Giving Compass' Take:
- Marc Schultz discusses three important factors in determining the financial health of a nonprofit organization.
- How can these factors be used to start a conversation between a nonprofit and a funder rather than being used to limit the opportunities of already underfunded nonprofits?
- Learn about racial disparities in nonprofit funding.
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Two grantmaking advisors from BDO headlined the PEAK2023 hybrid session “Nonprofit Financial Health in Today’s Context,” covering the topline data to consider for assessing the financial situation of a potential grantee. On-hand were Hilda Polanco, market managing partner with BDO’s Nonprofit and Grantmaker Advisory Services, and BDO Director of Philanthropic Services Jennifer Pedroni.
Among the topics covered were the financial trends putting pressure on nonprofits right now, and the three financial data points that Polanco described as “absolutely top of mind for us.” Below are highlights from their discussion. Quotes have been lightly edited for length and clarity.
Polanco began the conversation by addressing sector trends putting pressure on nonprofits’ financial health, including the end of pandemic-related relief funds, increases in staff turnover, and high rates of inflation. Polanco spoke to the latter point: “For a $50,000 grant in the year 2000 to have the same purchasing power in 2020, that grant would need to be almost $25,000 higher. Only two years later, that $50,000 grant would need an additional $35,000.”
One area that inflation hits nonprofits particularly hard, Polanco noted, is compensation. “In the last two years, every indicator shows that in order to keep up with inflation, we’re looking at 5 percent increases in compensation.” Because compensation accounts for roughly 80 percent of most nonprofits’ budgets, that 5 percent means a significant challenge for organizations.
“So how do we factor that into grantmaking?” Polanco continued.” Go back to your teams and explore how you are thinking about multi-year fixed dollar amounts. For example, in a three-year grant, ask: Do we expect $100,000 to go as far in years two and three as it did in year one?”
The effect of inflation can be compounded by grantmaker inflexibility, especially regarding smaller organizations. “We’ve worked with many foundations that say they believe in equity. Then they have a requirement not to fund more than 30 percent of an organization’s budget,” said Polanco. If every funder uses this one-size-fits-all spending cap, she notes, small organizations will be unable to grow. “That’s a self-perpetuating limitation.”
Read the full article about nonprofit financial health by Marc Schultz at PEAK Grantmaking.