You Received Your Nonprofit Funding, But…

Congratulations, and what a relief! The nonprofit funding you applied for has been granted to your organization. You feel ecstatic because this initiative will be incredibly helpful to the population you serve. Now it’s time to implement this new and essential program that will improve the lives of the people your organization serves. But wait… you received $20,000 less in nonprofit funding than you need to implement the program to its full capacity. Also, you did not receive any of the other grants that you applied for. This means either you have to scale back your program, which may diminish the impact, or quickly find additional funds to run the program. Otherwise, you will not achieve the social impact you are aiming for.

Implementing Without All of the Funding

You strategize with your team about how to make up for this shortage in nonprofit funding. Finally, you turn to your “funders” Rolodex, and you begin to reach out to them. With every conversation, you slowly realize that fully funding this program is going to be an even bigger challenge than you had hoped for. Most of the program officers you have spoken to have been impressed with the merit of your program, but unfortunately, their nonprofit funding priorities are not aligned with the focus of your program. Furthermore, their nonprofit funding cycles are after the period when you will need them. Plus, even if you get additional dollars to support your program, all of the potential funders have different reporting requirements coupled with varying logic models that your staff will have to report on and will be overwhelmed by.

You think about tapping into your unrestricted funds (if you have any) to cover the diminished budget and the start-up costs for this program. Then, you realize that it is almost summertime, which means it is the end of the fiscal year. Every year at this time, your government funders are typically late in their payments, and your insurance payments are due. This means your cash flow will be lower beginning on July 1, so you will have to tap into the reserve (if you are lucky enough to have one) and then restore it in August or early September. Thus, your unrestricted funds are tied-up with covering the summer income lag.

You think some more, and you realize you could use your line of credit. Then, your accountant reminds you that your fiscal protocol requires approval from the board. Plus, you need to have a plan for paying that money back. You scratch this idea because you cannot guarantee that it will be paid back since you do not know whether the new potential funders that you hope will invite you to apply will actually come through (albeit, in your heart, you know your proposal is pretty much the best thing since sliced bread.) You also know that the interest on the loan is not an allowable cost in some of the grants you are applying for. RATS!

So Close… Yet So Far Away from Full-Funding

You finally reach out to a private donor that is a truly caring person that believes in your work and wants to see your target population succeed. After a long conversation with this good Samaritan, she agrees to give you the funding, but then she places some restrictions. The money can only be used for direct contact with the population you serve, and it cannot be used for administrative costs or training. You are obviously thankful, but you are frustrated. You have the “amount” of money that you need, and you don’t have a solution to your problem. You can’t use the extra money to train your staff to help them develop the specialized, technical, and expensive skills needed to ensure the quality of your program. Furthermore, the rest of the money in your bank account is restricted, so it is untouchable.

At this point, you begin to question why you decided to become a nonprofit professional. You always preach to your staff about staying in the moment and practicing self-care, but these strategies do not seem to be working. You quickly pull yourself together and refocus on the implementation of this grant.

You finally decide to scale back the pilot program. You also submit a budget and program modification to your funder in order to accommodate the reduced funding and the donation you received. You take another look to see where you can increase efficiencies and develop a new strategy to streamline some components of the program. Then, you begin to direct your fundraising efforts to a broader expansion of the program in the following fiscal year. You also know that you will have to find replacement funding because the existing foundation will not support the same program for two years in a row. Thus, you recalibrate and think long-term. You begin planning your fundraising strategy to make the program sustainable beyond this funding cycle.

Lots of Support, but Little Understanding of the Nonprofit Funding Model

In the meantime, as you finish performing what feels like a miracle to get this program running, you receive a lecture from your corporate funders and a well-meaning donor. They have that dreaded discussion with you, that only people who have not managed a nonprofit seem to have with nonprofit leaders. It begins with, “What you need to do is learn how to think like and run you're nonprofit more like a ‘business’.”  You point out you do run your nonprofit like a “business” because making payroll is something that is always on your mind.  However, unlike a business, you face numerous administrative constraints and funding restrictions that impede you from adequately covering the costs of your operations, overhead costs, managing cash flow, and determining prices. Furthermore, unlike for-profits, you are extensively monitored to ensure you implement best practices. Your funders audit every area of your “business”, ranging from document retention to the implementation of your HR Manual. If everything is not up to par, you then run the risk of having to return the money. You must also maintain high ethical standards and maximize efficiency, despite the fact that many of the key essential pillars of internal controls that are considered best practices are not funded. You take a deep breath and go back to your happy place, only this time, there are streams of unrestricted funding and fully-funded programs. True paradise.

Does this scenario sound all too familiar? If so, you may be among the thousands of nonprofit administrators that manage to cobble together miracle-based solutions built on counterintuitive rules and funding constraints. So what are you supposed to do in an era where government funding is increasingly funding larger operations; nonprofits are facing greater competition; there are increasing and unfunded compliance requirements; and there are greater restrictions on how you can use funds?

Adapting to the Realities of the Nonprofit Funding Landscape

The fact is that the nonprofit funding environment is extremely challenging. This is attributable to obstacle course-like conditions like the ones described above. Thus, as nonprofit leaders, there is no other choice, but to become increasingly creative and resourceful. Of course, this is something that does not come as a “newsflash” for nonprofit organizations. However, as we are starting to see a rise in defunct nonprofits, it is time to be more strategic than ever. The following are some strategies that nonprofit leaders can use to help organizations survive the increasingly complex nonprofit funding world:

• Create an evidence-based culture in your nonprofit that documents and examines funding trends and program outcomes. This will help you identify when the nonprofit funding landscape is changing, and be better prepared to carry out your mission. Questions you should continuously ask yourself are:

  • What type of funding are organizations that are your size getting?

  • Are you in an environment in which nonprofits are expected to merge because funders only want to pay for larger nonprofits with greater economies of scale? If so, is this an option for you? If not, what partnerships can you develop?

  • What are other programs with similar missions that are successfully doing? Could any of their strategies be beneficial to your organization?

  • Are you providing quality programs and services? If so, how are you documenting and promoting your accomplishments?

  • Do your programs actually work and why should the funder care about them?

  • Are there any documented obstacles your staff is facing that was not happening when your program(s) started that must now be addressed? If so, do you have sufficient and appropriate data to justify new funding for meeting this organizational need?

  • Do you have enough staff with the appropriate skills to carry out the work that is being conducted?  If not, what will it take to get you there, and how will it change your organization?

  • Are there new program needs that should be added to your wheelhouse? If so, what evidence do you have that this is needed? Also, who will carry out the work and monitor it?

• Create or revisit your strategic plan to ensure that it has a business development plan that is: a) aligned with the current funding and compliance realities; b) realistic based on the types of services your organization provides, and c) helps your organization build both administrative infrastructure and unrestricted funding sources. Often, nonprofit business plans include assumptions about the funding environment that are outdated or unrealistic based on the industry. Thus, if you are an organization whose funding streams have switched from contract-based to fee-for-service, then your business plan should include steps for covering costs when there is a dip in your program census. If your organization receives a cost-reimbursement contract or grant, your business plan should include a strategy for raising unrestricted funds to cover the potential delays in reimbursement. Also, if you are an organization that is primarily a health and human services provider, it is unrealistic to expect that your funding stream will eliminate government funding and substitute it with private funding. Government is the largest and most consistent funder of direct services such as homelessness prevention, behavioral health, mental health, social services and case management, and a variety of other services. This will not change.

• Educate all of your funders about the needs of nonprofits by being vocal about the realities of running a nonprofit business. There is a lot of misinformation about what it takes to run a nonprofit. The idea that overhead, indirect costs or salaries are not going to clients is absolutely mistaken. Overhead must always be covered and an administrative allocation of 10% and under is not indicative of efficiency for a variety of reasons that include:

  • A consistent definition of administrative costs does not exist. Indirect costs and overhead are defined differently by funders so organizations adapt themselves to what funders want.  As a result, you will find that the same organization can have an overhead of 10% with one funder and 25% with another. This is not attributable to corrupt practices or unethical behavior, but rather to the fact standard definitions do not exist for these terms, and they are driven by each individual funder.

  • Actual indirect costs and overhead across industries vary depending on the work of an organization. The overhead rate for a nonprofit that runs group homes, for example, is going to be much higher because it must run programs 24 hours a day. Furthermore, a robust administrative infrastructure is needed since the programs are providing services to the most vulnerable in society (e.g., youth that cannot find home placements or permanently disabled populations). Programs also must maintain tiered staffing patterns based on the program census of social workers, counselors, supervising staff, etc. Strong compliance programs must simultaneously be implemented to ensure the protection of the residents and to meet very complicated state and federal requirements. On the other hand, the overhead of a nonprofit that runs a volunteer placement organization with a small staff and operates mostly in a virtual setting is going to be significantly lower. You are not comparing apples to apples. 

• Partner with coalitions to advocate for allocating resources to nonprofits to support the development of capacity and the fortification of infrastructure. This means challenging funding formulas that are not aligned with the nonprofit corporate business model; ensuring compliance requirements are aligned with what is being measured; and verbalizing that funding for training and implementation is needed. 

This last point regarding coalitions taking on advocacy efforts is inevitably important for nonprofits that receive government funding because they can provide a collective voice, which legislators and policy brokers are more likely to respond to. In addition, they can serve as a shield against being targeted by funders or contract managers that could deny them future funding or punitively audit their programs for speaking up. 

In the end, as bureaucratic and time-consuming as some of these strategies can seem, they are essential in ensuring the long-term sustainability of nonprofits. We exist in an environment that requires evidence-based outcomes and organizational infrastructures that maximize economies of scope and scale. These are impossible to achieve without strategic planning and robust implementation.

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