August 2019 – Rick Szilagyi, Principal

The Wake-Up Call: The failure rate of small nonprofits

Due to challenges in collecting data, such as the fact that nonprofits under $50K in annual revenue do not need to file financial results, it is difficult to determine the exact failure rate of nonprofits.  But, below is data from the National Center for Charitable Statistics, and I think it is fair to say that for smaller nonprofits, the results would be even more disturbing:

  • In 2005, 50,089 organizations achieved 501(c) tax-exempt status. By 2015, 64.0% were still registered, and 27.5% reported financial activity.
  • In 1994, 41,797 organizations achieved 501(c) tax-exempt status. By 2015, 51.3% were still registered, and 29.8% reported financial activity.

Follow the map. It is the first step towards sustainability.

Why is understanding the current stage of your nonprofit important?  Simple.  Compare it to planning a road trip.  Before you can use your favorite navigational system, you need to know two things: your current location and your destination.  Relative to your nonprofit’s journey, identifying the starting point, waypoints, and destination requires a quick analysis.

Last month, I wrote about the evolution of the nonprofit organization and its board.  I cited the standard lifecycle chart for an organization, which is repeated below, along with key points for thinking about your organization’s stage.

Go before the light turns red. There are windows of opportunity.

I am going to refer back to an article published by BoardSource, written by Karl Mathiasen III, entitled, “Board Passages: Three Stages in a Nonprofit Board’s Lifecycle.”  The article details qualities and behaviors of the organization in each of three stages, from an initial organizing / founding board, to a governing board, and finally to an institutional board.  Within each stage, the article discusses how leadership style, fundraising, and task performance all evolve as the organization matures.  Before I continue, I want to draw attention to another article, “The Five Phases of Board Development” by Lee Bruder of Lee Bruder Associates here in New Hampshire.  Bruder’s article details these five phases as creation, launch, refinement, stability, and dissolution.  To a great extent, Bruder’s phases line up well with the phases and related growth sequences shown in the lifecycle chart above.  The article describes—in great detail—the actions and behaviors of the board in each phase.

Both of these articles address points that many boards in the earliest stages of their small nonprofit may not realize.  First, the same level of commitment to the initial leader may be hard to maintain as board members come and go, resulting in a less-energized board.  I am not suggesting that a board cannot recapture a high level of positive energy after the initial founding, but we have seen board energy rise and fall over time.  It is always easier to accomplish goals in periods of cohesive teamwork and high energy.

Second, both articles call for the early hiring of staff.  This is because the growth of the board through the stages of success is contingent on how the tasks of the organization get done, and by whom.  I know that there are those of you reading the second point about the necessity of hiring staff, thinking that you do not have the funding… that you can’t afford to do it.  You’re not alone; many others charged with leading small nonprofits have felt that way, too.  But the question becomes this: “If you truly want to see your nonprofit grow and sustain, can you afford NOT to hire staff?”  And the truth of the matter is that while the revenue of small nonprofits is often low, it also does not take huge sums of money to engage the professionals needed to keep moving ahead.

“Management is doing things right; leadership is doing the right things.” – Peter F. Drucker

The board of directors leads.  That means, for example, that beyond the very beginning of your nonprofit, board members identify and write articles, but do not donate time to the mechanics of database management and production.  It means that they devote time to deciding on content and fundraising for an event, not to executing all of the details of events.  Sapping the limited time of board members, rather than having that work done by staff, is not the best utilization of board time.  Your job is to review the current position of your board and the organization, and make the decisions necessary to build and sustain the organization.  The board determines the right things to do; your staff is charged with doing them correctly.

I challenge you and the rest of your board to make time to do the following:

  • Ask each member of your board of directors to read the Mathiasen and Bruder articles cited herein.
  • Discuss where you feel your organization is on the lifecycle map, and in what ways the Mathiasen and Bruder articles hit home for your organization specifically.
  • Decide on your next steps.  And, if you need help, please call.

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