtogive.org/ Primoff, Walter. 2012. “Fiduciary Financial Management in Nonprofit Organizations.” Certified Public Accountant Journal 82(11): 48-57 Strom, Stephanie. 2003. “Guilty Plea Due Today In Big United Way Theft.” The New York Times http://www.nytimes.com/2003/02/06/us/guilty-plea-due-today-in-big-united- way-theft.html
- 13. Suarez, David F. 2011. “Collaboration and Professionalization: The Contours of Public Sector Funding for Nonprofit Organization.” Journal of Public Administration Research and Theory 21(2): 307-326 Vermeer, Thomas E., K. Raghunandan, and Dana A. Forigone. 2009. “Audit Fees at U.S. Non- Profit Organizations.” Auditing: A Journal of Practice & Theory 28(2): 289-303