Organizational budget size is a favorite proxy indicator in philanthropy. Donors use rules of thumb to streamline grantmaking due diligence, but generalizations are imperfect. Using organizational budget size as a proxy indicator can reinforce funding inequities and lead to lost opportunity. Here are a few ways to find and minimize blind spots.

Creating Blind Spots in Grantmaking Due Diligence

It is nearly impossible for grantmakers to avoid making quick judgements about organizations based upon budget size. The result is often a conclusion that is used in support of the grantmaker’s own values and assumptions.

We have all heard reviewers critique a proposal by saying, “They don’t need our money. They’ll find a way to raise funding.” There is an element of truth here. All organizations deserve scrutiny about questions of financial need and equity, particularly as it relates to accessing funding resources in the non-profit sector

Small organizations face funders’ biases too. They often get judged on a perceived lack of capacity or concerns about sustainability.

Yet, organizational budget size alone is not enough information to draw conclusions about need and accessibility to funding. The problem with rules of thumb is that they are often subjective and not based on appropriate data. Like all generalizations, they create blind spots which can lead to overlooked opportunities or reinforced funding inequities.

Avoiding Organizational Budget Blind Spots

As advisors, we caution grant proposal reviewers about the following blind spots in nonprofit budgeting, financing, and fundraising data:

  • Ignoring the difference between restricted vs unrestricted funds. Organizations might have large budgets but not have the flexibility to spend revenues most effectively. They need unrestricted income to innovate, grow, or build capacity. A huge hospital system, for example, may have millions in revenues that support health care, but no discretionary income to pilot an innovative program to train workers.
  • Overlooking different nonprofit capitalization structures. Different nonprofit sectors have different capitalization structures. Not all organizations finance their work in the same way. Youth development, for example, is more reliant on institutional philanthropy. Health care might be more dependent on fee-for-service contracts or reimbursements and may have less cash for capacity building. A small research institute at a state college may have to raise every dime of its budget and not get the college’s support beyond office space and a mention in an annual report.
  • Failing to distinguish particular types of capital. A Nonprofit Finance Fund guide outlines the various types of capital that, combined, support a healthy capital structure. Understanding the intended or prudent use of each of an organization’s types of capital is important if grant decisions hinge on budget size. The tutorial program at a Boys and Girls Club with an annual budget of $5.9 million may or may not be financially stronger than the program at a GIRLS Inc. with a $375,000 annual budget. Much depends on how the programs are financed.
  • Anchoring. Proxy indicators can anchor a bias in favor of a person’s particular decision. “We don’t like funding large (or small) organizations” is a common anchor that precludes a more nuanced analysis.

Read the full article about budget due diligence by Prentice Zinn at Exponent Philanthropy.