This post originally appeared on GMA Foundations’ blog.
Organizational budget size is a favorite proxy indicator in philanthropy. Donors use rules of thumb to streamline grantmaking due diligence, but generalizations are imperfect. Using organizational budget size as a proxy indicator can reinforce funding inequities and lead to lost opportunity. Here are a few ways to find and minimize blind spots.
Creating Blind Spots in Grantmaking Due Diligence
It is nearly impossible for grantmakers to avoid making quick judgements about organizations based upon budget size. The result is often a conclusion that is used in support of the grantmaker’s own values and assumptions.
We have all heard reviewers critique a proposal by saying, “They don’t need our money. They’ll find a way to raise funding.” There is an element of truth here. All organizations deserve scrutiny about questions of financial need and equity, particularly as it relates to accessing funding resources in the non-profit sector
Small organizations face funders’ biases too. They often get judged on a perceived lack of capacity or concerns about sustainability.
Yet, organizational budget size alone is not enough information to draw conclusions about need and accessibility to funding. The problem with rules of thumb is that they are often subjective and not based on appropriate data. Like all generalizations, they create blind spots which can lead to overlooked opportunities or reinforced funding inequities.
Avoiding Organizational Budget Blind Spots
As advisors, we caution grant proposal reviewers about the following blind spots in nonprofit budgeting, financing, and fundraising data:
- Ignoring the difference between restricted vs unrestricted funds. Organizations might have large budgets but not have the flexibility to spend revenues most effectively. They need unrestricted income to innovate, grow, or build capacity. A huge hospital system, for example, may have millions in revenues that support health care, but no discretionary income to pilot an innovative program to train workers.
- Overlooking different nonprofit capitalization structures. Different nonprofit sectors have different capitalization structures. Not all organizations finance their work in the same way. Youth development, for example, is more reliant on institutional philanthropy. Health care might be more dependent on fee-for-service contracts or reimbursements and may have less cash for capacity building. A small research institute at a state college may have to raise every dime of its budget and not get the college’s support beyond office space and a mention in an annual report.
- Failing to distinguish particular types of capital. A Nonprofit Finance Fund guide outlines the various types of capital that, combined, support a healthy capital structure. Understanding the intended or prudent use of each of an organization’s types of capital is important if grant decisions hinge on budget size. The tutorial program at a Boys and Girls Club with an annual budget of $5.9 million may or may not be financially stronger than the program at a GIRLS Inc. with a $375,000 annual budget. Much depends on how the programs are financed.
- Anchoring. Proxy indicators can anchor a bias in favor of a person’s particular decision. “We don’t like funding large (or small) organizations” is a common anchor that precludes a more nuanced analysis.
Minimizing Blind Spots When Relying on Organizational Budget Size
Despite the shortcomings, budget size will never go away as a proxy indicator. The best way to minimize bias about budget size is to focus on organizational and program outcomes. This approach is good in theory but hard to put into practice. People tend to stick to their beliefs. Simple generalizations about budget size may also be a smokescreen for other reservations about a request for funding.
One way for a foundation to minimize blind spots is to balance its stated bias about budget size with policies that are less arbitrary. For example:
- Asset allocation ratio. As with investment portfolios, donors can balance grant allocations to organizational budget size. You could fund a percentage of large cap organizations along with small cap ones. This supports values of organizational equity, fairness, and field-building. A health funder, for example, would include both community health care centers and smaller grassroots public health programs in its portfolio.
- Right-sizing. Most donors intuitively find a sweet spot where they have a sense that an average grant size is efficient to administer and valuable for the grantee. Having guidelines that target organizations with budgets below a certain level can help address the bang for your buck criteria desired by many donors.
Refining Grantmaking Due Diligence
The best way to avoid the pitfalls that come of generalizing about budgets, and to guard against the risks of over-financializing grant decisions, is to talk with the organizations’ leaders. They can help you understand the numbers and assumptions more fully, and develop a deeper understanding of how their organizations and programs thrive. The conversations may yield valuable surprises and sharpen your giving strategy.
About the Author
Prentice Zinn is a director of GMA Foundations, a philanthropic services firm. He manages several local, regional, and international foundations. Prentice is known for start-up work with new donors, planning for multi-generational philanthropy, guiding boards in rethinking mission and focus, and identifying high impact funding opportunities.