Tuesday, May 1, 2012

28+ Reasons Start-Up Nonprofits Fail

Why do so many start-up and long-term nonprofits fail?  Most start-up for-profit businesses fail, over 50%. It is no different for nonprofits. In my opinion here are 28+ reasons why a nonprofit will fail. Do you see other reasons why nonprofit groups fail and close their doors? Please add them here for others to learn what it takes to avoid failure and to enhance success. 

1.       It is started or run by a single person
2.       Leadership fails to have an appropriate, adequate and diverse board for overall governance, policy planning and development;
3.       Leadership fails to provide appropriate insurance, ethical and conflict of interest policies 
4.       Leadership fails to assess the market for need or duplication
5.       Leadership fails to develop long-term, meaningful relationships with those who share their passion for the mission, also known as “friendraising”
6.       Leadership does not want or fails to work with others
7.       There is inadequate resource planning and development
8.       Leadership fails to develop a written business plan and plan for succession
9.       Leadership underestimates what it takes financially to start and to operate a nonprofit and to maintain and sustain it; inadequate budgets  
10.   Leadership fails to translate and to evaluate what they are doing into meaningful activities and measurable goals, objectives and outcomes
11.   Leadership fails to assess and keep records of what they do that works and what does not work
12.   The organization lacks transparency in its mission, vision, values and finances
13.   Leadership fails to assess and address risk in its management, goals, objectives, outcomes and activities
14.   Leadership fails to keep and to assess business records and meaningful data
15.   There are inadequate fiscal controls
16.   Leadership fails to keep adequate and full fiscal records
17.   Leadership fails to pay attention to detail in what they are doing
18.   Leadership fails to prepare necessary written best practices, policies, procedures, forms and recordkeeping standards
19.   Leadership does not stay true to facing the need and does not alter programs when needed, inflexible and stubborn leadership
20.   Leadership pursues funding for goals, objectives and activities outside its mission
21.   Leadership fails to be advocates for the need they are addressing
22.   Leadership has inadequate skills to manage a nonprofit and its activities
23.   Leadership fails to provide reports in a timely manner to the board, to funders, to the public, to local, state and federal regulators
24.   Leadership fails to assess and use social media for the mission of the organization 
25.   Leadership fails to stay current on local, state and federal regulations and laws governing nonprofit organizations
26.   Leadership does not provide reports and data as required under contract compliance
27.   Leadership underestimates the amount of mental, physical and spiritual energy needed to start, maintain and sustain a nonprofit, they become exhausted and cannot face “no” when it comes to money or support, they fail to follow through on promises or requirements
28.   Leadership overestimates their own abilities, energy, skills and belief in the mission and they expect others will want to help without telling a clear, honest and meaningful story about the mission; they become exhausted, puzzled or resentful that others do not follow them

I do not consider those nonprofit organizations that succeed in fulfilling their missions and then close their doors or that merge with other groups as failures.

But these 28 reasons do not tell the full story. There are lessons to be learned from experience such as these below. 

Funders want to buy certain results and want to know what results a nonprofit organization offers and what results they can achieve. A nonprofit may offer certain results but can they demonstrate they can achieve them?

In the United States nonprofit world most funding comes from individuals. In 2011 73% of the $290.89 billion in charitable donations came from individuals. 35% of that went to religious organizations. 14% was given to education. Households give 1.9% of their disposable income compared to 0.9% giving by corporations including corporate foundations of pre-tax profits in 2010.

Nonprofits range from sports teams, hospitals, universities, Smithsonian Institute, American Cancer Society to volunteer fire stations, community recreation programs, neighborhood HIV/AIDS programs and so on. There are over 1.4 million tax exempt organizations in U.S.  The American Red Cross is one of the largest and spent more than $3 billion in 2010. Houses of worship, churches, synagogues, mosques and similar groups, do not have to file with the state or the IRS for nonprofit tax exempt status but some do.

Nonprofits reporting annual expenses of $10 million or more accounted for 85% of total spending on charities in 2009. Nonprofits that receive tax deductible donations have many sources of revenue. In 2009 the largest source of revenue, about 76%, was from fees for goods and services, tuition, admission, Medicare, third party contracts, etc. The rest come from government grants, and donations from individuals, corporations and foundations. Health care received 60% of the revenue and had 41% of the assets in 2009 compared to education, public and social benefit and arts, culture and the humanities.

The Independent Sector reports there were over 115,000 private grantmaking foundations in 2010 with total revenue of $43.8 billion and total assets of $582.5 billion listed by the IRS. There were also in excess of 5,000 private operating foundation which rarely give grants..Corporations that provide gifts and grants but not through their foundations are not required to be recognized by the IRS.

The Nonprofit Finance Fund’s Report for 2012 had nonprofit tax exempt organizations respond to its questions about finances and service. Basically most have seen a reduction in income and an increase need for service.

“In this year’s survey, more than 4,500 respondents at nonprofits across the country shared the details of how they are adapting their organizations and finances to economic conditions.  The survey, which was supported for the second year in a row by the Bank of America Charitable Foundation, reveals that while 2011 was a year of significant organizational and programmatic changes, many nonprofits are still facing fundamental challenges that threaten the stability of the sector and the well-being of the people they serve.

Here are the facts: 

·         85% of nonprofits experienced an increase in the demand for services in 2011.
·         This is on top of years of increased demand: previous NFF surveys found that 77% of nonprofits experienced an increase in demand in 2010; 71% experienced an increase in 2009; and 73% experienced an increase in 2008.
·         88% expect an increase in demand for services in 2012.
·         57% have 3 months or less cash-on-hand.
·         87% said their financial outlook won’t get any better in 2012.

But this is just a fraction of what the data show. This year, for the first time we’re enabling you to explore the data yourself. Our NFF Survey Analyzer at survey.nonprofitfinancefund.org allows you to investigate questions that cut across sub-sectors, budget size, and geography. We invite you to share what you discover via e-mail and social media.”

Resource development includes but is not limited to dues, grants, fee for service, third party contracts for service, fundraising (aka friendraising), volunteers, equipment gifts, in-kind donations, dinners, golf tournaments, marathons (bike-athons and other –athons), capital and building campaigns, pledges, gifts and annual giving, bequests, endowments, selling products (as with museums for instance), partnering with others on projects or for funding, and more.

Nonprofit organizations are incorporated in states and receive tax exemption from the IRS and possibly from the state for state taxes. The cost for that at a minimum is close to $1.000 for each organization. State laws usually govern how the group is incorporated although the state incorporation papers also have to meet IRS requirements. The IRS has been tightening the process for initial recognition as tax exempt and also for remaining tax exempt. The IRS is making nonprofits more accountable, transparent and more business-like.

Many nonprofits are losing their tax exempt status for failure to file annual reports with IRS for 3 consecutive years, 275,000 in June 2011. http://www.irs.gov/charities/article/0,,id=239696,00.html  

Money and other resources are becoming harder to find and receive. Demand for services has increased. There is a time when the demand far exceeds the ability to serve and nonprofits have to close or merge. Programs such as civil legal services for the poor, the arts, mental health, animal care, community-based groups, and others have felt the financial crunch the past 5 years. They have had to renegotiate grant contracts and reimbursement contracts. They have closed offices, downsized staff or prioritized services.  Some have started for-profit companies to try to help in the revenue earning. They have merged with similar programs or closed their doors.

Programs that have developed partnerships or collaborations, those that have developed an entrepreneurship concept and larger environmental groups are favored by funders. Funders are looking for demonstrable impact from their contributions.

Problems for nonprofits predate the recession. Except for the largest nonprofits many had little more than three months carry-over funding to handle a reduction or loss of donations, a grant or other income. Reduction or loss of funding in 2008-2009 had many scrambling to seek new funding and facing layoffs and closing of offices. I wrote extensively on this at my blog during that time.

Theft and embezzlement in nonprofits may be greater than in government or Wall Street. Gary Snyder, a writer from Detroit, e-mails a monthly factual scandal sheet and has a blog, Nonprofit Imperative, about fraud and embezzlement in nonprofits and government, He is not writing about 5 and 10 cent crimes but crimes involving $100,000s and $1,000,000s. These scandals have made a negative impact on peoples’ trust and on their giving. See http://nonprofitimperative.blogspot.com/2012/04/trustno-controlsfraud.html?spref=tw

In some instances local and regional organizations are suffering in securing donations because of the development of web sites assessing the work of nonprofits. There are three well known sites where anyone can access information about tax exempt organizations. The data available includes the IRS Form 990 filed annually by nonprofits with an annual income of $25,000.00 or more. The IRS features the information at www.irs.gov.

The second site is GuideStar. GuideStar does include all tax exempt organizations. It is struggling to become a place where donors can get up-to-date information and some evaluation of the work performed or not performed by charities. You can access information about nonprofits here –


The third site is that of Charity Navigator. It does not include all tax exempt organizations. It includes less than 1% of them in fact. In my view this web site has a negative impact for fundraising on those groups not listed. A donor seeking information from CN will be disappointed not finding local or regional groups. That can dissuade a donor giving to those groups. I wrote about the danger of CN several years ago. I am aware of a number of nonprofits that have tried to be included in CN’s listing but were turned down because they did not meet CN’s prerequisites.CN advertises itself as the world’s largest evaluator of charities but it is not. It fails in many ways but is given credence by the news media and the few charities it lists. http://www.charitynavigator.org/

Mergers and partnering on programs and grant applications have played an important role in saving organizations

The role of social media in telling the story, securing, maintaining and interpreting data is vital for the life of nonprofits.

Keys to money: relationships x 3 or more (spheres of influence), and location x 3 or more (they are in the right place, they are the right people to do the work, they have the right tools to do the job) and character of the leaders, matching needs and ability to meet the needs to money and to givers' interest.

Nonprofits that rely heavily on contracts or grants may not have a reasonable reimbursement rate to cover the service and growing excessive reporting requirements. In a number of states where nonprofits have government contracts, reimbursement is running 6-12 months late seriously jeopardizing the health of nonprofit organizations, their cash flow, staff retention and ability to get the job done..

An important element in maintaining and sustaining a nonprofit organization is paying for staff. Most nonprofits with income of $25,000 and $10 million are not paying competitive salaries for line staff. There may be some instances that the CEO is being paid well over $150,000 a year. But the worker bees including the financial people are not paid appropriately in my view. This can result in employees with lower skills or forced turnover because of poor salaries and benefits. Most community-and faith-based health providers, for instance, do not pay their employees the same level as their government or for-profit counterparts. That makes recruiting and retention of top quality employees difficult.  The sector has to face the fact that nonprofit employees are very dedicated and are underpaid. They do not receive a fair reimbursement for travel. But both the nonprofit organization and their employees are caught in a fiscal trap. Claims of exorbitant executive salaries suggests that others are also over paid. It is a false premise but one that affects donations.    

Two recent stories of famous nonprofits either rocked by scandal or by mismanagement show the danger zones in which nonprofits exist.

Greg Mortenson and the charity he founded, Central Asian Institute, to build schools in Afghanistan and Pakistan, have been featured in books including Three Cups of Tea. The stories have been a large inspiration to many. The TV show 60 Minutes has demonstrated that stories may have fabricated.  False accounts in his books, excessive financial benefits, bad financial management, poor recordkeeping and failure of board oversight have given the charity a bad name. Mortenson has been ordered to repay a million dollars by the Attorney General of Montana for allegations of double dipping and other financial mismanagement. The charity’s board is going through a substantial change in leadership.

This story is similar to the Enron scandal which on its own has affected nonprofits requiring greater transparency. The William Aramony and the United Way scandal that resulted in Aramony going to prison in 1995 was fraught with fraud left the sector with difficulties of trust. Fame and the famous are always potential targets, such as Lance Armstrong and his Foundation with allegations of doping. University campuses have been rocked by lying, cheating, child molestation, and infidelity at Ohio State, Penn State, North Carolina, Tennessee, Arkansas, all nonprofits or government entities, resulting in firing head coaches and even university presidents. .

The failure of the venerable Hull House in Chicago which was started by Jane Addams in 1889 shocked many. It was the model for social work and community centers including the one I created in Camden NJ in 1963. A report from The Chronicle of Philanthropy suggests the problems already existed when the recession hit with a debt over $2.3 million in 2007. 300 employees were laid off on January 27, 2012. There seems to be more than just failure of the board which had fiscal managers, top attorneys and other professionals available for guidance. They did not challenge the executive director and top management staff who said that nonprofits always live on the fiscal edge – and that is accurate. Most nonprofits, below $10 million annual income, live on the edge. But this time the edge was too close to live on. 


On May 3, 2012 The Chronicle of Philanthropy reported that Public/Private Ventures (P/PV announced that it will cease operations at the end of July because of financial issues. P/PV was founded in 1978 and grew to be an influential research and evaluation organization in the nonprofit tax exempt arena. The Chronicle points to two landmark areas for P/PV research, first, Big Brothers, Big Sisters mentoring program and second P/PV’s work on job training for re-entering prisoners to society.  P/PV acknowledges they have had trouble since the downturn of the economy in securing grants to cover operating expenses and to withstand competition. They laid off 21 staffers and revised their pricing plan to reflect true cost but that was not enough to withstand the pressures. It is ironic that as funders seek more evidence-based funding and greater evaluation that the future of one excellent nonprofit organization providing those has resulted in closing for lack of financial support.   

The P/PV board apparently did its job through the difficult assessment. P/PV President Nadya K. Shmavonian reports at their web site –

“P/PV has worked hard for more than a year to chart a new, sustainable path forward. We enjoyed generous core support from several private funders and made difficult staff cuts. But we have recently concluded that changing trends in evaluation, as well as resource constraints among both public and private funders, will not allow us to remain competitive as a small, mission-focused agency. That has led to the decision to cease operations.”

Congress is asking for more accountability for 501 (c) (3) organizations yet individual congress people and others in the election arena start up tax exempt organizations to help get them elected. The case of Citizens United allows for invisible money to run our elections without accountability or transparency. I do not oppose more accountability or transparency for tax exempt groups but I do seek equality of others that are giving nonprofits a false bad image. There are major differences between a 501 (c) (3) and a 501 (c) (4), (5) and (6) when it comes to lobbying and political campaigns. When (4), (5) and (6) organizations produce a scandal it is handled by the media as a nonprofit tax exempt organization without detailing that they are not the same as a (3).

Starting and operating a nonprofit tax exempt organization is a leap of faith. It has to be done smartly, however, not foolishly.  The states and the IRS allow a great deal of latitude to start and operate with some but not many restrictions. There could be more. Just because someone has a good idea does not mean that person can carry out that good idea nor does it prove it is a good idea without data and facts to back it up.

For more about what I mean by the leap of faith and the origin of a nonprofit please see –

That is my assessment of what is happening to the thirds sector, the nonprofit world. I have the utmost regard for those who work in that sector and I miss working there every day.

Do you see other reasons why nonprofit groups fail and close their doors? Please add them here for others to learn what it takes to avoid failure and to enhance success. 



There is not universal agreement about the need for a business plan for nonprofit organizations. I am one of those who believe it can be an enormous benefit both in process and results. 

The Nonprofit Business Plan - Program Precedes Money. Planning Precedes Program

I wrote the following article several years ago at the height of the money scare for nonprofits, that still has not eased, The title may be misleading now, but I would just change the year and leave about everything else the same with the emphasis on UNLESS. 


1 comment:

Non Profit Groups said...

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