By Zoe Pacciani, interviewed by Elizabeth Buhungiro
Non-profits are a significant part of the global economy. However, the organizations often struggle with ensuring financial sustainability while also achieving their social impact goals. To shed light on this issue, we talked to Zoe Pacciani, Chief Operating Officer (COO) of International Lifeline Fund, who has worked in the international development sector for over 20 years. In this interview, Zoe shares her insights on what Return-on-Investment (ROI) means for non-profits, why non-profits should focus on ROI, the top five business mistakes they make, how to determine necessary versus discretionary overheads, and the most practical way to boost a non-profit’s ROI.
1. Return-on-Investment (ROI) is a term you typically hear in businesses but not non-profits. So, what does ROI mean for non-profits?
Let me start by saying that non-profits are businesses and should be run with that in mind. The only real difference is motivation. With a business, the motivation is naturally to profit first, whereas a non-profit is motivated by impact, i.e. “Are we doing good, improving lives, and meeting our social impact goals…?” So, to answer your question, ROI for non-profits means striking the balance between investment, impact, and expected project lifetime. It is not only measured financially, but also in achieving social investment goals and program sustainability.
2. Why should non-profits focus on ROI?
Non-profits don’t typically think of themselves as businesses and because of that, they make poor financial decisions that bring low cost/beneficiary ratios but short-lived impact. A practical example of this is something everyone implementing rural water programs in sub-Saharan Africa is grappling with; billions of dollars have been sunk into achieving clean water access over the last four decades, and yet there is such a low return on investment. A third of handpumps in Africa become non-functional within the first five years. On the flip side, cost/beneficiary ratios can be exaggerated with the notion that NGO budgets are bottomless, and as a result, financial efficiency is not considered, hiking the cost of the project unnecessarily. Somewhere between these two scenarios, we might find the sweet spot where systems are built and managed for the long term without pushing project costs beyond the realistic or necessary.
3. What would you say are the top five poor business decisions non-profits make?
The biggest mistake non-profits make is perceiving funds as simply there to spend rather than viewing each financial decision from a value-for-money perspective. The second mistake is not valuing expenditure tracking to understand the organization’s spending habits and identify inefficiencies in management approaches. Thirdly, non-profits and donors alike highly value monitoring and evaluation of projects, but leave these activities underfunded. They also often do not have a budget for establishing necessary operation and maintenance activities, in favor of community-based management and contributions – a failed sustainability model. Another mistake non-profits tend to make is over-staffing – usually due to institutionalized bureaucracy in the form of long reports and excessive paperwork that unnecessarily distract employees from the organizational objectives. I’ve also noticed that non-profit organizations cast a very wide net when it comes to stakeholder participation, extending project timelines and budgets. Of course, stakeholder buy-in is crucial, but this can occur without exaggerating the number of stakeholder meetings or number of meeting participants beyond reasonable or necessary bounds.
4. Non-profits often use ‘low overheads’ as a selling point during fundraising. Where do you stand on this? Is it realistic to keep your overheads low? How low is low? And how do you determine which overheads are necessary versus discretionary?
It depends on what is considered overheads. This is often manipulated to meet low overhead goals. I do agree that overheads should be kept to a minimum, but I also do not believe they are a measure of an organization’s success, or perhaps the only measure. I would rather organizations focused on quality projects that are sustainable rather than moving expenses around to keep overheads “low” or not paying their staff a decent wage, or relying on volunteer support, or not building local capacity.
5. What is the most some practical way for nonprofits to boost their ROI?
There are two critical components of a successful project: community expressed need (and keep in mind that community can be a number of things, including an entity or group) and sustainability. I don’t think anyone would argue this. The most practical thing an organization can do to improve their return on investment is to look at that investment over its expected lifecycle. For example: if a water system is being installed for $20,000 and will last 2 years, but the same system could be installed for $40,000 and last 10 years, it makes sense to invest $40,000 because the return-on-investment is much greater than the investment itself. In other words, many non-profits want bang for their buck but are not recognizing that it is short-lived and can effectively be considered a poor investment. Too often, non-profits look at the immediate cost/beneficiary ratio and try to reduce that as much as possible. Instead, I suggest, and I know this is already happening in many cases, looking at the cost/beneficiary ratio over a period of time – for example, a water system over 5 years.
Non-profits should approach their work with a business mindset, valuing each financial decision from a return-on-investment perspective. By focusing on community-expressed need and sustainability instead of short-term cost-beneficiary ratios, non-profits can increase their return on investment and make a greater impact.
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