Supply chain management lessons may  help nonprofits in hard times

Published in the January 23, 2009 edition of Columbus Business First

There has been a shift in the relationship between nonprofit organizations and philanthropists. 

Historically, nonprofits took the lead in determining community need, and philanthropy focused on supporting the nonprofit and its program choices.  Nowadays, many philanthropists and grant-makers determine the services they believe are most important for the community and then identify nonprofits to supply those services. 

Thus, nonprofits increasingly serve as suppliers, and the goal of much philanthropy has been to maximize the service impact of donor money.  This focus on leveraging the donor is reflected in grants that require the nonprofit to provide matching funds or provide startup monies for new programs that nonprofits are expected to support independently after a few years. 

It has also led to a preference to fund only programs and not to provide operating support.  In many cases, it has shifted grants to cost reimbursement rather than cash advances, essentially making the nonprofit the banker for the philanthropy’s projects. 

This approach was manageable when the economy was strong and nonprofits could develop profit-making programs and tap large numbers of small donors to generate cash to meet donors’ terms.  Unfortunately, in the economic climate now, the pool of small donors is shrinking and nonprofits are having the same difficulty in earning money as the for-profit sector.  

As a result, the model of leveraging donor money is demanding cash that the nonprofits are less able to provide. 

It is helpful to tap some lessons from supply chain management.  In a supply chain, the lead company recognizes its dependence on the financial health of its suppliers.  In good times, the lead company could compel terms that favored itself over its suppliers, but in difficult times it must be responsive to the financial stress on suppliers if it is to maintain the supply chain.

So, too, must the philanthropic community consider ways to ease the financial strains on nonprofits that are delivering the services the philanthropies want.  Particularly helpful are these steps, which philanthropies can take to improve nonprofits’ cashflow and help them remain solvent. 

• Eliminate match requirements:  Grants that require a match cost a nonprofit money.  While the nonprofit may have been able to find additional donors in good times, in this environment a match requires a nonprofit to divert existing fundraising from other programs to the program that requires a match.  This is the equivalent of a lead company paying a supplier less than the cost of goods supplied.  Nonprofits are realizing they cannot afford these matches and they are increasingly turning down such grant awards.

• Pay the grant award up front:  Nonprofits are rarely well-capitalized, so a grant that pays after services are delivered and costs are documented demands nonprofit capital that may no longer be available.  This notion of donor leveraging has the nonprofit finance the service delivery at zero interest.  Nonprofits have used reserve funds or bank lines of credit to manage this.  Both financing sources are slipping away, creating a cash-flow crisis that may lead nonprofits to have to refuse grants that pay only by reimbursement.

• Reduce reporting requirements:  The amount of information required by philanthropies, both to apply for and to execute a grant, has increased enormously due to a desire for greater accountability and demonstration of program effectiveness.  One cannot dispute the value of accountability, but in difficult times one should examine the administrative burden of specific reporting requirements, particularly for grants that don’t pay administrative costs.  Much of the cost is caused by having to provide separate, customized reports for each grantor.  Since a penny saved is a penny earned, an economical way to help nonprofits would be for grantors to collaborate to reduce the volume, customization, and duplication of required reporting. 

• Include overhead expenses in grant awards:  Any for-profit supplier would reject a contract that did not cover administrative and facility costs because they would eventually go bankrupt.  Nonprofits are in a similar position.  Heating the building and turning on the lights are essential to any nonprofit’s work, yet many grantors will not cover their share of these costs.  Many nonprofit failures can be avoided if grants can be modified to cover these essential costs. 

• Make unrestricted grants:  Managing through difficult financial times requires flexibility.  For-profit companies have complete flexibility in how they use their funds but nonprofits often must hold the bulk of their cash in restricted form, which means that the cash can be used only for the purpose designated by the donor.  Unrestricted grants, or so-called operating support, allow nonprofits to use cash where it is most needed.  It is ironic that some nonprofits with sufficient cash overall, have insufficient unrestricted cash to meet their next payroll. 

Nonprofits are the suppliers to the philanthropic community.  In these difficult times, preserving nonprofit suppliers can be the most important step a philanthropy can take.

Allen J. Proctor was formerly chief financial officer of Harvard University and is the author of Linking Mission to Money® Finance for Nonprofit Board Members. Subscribe to his free newsletter at www.proctorconsulting.org.

Copyright 2009. Reprinted with permission, Business First of Columbus Inc.