July 10th, 2017; AL.com
Many nonprofits must work two jobs to make ends meet, and not understanding that can be fatal. For most organizations, even the smallest, serving our constituents also requires serving the sources of our money. These are called transaction costs, and they can be overwhelming, especially if you have not budgeted the attention, time, systems, and resources you need to keep the revenue source happy.
It must be said that some transaction loads are heavier than others. They bring with them the burdens of reporting, funds restrictions, funds separation, maintaining the source relationships even without a firm promise of recompense, and much more. But you pick the transaction costs when you pick the revenue, and ignoring them is beyond risky to your organization and constituents.
The Shoals Crisis Center in Florence, a nonprofit rape crisis center in Alabama, may be learning this the hard way. Reportedly, the group is closing because it was denied emergency funding from the state. The funds were denied “because of the center’s inability to adequately document grant expenditures and its failure to meet reported goals and objectives required,” according to Alabama Department of Economic and Community Affairs (ADECA) Director Kenneth Boswell.
Samantha Belville, executive director of the center, told AL.com that “sexual assault victims and their families in Florence must now travel more than 70 miles to Huntsville to seek help,” and Shoals is appealing to the attorney general’s office.
The Shoals Crisis Center’s mission is “To provide educational assistance for victims of rape, as well as, the prevention and reduction of rape in the Northwest Alabama area.” They provide counseling, exams, and a 24-hour crisis hotline, as well as legal assistance and continuing education for victims and family members. Belville also told the Times Daily that “We are going into area jails and detention centers working with the staffs, doing assessments, examinations. Then we go back and do counseling and therapy with the victim.”
Nearly two thousand rapes were reported in Alabama in 2015, though only 242 people were arrested for rape. The number of victims is likely much higher; Kathy Echols, a staff therapist for the University of Alabama’s Women and Gender Resource Center, told the Crimson White that “60 to 80 percent of victims won’t report.” Alabama did not expand Medicaid coverage for low-income residents and only legally recognized male victims of sexual assault in 2013, making nonprofit resources for victims in the state even more crucial.
Unfortunately, the Shoals Crisis Center’s commitment to responsible financial management has not matched its commendable commitment to its constituents. The Shoals Crisis Center nearly closed from lack of funds just last year and was rescued just in time by ADECA grants. “This will keep the doors open,” Belville said at the time. Alabama allocated $339,685 to Sexual Assault Services Formula Grants in 2016 (all but $2 of the federal receipt), and $318,528 went to the Shoals Crisis Center.
A review of the organization’s Form 990 from 2015 (the most recent year available) shows that they committed two of NPQ’s documented management faux pas for nonprofits: Operating in the red and concentrating on one revenue source. (In this case, grants from the state.) In an interview with NPQ, Richard Brewster describes a very common problem that could lead to these kinds of issues.
Transaction costs include those costs that are over and above the directly attributable costs of fundraising: the costs of administering a particular type of funding (meeting reporting requirements, for example); the costs of developing systems to support fundraising and administration; the time spent by the executive director and key staff in building relationships with potential funders; and the time and attention of program managers, who may be forced to act differently as a result of a particular funding stream.
It is important to take these transaction costs into account even if some of them seem qualitative.
Bob Herman and Dick Heimovics of the University of Missouri-Kansas City have produced some good evidence that one of the transaction costs critical to the effectiveness of a nonprofit is the time the executive director spends securing support, such as networking with politicians or maintaining relationships with foundation or United Way staff and large donors. But what about the opportunity costs of this activity? What other work is not performed because of the effort devoted to this activity? There are only so many hours in the executive director’s day: in effect, he or she can become a bottleneck that checks growth in revenues. One response to this may be to concentrate on one or two sources of funds.
In organizations largely funded by grants and contracts, managing the interplay of restrictions that come with certain sources of funding is also time consuming and can back the organization into a corner.
Virtually all nonprofit revenue demands that it be served. Do you know what that service to the source is costing you and who will pay the price?—Erin Rubin and Ruth McCambridge