Why free stuff isn’t free

GiftI have heard too many times from people in disaster response: “If we can just get the product donated, then we can do…”  If a person or organization is willing to do a program only if it is all provided for free, they are simply stating that the program is not important enough to budget for it.  That attitude minimizes the value of the program and makes me wonder if it was important enough in the first place.  They miss the point on in-kind donations.  An in-kind donation is when someone gives you a something at no financial cost.  But don’t think it is free.  Free stuff is never free.  Everything in a supply and demand economy has a cost.  There are financial, time, resource costs associated with everything.

Let’s look at fictitious non-profit group Acme.  Acme has a mission to bring internet access to disaster survivors.  One of the tools they use is a widget and hundreds of widgets are used each year.  Each widget costs $100 and is produced by Ajax.  There are two ways to get widgets.  Acme can buy the widgets from Ajax using donated money, or Acme can ask Ajax to donate the equipment.  Procuring a widget meets Acme’s need regardless of how the widget is procured.

Acme’s fundraisers are tasked to raise the necessary funds to cover the organization’s annual budget.  As money is brought in to the organization, it is applied to the annual budget.  The money goes to offset the general (or core) expenses including facilities, salaries, program maintenance, daily operations … and the purchase of Ajax widgets.  In general, donors like to see where their money goes to know that they are making a difference.  That is what makes fund raising such a hard task; it is convincing the donor to give money and trust Acme to the right thing without being able to show them a specific thing that their money did.  There is another concept called a “directed donation” where funds are raised for a specific goal.  Directed donations are very commonly seen as capital improvement projects.  I’m leaving directed donations out of this discussion.

Donors are not restricted to just providing cash.  They can provide goods and services; this is an in-kind donation (IKD).  In-kind donations are unique because it should match Acme’s needs with what the donor has to offer.  (Receiving product that isn’t needed becomes wasteful in costs to ship, receive, store and dispose.)  When Acme receives an in-kind donation, it offsets expenses that would be spent otherwise to get the products. For our example of widgets, this is declared as income on Acme’s taxes, and a donation on Ajax’s taxes.  When Ajax decides to donate the widgets to Acme, Ajax is providing a value of products in lieu of a cash donation of the same value.

The end results of any of these actions is the same: Acme has widgets.  It didn’t really matter if the fund-raisers directly courted Ajaz for the widgets or had a third-party donor provide cash to buy the widgets.  The result is budget-neutral: the right amount of cash or products came in to match the same amount of expenses for the product procurement.

Here’s why free stuff isn’t free.  At the start of the year, Acme set forth a financial budget based on expected donations (IKD or cash) and expenses.  The cash value of the widgets that Ajax donated gets applied to the budget and reduces the cash that needs to be raised that year to buy widgets.  Ajax’s donation doesn’t free up Acme’s budgeted amounts to be applied elsewhere; the donation met the business needs of procuring widgets per the budget.  The budget is just a financial tool to manage incoming donations and outgoing expenses regardless if the donation show up as cash or IKD.  A budget is very different from an account balance of real money in the bank.  The hope is the budget, actual expenses and cash in the bank match up during the fiscal period.

In-kind donations often come with additional strings that are not part of a cash procurement.  The donations are usually large enough that the donor wants publicity which will help create an impression of the donor.  Here, Ajax wants to be able to publicize that they donated to Acme which helps create the public impression that Ajax is a good corporate citizen.  Acme and Ajax producing a joint press release to promote the relationship doesn’t take too much time.  But imagine if Ajax’s expectation is for Acme to take a photo and publish a story every time a widget is used.  The cost in Acme’s resources to meet that expectation could exceed the cost of just buying the widgets with cash.

So next time you hear that a project will only be done if product is given for free, ask the question if the product needs to be free or just be budget-neutral for the organization?