Allocation of Nonprofit Funds Among Program, Fundraising, and Administration

40 Pages Posted: 30 Sep 2019 Last revised: 5 Jan 2021

See all articles by Telesilla Kotsi

Telesilla Kotsi

The Ohio State University, Fisher College of Business, Department of Management Sciences

Arian Aflaki

University of Pittsburgh - Katz Graduate School of Business

Goker Aydin

Johns Hopkins University - Carey Business School

Alfonso Pedraza Martinez

Indiana University - Kelley School of Business - Department of Operation & Decision Technologies

Date Written: December 24, 2020

Abstract

Problem Definition: US nonprofits declare three types of expenses in their IRS 990 forms: program spending to meet their beneficiaries' needs; fundraising spending to raise donations; administration spending to build and maintain capacity. Charity watchdogs expect nonprofits to prioritize program over other expenses. We study when such expectations may be counterproductive.

Academic/Practical Relevance: The intertemporal tradeoffs among program, fundraising, and administration shape nonprofits’ operations but have received scant attention in the literature. We provide insights on how nonprofits can manage these tradeoffs to optimize budget allocation.

Methodology: We characterize the optimal budget allocations to program, fundraising, and administration using a two-period model, which also includes the nonprofit’s capacity, return on program (the net value of program to beneficiaries) and uncertain future needs of beneficiaries. We use public data to compare our model’s prescriptions with the actual budget allocations of a leading network of foodbanks.

Results: The optimal allocation depends on the nonprofit's capacity. At high capacity, the nonprofit should spend on administration just enough to maintain its existing capacity. At moderate capacity, the nonprofit should still just maintain its existing capacity, but also limit its program spending, so that it has money for fundraising to raise a budget that will use up its capacity. At low capacity, the nonprofit should increase administration spending to expand its future capacity.

Managerial Implications: Our case study indicates that the nonprofit underspends on administration and fundraising. We conduct a sensitivity analysis focused on return on program. At higher values of return, the gap between actual and prescribed allocations shrinks. Perhaps this indicates that the nonprofit's allocations are based on high estimates of return. An important implication is that, when setting expectations for a nonprofit, watchdogs should be mindful of the nonprofit's capacity and return on program.

Keywords: nonprofit operations, capacity, program, fundraising, and administration spending

Suggested Citation

Kotsi, Telesilla O. and Aflaki, Arian and Aydin, Goker and Pedraza Martinez, Alfonso, Allocation of Nonprofit Funds Among Program, Fundraising, and Administration (December 24, 2020). Available at SSRN: https://ssrn.com/abstract=3460795 or http://dx.doi.org/10.2139/ssrn.3460795

Telesilla O. Kotsi (Contact Author)

The Ohio State University, Fisher College of Business, Department of Management Sciences ( email )

2100 Neil Ave, Columbus
Columbus, OH 43210
United States

HOME PAGE: http://https://fisher.osu.edu/people/kotsi.1

Arian Aflaki

University of Pittsburgh - Katz Graduate School of Business ( email )

Pittsburgh, PA 15260
United States

Goker Aydin

Johns Hopkins University - Carey Business School ( email )

100 International Drive
Baltimore, MD 21202
United States

Alfonso Pedraza Martinez

Indiana University - Kelley School of Business - Department of Operation & Decision Technologies ( email )

Business 670
1309 E. Tenth Street
Bloomington, IN 47401
United States

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