Embedding Equity in Your Financial Vetting Process

There are deep-rooted inequities in philanthropic giving because the concepts of risk and due diligence processes have become so deeply ingrained in philanthropic practice. “Risk models were not invented to help philanthropy advance their work,” PEAK President and CEO Satonya Fair wrote in 2021. “They were created for businesses most intent on protecting their profit margins and financial standing.” Foundations, unlike corporations, are in the unique position of being able to take financial risk since there is no expectation of financial gain as long as there is a strong potential for positive social change.

In BDO’s work and research with more than a dozen foundations, we’ve learned that most funders do not intend to use their financial due diligence—or vetting and assessment—process to disqualify grantees from receiving funds. However, often they use a one-size-fits-all or otherwise regimented process that is designed without awareness of the inequitable burdens it can create for funding.

These factors are key reasons why PEAK partnered with BDO to create the Assessing Financial Health Virtual Training Series, a three-part curriculum designed to help grantmakers explore the concept of risk, learn what it takes for nonprofits to be financially resilient, and understand how to approach financial review using a grantee–centered lens.

As we look forward to the launch of this series in October, and in an effort to help grantmakers drive equity throughout the financial review process, we encourage funders to consider three opportunities for improvement:

• Look for opportunities to reduce grantee burden.
• Seek to understand and account for context.
• Reframe your relationship to risk.

Look for opportunities to reduce grantee burden

Too often, we see grantmakers request the same amount of information from all grantees, regardless of their relationship history, the grant size, or type of grant. Grantees with limited staff capacity or fiscal infrastructure may struggle to adhere to the bespoke reporting and application guidelines for multiple funders. By only requesting the most necessary, relevant information for the specific grant type and size, the grantee financial review can better align with the intended outcomes of the grant. While funders can often feel inclined to request all common external and internal financial reports, consider what information is most critical to inform your grantmaking decision and strengthen your grantee relationship. Equally important is to consider requesting only information that you have both bandwidth and expertise to review.

Alternatively, you may decide to not request financial information at all. This may be the case if the grant is small or if you’re able to first pull information from a publicly available source—such as Candid’s Financial Trends Analysis. Because publicly available information is going to be limited to US-based organizations that file IRS Form 990, some grantmakers may be reluctant to use these resources assuming that 990 data is too old. However, it’s important to keep the following considerations in mind:

• It’s unlikely you’ll get more than one additional year in audited financial statements.
• A nonprofit’s internal financials may be the most recent, but they are often trickier to evaluate because their formats have varied widely.
• The five years of trend data offered by Candid gives users a good sense of a nonprofit’s financial trajectory, which may be more meaningful than one year of the most recent data.

Seek to understand and account for context

Grantmakers and program officers often review grantee financial information in hopes of identifying any “red flags.” While we recommend a number of key metrics to review for understanding an organization’s needs, to look at results through the “red flag” lens with “standard” benchmarks can obscure important context which may have significant impact on a grantee’s metrics in a number of ways:

• Grantees that are led by and serving marginalized communities worldwide (e.g., based on race and/or ethnicity, gender, religion, and location) may have less access to flexible resources. They often get most of their funding through project grants, which typically do not cover all relevant costs. Project grants also generally must be spent down, thus not allowing for surpluses and reserves.
• A grantee’s subsector and primary revenue sources may impact their ability to achieve surpluses. Government funding (especially when provided at the state or local level) can create challenges for cash flow and development of reserves.
• Recent organizational and programmatic growth or change (by choice or circumstance) may affect surpluses and reserves.
• Grantees who own significant property often have less liquidity.

By acknowledging and prioritizing the specific context of your grantee’s financial position, it opens the possibility for better understanding your grantee’s needs and creates a more trusting relationship.

Reframe your relationship to risk

Finally (and perhaps most elusively), consider engaging your grantmaking team in a frank conversation about perceived risks associated with funding an organization who may feel new or different from many within your portfolio.

• Seek to understand how your financial review process may favor well-resourced organizations with greater financial stability.
• Identify places where a low tolerance for risk conflicts with your values or is keeping you from the impact you seek.
• Discuss the flipside of your approach to risk. Consider the risk of overlooking and underfunding organizations that are essential for progress.

For the changes that foundations and nonprofits seek to create in the world, a certain amount of risk is necessary. Philanthropic dollars are risk capital and can go places and fund ideas that are not possible to fund through regular capital markets or via government dollars. To be a responsible steward of philanthropic resources means taking a nuanced approach to assessing risk. In addition to considering risk to your foundation, consider the risk of resources not being deployed to communities that need it most and the risk of missing opportunities for impact or learning.

Every step in your grantmaking process is an opportunity to live your organization’s values and promote progress towards equity. Your financial vetting process, because it relies on “neutral” numerical data, is an often overlooked and unquestioned aspect of your grantmaking process where roadblocks to equity and misaligned values may abound. But when organizations fully consider and act on the three opportunities for improvement above, there are incalculable payoffs in streamlined processes, enriched relationships, and new capacity-building opportunities.

We hope these insights inspire you to consider your own processes and start a conversation within your foundation. Here are a few questions to explore: Who has benefited or been excluded from funding because of your current financial due diligence process? Where are opportunities to shift language, practices, and attitudes to bring in new-to-you grantees or support those who may have experienced historical under-investment?

Click here to learn more about and register for the Assessing Financial Health Virtual Training Series developed by PEAK in partnership with BDO.