This month, CNJG presents the second in a series of monthly tips for streamlining the grant application - and grantmaking - process.
Adapted from www.projectstreamline.org
Before a funder can assess a nonprofit’s finances, it must first get the financial information, either from the organization itself or from public sources. When the funder asks for information from the nonprofit directly, as most do, what format should they require? Our answer: whatever format the nonprofit already uses. We recommend this for project grants and general operating support grants— in all cases.
More specifically, we believe funders should adopt this simple principle: Grant budgets and financial reports should follow the way the grantee organization generally accounts for the use of its funds.
While this may seem like common sense, many funders fail to follow it. For example, nonprofits and funders often account for funds using different categories. One may use a category such as “salaries and benefits,” whereas the other may break down “benefits” into further sub-categories. When a grantee is required to alter accounting codes to match a funder’s—and in the process has to figure out, for example, what the funder means by “benefits”—it can create confusion, delays and errors.
The result can be grant budgets and reports that don’t fit with the way the grantee typically organizes its budget and accounts for its use of funds. Some funders minimize this problem by making grants to the organization as a whole or grants to a particular program, then reviewing all expenditures incurred by the organization or the program. When funding a discrete portion of a project, we recommend that funders request the entire project budget and not just a budget covering that portion.
Why use nonprofits’ existing financial information?
1. Creates less of a burden: Grantseekers report that having to “slice and dice” their financial information to satisfy the requirements of a particular funder is one of the most time- and cost-intensive parts of grant seeking. By accepting grantseekers’ existing budgets, funders help keep the “net grant” high.
2. Yields valuable information on capacity: It’s true that some nonprofits struggle with budgets and financial statements. Receiving these documents in the grantseeker’s format can allow the funder to assess the grantseeker’s financial sophistication and organizational capacity.
3. Is more accurate: Accepting existing materials eliminates the chance that the nonprofit organization will make errors when transcribing budget or financial numbers into a new format. These materials are also most authentic to the grantseeker and most representative of the specific project (if a project grant) or type
of organization (if a general operating grant).
4. Provides the information needed for small grants: We don’t think that small project grants require a detailed organization-wide budget or report. Instead, an existing financial statement from the organization, paired with a project budget developed by the organization in its own format, should suffice.
If You Must Use a Template…
While we realize that are a limited number of circumstances for which they’re appropriate,3 we generally recommend that templates—standard forms requesting specific categories of information—not be used. Templates can be appealing to funders because they convey financial information in predictable, funder-defined categories. But keep in mind that, while templates may make things easier for the funder, they almost always make things harder for the nonprofit organization. As we’ve discussed, templates can force grantseekers to cut their budget and financial reporting information into categories that might not be authentic to the way they do business. Funders that choose to require budget templates should consider the time and cost implications.
If your organization does plan to use a budget or financial reporting template, make sure that it (1) uses a limited number of line items—ideally no more than seven—to allow grantees the flexibility to accurately represent their budgets or financial information and (2) is easy to understand and use.
Best Practice: Pull What You Need
Common practice has been for funders to require grantees—prospective and current—to customize their financial information to fit certain requirements, then “push” this information back to the funder.
There’s a better approach. Where possible, funders should not only rely more on information already produced by the organization, such as financial statements and 990s, but shift to a “pull” model to get that information. Under this approach, nonprofits make financial information available on their website, or a public site such as Guidestar, and interested parties can pull this information from such online sources, if and when they need it. While this may at first take some adjustment, ultimately it would be a simpler system for nonprofits and funders alike.
Resources about the new Form 990:
Websites:
IRS: http://www.irs.gov/charities/article/0,,id=176667,00.html
Independent Sector: http://www.independentsector.org/programs/gr/Draft_Form_990.htm
National Council of Nonprofits: http://www.councilofnonprofits.org/?q=policy/form990changes
Webcasts:
IRS: http://www.taxtalktoday.com/index.cfm?page=8.778
IRS/Stay Exempt: http://www.stayexempt.org/course4purple/index.html
Articles:
Journal of Accountancy: http://www.journalofaccountancy.com/Issues/2009/Mar/RedesignedForm990.htm
Additional Resources:
Ratio Analysis Tool
Ratio analysis can help both the grantmaker and grantseeker get good information out of the financial data available. It allows you to consider various numbers from a financial statement in relation to other numbers and identify potential trouble spots by looking at the ratio generated. Because nonprofits operate differently, financial ratios have to be interpreted in the context of the organization being reviewed. Statistics and percentages may be misleading if taken at face value. This tool is meant to be the start of your questions, not the end of them. Visit www.projectstreamline.org for more information about ratio tools.
If you’re interested in other ratio tools or learning more about using ratios, see the following sources:
Guidestar.com: Why Ratios Aren’t the Last Word: http://www2.guidestar.org/rxa/news/articles/2004/why-ratios-arent-the-last-word.aspx?articleId=850
Nonprofit Assistance Fund: http://www.nonprofitsassistancefund.org/%20pages/toolstemplates