On Non-Profit Quarterly Claire Knowlton wrote a piece advocating for moving past a focus on overhead costs and direct program expenses in favor of full funding of non-profits by foundations. (Or at least recognition of full costs incurred by a non-profit.)

She seems to start from the premise that programs undertaken are essentially jobs non-profits do to further the interests of the funders. This sort of shifts the whole dynamic from a situation where non-profits cast about to find money in order to provide services to one where foundations seek skilled entities to solve problems for them.

Imagine if your personal paycheck were like a restricted grant. Instead of representing your value and level of responsibility in the company, your paycheck is based on a predetermined line-item budget that details exactly how you can spend your earnings. A portion of your paycheck can be used for rent, some for utilities, but most is earmarked for business attire, transportation to work, and coffee to keep you productive throughout the day. The thinking here is that by tying your paycheck to the expenses that contribute to your work, the company is making sure that you will show up on time, appropriately caffeinated, and properly dressed. It’s as if every penny of your paycheck is spent before you cash it.

To some extent, you had a say in your paycheck budget. In fact, you had to present a proposed paycheck budget when you applied for the job. Your friends on the inside said no one who spends more than 20 percent of his or her paycheck on rent has ever been hired. To get the job, you cut your rent line item. That means making do with an efficiency unit above an all-night bowling alley, but it’s better than not having a job at all. Some line items were nonnegotiable from the start: As a policy, your company won’t pay for haircuts; but that’s okay—you can let your hair grow long.

She goes on with this analogy noting that the “company” wants to make sure you are working effectively so they require you to generate reports–except that the cost of doing so will cause the ratio of time you devote on administrative tasks vs. the central tasks they are paying you to accomplish to skew higher. The employer won’t like that.

Because every penny of your paycheck is pre-spent, there is nothing left over for the future or to take care of retirement, emergencies and replacing your aging car (equipment).

In terms of a solution, she says:

“If we start to fully fund nonprofits for their day-to-day program and overhead expenses, and abandon overhead measurements as a proxy for mission fulfillment and efficiency, it’s the equivalent of giving nonprofits control over their paycheck.”

But she says the term “full costs” include:

Day-to-day operating expenses + working capital + reserves + fixed asset additions + debt principal repayment = full costs

In addition to laying out her argument, she makes suggestions to both non-profits and foundations about how they can change the conversation and practices.

Full funding of costs according to her definition would allow non-profits to be more focused on outcomes rather than compliance in order to survive.

This distinction is important. One of my initial thoughts when I read this was that what Knowlton was talking about would primarily be applicable to social service non-profits because fewer foundations would be interested in funding an arts non-profit primarily focused on creating performances.

The thing is, many performing arts organizations are just as focused on compliance and survival as any other non-profit. There are a lot of sincere ambitions that get abridged and curtailed because there isn’t possibility of revenue or funding.

I don’t know how many conversations I have had that started enthusiastically but were quickly ended by the phrase, “…unless we can get a grant to cover it.” Enthusiasm to do a week long residency with multiple interactions turns into a single lecture-demo for lack of funding. Opportunities for single lecture-demos get turned down for not being revenue generating. The outcome focused on is surviving another season.

After awhile, no one even entertains exciting ambitions and settle for minimal token gestures that will garner them a little bit of funding.

A situation where both the organizations and foundations embrace philosophies that make a complete assessment of what would be required to fully fund an arts non-profit could yield amazing outcomes from some.

In addition to funding capacity building for the organization so that everything from the board governance to hiring practices were strengthened, a rigorous study of what the local market would bear in terms of pricing, (including the optimal pricing spread for events), would provide a clear picture of what the capacity is for revenue.

This way there is a good basis for decision making by the organization as well as stronger justification of the funding that is needed to offset the difference between earned revenue, donations and program expense.

While I am skeptical full funding will happen, articles like this one and the conversation about eliminating overhead ratio as a measure of effectiveness are indications that there is potential for a shift toward more constructive policies.