The Challenge of Resource Allocation in the Nonprofit Sector: Determining the Right Amount of Fundraising Expenses

ABSTRACT

Nonprofit organizations (NPOs) have access to a limited amount of funding which must finance multiple activities. The challenge of allocating resources includes setting an appropriate budget for fundraising. The dynamic optimization model developed in this study enables an NPO to maximize the services that it can provide over time by calculating the optimal amounts of fundraising and service expenses for each period. It highlights the trade-off NPOs face in allocating resources to either services or fundraising. Our analysis provides practitioners with initial recommendations as to how an NPO’s resource allocation can be adjusted to suit different environmental settings. From a research perspective, the paper presents an analytic modeling approach grounded in well-founded economic theory, which addresses the challenge of resource allocation between fundraising and service expenses. We also discuss directions for future research and provide suggestions for other researchers and practitioners interested in this field.

KEYWORDS:

• Budgeting
• decision-making
• fundraising
• nonprofit management
• quantitative research

Disclosure statement

No potential conflict of interest was reported by the authors.

Correction Statement

This article has been republished with minor changes. These changes do not impact the academic content of the article.

Notes

1. Note that the function may vary from period to period, but henceforth we assume that the marginal revenue is sufficiently large, such that $F{R_t}^{\prime }\left(0\right)>\left(1+i\right)\ast \left(1+d\right)\mathrm{\forall }t$ is satisfied.

2. In analogy to Oster (1995) and Newlands and Hooper (2009), we interpret the marginal revenue of fundraising investments as the additional amount of money (i.e., donations) that an additional unit of fundraising investment returns.

3. Note that the function may vary from period to period, but henceforth we assume that regular contributions and government grants are sufficiently large, such that $R{C}_t+G_t>F{C}_t\mathrm{\forall }t$ is satisfied.

4. Confer endnote 2: An NPO invests in fundraising in each time period ($M_t>0\mathrm{\forall }t$) because the marginal revenue of fundraising investments goes to infinity if $M_t$ goes to zero $\left(\underset{M_t\to 0}{lim}F{R}_{t+1}^{\prime }\left(M_t\right)\to +\mathrm{\infty }\right)$.

5. This is not necessarily given in each case.