Balancing the Mission Checkbook

Three cheers, at least, are deserved for Grantmakers for Effective Organizations (GEO) new publication On the Money by Nancy Burd. You can download either the executive summary or full report from the website.

As summarized on the GEO website:

This publication highlights the financial challenges nonprofits face and the ways in which grantmakers are both improving the situation as well as perpetuating the problem.

The first section, Assessing the Problems, identifies five problem areas:

1. Restrictions on Funding
2. Misperceptions Around Sustainability and Growth
3. “Too Many Masters”
4. Onerous Grantmaking Practices
5. Knowledge Gaps

The other sections discuss Barriers to Smarter Grantmaking and Ideas for Grantmakers.

It’s impressive how in 28 pages the author distills a variety of ideas, research, and practices about the realities of financial instability faced by nonprofits. The report also provides helpful and realistic suggestions for grantmaking organizations based on practices that have already been developed and implemented by foundations.  The advice and guidance for funders is great, but this guidebook is a must read for everyone in our sector.

I’m pleased that GEO will be focusing on nonprofit finance and encouraging foundations to understand how “many prevailing approaches and practices in philanthropy can unwittingly create problems for the nonprofit sector.” Many nonprofits have experienced these unintended consequences and will welcome a dialogue on this topic.

However, nonprofit organizations also have a lot to learn from the report’s comprehensive overview of grantmaking. Misconceptions about the true cost of programs and capital needs apply equally (or more) at many nonprofits. We can’t expect a seismic shift in foundation practices and investment unless we nonprofit leaders understand and can effectively communicate what it takes to sustain ourselves.

Download this report, read it, and copy it for your board and senior staff.

Last week I had the pleasure to participate in the final round of judging for the Minnesota Cup business plan competition, “looking for the next great entrepreneurial success story in our state.” The judges finished the afternoon of presentations from the six impressive finalists with some discussion about the strengths and weaknesses of the business plans. Everyone agreed that all of the ideas were innovative and had great market potential. Most of the questions boiled down to execution – did they have the right people beyond the founder, would they be able to build the kinds of systems and structures they would need, would they have enough capital to spend to build the systems? The judges understood that breakthrough ideas are only as good as the follow through and structure to make them happen. The day ended with a well attended event and announcement of the winning business plan.  Each finalist won some seed funding and pro bono professional services for prevailing at the division level and the grand prize included more seed funding to implement the plan.

What a stark contrast, then, to read The Bridgespan Group’s recent article The Nonprofit Starvation Cycle about the causes and consequences of weak infrastructure at many nonprofits:

Organizations that build robust infrastructure—which includes sturdy information technology systems, financial systems, skills training, fundraising processes, and other essential overhead—are more likely to succeed than those that do not. This is not news, and nonprofits are no exception to the rule.

The judges for the Minnesota Cup business plan competition certainly know this about business. But what would be the questions raised by a corollary panel reviewing nonprofit plans? Unfortunately, I think they would focus on overhead ratios rather than the importance of having the right systems, structure, and technology to implement the plans, along with sufficient operations and finance staff. The infrastructure that’s encouraged for growing business is overlooked (or undermined) for nonprofits.

The Bridgespan Group believes that this starvation cycle begins with funders:

Our research reveals that a vicious cycle fuels the persistent underfunding of overhead. The first step in the cycle is funders’ unrealistic expectations about how much it costs to run a nonprofit. At the second step, nonprofits feel pressure to conform to funders’ unrealistic expectations. At the third step, nonprofits respond to this pressure in two ways: They spend too little on overhead, and they underreport their expenditures on tax forms and in fundraising materials. This underspending and underreporting in turn perpetuates funders’ unrealistic expectations. Over time, funders expect grantees to do more and more with less and less—a cycle that slowly starves nonprofits.

I think that the authors describe the cycle perfectly, but you could replace the word “funders” with “boards of directors” or several other nonprofit stakeholders just as accurately. The burden of breaking the starvation cycle is shared and will require us to understand the real value of infrastructure in accomplishing mission. Start with this question: what could you achieve in the community if your organization had the structure – systems, facilities, processes, staff - that were needed for long term success? What would you need to make that happen, and how much would it cost?  For the entrepreneurs at the Minnesota Cup, their potential investors understand the importance of seed funding to build the staff and systems needed for success. We in the nonprofit world need to learn the language and incentives to advocate for infrastructure funding critical for community success.