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Thursday, August 17, 2017

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What's the Cost of Bad Decisions?
Nell Edgington

May, 2010

There is an economic concept that is beautifully profound in its simplicity, but often overlooked in the nonprofit sector. Opportunity costs are the cost (financial, time, resource, other) of what you have given up in making a choice between two or more options. Understanding the opportunity costs of decisions is particularly important when resources are scarce, as is the case in the nonprofit sector.

Key to the concept of opportunity costs is that you are consciously analyzing two or more options and what you must give up in choosing one over the others.  So, for example, a child who has to decide if they want a candy bar or an ice cream cone recognizes that in choosing the candy bar they are giving up the enjoyment of the ice cream cone. It seems so simple, yet in the nonprofit world it becomes much more complex.

Because the nonprofit sector is undercapitalized, money is king. A driving motivation in many nonprofit organizations is to preserve money, or go after money, at all costs.  So the idea of opportunity costs is often thrown out the window.

Say, for example, that a nonprofit leader is deciding whether to spend $45,000 to hire a grant writer or $75,000 to hire a Development Director.  The tendency would be to hire the grantwriter because they are cheaper, because in the world of nonprofits, cheaper is always better.

But let's look at the opportunity costs.  In hiring a grantwriter, the nonprofit would save $30,000, but lose many times that amount in opportunity costs. If they had hired a skilled Development Director with experience raising money from sources beyond foundations (individuals, corporations, earned income), the difference in revenue brought in under the grantwriter versus under the Development Director could be in the hundreds of thousands.  In choosing the "cheaper" grantwriter, the nonprofit is actually costing the organization a huge amount--the opportunity cost.

Nonprofits are sometimes so strapped for money that they head out the door with a fundraising ask trying to get the quickest money, instead of the most money. Take Idealist's campaign earlier this year to raise emergency funds for the nonprofit job board. They raised some good money, but what if they had waited to launch a fundraising campaign until after they put a new business plan together? With a solid, innovative plan in hand for completely revamping a struggling organization, they probably could have raised 10 times the amount they did raise. So for them the opportunity costs of not waiting to go public with an ask was potentially huge.

But the calculation of opportunity costs goes well beyond money. The value of a board member's time in a nonprofit is huge. A good board member has the potential to forge relationships with funders, partners, governing entities and others that could grow or strengthen the work of the nonprofit. But often a board member's time is instead used to organize fundraising events, sit in endless meetings, review mindless policies. If a nonprofit were to calculate the opportunity cost of choosing to have a board member pick out tablecloth colors for the next event (trust me, it happens) versus having them use that time to introduce the Executive Director to a new potential donor, the costs would be eye-opening.  A board member's time, just like the money flowing to the organization, is not limitless.

Nonprofits cannot ignore opportunity costs, as if they don't apply in their resource-strapped world.  Indeed, because nonprofits are so constrained for resources (money, time, staff, volunteers) they should be even more cognizant of opportunity costs and ensure that every last resource is put to its highest and best use.

Learn more about Nell Edgington and Social Velocity at  http://www.socialvelocity.net/



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