NEWSLETTER NO. 6
It's All About CASH - What You Can Do As a Funder
In our last issue we talked about the "new normal" and purported that resources will remain limited for years to come. We discussed the importance of cash when it comes to a charity's ability to serve its community today, and described ways executives can manage uncertainty and make the best use of limited resources. In the second installment of this three-part series, we talk about how foundations can use their resources to greatest effect, and the unintended consequences charities may encounter in spite of a foundation’s best intentions.
Cash and the Foundation: Do Well for Your Mission and Your Grantees
This economic environment can force foundations to consider how they can use their shrinking endowment income to achieve maximum impact.
Foundation executives and their boards face four key questions, and their answers will affect how they will use their cash:
Where do you want to invest your cash?
Grants are investments in organizations that deliver programs and services a foundation believes will achieve a desired impact. As a foundation executive, you and your board might consider the following questions in determining how best to deploy your diminished resources:
- Goals: What is the difference you want to make with the grant-making funds you have to invest? In essence, how do you want to "move the needle" in the area(s) you are passionate about supporting? How might you modify your goals given the resources you have available now?
- How you invest: How might the way you invest your money - the type of programs and nature of grants - shift in this "new normal" environment, if at all?
- Resources: What non-dollar resources can you leverage for even greater impact? Consider your staff, other effective programs, and your reputation. What might you want to strengthen? What duplications and/or inefficiencies can you eliminate to free up funds that you can redirect to grant awards?
- Priorities: What are your two or three primary focus areas for the next few years, especially given the recession's impact on your grantees?
Ultimately you may have to decide whether to eliminate a program or not renew certain grants. We submit that, painful as it is, you are more likely to achieve your goals by allocating funds to grantees with strong leadership and excellent programs than to less effective organizations. There is a very real opportunity cost - particularly to the people you want to serve and the change you want to make - in doing otherwise.
If you do decide to shrink a program or defund a grantee(s), develop a clear strategy for making the transition internally and with the affected organizations. Be honest and candid with your staff, share the rationale for your decisions and invite questions. Communicate quickly and clearly with every grantee so they know the decisions you've made and what to expect from you in the future. Talk individually with grantees being defunded, and do so frequently: remember they may have difficulty absorbing the bad news and shifting their expectations. Consider providing a step-down grant to phase out a program or grantee.
How do you want to invest your funds?
Many foundations increasingly recognize it may be important to invest not only in a grantee's programs, but also in the organization itself. Without strong leadership and financial health, program quality and the desired impact suffer. The type of support you provide now may be different from the kind of grant you made in better times, but frankly it is just good practice. You may:
- Provide general operating support, with fewer restrictions, to enable charity executives to use the funds where they are most needed. Some worry that this runs counter to the increasing focus on program outcomes. We suggest that foundations consider both program and organizational outcomes, including financial health, fund-raising, and leadership development.
- Designate grants for particular infrastructure needs like adding a development staff/consultant or installing a better reporting system. Some foundations have found that helping a grantee shore up its infrastructure has a greater benefit than pushing it to continue programs at the same or a higher level.
- Offer incentive or matching grants to encourage boards to increase their fund-raising efforts. It is a great way to build or strengthen a culture of board giving and engagement.
- Provide the technical support grantees need to manage their agency. Whether directly or through consultants, we have found that targeted support based on a solid understanding of the grantee's situation can add needed capacity at a crucial time in an organization's development. Examples include leadership coaching, restructuring, program evaluation and development support.
When do you want to distribute your grant?
Program officers and foundation staff who have not run organizations may not fully understand the cash issues nonprofit leaders face. Foundation executives typically don't have to worry about whether there will be enough cash for the next payroll. There is a reason charity executives are begging you for money: they need it!
Talk with a nonprofit's CEO or CFO about the organization's 18-24 month cash flow projection to understand better its cash flow needs and structure your grant accordingly. Be clear with your grantees when they can expect to receive disbursements. If possible, establish payment schedules. For example, shifting a grant award to the time when a charity's receipts are at a seasonal low – without changing the award amount - can ensure a grantee will get through the year. Foundations that want to use their grant awards to encourage individual fund-raising can offer matching grants with quarterly payments based on cash donations received.
How can you be an effective partner?
"Partner" is the new mantra for foundations' desired relationship with grantees. Unfortunately, as the recent Center for Effective Philanthropy (CEP) research reveals - and many nonprofit executives complain - partnership is more often theory than reality. From our experience and CEP's research, the most effective foundation partnership is built upon a deep, thorough understanding of a grantee organization's success as an enterprise: its mission/programs, its financial picture (money), and its leadership, including that of the board.
The amount, purpose, and timing of your grant awards reflect your understanding of your grantees. There are additional steps you can take to partner with your grantees:
- Communicate! We can't emphasize enough the importance of program officers reaching out frequently to their grantees' executives and program directors. Recognize that funders have the power - the money grantees need - and that you are intimidating to grantees. Your actions model the behavior you desire and set the tone of the relationship. Check to make sure that the message you conveyed is what your listener heard and understood. Expecting a grantee to initiate a conversation with you and be candid, especially about problems, is unrealistic. How many of you would speak up in a similar situation?
- Reassess the information you require from grantees from proposal through reporting. We encourage our foundation clients to think about the "so what": how will the information you request from a grantee affect your grant decision? Grantees find themselves spending hours or days gathering information for a proposal or required report, yet program officers frequently don’t have the time or energy to read thoroughly the reams of paper they receive. Paring your application, follow-up questions, and report information to focus on only what you really need helps both your program staff and your grantees.
- Address the unintended consequences of your grant-making process. Analyze your workflow: how long does it take from proposal to review to commitment to disbursement and how long do you want it to take? Make sure grantees know what information you need to process an application and make a disbursement and make it easy for them to provide it. Postponed meetings, internal signature requirements at multiple levels, etc., all may delay payments, so figure out how to eliminate the bottlenecks. A foundation’s inefficient processes may not cost much, but the delays can have a significant effect on a charity's cash.
- Consider your role as an advocate for the sector. Foundations are in a unique position to advocate in an unbiased fashion for the program areas they support. You are well positioned to bring to the table government agencies, corporations, and other foundations to grapple with community-wide issues ranging from literacy and workforce development to health care and prevention. Working together with your foundation colleagues, you can gather and share the information you need to determine how best to tackle serious problems that require a coordinated, multi-faceted approach.
We Want Your Knowledge!
Let us know what you are doing to improve your grant-making or and program effectiveness. Your insights can help strengthen the sector.