A nonprofit organization must achieve financial balance by spending the appropriate amount of money in each spending category to ensure the nonprofit delivers impactful results. The three main spending categories are program service expenses, management and general expenses, and fundraising expenses, according to the IRS Form 990.

How to appropriately allocate a nonprofit organization’s resources for impactful results has been a long-standing issue in the nonprofit sector. There are many reasons as to why including satisfying all stakeholders, external pressures from “watchdog” organization ratings, an overall lack of resources, pressure to spend on programming, pressure to not spend on overhead, and the list goes on and on. One can see how it would be easy to get caught up in all of this.

How to base allocation decisions

Thankfully, there are solutions for nonprofit organizations. To begin with, a nonprofit should look at how they are basing their decisions. Decisions should be made first and foremost with the mission of the nonprofit in mind. Next, outcomes, or impactful results, should be what drives the decision on where to allocate a nonprofit organization’s resources. In other words, decisions should not be made based on external pressures to allocate resources a certain way, but these decisions need to be made based on what is best for the nonprofit, its mission, its community needs, and its internal needs such as organization, employee, and volunteer wellbeing.

Although it is tempting to look at ratings from “watchdog” organizations and make resource allocation decisions based on these rating because of the impact they may have on donor funding, at the end of the day, it is important for a nonprofit to do what is best for their own organization. This should include ensuring the future success of the nonprofit and not just the immediate programming needs. Long-term investment is important for the nonprofit sector to continue to provide their invaluable services to communities in need.

Other strategies to help with issues at the base of resource allocation issues.

There are additional strategies that nonprofits can use to help with the issues of resource allocation. Donor education can have a large impact on helping nonprofits to receive more resources, which would then lessen the burden of choosing between what needs funded most. Donors should be educated on the true costs of running a nonprofit organization, in all spending categories (typically programming is highlighted as that is where donors usually want their money to go). Nonprofits need to work to be more transparent regarding their financials. This helps to build trust between stakeholders and nonprofits so that everyone understands what is needed and why. Nonprofits can also educate donors on when they have a change of what stage they are in. For example, resource allocation will vary greatly if a nonprofit is in a start-up stage in comparison to a stage of maturity.

Although there are many factors that come in to play when attempting to appropriately allocate a nonprofit organization’s resources for impactful results, nonprofits need to shift their focus to mission, outcomes, and impacts rather than external pressures. Donor education and transparency can play a key role in ensuring the success of impactful results.

Nikki Fowler is 2023 graduate of the Masters of Nonprofit and Leadership Management program at Arizona State University. She is a United States Army veteran who worked in the nonprofit sector for over four years before becoming a stay-at-home mom to focus on continuing her education and. She currently resides in Phoenix, Arizona but will be moving to San Antonio, Texas with her family in the summer of 2023 where she plans to learn more about and serve the nonprofit community in that area by either volunteering or working part-time once her family is settled in.

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Illustration by Lillian Finley / ASU Lodestar Center

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