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Jul 27, 2011

Best Practices to Ensure Nonprofit Sustainability

In my column for Business First this July, I composed the second installment in my series on ways to make philanthropic grants more positive contributors to nonprofit sustainability.  This month I concentrated on project review and payment, borrowing a phrase coined by Clara Miller.  Miller’s phrase, “pretty bad best practices,” can be found in a great article she wrote last year in the Nonprofit Quarterly titled “The Four Horsemen of the Nonprofit Financial Apocalypse“.  She is one of the best (and frankest) writers on nonprofit finance issues – a true nonprofit resource.

I titled the article “Challenging Best Practices,” ultimately concluding that oversight creates nonprofit overhead, and payment reimbursement erodes liquidity.

Part of that problem is the use of metrics that claim to measure best practice.  Percent of gift going to program is a ridiculous measure of effectiveness.  When donors allocate zero to ten percent for overhead, there are several negative repercussions: missed payroll, inadequate computers, inferior lighting, insufficient climate control, substandard internal controls, and poor bookkeeping, just to name a few.  A well-managed business will be spending 15% or more to make the business hum.

The second problem is the notion that a donor should not pay under a grant until the nonprofit submits proof of eligible expenses.  Not only does that requirement boost overhead for reporting (see above), it also results in payments that come well after the nonprofit has had to pay its own expenses – essentially a loan from the nonprofit to the grantor.  That is not philanthropy.  The government is the worst offender because not only does it pay by reimbursement, it also generally pays 90 or more days past due.  To get really upset about this, read the Urban Institute report on its survey of government contracts with human services providers. It provides a new perceptive on state funding for nonprofit organizations.

But this should not let donors and foundations off the hook.  To call payment by reimbursement a best practice is the antithesis of philanthropy, which supposedly exists to benefit the nonprofit and its services rather than save money for the grantor.  A true best philanthropic practice would be to pay the nonprofit in advance, freeing the nonprofit from having to find sufficient other cash to pay expenses until reimbursement payments arrive.

The third problem is the explosion of reporting requirements and the exclusion of those added costs from the grant award.  There is no coordination across grantors in the format and content of these reports.  It has become a significant expense and distraction for nonprofits.  Without reimbursement for these added costs, accepting a grant can actually lose the nonprofit money.

I challenge nonprofits to calculate the person-hours spent on mandatory reporting and prorate across the salaries and benefits of the staff to estimate the dollar cost of each report to a grantor.  Send me your results.  Report it to your board.  And consider sending your grantors a bill.  They may not pay it, but it will focus everyone’s attention on the true cost of reporting.

If one thinks of best practices as standards which can make grants and gifts more positive contributors to the sustainability of nonprofits, the focus shifts to how grant-making can support the nonprofit rather than how to foil bad management.  Here are my suggestions for best practices for grant review and payment:

  • Fund in advance and near the beginning of the nonprofit’s fiscal year.  This enhances the liquidity of the nonprofit and allows it to focus on running the program rather than on how to juggle funds in order to make payroll.
  • If reimbursement is unavoidable, add a carrying cost to the grant award.  Two percent per month seems to be the for-profit standard, so why would a philanthropic grant offer terms inferior to what it would to its office supply vendor?  I would take this further and initiate the carrying cost from the moment of nonprofit expenditure rather that with the reimbursement request so that the nonprofit pays no expense before it receives funding.
  • Include the full overhead rate in the grant award or else pay the nonprofit for the full cost of its time and effort to comply with the grantor’s reporting requirements.  If the donor adds to a nonprofit’s overhead, it is appropriate to compensate for that added expense.  If the nonprofit loses money on donor gifts, where is it supposed to make up the difference?  Ironically, most nonprofits make it up by reducing the salaries and benefits of its employees.  Then who is the true philanthropist to nonprofits?

Best practices should be evaluated from the perspective of the nonprofit.  A best practice that erodes the financial health of a nonprofit is contrary to the true intent of philanthropy.   Pretty bad, don’t you think?