In the for-profit sector, customers provide revenue that covers the cost of providing the products and services they buy. In the nonprofit world, the beneficiaries of nonprofit services usually provide little, if any, of the revenue to fund the services they receive. Despite this distinction, nonprofits must think like for-profit organizations if they want to fully recover their costs. For this reason, gratitude towards funders is critical, but thankfulness shouldn’t stop us from having honest discussions about expenses. With recent budget and economic pressures on government funders and private donors, honest conversations are more critical than ever before. After all, success is not only defined by providing needed services, but it’s about the ability to continue providing services year after year.
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5 Best Practices for Nonprofit Funding:
1. Think of Funders as Customers
Think of nonprofit funders not only as donors but also as customers. Therefore, negotiate with your funders like you would with customers. While you might negotiate discounts, you don’t give away your services for less than cost. Your mission needs funding to be sustainable and successful.
2. Negotiate While Nurture Your Funding Relationships
The right tone makes a big difference in a successful negotiation. You want to be honest and grateful while conveying your deep appreciation to your funders. They are your partners. Therefore, it’s important to talk about your passion for the work that their funding makes possible. Establishing a tone of partnership, gratitude, and passion for your mission sets the stage for negotiation.
3. Recover Indirect Costs
- When the funding source is federal, your indirect costs have to be covered. Since the Uniform Grant Guidance (2 CFR 200) passed, all federal awards after December 26, 2014 must allow for indirect cost recovery at your federally negotiated indirect cost rate. If you don’t have one, at a de minimis rate of 10%. This is true even when you are a sub-recipient of a state or local government agency, as long as the funding source is federal. The only exception is when indirect costs are unallowable or capped by federal regulation or statute. If the request for proposal or award doesn’t include indirect costs, you can use the language at CFR 200.414 (c) to remind funders of the requirements. Keep in mind – not all federal funders have been trained in the new regulations, so respectfully citing the language from the Code of Federal Regulations helps.
- What if the funding isn’t federal? State, local, and foundation funders have initially refused to cover indirect costs. Therefore, citing the Code of Federal Regulations won’t help here—these funders aren’t subject to the Uniform Grant Guidance. Generally, it’s helpful to gently point out the indirect costs incurred so that explicit requirements of the grant/contract can be met.
4. Establish Favorable Payment Terms
It’s not unusual for grants to be silent on payment terms. Grants might cite requirements about when invoices have to be submitted, but not necessarily when they’ll be paid. This is practically unheard of in for-profit environments. So, always go back and negotiate payment terms into the award. If the award is federal, cite CFR 200.305. It says nonfederal entities are to be paid in advance when certain conditions are met or at least within 30 days. Occasionally, your organization may have success getting paid in advance or with net zero terms in spite of the regulation. Some foundations pay in advance, and we love that! However, it is most successful to get 30-day terms written into the grant award with terms included on the invoices. If payments are late, cite the contract clause and the invoice terms when following up with the funders.
5. Include Other Costs
Carefully read the RFP or grant award for other costs that you might not have considered. One area to think about is required insurance coverage. If a funder initially requires a particular coverage that no other funder has required, get a quote to acquire the coverage. Then, let the funder know that the cost will need to be a direct, reimbursable cost of the contract. You may find that funders will retract the particular insurance requirement.
It’s imperative that you engage your funders in respectful yet candid negotiations regarding your expectation that your costs will be paid. You probably won’t win every negotiation. When you don’t, you and your leadership team will need to make a thoughtful decision about utilizing unrestricted income to subsidize your costs, or even reduce services to match available funding. I’ve found that these options are unappealing and act as inducements for funders to negotiate.
Laurie Tarpey has over 18 years of experience in accounting, beginning in Big Four public accounting and followed by leading finance, IT, facilities, and operations at entrepreneurial for-profit companies. She is now the CFO for a large regional nonprofit in Northern Virginia. She specializes in strategic financial analysis, operations management, budget leadership, and contract negotiations. Laurie is a member of the AICPA, the Virginia Society of CPAs, and the Greater Washington Society of CPAs. She also serves on the Finance Committee of the Finance and Administration Roundtable, a DC area association dedicated exclusively to nonprofit financial and administrative professionals. She is a CPA with a degree in economics-accounting from Holy Cross College, an MBA from Harvard Business School and a certificate in nonprofit executive management from Georgetown University. Other publications include Three Things I’ve Learned as a Nonprofit CFO since Making the Leap From the For-Profit Sector and How to Lead Change Management.