Recently over the course of about three weeks time, I watched a nonprofit organization, which had projected a bright future go from a million dollar revenue goal to all but closing its doors.  At the time of this post, it is doubtful they will survive.  That’s sad for several reasons: well-meaning and caring people are out of a job, there is now a void in the community for valuable services, and committed donors and stakeholders are scratching their heads.

It’s a well-known fact that most businesses fail within the first couple of years,

I’ve heard as many as 8 out of 10.  It’s a bit harder to get the numbers on nonprofits; many simply fade away and fail to report to the IRS, but from what I could find, they do much better than their for-profit counterparts.  For instance, of the 50K+ organizations that gained 501 c)3 status in 2005, 64% of them were still listed as registered with the IRS as of 2015.  Additionally, when reviewing 990 filers over the period from 2000 to 2005 only 16% of them failed to file in 2005.  So, that’s good news, nonprofits can boast they have a higher sustainability rate than their for-profit cousins.

Bottom line… businesses and nonprofits fail because they simply just run out of cash;

but, the reasons for that run deeper than what you may think…

I didn’t find the problems with the aforementioned organization all that hard to understand, they were unable to answer some of the most basic questions about the business side of their organization.  When queried, cash flow analysis, budget justification, and prospect forecasts garnered a doe-eyed look of perplexity.

Here are some thoughts on why organizations often fail.

For multi-dimensional and larger organizations, Leadership breakdown may be by and large the biggest factor.  Far too often, the shared vision of a greater future gets watered down or lost all together.  As new programs grow and begin competing for resources, they develop an infrastructure that creates individual silos of ownership.  These silos often fail to coordinate or collaborate and interdepartmental communications may cease to exist all together.  The board becomes a rubber stamp and leadership loses its focus on its principal business.  This has an overall effect of core message becoming faded and mission, vision, and values becoming less important.  Leadership must take the time to routinely revisit purpose and work to keep the team focused and on track with an exciting plan for the future.

Another key aspect of success is a valid value proposition; it must be clearly stated and understood by the entire team.  It must position your organization as unique in the community and inspire others to participate, collaborate, and donate.  There must be differentiation between what your organization does or produces as compared to other options in the community.  Often, this translates into a unique process or exceptional delivery of service, but it also might include a different perspective, or a compelling success story.  Whatever your value proposition, remember it needs to be focal to your business model.

Speaking of business model, while it can be defined as quite simply how you earn revenue, it incorporates several key components.  An excellent tool for developing or assessing your model is the business model canvas.  It has also been adapted for the nonprofit world by several entities (here’s one) but the basics are pretty straight-forward.  At the heart of your business model is your value proposition; surrounding that are your key partners, activities, and resources and your relationships, stakeholders, and delivery channels, these elements are then supported by your cost structure and your outcomes or impacts.  If you are not infinitely familiar with each and every one of these elements, you do not understand your business and your future is not as bright as you think.

More than any for-profit business, relationships are at the heart of your nonprofit operations.  While the customer is always right, many businesses do not have to rely too heavily on specific customers.  Nonprofits do not have that luxury.  We’re in a relationship business, we don’t so much as raise money, as raise friends.  We need to communicate, cajole, connect, and engage with so many unique individuals in an effort to move them from a position of interest to one of ownership.  We need to understand that donors are investors and they need reinforcement with regard to their giving decisions.  They need to be included in the mission, understand the difficulties, and be connected to the people you help.  The nonprofit I mentioned earlier lost their connection with several of their key donors, robbed Peter to pay Paul, and relied too heavily on a couple of large donors that they then took for granted.  When they disappeared, they were done.

The final area concerns understanding need.  Which translates to knowing your service recipients, your community, or (for lack of a better term) your customers.  Needs shift and change over time and not keeping your finger upon the pulse of those you serve is a sure-fire recipe for failure.  Just because what your did 10 years ago was wildly popular, does not mean that it will be embraced today.  You need to ask questions and probe and survey your service recipients to ensure that you are fulfilling their needs.

If you are a stakeholder within a nonprofit organization,

take the time to consider these core fundamentals.  Whether you are a board member, staff, or a donor, these questions need to be addressed and readdressed on a regular basis.  One more thing, remember that often you may be too close to see a problem.  That’s why outside assessments are critical to sustainability.  Call us today to learn more!