Allocation of Nonprofit Funds Among Program, Fundraising, and Administration

Abstract

Problem Definition: Most US nonprofits disclose three types of expenses: program spending to meet their beneficiaries’ needs; fundraising spending to increase their future budget; and, administration spending to make their future budget more impactful. Charity watchdogs expect nonprofits to prioritize program over fundraising and administration. We study if nonprofits should ever prioritize fundraising and administration instead. Academic/Practical Relevance: Although the nonprofit operations management literature is growing, the trade-offs among program, fundraising, and administration have received scant attention. By modeling these trade-offs, we provide insights on the soundness of nonprofits budget allocations. Methodology: Using a two-period model, we capture the trade-off between the immediate reward from program and future rewards from fundraising and administration. We characterize the optimal allocation and calibrate the model with public data on two nonprofits’ budget allocations. Results: The optimal budget allocation depends critically on the nonprofit s budget and return on program (the net value of program to beneficiaries). For moderate return on program, the budget’s effect is intricate. While low budgets favor the prioritization of program, higher budgets might favor the prioritization of fundraising and administration for the nonprofit to be forward-looking. Managerial Implications: To assess the soundness of a nonprofit s budget allocation, one should know its return on program — a challenging metric to estimate. We derive the imputed return on program (the return on program at which the nonprofit s actual allocation matches our model’s optimal allocation) in a case study of two nonprofits with divergent models: in-kind aid versus cash aid. The imputed return on program reasonably distinguishes between the nonprofits’ implicit assumptions, confirming that the in-kind nonprofit operates under the assumption that its services are of added value for beneficiaries. Therefore, the imputed return on program indicates to watchdogs and nonprofits when nonprofits could take better advantage of fundraising and administration.