The Dangers of Relying on Grant funding

By Eve Fromberg Edelstein, Esq.

There is nothing more satisfying that winning a grant.  The feeling of satisfaction you get when knowing that someone else believes in the vision or mission of your nonprofit is second to none.  It is validation for all the hard work and dedication you put into their work at a nonprofit.  It means your ideas and work have attracted others in the field, and they are endorsing what you are providing.  However, when your organization is heavily reliant on grants and donations, you live in panic of not knowing with the funding cycle will cease.  You are at the mercy of others for your survival.  It is precarious and honestly, a dangerous position for any organization. It puts your organization in a gambler’s funding cycle, with potentials for booms and busts.

The other potential pitfall is that you begin to tailor and alter your mission and your work to satisfy a granting organization.  Slowly you begin it veer away from the original work, and begin to serve someone else’s agenda. It’s like being moved by a current. When you left the shore, you had charted your course, but as the current moves you from underneath, you suddenly look up and you cannot recognize the shoreline, you cannot see where you are headed and your maps no longer work. It happens slowly over time, but you are far away from your once carefully charted course.  Essentially, you are no longer working within your intended mission, your staff is ridiculously overworked, and you are living under terms to which you do not remember agreeing.

Fundraising addiction-how did it happen?

You are in a financial crunch; it may have always been that way since you started the organization.  You keep waiting for private donors to come in, but in the meantime, startup grants keep you operating, and keep the doors open.  Grant money is a great way to establish and organization, or to provide money for new programming or program growth.  But it cannot sustain an organization indefinitely.  It can happen when you never establish a solid fee funding source, or a strong donor base.  Sometimes it happens when you happen upon a funding crisis and the grants cover the cap, but you never recover fully from the financial crisis and cannot reestablish sustainable funding, and grants keep filling the gap. You begin to exhaust your reserve assets, and suddenly you’re driving on fumes (figuratively).  Grants continue to save you, but you can never seem to catch up and get secure.  You are afraid to show your financial weakness so you keep covering up your losses, afraid that funders will know of it, and stop making gifts.

The Three Signs of Financial Weakness

  • Sliding away from Mission. You begin to slide away from your original mission. You begin to add more services or more types of clients. You begin to target types of activities or clients that are “hot” with funders. You begin to follow charity trends to attract new grants that focus on new giving trends or the new community need.  It doesn’t feel like a compromise of values because you are still serving a need in society, but it is barely connected to your original mission or purpose. Eventually, you are forced to change your mission completely to truly reflect your actual activities.  The worst scenario is you begin to do charity work in an arena you are not qualified to serve, and you sacrifice quality or passion for funding.
  • Draining Assets. This occurs when you begin to drain reserves, endowments, or sell hard assets just to cover operating expenses. You continue to hope a financial windfall is coming and you promise to put the money back as soon as it comes in. But the promised savior never shows up and then you are simply empty of any real financial security.  This can happen with or without board involvement depending on how attentive a board of directors really is. Without proper financial oversight by a board of directors, this can happen right under their noses.
  • Keep wishing. This occurs when a board continues down a path of financial ruin, but keep putting off the hard decisions to cut back or close or merge, hoping for a wish for financial salvation to happen within the next 30 days. This can be in the form of a new big donor, a big win at a special event, or a big grant to be awarded.

How to Turn Around the Ship

It may be time for an intervention. A small group of board members come together to state the problem. They will need to outline with a visual presentation the true vastness of the financial crisis. They will need to educate the remaining board members and staff as to the depth of the problem, and begin to brainstorm real solutions which should include a no holds barred conversation about closure, layoffs, dissolution or merger.  Fault does not truly matter unless there is criminal wrongdoing.  It is not always about how it happened. Usually, everyone on the staff and board of directors have blood on their hands. Being a bystander makes one as guilty as those who took action in these situations. IN fact, board members who were not involved enough or weren’t paying attention are as responsible as those who took direct action.

It may be time to hire consultants and other professionals.  Usually staff is at a loss during these times, and may be too close to the problem to offer any solutions. Fundraising consultants, accountants and attorneys, grant writers, and strategic planning professionals may be helpful and have enough distance from the issues to offer new solutions and to think “outside the box.”  Sometimes this situation arises because you are stretching staff, especially executive directors too thin.  Another set of eyes and hands can make all the difference. While funds are low, hiring outside help may be the best use of the money that is left. Allow your ED to get back to what they do best, instead of trying to do it all.

The key is after the crisis has passed, is to get back to the original mission.  Brainstorm new ways to offer old services.  Verify that your need is still relevant. Start campaigns to re-engage old donors and ask them to reach into their spheres of influence for like-minded individuals.  Re-invent your image.  Modernize your look and feel.  Relaunch your organization in your community with an activity based on community outreach, not necessarily fundraising as its key activity.  A “friend raiser” rather than a “fundraiser”.  Explore a fee structure that can create a direct source of funding that is consistent and reliable, like a small membership fee, or a small increase to a current fee structure. Create a “widget” for sale based on your mission that you can sell to other organizations or to your community.

Grants can be a useful source of funding. But the key is that is one of many streams of income. It cannot become the main source of income. A rule of thumb should be that grant money should comprise no more than 30% of your total income stream.  Most organizations can withstand a reduction of 30% of its income if it plans for rainy days. When your organization is heavily reliant on grants, you put your organization at risk for financial ruin.  Grant funders can be fickle, and shift funding focus quickly and without warning. There are even times when the effort for prepare a grant application or to account for grant gifts after they are awarded is not worth the money awarded. Always do a cost benefit analysis when deciding to apply for a grant.

The ultimate goal is a diverse funding stream that includes some regular revenue streams made up of a balance of small individual donations, earned revenue, and contract work. The key to financial security is to have a long-term sustainability plan.

Eve Fromberg-Edelstein is a partner with the full service Palm Springs based firm of Fromberg, Edelstein & Fromberg, in which she specializes in real estate, estate planning, and non-profit organization counseling and advice. 

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