About this series

This article series has been a long time in coming. Most people who I’ve spoken to over the past 6 months have heard me talk about it. It’s about a topic that I feel strongly about. Working with many nonprofit leaders, I consistently encounter similar problems over and over again. Some of them I can do something about - and I do. That’s what created our Growth Readiness Improvement Program (GRIP), operations accelerator, and fractional operations support. When I see a problem, I feel compelled to fix it (that’s the Responsibility and Arranger Strengthfinders theme in me!). But there are some that I can’t do anything about - except write about it.

This series is about years of watching the gaps in fund distribution and management. It’s about focusing on what goes wrong, and more importantly, what goes right. It’s about proposing pathways forward that bring the best of funders and nonprofits together and propose a healthy way of funding impactful organizations.

By writing this, I’m hoping that each funder and nonprofit leader who reads it will develop a slightly different perspective on their part of the funding circle and make stronger and more financially resilient organizations.

The Infrastructure Gap: Why Operations Determines Impact

I. The Shared Opportunity

Every funder wants maximum return on impact. Every nonprofit leader wants to deliver it. But across nonprofit sectors, impact is leaking – not because programs are weak or leaders aren’t dedicated, but because the operational infrastructure that connects funding to outcomes is chronically underbuilt. Nonprofit leaders feel it every day – stretched thin, under-resourced, and spending more time on survival than on mission.

From what I understand, funders don’t choose to fund an organization because it’s good and penny-pinching and paying low salaries. They fund organizations because they are investing in the impact and they like the results.

So why is it that the norms for nonprofits to feel compelled to skimp on “basics”? In my previous post about effective operations, we explored how spending money on overhead actually increases impact - which is what the funders want to see. Which leads to the next question: Do the funders want the nonprofits to have a higher impact and spend their funds on operations to do that? Or do they want to keep the operational percentage lower, but reduce the impact the organization has? You can add some more questions here - for those who are solely impact-driven, do they care if you use your funds wisely? And if they don’t have insight into how you’re using your funds, how can they make sure they’re maximizing their impact investment? More importantly, why aren’t the answers to these questions easy - and how do we improve the communications between funders and recipients about this?

It’s my belief that we need to answer “yes” to most of these questions - but everything needs to be in moderation. Extremes are almost never good. I want to see the funders investing in operational overhead, to make sure they’re measuring impact, and giving the nonprofits guidance about appropriate expenditures. I want the organizations to ask for what they truly need, have the financial bandwidth to get appropriate operations support, and have guidance from the funders about what that might look like. Additionally, a lot of our nonprofit founders and leaders don’t have prior nonprofit entrepreneurial experience - I’d like to see them have the right support to make informed leadership decisions. There is no one better placed than the funders to provide that support and guidance.

This series explores a simple thesis: When funders pair trust with support and nonprofits invest in their own operational foundations, the result is more impact per dollar, more stable organizations, and stronger partnerships.

Think of it this way: We wouldn’t hand someone the keys to a car without making sure they know how to drive – not because we don’t trust them, but because we want them to arrive safely. The same principle applies to funding nonprofits.

II. The Return on Impact Gap

When we talk about nonprofit effectiveness, the conversation almost always centers on programs – what the organization does, who it serves, and what outcomes it produces. But programs don’t run themselves. Behind every effective program is an operational foundation that determines whether funding actually translates into impact.

Think of it like a building. The programs are what people see – the floors, the rooms, the activity inside. But without a solid foundation, plumbing, and electrical, the building can’t function no matter how beautiful the architecture. Operations is the foundation, the plumbing, and the electrical of a nonprofit. Without it, programs can’t deliver at their full potential, funding can’t be deployed strategically, and leaders spend their time holding things together instead of moving the mission forward.

Operational infrastructure isn’t a “nice to have” that organizations can build later when they have time. It’s the difference between a program that scales and one that collapses under its own weight. It’s the difference between a leader who builds something lasting and one who burns out trying to hold it all together. And from a funder’s perspective, it’s the single biggest variable that determines whether a grant produces the impact it was designed for – or quietly disappears into operational chaos.

In an ideal world, every funded nonprofit would have these operational foundations in place:

• A clear strategic plan – so decisions are proactive, not reactive
• Sound financial systems – so leadership can make informed decisions with real data
• Internal controls – so accountability is built in, not dependent on outside oversight
• A leadership pipeline – so the organization doesn’t depend on any one person
• Competitive compensation – so the organization can attract and keep the right people
• Technology and data systems – so the organization can measure, learn, and improve
• Adequate cash reserves – so a single setback doesn’t derail months of programming

These aren’t luxuries. They’re the operational basics that allow programs to deliver on their promise. When they’re in place, funders see real return on their investment and nonprofit leaders get to focus on mission instead of survival.

Yet the Nonprofit Finance Fund NFF 2025 State of the Sector Survey shows some worrying data:

• 36% of nonprofits ended 2024 in an operating deficit – the highest rate in a decade
• 52% hold three months or less of cash on hand.
• Only 41% of organizations can pay all full-time staff a living wage. For nonprofits with budgets under $250,000, that drops to just 28%
• 68% reported staff burnout as a challenge (24% major, 44% minor).59% cited leadership burnout as a challenge.
• Over two-thirds had difficulty employing enough staff for both program and administrative work.
• 69% said local cost of living is a management challenge.

This matches what I see on the field: nonprofits don’t have the funding flexibility to thrive. They’re operating in starvation mode, which is terrible for long term planning. That creates a sector-wide return on impact gap. Not because programs are weak or leaders aren’t dedicated – but because the infrastructure supporting their work has been chronically underbuilt.

Every missed compliance requirement, every program that can’t scale because there’s no one to manage the workflow, every talented employee who leaves for a livable salary – that’s impact that was funded but never fully delivered. It’s return left on the table.

The good news: this is a solvable problem. A randomized controlled trial by the Compassion Capital Fund demonstrated that when organizations receive targeted capacity-building support, their operational effectiveness measurably improves (Compassion Capital Fund Evaluation). The gap isn’t permanent. It’s an underinvestment – and the fix is straightforward: invest.

III. Three Shared Responsibilities in a Funding Partnership

There’s good news in all of this: operational gaps aren’t permanent conditions. They’re the result of patterns that can be changed – patterns in how funders invest, how nonprofits budget, and how both sides communicate about what’s actually needed. Closing the gap starts with redefining whose responsibility it is.

The honest answer is that it belongs to both funders and nonprofits. Funders can’t build an organization’s internal systems for them, and nonprofits can’t fund their own infrastructure when every dollar they receive is earmarked for programs. Closing the gap requires a partnership – one where both parties understand their role and hold each other accountable for the outcome.

In our experience working with dozens of nonprofits across cause areas, three shared responsibilities define the strongest funding partnerships:

1. Resourcing the mission – honestly

Funders have the responsibility to provide adequate capital – not just for programs, but for the infrastructure that makes programs work. Nonprofits have the responsibility to build budgets that reflect what things actually cost, rather than artificially lean numbers designed to look like a more attractive investment.

This sounds simple, but it’s where the breakdown starts. Nonprofits understate their costs because they think it’s what funders want to see. Funders accept those understated budgets because they assume the organization knows what it needs. Neither side pushes for the honest conversation about what the work truly requires – and both sides pay for it later when the organization can’t deliver.

The fix starts with both parties committing to honesty over optics. Funders should signal – clearly and repeatedly – that they expect to see realistic budgets including operational costs. That means explicitly calling out what they want to see: staff paid at competitive rates, line items for professional services like bookkeeping and legal, investment in training and technology, and adequate overhead percentages that reflect the true cost of running an organization. When funders name these things specifically, it gives nonprofits permission to budget for them – and removes the guesswork about what’s “acceptable” to ask for. Nonprofits, in turn, should stop treating infrastructure as something to apologize for and start treating it as what it is: the foundation of their impact.

2. Ensuring sound governance – together

In theory, governance is the board’s responsibility. In practice, many small nonprofits have boards that are still learning the role themselves. Board members may have been recruited for their passion for the mission rather than their experience with organizational oversight. They may not know what questions to ask, what financial red flags to look for, or what governance structures should be in place.

This creates a gap that somebody needs to fill. Funders aren’t responsible for running an organization’s board – but they are well positioned to set clear expectations for what good governance looks like: an engaged board with defined roles, basic financial oversight, written policies for the areas that matter most (conflict of interest, fiscal management, HR), and a leadership structure that doesn’t depend entirely on one person.

For nonprofits, the responsibility is to take governance seriously even when it feels like a distraction from the “real work.” Building a functional board, writing policies, and establishing oversight structures aren’t bureaucratic exercises – they’re what protects the organization, its people, and its mission when things get hard.

3. Maximizing return on impact – deliberately

This is the responsibility that both sides most often neglect. Funders focus on selecting the right organizations and programs to fund. Nonprofits focus on delivering those programs. But neither side consistently asks the question that matters most for return on impact: how far will these dollars actually go once they’re inside this organization?

The answer depends almost entirely on the operational layer between funding and outcomes – the systems, processes, staffing, and infrastructure that determine whether funded programs actually produce the impact they were designed for. A dollar invested in a well-run organization goes further than a dollar invested in one that’s held together with duct tape and good intentions. Not because the mission is better, but because the machinery to deliver on it is stronger.

This is where the biggest returns are hiding. A nonprofit with a strong program and weak operations will always underperform a nonprofit with the same program and strong operations. Funders who want to maximize how far their dollars go should be looking at operational infrastructure with the same rigor they apply to evaluating programs. And nonprofits who want to deliver more impact should be investing in their own operational capacity with the same urgency they bring to program work.

Both sides should be asking: “What would it take for this organization to operate at full capacity?” And then investing accordingly – not as overhead, but as the highest-leverage spend in the entire portfolio.

Wrapping up Part 1

The infrastructure gap is real, it’s costly, and it’s solvable. Every dollar of impact that leaks through an operational gap is a dollar that was funded but never fully delivered – and the data shows that this is happening across the sector at a massive scale. But it doesn’t have to be this way.

The fix starts with recognizing that operational capacity is a shared responsibility. Funders bring the resources and the standards; nonprofits bring the honesty and the commitment to building strong foundations. Neither side can close the gap alone. Together, they can.

What’s next

In Part 2, we’ll look at the two dominant funding models in the sector – restricted grantmaking and trust-based philanthropy – and examine why both of them, despite their very different approaches, end up leaving impact on the table in remarkably similar ways. We’ll also look at what one sector has figured out that philanthropy hasn’t: how venture capital invests in operational success.

I'd love to hear thoughts from readers and thinkers along the way - the more conversation we can initiate about this topic, the better off our nonprofit ecosystem will be!