Why Do So Many Nonprofits Fail?

The staff and board members for any nonprofit are genuinely committed to their cause, dedicated and engaged to improve the lives of others. So the question posed is: why are so many nonprofits unable to reach the point of sustaining their mission?

Nonprofits rely entirely on donors and external funds for their welfare and have a dire need to retain this source of income. However, this task is fraught with many challenges because if not engaged and updated regularly, the number of donations is bound to fall and if contributions fall, the nonprofit is heading towards failure. There is also the matter of internal and administrative functions that have to be dealt with on a daily basis to be solvent.

How Many Nonprofits Fail Each Year?

Nobody likes the thought of failure, whether in business or your own life. The business world is very competitive. Companies are continually trying to build new business, retain current customers or figure out why customers left and went elsewhere. This is even more prevalent in the nonprofit sector.

According to data from the National Center on Charitable Statistics (NCCS) on all 501(c)(3)s that filed a tax return between 1989 and 2003, they found that 12 percent of these nonprofits exited from the data within five years and 17 percent exited within ten years.

Nonprofits face some significant challenges if they are to survive, if they can keep their staff and donors and, more importantly, have a considerable impact on those they seek to assist.

The failure of nonprofits can be due to some factors, some of which include:

difficulties related to how decisions are made (and by whom),
a lack of systems to support meeting the expectations of stakeholders
lack of visibility to the environment,
confusion about structure
overconfident leadership or leadership with limited financial experience
unpredictable change in revenues such as loss of a major donor or grant funding
no long-term planning
poor accounting and money management

Overlapping Missions

For the staff and board of nonprofits, they are all typically there because they have a passion and mission to help those in need. Unfortunately, not everyone has the knowledge about how to operate a nonprofit successfully. That lack of knowledge can contribute to a lack of efficiency when it comes to the financial aspect of running the nonprofit – whether how to allocate funds or keep up with the nonprofit’s assets and inventory. In an industry where every single dollar matters, inefficiency can mean the end of a nonprofit.

It’s essential that everyone is on board with the overall mission of the nonprofit and has a clear vision of how to achieve that. If the board thinks one way and the employees believe another way, these overlapping missions are missing the point of the nonprofit and whom they are supposed to be assisting. Long-term sustainability depends on everyone working together on growing revenue, addressing the organization’s culture and leadership issues.

Inexperienced Board of Directors

A good board of directors matters in how a nonprofit performs. Unfortunately, not everyone who is on the board has the experience and know-how to direct a nonprofit to success. Often they have competing ideas of what works and what doesn’t. Ultimately, the board has fiduciary responsibility for overseeing the organization and asking the tough questions that need to be answered to ensure financial sustainability. If the board is disengaged, or if it doesn’t have the skills/tools to monitor an organization’s financials, it increases the likelihood of financial surprises that may be difficult to overcome by the time they become apparent.

In a survey of about 900 nonprofit board directors, conducted in collaboration with BoardSource and GuideStar, a significant number of directors (27 percent) don’t believe their fellow board members have a strong understanding of the organization’s mission and strategy. Sixty-five percent reported they don’t think their board is very experienced, and about 50 percent don’t think their colleagues are engaged in their work.

The ASAE (American Society of Association Executives) Foundation conducted a study in 2013 to learn from boards that have succeeded. Among more than 1,500 associations, just 170 ranked in the top 10 percent. In the study, they identified three things that set a strong board apart from one that is destined to fail:

A strong strategic orientation
A culture of self-assessment and accountability
Healthy attention to board member recruitment and development

More importantly, the highest-performing boards had the following attributes:

Strategic focus. High-performing boards were twice as likely to invest substantial board meeting time to strategic considerations. Fully 99 percent of these boards were operating under an organizational strategic plan—and the project was more likely to be one the committee had worked jointly with staff to develop, rather than allowing the team to drive the planning.

Commitment to assessment and skills development. These boards were twice as likely to set board-level performance goals for themselves, almost twice as likely to invest in board development activities such as mentoring and training, and twice as likely to engage in formal or informal board self-assessment.

Effective recruitment processes. They were also more likely to recruit new board members broadly, by, for example, soliciting nominations from outside the board rather than depending on CEO nominations. They were more likely to screen prospective board members and to hold competitive elections rather than voting for a single slate.

Misuse of Nonprofit Technology & Asset Tracking

Technology is playing a significant role in the nonprofit sector. Today’s technology allows any sized organization the ability to communicate, educate, and engage on a grander scale than ever before—at little cost. There is a myriad of programs aimed at helping nonprofits manage their business more efficiently and responsibly. Transparency is crucial for staff, the board, and donors. Technology is giving nonprofits the ability to show where the money goes and how it’s being used.

The entry of mobile technology is especially prevalent. With one click, donors can send their financial support to the nonprofit of his/her choice right from their smartphone or tablet. But if your nonprofit isn’t able to take donations online, you are missing out on thousands of dollars.

Technology is also important for nonprofits that have a lot of assets to keep up with. Most non-profit organizations have some asset tracking software in place for their equipment. Typically the equipment is tracked with an excel spreadsheet. The problem with spreadsheets and most systems/asset tracking methods is when equipment is used, moved or taken away for off-site service by employees; there is no way of knowing what happened to each item, when it was taken or why.

By employing asset tracking and management technology as part of daily operations, nonprofits are always able to know:

Where their assets are
Who has an asset at any given time
Check in/check out status
Complete maintenance and repair history

Nonprofits don’t have the extra funds to buy unneeded replacements for equipment or other assets that are merely misplaced or “thought” to be lost. Asset tracking technology also cuts down on the administrative time for an employee to manually type data into those excel sheets. Today’s tracking technology comes with built-in barcode scanners that can be used from employees’ own smartphones and tablets to quickly and accurately track assets anytime, from anywhere.

The data recorded to asset tracking software is stored in one central location and can amp up the auditing process, dramatically decreasing not only the time it takes to conduct the audits but reducing the number of people required to complete the task as well. Auditors can add detailed information on a nonprofit's assets including pictures and videos, details on when an asset was added into inventory, how an asset is used (or not used), and track the depreciation costs and how it impacts the nonprofit year over year.

Lacking a Clear Focus

Many nonprofits begin with a good statement of purpose but don’t always come up with an actionable way to bring about their mission in the world. That’s why it is critical that nonprofits make long-term planning a priority. So often we are focused on the “right now.” That’s great, for now, but what about down the road? Having a clear vision for how the nonprofit can thrive and survive and continue to help those in need for the years ahead should always be in the forefront.

Helpful tips that may help nonprofits plan for the future include:

Make long-term planning for revenue development a priority.
Include contingency plans to address any future revenue shortfalls.
Establish key performance indicators and review them at least once a month
Set up a “Finance Committee” that receives financial reports and monitors the financial health of the organization.
Recruit leadership that has multi-disciplinary experience.
Count on board members to provide essential expertise or financial support. Board members who are not giving value to the organization should be replaced.

Asset Panda's Asset Management Software for Nonprofits

Asset Panda’s asset tracking and management platform are ideal when it comes to asset tracking for non-profits. Asset Panda knows that you have a lot to worry about. From organizing fundraisers or charity events to meeting with donors and event organizers, it can often feel like you don’t have any time to yourself. You shouldn’t have to worry about tracking the donations and assets which keep your organization functioning from month to month.

Going beyond necessary check in/check out, Asset Panda works the way you do, on devices your team is already using—making it easy for you to manage the entire lifecycle of your assets. Our platform makes it easy for you to track donations or assets of any kind. With customizable fields, you can record all of the information you need to monitor for tax purposes. You’ll then be able to provide this information to donors, who rely on accurate reporting to complete their tax returns each year.

Want to check out all of the ways Asset Panda can help your nonprofit succeed? You can check out our platform at no risk when you sign up for a free trial today (no card required).