The nonprofit industry covers many types of organization but it is the 501 c 3’s that are primarily financed through two main sources; government agencies and the private sector philanthropy.  Both sources are heavily tied to the health of the economy, with the private sector being more closely tied to the performance of investment securities.  With both the economy and the major aggregate indexes (equity and fixed income) having suffered declines in the past few years, nonprofit 501 c 3  funding has leveled off and the competition for funds among non-profits has become much more fierce.  Both government agencies and philanthropic organizations are becoming more selective in distributing funds, looking for nonprofit 501 c 3 organizations providing a more effective use of its funds.

Regardless of size, every non-profit organization needs the ability to do some basic administrative functions, such as human resources, accounting, purchasing, and auditing.  Larger non-profit organizations (defined by us as having greater than $3.5 million in revenue) are able to achieve economies of scale in many of these areas, allowing them to spend a smaller percentage of their overall income on administration and more on direct care.  Non-profits generally begin to gain this benefit by expanding to offer a wider cross section of services across multiple communities.  For small non-profit organizations 501 c 3’s, they are unable to benefit from such economies of scale.  Rather, they tend to excel in treating a small, focused segment of one community very intimately.  Simply put, they subscribe to the theory of quality over quantity.

In addition, most non-profits 501 c 3’s depend on government funds to support their operations and pay for their overhead.  Government organizations which provide the funding for these non-profits are constantly struggling with the need to purchase services in the most efficient, cost effective manner possible.  Often larger non-profits are able to offer the efficiency and cost effectiveness the government is looking for, but the government is looking for more than just efficiency in the human service sector.  They are also concerned about quality of care issues and free care/services.  Small non-profits are typically focused on a small, specific segment of the population, which naturally lends itself to a high quality of care and more donated services from volunteer time.