Joan M. Renner, CPA, CGMA, Director 501(c)(fit!)
Lately I’ve had the opportunity to do a lot of reading on various nonprofit topics for 501(c)(fit!). I know this makes me sound like a nerd, but I find it fascinating when seemingly unrelated pieces of knowledge connect and form new perspectives on nonprofit issues. That’s just what happened recently when I read about some high profile nonprofit bankruptcies.
I was surprised to learn that these stories had a number of issues in common, leading me to think of it as “The Grant Paradox” and “The Blindsided Corollary”. In fact, the full title of this FIT TIP, it should be “Nonprofit Finance— what you don’t know can hurt you.
The Grant Paradox: “One cannot live by grants alone”
s demThe biggest risk for nonprofits providing grant-funded services is not failing to comply with program requirements, it’s bankruptcy! In March 2015 a huge New York social services nonprofit, the Federation Employment and Guidance Service (FEGS) announced itise after 80 years of service, leaving 120,000 beneficiaries to transfer their services to other service providers. FEGS’ primary source of funding came from government agency human services contracts.
There have been other high profile nonprofit closures, but this one led to a study of the health of the nonprofit social services sector as a whole. A group in New York called the Human Services Council undertook the study and in February 2016, released their report, New York Nonprofits in the Aftermath of FEGS: A Call to Action stating that:
- “Human services nonprofits have a higher rate of insolvency than other types of nonprofits.”
- Six out of 10 human services nonprofits “are financially distressed, having no more than three months of cash reserves”. (Many of you would love to have three months of cash reserves.)
- The primary driver of this financial distress is that government contracts only pay about 80 cents of every $1 of what a program costs to deliver.
- Government agencies assume that nonprofits make up the remaining program costs with funding from outside donors.
The first reaction to this information is to advise nonprofits to go raise more outside funding to cover the rest of the costs of their grant programs. If government social services contracts only fund 80 cents of every program dollar, then your $100,000 grant makes it necessary for you go out and raise $25,000 more from outside donors to cover the costs of finishing the program. Tragically, some nonprofits try to work their way out of financial distress by getting more grants. This might help cover cash shortfalls from one grant with the advance from the next grant, but it is ultimately unsustainable.
That brings us to The Grants Paradox—“One cannot live by grants alone”. What the grants paradox really means is that you can only afford to do so many grants. Your capacity to take on government social services contracts that don’t cover your full overhead is limited by your ability to make up those costs with outside contributions. Even with the best fundraisers on the job, there is a limit to how much a nonprofit can raise from its local or regional community.
Doing the math, if you can reliably mobilize about $500k of outside contributions each year, and your grants cover 80 cents of every program dollar, then you can only afford to accept $2 million in grants—period. Yea math! So, short of requesting more overhead reimbursement, mobilizing outside resources should be the first step in determining how many grant programs you can afford to take on.
What Can We Learn
Stand up for realistic grant funding. Nonprofit leaders are conscientious people who believe that if we all just worked a little harder, we could raise a little more money and cut a few more expenses to make the funding model work. There is a limit to how far we can all stretch before we snap. Calculate your true overhead rate and defend the amount of money you need to run your organization with appropriate oversight and governance in the absence of crisis conditions.
Know how many grant programs you can afford to subsidize. Calculate your true costs compared to what your grant programs cover. Unless you can get more overhead reimbursement, don’t take on more grants than you can support with outside funding. To learn more about grants, check out our 501(c)(fit!) PLUS webinar; Grant Basics—Following the strings attached.
Assess your financial risks. In its 2016 report, A Call to Action, The Human Services Council urged human services nonprofits to expand their risk assessment capacity “for aggressively identifying, assessing, and addressing risks to their fiscal health and put in place the checks and balances needed to protect themselves and the people they serve.” To learn more about nonprofit risk assessment, check out our 501(c)(fit!) NEXT Guided Solutions webinar series; Your Nonprofit Risk Assessment.
What about The Blindsided Corollary? We’ll have to discuss that one next time.
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