Why Do Nonprofits Fail? 3 Common Reasons

We don’t often talk about the potential of our favorite organizations and close-to-our-heart causes failing and closing up shop. On its surface, the fact that the rate of failure for nonprofit organizations is a bit lower than that of for-profit businesses looks like good news, like maybe we aren’t doing too bad, right? However, I think it is more likely that we simply allow nonprofit organizations to flail and flounder for far longer than we do their for-profit counterparts, that failure “looks” different sometimes.

Before we get into some of the top reasons organizations fail, let’s take a glance at the sector itself.

Nonprofits in the United States

According to the according to the National Center for Charitable Statistics, there are over 1 1/2 million nonprofit organizations in the United States these are the ones that are registered with the IRS this doesn't include lots of the faith based organizations community organizations that aren't don't have status so wait you're probably looking at close to 2,000,000 charitable nonprofit organizations of some kind or another in the United States. Complicating things even further, Congress (through the IRS) established at one point 36 different kinds of nonprofit organizations under the 501 code; there are still 29. Everything from the charitable organizations that most of us typically think about-the American Cancer society, the shelter down the street, all the way to you labor unions, childcare organizations, chambers of commerce, homeowners’ associations, to volunteer fire companies, and the list goes on.

Nonprofits in Oregon

There Over 19,000 nonprofits in the state of Oregon. That equates to one nonprofit organization for about every 4700 people in Oregon. Again this doesn't include things like churches community groups that are unincorporated or not filed with the IRS. That is a lot of organizations for state that is only 27th in terms of population.  

So, why?

Nonprofit organizations can fail for a number of reasons-lack of planning, lack of money or resources in general. Technical reasons like failing to file required paperwork with the IRS or the state in which they operate. Founders and leaders leave with no one to take their place (this is known as failing to succession plan). Organizations can die from attrition, meaning that that there's simply no one stepping in to move it forward.

Sometimes organizations fail because they are no longer relevant, whether the issue that they were addressing has been resolved in some way (we can hope!), or the manner in which they are operating leaves them behind-someone else comes along with better resources or more effective strategy-or simply gains traction in your industry. While we often equate charity with giving and kindness, the nonprofit sector itself can be as competitive as the for profit. *Given the high per capita rate of nonprofits in Oregon, this is an especially important factor to note.

While there are lots of different reasons a nonprofit may fail but there are a few reasons that sort of rise to the top in my opinion, all kind of related to each other.

Lack of funding

Let’s face it-whatever the mission or purpose for a nonprofit to exist, that organization will be hard-pressed to stay afloat without at least minimal funding to carry out its work. Whether cash revenue or in-kind donations (this includes founders and volunteers paying for things!), every effort requires some kind of funding source. While there are, most assuredly, small community groups that function without a formal financial structure, even they need resources. There is no getting away from the fact that nonprofit organizations depend on external resources and, without them, failure is inevitable.

Lack of Planning

A sure way to run up against a funding shortfall, is poor planning; even worse, no planning at all! I belong to a number of nonprofit leadership peer groups-I will feature some of my faves in a future post-and I cannot count the number of times someone has posted some variation of “Ok, I just established a nonprofit-what now???”  I get it. Starting or establishing a nonprofit is an exciting time. Passion and commitment are high, and the possibilities can seem endless. Often, there is also a sense of urgency to get up and running, to “do the thing!”

However, for better or for worse-usually worse-this can mean that some critical foundational steps are missed or skipped altogether. Take funding, for example. You have your great idea off the ground, but have you thought about how you are going to keep the ship afloat past the first year, or even the first six months? When it comes to nonprofits, that old adage “Failing to plan is planning to fail” is 100% accurate.

Inexperienced Board of Directors (and associated lack of training)

My third (but not least!) most common reason is an inexperienced and/or untrained board of directors. Even worse, a board that fails to recognize how important that is and doesn’t seek to properly educate itself.

No matter the size, no matter the location, no matter the type of nonprofit, there are legal guidelines for how it is expected to function. Ignorance of the law is a sure recipe for disaster, and one not looked kindly upon by authorities. Beyond legal requirements, a board of directors that doesn’t understand its role or responsibilities, will be overwhelmed and/or not engaged. It will be unable to effectively ensure that the organization carries out its mission and that it has enough resources to do the work. Inexperienced and untrained board members won’t be able to fill that critical “ambassador” role for their nonprofit, engaging community and building supporters. Finally, if an organization has executive staff (or any staff for that matter), an ill-prepared board will be unable to provide the kind of oversight expected of it, by the state. The door to potential improper use of resources entrusted to it, is not only wide open, but potentially blown completely off its hinges!

Establishing a nonprofit organization is not all that complicated. But, without a doubt, it is an effort that should not be undertaken lightly. By definition, nonprofits hold public resources in their trust-a trust that is, far too often, broken-something that hurts everyone.