Budgets and Financial Reporting – Streamlining Basics
This series of blogs will remind you of Project Streamline’s diagnosis of our field’s application and reporting challenges, streamlining’s core principles, and practical recommendations for good practice.
Streamlining Basics blogs tackle the following topics:
- What is Project Streamline and Where’d it Come From?
- Wearing the Streamlining Goggles – Four Streamlining Principles
- Rightsizing Application and Reporting
- Budgets and Financial Reporting (Today’s Blog!)
- Making Reporting Mean More
- Online Systems
- Getting Started With a Streamlining Process
Budgets and Financial Reporting
When it comes down to it, grantmaking is about money. There’s more, of course. There’s your expertise, your convening power, your relationships with grantees, capacity building, voice, and influence. But few would deny that the grants that funders give are the primary tool and purpose of the philanthropic sector. The money opens the other doors.
So it’s not surprising that funders want a detailed accounting from grantees as to how funds are used. Most grant application processes require a project or organizational budget, and sometimes ask for organizations’ audited financials. Some funders look at the 990PF for another window into the financial health of a prospective grantee. In reporting, almost all funders require a financial accounting that shows how dollars were spent in relation to what had been proposed.
In this blog, we want to introduce or remind you of PEAK’s Project Streamline recommendations for budget and financial requirements. First proposed in our Guide to Budgets and Financial Reporting, these basic recommendations continue to be relevant, because grantseekers have told us that developing funder budgets is one of the biggest burdens of fundraising. In Project Streamline’s research for Practices That Matter, grantseekers named being allowed to provide financial information in their own formats as one of the top five positive funder practices.
Let’s look a bit more closely into the issues for nonprofits:
- Templates make it tough: Nonprofit organizations keep their own budget and financial information in their own formats that (usually) work well for them. Slicing and dicing this to fit funder templates and to meet funder restrictions takes significant time and energy. Some templates ask for financials divided into five or ten categories – sometimes more. As an example, some funders are interested in seeing all travel expenses pulled out separately, while others might want nonprofits to group those costs by program. Now imagine reporting to two different funders for the same project but needing to prepare two different budgets in addition to your own program budget.
- Funder budgets invite magical thinking: The budgets that nonprofits so lovingly construct for grant proposals and reports are often – in the words of Carol Cantwell and Molly Shultz Hafid – “Fake Funder Budgets” because they always miraculously zero out. These budgets are also deliberately opaque; nonprofits know that many funders frown upon expenses like staffing, facilities maintenance, and professional development, so they expertly disguise those costs when they can.
At the same time, many funders require detailed financial information in funder-specific templates. Why is that?
- We don’t know how to read them: Nonprofit financials can be intimidating to staff and grantmaking organizations, many of whom did not go into their jobs because they had an abiding interest in nonprofit cash projections, profit & loss statements, and audits. In a recent survey of staff in one mid-sized foundation, not feeling confident about reading nonprofit financials was the top concern articulated by program staff.
- So we try to get them into a consistent format: Funders uncomfortable with their ability to make sense of nonprofit financials try to standardize the information they receive so that they can compare “apples to apples” and know where to look for issues.
- And in doing so, sacrifice important information: There’s potentially much to be learned from a more honest and long-term picture of nonprofit’s own budget and financial information, including information about that organization’s financial acumen and capacity.
Project Streamline’s Guide to Budgets and Financial Reporting, lays out some basic principles for grantmakers to consider:
- Use the information that nonprofits already have: Nonprofits use budget and financial report formats that fit into their financial systems. Using nonprofits’ existing materials can not only save nonprofits time and add to the “net grant,” it can also give you important insight into a nonprofit’s financial sophistication.
- Align grant schedules with the grantee’s timing, not the funder’s. Funders should make sure two elements of grants—grant start and end dates and reporting periods—align with the grantee organization’s fiscal cycles and project timelines. Too often these schedules are instead based on the funder’s process, regardless of what makes the most sense for the grant.
- Require less reporting than foundations typically require of grantees. We recommend funders follow three principles:
- Written reporting should generally be required on no more than an annual basis (unless there’s cause for particular concern).
- When a number of funders jointly support a project or program, one budget and financial reporting format should be used, and all funders should agree to accept reports in that format.
- The smaller a grant is, the simpler the grant budget and financial reporting requirements should be. For general operating support grants, the organization’s 990 and annual budget should suffice.
- Ask only for the information you will use. Funders need to know what information to ask for and what they’re going to do with it. This guide includes tools, tips and resources to help with this process.
- Consider the possibility of doing your own financial due-diligence instead of asking for nonprofit financials. That’s right! Back in the Project Streamline’s archives, our interview with Carol Cantwell and Molly Shultz Hafid (A Radical Proposition: Say Goodbye to Budgets) is as relevant as ever! It describes a completely different approach, in which the funder reviews past financial data to look at the nonprofit’s overall financial health and sophistication, rather than requiring specific budgets. Their Foundation Review article, “In Other Words, the Budgets are Fake: Why One Funder Eliminated Grantee Budgets to Improve Financial Due Diligence” provides even more detail.
Dr. Streamline is Jessica Bearman of Bearman Consulting, LLC. She provides facilitation, organization development, and research and development to help grantmakers and other mission-focused organizations align strategy, practice, and culture for greater effectiveness, equity, and joy.