The Significance of Unrestricted Funding for Sustaining an NGO – Part 1

Build a solid foundation.

(For the Chinese version, please click here.)

NGOs provide direct, tangible, and immediate aid to marginalised and disadvantaged communities, and the pandemic season has highlighted their critical contribution even further. But the financial situation of non-government organisations (NGOs) now may be even more tenuous than it was pre-Covid. Despite a more positive macro sentiment, NGOs are still witnessing a curve bent out of shape: demand from beneficiaries is increasing while supply of funds is decreasing. While the cancellations of key fundraising events like gala dinners and flag sales occurred in 2020, the repercussions are being felt in 2021. Many NGOs do not have sufficient financial reserves to absorb external shock, and as a result, a few have closed their doors, or survive from month to month.

We, at Asian Charity Services[1] , want to challenge your beliefs on how to give and to re-examine how your dollar can be maximised to its greatest utility for the NGO you are donating to. We can take our cue from the individual donor. Individual donations, although usually not as substantial as those of foundations or corporate funders, are helpful because of their flexibility: NGOs can spend the amount as they see fit. Foundations and Corporate funders usually donate to sponsor a specific programme or initiative, instead of to the NGO itself. This article urges funders to consider how unrestricted funding can provide a firm financial foundation for grantees.

[1] A NGO that serves other non profit organisations through capacity building.

Gifts with strings attached

As mentioned, individual donors generally donate towards unrestricted funding.  One evening you find yourself as a guest at the annual fundraising gala of a charity.  You are touched by the plight of, say, the orphaned babies; you reach for your wallet and donate some money.  You don’t ask how the money will be used.  You implicitly trust that the organisation’s leaders will honestly and prudently steward the funds for the unfortunate babies. 

Do not underestimate the impact of one-off individual donations or, even better, the critical importance and impact of monthly giving.  “Everyday donors are the ones who have a monthly HKD100 automatic debit from their bank accounts to support NGOs,” says Jennifer Chen, Chief Executive of The Chen Yet-Sen Family Foundation.  “Their donations are unrestricted, giving the organisation’s leadership freedom to allocate where it’s most needed.  This type of funding unlocks the potential of an organisation especially [in 2020] when they needed to respond nimbly and quickly.”

Philanthropic foundations tend to donate in a different manner.  While foundations have vastly deeper pockets than individual donors; their donations often come with a variety of restrictions (and the best of intentions).  Foundations’ giving guidelines are many because they themselves are beholden to their own stakeholders, strategic alignment and impact measurements.  To this end, NGOs who receive such funding are presented with a list of conditions, and a common proviso: less than 10% of the funding can be spent on administrative costs.  While this may be feasible for a larger NGO with a more sizable budget, it penalises small to medium NGOs who are unable to scale to a sustainable and efficient level.  NGOs are both helped and hamstrung by restricted funding.

How to spend it

Mackenzie Scott, currently the third wealthiest woman in the world2, recently caused a positive ruckus in the world of philanthropy.  The fact that she rapidly commissioned USD4.2 billion of donations in four months as a response to Covid needs is not even the headline news.  It is the fact that her gifts to 384 different nonprofit organisations were given with no conditions, a gift style reflecting her respect and faith in those organisations.  This maverick philanthropist used “research that is data-driven and rigorous,” so that her giving could be “human and soft.”  In short, she writes in her Medium article, “we select organisations to assist – and get out of their way.”

Last year, in response to the financial stress that NGOs in Hong Kong faced as a result of Covid, a number of local Hong Kong foundations also gave without restriction, and graciously got out of the way to let NGOs do their vital work.  The D. H. Chen Foundation responded to NGOs’ Covid needs with Project Fuel, which gave up to HKD750,000 each to 15 small to medium-sized non-subvented NGOs to cover their critical operational costs like administrative manpower, rent and utilities.  Lee Hysan Foundation set up an Emergency Rental Support Fund for 10 small to medium-sized NGOs.  The Chen Yet Sen Family Foundation rallied the Hong Kong Club Foundation and Fu Tak Iam Foundation under their #BridgetheGapHK initiative, to provide different amounts of unrestricted funding for a group of 13 NGOs.  And the Hong Kong Recovery Community Fund, an initiative of the American Club Foundation with the collaboration of the Hong Kong American Community, provided flexible funding to 12 NGOs.  These are significant, influential players among the funding community who are well disposed towards unrestricted funding.  They understand that aiding a NGO’s agency will ultimately create a more resilient, effective, and efficient social impact sector.

[2] As of January 2021

The Overhead Myth

The Overhead Myth plays to the donor’s natural scepticism: how much of this money is actually reaching the beneficiary? 

While stakeholders justifiably want evidence of positive outcomes for beneficiaries – whether subdivided unit dwellers,  moon bears, or at-risk children – the focus on funding programmes should be shared with funding the NGO team which is  itself delivering the social service.  Although obvious, it is worth stating: if a NGO cannot sustain itself, subsequent services, programmes, and activities cannot be delivered. 

At an NGO, staff salaries (including MPF contributions), office rent, water and electricity costs – the nuts and bolts of an operation – are called ‘overheads’ because these costs do not directly contribute to a programme.  Overhead has dismissive connotations; it makes these expenditures sound excessive when, in fact, these costs are a reality and not a myth.3 

One writer on Nonprofit Quarterly describes it well: “the reporting of functional expenses exacerbates the myth that, somehow, nonprofits should be able to operate programs without an administrative structure to manage, measure, and execute. It implies that, by some as-yet-unknown magic, nonprofits should be able to achieve their mission without dedicated and systematic fundraising efforts to pay for it.”4

[3] Language impacts funding, so we prefer the term capacity building.

[4] Why Funding overhead is not the real issue: the case to cover full costs, Sep 2019
https://nonprofitquarterly.org/why-funding-overhead-is-not-the-real-issue-the-case-to-cover-full-costs/

10% is not the same 10%

The overhead ratio, or the efficiency ratio, has traditionally been the metric to measure NGO success (operating costs divided by total expenses).  In an effort to attract prospective donors, NGOs often cite as low an overhead number as possible. “Our operating costs,” reads one pitchbook, “are less than 10%.”  While low overhead numbers make a persuasive pitch, the drive for efficiency may in fact impair an organisation’s day-to-day effectiveness and overall resilience. Some charities use other metrics e.g. cost-per-beneficiary or output numbers, but the objective is the same: to spend the least amount on operational cost for the highest possible impact for beneficiaries.

The 10% cap is onerous for most organisations, but debilitating for a few.  One percentage number does not fit all NGO budgets.  10% of a ten million dollar budget is a larger sum than 10% of a one million dollar budget, thereby penalising the small to medium NGOs which need the most support. 

It is curious we use different yardsticks to measure nonprofits and for-profit companies, when there is one obvious and identical characteristic: they are both organisations.  Organisations have the same challenges and the same formula for success: strong inputs produce strong outcomes.   While companies understand the value of investing in talented staff, NGOs face strict restrictions as to how much they can spend on salaries to recruit and retain talent.  The strength of an organisation is the sum of its people, and it would not be a surprise that hiring a strong and talented team – an inspiring Executive Director, a competent grants writer, a compelling fundraiser – would lead to increased funding and diversified income streams.

Your donation matters

In a perfect world, foundation and corporate funders would behave a little more like individual donors.  They would give more unrestricted funding and allow NGOs more freedom to make decisions for building capacity and creating effective programmes.  NGOs would have the flexibility to exercise their good judgment as to where funding would make the most difference. 

In Part 2, we will share stories from NGOs of how unrestricted funding sustained operations in 2020, and how financial flexibility is essential for them to successfully navigate beyond the pandemic. 

The Author

Jen Wannenmacher

Jen Wannenmacher

Jen is an equal opportunity NGO lover, and enjoys meeting diverse organisations via ACS's Community Outreach team. Adopting ACS’s tagline as her own, she serves those who serve by writing articles promoting NGOs, NGO leaders, and best practices within the social impact sector. Her other volunteer roles include The American Club Foundation, Mother's Choice, and the Princeton Club of Hong Kong.

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