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PEAK Grantmaking

Assessing Grantee Financial Health in Practice

Do you have a systematic approach to evaluating grantee financial health? Start by adapting Key Performance Indicators and a commitment to building partnerships that make communication easier.

Funders know that they can’t neglect the financial health of their grantees when making funding decisions, but if they haven’t been doing it systematically, they may not know where to start. This is for a couple of reasons: First, nonprofits’ finances are complicated! And it can be tough for anyone to parse financial statements and come away with a clear understanding of an organization’s financial health. Second, as our consultants are fond of saying, “If you’ve seen one nonprofit, you’ve seen one nonprofit!” That is to say, even organizations that do ‘the same thing’ may have very different business models, strategies and structures! Finally, grantmaking staff vary in their capacity to incorporate financial evaluation into grant assessments. At smaller foundations, grantmaking staff may have many duties and have difficulty optimizing for financial analysis. Larger foundations may have separate staff dedicated to program and financial analysis, but they have the additional challenge of getting the two groups to coordinate and even agree on which factors are critical.

One way we’ve explored for solving the problems of programmatic and financial complexity is identifying a set of key performance indicators (KPIs). Much of the work on nonprofit KPIs in the last few years has focused on programmatic performance, but this has, on the margins, been accompanied by an increased recognition that financial health and programmatic performance may be tightly connected. And connecting financial health to nonprofit programmatic performance has led to new efforts to capture and present fiscal information in formats that are easier to communicate and more usable.

My colleagues have developed a Financial Health Analysis Tool, described in some depth here, that pulls from standard nonprofit financial documents such as the audit, form 990, current year actuals and the annual budget to produce a single-page graphic overview in Excel. While these metrics may not be sufficient to satisfy a full due-diligence process, they are a great starting point. And, perhaps most importantly, for solving the coordination and collaboration problem, the metrics begin to establish a shared vocabulary for talking about nonprofit financial health.

Solving the final challenge of encouraging collaboration across grants management, finance staff, and program officers requires thoughtful engagement with a foundation’s culture and an empathetic and respectful approach to grantseekers. Here is where the experience of foundation leaders who have done this successfully can be extraordinarily helpful.

Responsible grantmakers know they must consider their grantees’ financial health in the grantmaking process. This often-difficult and stressful process can be made easier by a focus on agreed-upon Key Performance Indicators and a commitment to building partnerships that make communication easier.

Join us for our PEAK Grantmaking October 8 webinar, Assessing Grantee Financial Health – The Internal Partnership, with FMA founder and CEO Hilda Polanco, James Gallagher of the Ford Foundation, and Janice Opalski of Robert Wood Johnson Foundation.

Register now