Measuring Financial Stability: Asking The Right Questions?
Philanthropic funders in Canada, especially those who fund community or social services on the front lines, are often faced with the question: does this organization have the financial stability to be able to apply our grants for maximum community impact?” Financial and economic conditions of the last few years have not been easy for many of these front-line organizations, forcing them to use up reserves and to search for new funding from donors. The public climate and perception of the need for charities to use these donated funds effectively also puts more pressure on grantees to demonstrate that they are applying funds directly to programs.
But is there a better way for a funder to assess whether a grantee is advancing its mission in an effective and sustainable way? A useful piece by Rebecca Thomas of the NonProfit Finance Fund, After Overhead: Investing in Nonprofit Financial Fitness gives some metrics for funders to consider beyond the arbitrary 80/20 ratio of program to overhead costs: surplus, savings and reserves.
First, does an organization generate annual unrestricted surpluses, not just a break-even result? In other words, does it have the reliable ability to generate cash to pay for wear and tear of fixed assets, meet any debt obligations and contribute to some savings? Secondly, for how long can the organization operate with access to cash? In other words, does it have enough working capital on hand for months, or merely weeks? Thirdly, does it have restricted reserves that can be used for growth or investment in capacity-building?
Funders, suggests Thomas, should think about rewarding, not penalizing, surpluses and savings by their grantees. Funders can also help by providing more general or unrestricted operating support, giving organizations a chance to apply their restricted funds to direct program costs. And funders can make a difference by being willing to fund projects at full cost with an amount for overhead and a project surplus.
Does your financial due diligence on grantees use any of these questions? It is not appropriate in all cases to ask them but could this be a better framework for thinking about financial health and sustainability that can take us beyond the rigid 80/20 rule that leads to an unproductive avoidance of “overhead” spending by grantees?