Monday, September 10, 2012

How do nonprofit funders assess your financial health?

Here at Cloudlancer Writing, I often counsel nonprofits on positioning themselves for maximum competitiveness when applying for grant funds. Mission is important, the ability to show results is important, program development and documentation is important, but financial accountability and sound management of funds is equally, if not more, important. When you move out into the larger philanthropic world, it increases the need to be as professional as possible. These people do not know you, and they have to have a way to assess your organization. The best prose in the world is not enough to put your organization at the top of the pile when applications are reviewed by national, regional or government agencies.  Your local philanthropist may be able to come to your office and chat with you, but larger organizations typically do not visit every nonprofit that they fund.
Many nonprofits have specific financial methodology for deciding which nonprofits should receive funding.  One example of such a tool can be found at:
This report format, which was developed with considerable collaboration with a major financial institution, is the epitome of the formula-based evaluation and uses the data obtained from your 990. It reads and functions like a loan evaluation form. Other foundations have their own, perhaps less rigid formulas that they have developed over years of experience with the nonprofit sector. The common denominator is that all of them seek to discover whether your nonprofit can survive and accomplish its mission.
As I have often stated, in many ways the criteria by which grant funding is awarded is no different from that used by a bank or loan company to loan funds. The only difference is that your nonprofit doesn’t repay the funds in cash. Rather, the use of the grant funds is justified from the grantor’s standpoint if it is used effectively to advance whatever cause or mission they are supporting. Since these particular dollars will never be repaid, the criteria for disbursing them can be, and often is, even more stringent than a loan application.
No funding agency, whether philanthropic or not, wants to see the dollars they provide squandered. Your nonprofit track record of getting maximum good out of the dollars you have been given is the charitable equivalent of a 900-point credit rating. No matter how great the need, no matter how committed your organization is to its mission, if you can’t prove good stewardship, your application is likely to be rejected.
I do not necessarily subscribe to the idea that all nonprofits must “solve” a problem to be considered for funding. Sometimes, the best that can be achieved is mitigation of the issue at hand. If your nonprofit supports victims of domestic violence for instance, your single organization can’t eliminate all the root causes. Poverty, substance abuse, illiteracy and a myriad of other factors enter into the equation. What funders DO want to see is that you are having a measurable and sustainable impact. Perhaps it’s a program to retrain the people to obtain a better income. Perhaps it’s substance abuse counseling. Perhaps it’s simply a way to be removed from the violent situation. If you can show that the dollars you were granted are providing solid, measurable results, and that you can support your daily operating expenses, that is usually enough to meet the grantors expectations.
To provide that proof, and keep track of your results year-over-year, you will need sound financial reporting, a program that provides for a clear description of the problem you are addressing, and clear result-based reporting. That is what funders are attempting to measure, using not just glowing accolades, but financial evidence that you have a defined mission, that you spend money wisely to gain maximum impact on the problem, and that you have a clear path to sustaining the program even without their specific funding. When applying for funding, don’t start out with a built-in roadblock. No matter how small your nonprofit is, good financial recordkeeping will help to position you for success.

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