As a teenager, my Grandpa Sidney Musher told me his goal as chairman of PEF, an early donor-advised fund (DAF), was to keep the overhead to 1.5%. He accomplished this by utilizing some of the business characteristics of a DAF, which earns income based on funds being held. For the last 25 years, I have worked with investors to maximize ROI on invested capital in private companies. With the benefit of this experience across sectors, including social services, I have come to appreciate the wide range of business models required of both for-profits and nonprofits to meet various societal needs, and how 1.5% is unrealistic for any nonprofit overhead, and probably tight for a DAF these days too.

Complementing Lisa Eisen and Barry Finestone’s important eJP article about nonprofit overhead, based on the work of The Bridgespan Group and five leading U.S. foundations, I would like to contribute an additional perspective. In “Ending the Nonprofit Starvation Cycle,” the authors provide a range of excellent analyses that one could consider as an activity-based costing approach for nonprofits. The authors dive into the true costs of running a nonprofit compared to the expectations of funders.

From Open Impact

Authors: Adene Sacks, Heather McLeod Grant, and Kate Wilkinson

How is the current economic and political environment impacting the capacity building needs of social-change leaders, nonprofits, networks, and movements? How are funders responding to these changing needs, and how can they better support this work going forward? 

Vu Le of the blog Nonprofit with Balls talks capacity building:

"Funders have been trying to help [nonprofits] develop, by teaching them to fish. We have a long-held belief that in order to build the capacity of organizations, we must teach them important skills such as financial management, evaluation, board governance, HR, etc. If we just throw money at them—give them a fish, so to speak—they’ll never build their infrastructure...

"What if a person’s skill is not fishing, but building houses? Let’s say someone’s an amazing carpenter. We keep insisting that this carpenter learn to fish, so the carpenter spends half his time doing that. Because of that, fewer houses are getting built, and he’s still pretty much a mediocre fisherman who feels horrible and guilty that he can’t fish as well as others...

From Grantcraft.

Supporting Grantee Capacity: Strengthening Effectiveness Together looks at how funders approach building capacity with grantees. Through examples from foundations ranging in size, mission, and geography, it explores various strategies for capacity building and the types of awareness that funders can choose to incorporate in decision making to facilitate informed, thoughtful judgments about strengthening organizations.

Nonprofits don’t have discrete ambitions. They want to quickly grow their seed money so they can expand programs that have both a measurable and meaningful impact. It’s one way philanthropists define “scale.”

But it is often a lot easier said than done.