The Minnesota Council of Nonprofits’ Minnesota Foundations 2012 conference was another info-packed afternoon, talking about all the news from the latest edition of the Minnesota Grants Directory. Hundreds of grant-seekers gathered to share what they know about philanthropic support in Minnesota, and occasionally to bemoan how funders just don’t get us.

The conversation shifted to ways nonprofits can help granters. One suggestion was to add a good narrative to budgets or financial documents. Financial narratives are brief comments that can accompany grant proposals and can be extremely helpful for potential funders. Nonprofit organizations that use financial narratives have the opportunity to explain unusual or exceptional circumstances and avoid any potential confusion or misunderstanding.

Some possible situations to explain in a financial narrative:

• Is there anything in your document that would stick out as unusual for the first-time reader?
• Are there any unusually large or exceptional sources of revenue requiring explanation, such as receiving a planned gift or one time grant?
• Explain if your organization received a multi-year gift that will be recognized all in one year and expended over multiple years. A simple sentence or two can go a long way in explaining an unusual surplus in one year and then deficits in one or more years after. If applicable, be sure to report temporarily restricted income and explain the restriction.
• Does your organization have an internal, board-restricted reserve or other internally restricted funds as opposed to having cash on hand? If so, does your board have a cash reserve policy? Explain cash reserves and any policies in the narrative.
• If your organization has a deficit or multiple-year deficits, put the situation in context and use the opportunity to explain what the organization is doing to address the situation.
• If your organization has a healthy balance sheet with surpluses, put the situation in context and explain your need. “Why not spend down your resources before seeking more?” You likely have a good answer. Write it down.
• Explain if the special event revenue line. Is this one special event or the totals from several special events?
• Does your individual giving contain special events or are those listed separately?
• Large amounts of in-kind contributions can raise questions. Provide some detail that explains how these donations fit the guidelines for in-kind contributions.
• Does your program budget contain all committed funds or only partially committed funds and the plan(s) to raise the necessary funds?

Obviously, not all of these questions are appropriate for every situation and financial narratives should be kept brief. A financial narrative that goes on for pages and pages is usually not as helpful. A brief, one-page or less narrative can be an important tool in helping your organization tell your story and make your case.

What is a general operating grant? Is it a grant to pay for overhead expenses, or is it funding to provide comprehensive support for the organization’s mission and activities? Too frequently, the term is used as in this excerpt from an article, “General operating money is certainly one of the more difficult categories of funding to secure, mostly because it’s a lot less appealing to the funder. Let’s face it, paying rent is not nearly as sexy as helping people fulfill their potential as human beings.” STOP saying that. This is the kind of thinking and woe-is-me mentality that can’t make the case for general operating support. There is an implicit choice in this article: We have $10,000. Should we spend it on rent, or should we spend it to help people fulfill their potential as human beings? How about this instead: Let’s spend it on rent, salaries, benefits, supplies, and phones to operate our effective, innovative programs that help people fulfill their potential.

Do we need some new terminology to cut through this mess?

• General Operating Grant: Apparently, this is a grant to pay for distracting, hard to justify, and uninteresting expenses (like rent and phones).

• Program Grant: A grant that is restricted for a defined set of activities and outcomes that fit with the organization’s mission. All expenses included in the program budget, including salaries, rent, and supplies, are needed to carry out the program’s goals.

• Core Mission Grant: A grant provided to an effective organization to use as their leaders direct in order to support and achieve their mission. Some of the funds may be spent on immediate program and organizational needs and some on long-term investments, such as program development, staff training, and technology.

According to Caruso’s article, “The majority of foundation leaders polled in the studies acknowledged that unrestricted operating funds were better and more effective for grantees. But they continue to focus their grantmaking on project support, they said, because they prefer its clear-cut results.” Flexibility is the key value of core, or operating, support. Think about how you can make the case that flexibility will enable your nonprofit to be more responsive to community, better prepared for the future, and more effective in all of your programs and activities – that’s results.

According to the report, in 2005 the State of Minnesota made $4.7 billion in payments to nonprofit organizations for a wide range of services in health care, education, environment, and human services. The Office of the Legislative Auditor reduced the pool of payments for review by removing payments of $3.7 billion made to hospital, health plans and similar “institutions”. Of the remaining $1 billion, about $700 million flowed through counties and was therefore not granted to nonprofits directly by state agencies. That left $300 million (approximately 1% of the state budget) for the purposes of this review and resulting report. The report states that the use of nonprofits to deliver services to citizens of the state is appropriate and valuable. The purpose of the report is to evaluate the systems and practices used by state agencies, not the programs and services delivered by nonprofit grantees.

The report includes three primary conclusions:

1. The state’s approach to managing grants to nonprofit organizations is fragmented and inconsistent, and does not provide adequate accountability.
2. Many state agencies have grant-making policies and procedures, but they vary considerably in the degree to which they provide for oversight and accountability.
3. Agency oversight of grant recipients is especially weak when the Legislature selects and names a recipient in law, rather than allowing the agency to select the recipient.

These conclusions don’t seem revolutionary to me. Anyone who has dealt with more than one state agency for grants, or even more than one program within an agency, could tell you that the process for applying for, reporting, and receiving payment for grants is not always consistent or easy for a new grantee to access. The recommendations from the Office of the Legislative Auditor follow their findings – to establish a Grants Management Office in the executive branch to strengthen accountability and improve management of state grants; to formalize and require agencies to follow the best practices discussed in the report; and that the Legislature should not name grant recipients in law but allow agencies to select recipients through a competitive process.

In general, I think that all nonprofits in Minnesota could embrace the concept of a clear, consistent, easy-to-access process for applying for and administering grants from state agencies. Imagine if all of the grants a nonprofit received from the State of Minnesota used the same budget format, report requirements, and payment system. Rather than worry about more cumbersome requirements we could work with the state to simplify, streamline and make both the state government and our nonprofits become more efficient in serving our citizens and clients. The Minnesota Council of Nonprofits has also responded with support for the overall goal of creating a more efficient, transparent, and consistent process for state grants.