Most nonprofits look to government and/or foundation grants to help finance goals. These grants are fundamental in expanding an organization’s reach. But organizations may find it difficult to quantify all the costs and benefits associated with a potential grant. Nonprofits that don’t do their research before accepting money could face problems down the road. This article summarizes the risks of blindly accepting grants, how administrative burdens can undermine a grant’s face value, and the possibility that expenses aren’t allowable or reimbursable under a grant.
Most nonprofits look to government and/or foundation grants to help finance their programs. These grants are fundamental in expanding an organization’s reach. But you may find it difficult to quantify all the costs and benefits associated with a potential grant. If your nonprofit doesn’t do its research before accepting grant funds, it could cause problems down the road.
What are the risks?
By its very nature, the nonprofit industry has long been resource-challenged. And the COVID-19 pandemic has increased financial uncertainty for many nonprofits. Under such ongoing financial pressures, you can’t afford to ignore offers of support. Yet you also should avoid blindly accepting grants — doing so could leave you shouldering excessive administrative burdens, cost inefficiencies and lost opportunities.
Smaller or newer nonprofits aren’t the only ones at risk of such unexpected consequences. You might think that larger, more mature organizations would have formal grant evaluation processes in place. But that’s not always the case.
Further, as an organization grows, it has significantly more opportunities to expand the scope of its programming. This expansion can open the door to more grants, including some that are outside of the organization’s expertise and experience. The organization could end up accepting a grant with requirements that need to be fulfilled and struggles that weren’t anticipated.
What about administrative requirements?
Even small grants can bring sizable administrative burdens. For example, you could be caught off guard by the reporting requirements that come with a small grant. You might not have staff with the requisite reporting experience, or you may lack the processes and controls to collect necessary data. Government funds passed through to your nonprofit often carry the requirements that are associated with the original funding, which can be extensive.
Grants that go outside of your organization’s original mission can pose problems, too. Not only might the grant not consider your learning curve and additional costs, you might also face IRS scrutiny regarding your exempt status. In addition, new grants from either federal or foundation sources may have explicit administrative requirements your organization must satisfy. This can create unforeseen inefficiencies that undermine the grant’s face value.
What about costs?
As the saying goes, there’s no such thing as free money. To start, your nonprofit might incur expenses to complete a program that may not be allowable or reimbursable under the grant. As part of your initial grant research, be sure to calculate all these costs against the original grant amount to determine its ultimate benefit to your organization.
Then if you decide to go ahead with the grant, analyze any lost opportunity considerations. For unreimbursed costs associated with new grants, consider how else your organization could spend that money. Also think about how the grant affects staffing. For example, do you have staff resources in place or will you need to hire additional staff? Could you get more mission-related bang for your buck if you spent funds on an existing program as opposed to a new program?
Quantifying the benefit of a new grant or program can be equally (or more) challenging than identifying its costs. You should evaluate every program to quantify its impact on your organization’s mission. This will allow you to answer critical questions when evaluating a potential grant, such as: Are there existing programs that can be expanded using the same funds to yield a greater benefit to your organization’s mission?
Avoid unpleasant surprises
Government agency and private foundation grants are among the most important funding sources for many nonprofits. But accepting grants without performing the necessary due diligence can backfire in costly and time-consuming ways.