Advice
February 03, 2014

Nonprofits and Those Who Support Them Should Talk Openly About Finances

About 6,000 nonprofits responded to the Nonprofit Finance Fund's survey asking how comfortable they are discussing their financial health.

When nonprofit leaders and funders get together to discuss grant opportunities, they discuss the programs and services that support the grantee organization’s mission, but they seldom talk about financial health.

In Nonprofit Finance Fund’s annual State of the Sector Survey, we asked nonprofit leaders which aspects of finance they are comfortable discussing with their funders (both individual and institutional). Sixty percent of 2013 survey respondents reported having an open dialogue about program expansion. The next most popular topics were a distant second and third: securing funding for facility needs (34 percent) and financial reserves (30 percent). Nonprofit leaders reported even more limited dialogue about liquidity issues, and 17 percent of respondents reported that they could not have an open dialogue with funders on any of those topics.

Without space for candid discussions about finance, we miss an opportunity to structure funding in ways that support organizational health and resiliency, and therefore efforts to advance mission over the long term.

It’s no surprise that program expansion comes out on the top of the discussion agenda. Funding for programs offers the straightest line between money and mission. But programs also require adequate infrastructure to realize their promise. Where would the after-school program be without the leadership, development team, physical space, supplies, and systems that collectively enable student enrichment and achievement? How can a government-funded domestic-violence shelter protect its clients if it can’t talk to grant makers about the need for philanthropic contributions to cover the gap between what the government pays and what the shelter truly costs to run?

Mission must be supported by appropriate levels of capacity and capital, and an organization’s health and vibrancy require that we make room to discuss operational and financial challenges. The grantor-grantee dialogue is a two-way street, so consider these principles and then offer your own suggestions in the comments section below:

Nonprofit Leaders

Use numbers to support the mission story. Your top priority should be to communicate how your organization’s revenue, expenses, and balance sheet influence your mission. No one knows the data better than you, so connect the dots by providing context for the numbers.

For example: What are you doing to increase the reliability of your critical revenue sources? How are you managing growing liabilities? Which types of cash reserves—for working capital, for facility maintenance or to invest in new opportunities—would be most helpful? How do these factors affect the programs you offer and their effectiveness? Without an explanation, a funder is left to fill in the details with hypotheses and speculation.

Always lead with mission (why it matters), but be sure you can connect your request for funding to your strategy and business realities.

Know your audience. Budgets, financial statements, and other financial data can provide a powerful starting place for conversations about money, but data overload or irrelevant information can overwhelm or focus discussion on the wrong issues. Be sure that the financial data submitted with a grant request or brought to a meeting are clear, pertinent to the goals of your conversation, and of appropriate depth to engage the particular funder.

Funders

Make finance an explicit component of due diligence. Audited financial statements and Forms 990 help explain an organization’s historical trends, whereas current budgets and projections show where it might be heading. When assessing the financial materials provided by your grantees, examine the organization in its entirety, not just at the project or program level.

Examine revenue, expenses, profitability, the balance sheet, and liquidity over a period of years to understand areas of strength and weakness. Finally, consider how your grantee compares to other nonprofits of a similar size and type, using benchmarks as a catalyst for more informed conversations about the operating environment. An automated analysis tool that illuminates nonprofit financial health and allows for peer comparisons like our Financial SCAN can be a useful first pass.

While benchmarks provide a starting point for dialogue, it’s important not to draw premature conclusions before considering distinguishing factors such as program models, leadership, and life-cycle stage.

Set the tone. There is an unavoidable power dynamic in the grantor-grantee dialogue. With this in mind, funders have a responsibility to invite conversations about financial health and resource needs and to set a collegial tone for these discussions. Your ability to obtain the right data to support informed grant-making decisions is enhanced by a genuine curiosity about the organization’s financial story.

Grantors and grantees alike can benefit from approaching what are often difficult conversations about money with a generous spirit. After exchanging pleasantries, and while keeping mission as the overall guide, be sure to make room for some of those often neglected but critically important financial discussions.