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Overview:  If the Board sets policy for funding growth and distribution in keeping with accepted charity ranking guidelines, the Foundation is much more strongly positioned to be financially stable and to achieve a 4-Star rating.

A stable organization will create a financial strategy that allows it to offer the programs and services that fully support its mission, but also that allow it to sustain those programs and services over time.  While the public view of non-profits will often assess the yearly cost of programs and services against the annual, overall budget of the organization, Directors must take a longer view.  Leadership must position the Foundation to pursue long term, strategic goals allowing consistent growth in both revenues and program offerings thus maintaining financial stability. 

By clearly defining both short and long term revenue goals and by identifying a diversity of funding sources, Directors are better able to sustain programs and services over time – including in the face of loss of support or economic downturns.  Short term planning risks uneven fundraising with operational expenses rather than program goals driving choices and methods.  Longer term and strategic planning secure financial flexibility and allow for the development of program goals that provide long term solutions.

The Foundation is well served to have a strategic commitment to growing revenues that includes contributions from corporations, foundations, government grants, actively engaged individuals and program service fees.  Programs and services should also grow consistently but should additionally be governed by short and long term strategies.  While many programs and services will be offered annually, the Foundation is stronger when it supports programs and services that are either funded or offered over time.  Strategic funding policies thus support longer range program goals.  Contributors to the Foundation can then appreciate the financial stability of the Foundation and the organizational efficiency of its programs and goals.

Thoughtful planning will create a financial strategy that allows an organization to offer programs and services that fully support its mission but also allows it to sustain those programs and services over time.

1. Public view:  Program cost vs Administrative dollars
2. Strategic view:  Program growth vs Revenue growth
3. Sustainability:  Revenue goals, funding diversity and Mission-driven program expansion

Philanthropy in the past eight years is marked by a much higher level of donor awareness and engagement.  This shift has supported the creation of a number of organizations (themselves non-profits) and venues in which the “public” of public charities (501 C 3’s) become much more visible.  The resultant transparency benefits strong foundations and certainly serves as a cautionary marker to those foundations whose financial strategies are more haphazard or short-term. 

Board members are wise to allow financial, investment and cash policies to be informed by the methodology of charity trackers.  By making such commitments at the board level, foundations are better assured of higher “star” and charity ratings and are less inclined to make short term and often harmful financial decisions.  As with any core element of a foundation, financial decisions are more solid if considered as part of the board’s formal fiduciary responsibilities.

Public charities (501 C 3’s) exist to provide programs and services.  Out of working capital (budgets), then, programs should reflect the largest piece of the pie.  The working capital for public charities includes fundraising expenses, administrative costs and program / services costs.

In broad strokes, the following financial distributions reflect the methodology used by public (non-profit) organizations which track public (non-profit) charities.

For Fundraising Expenses:

For Administrative Costs:

For Program Costs:

The reminder taken from the above tables reflects that organizations whose programs capture 80% or better of the working budgets achieve the highest ratings.  Generally accepted statistics  hold that 7 out of 10 successful charities spend at least 75% of their budget on programs;  9 out of 10 spend at least 65%.

The second major category considered by rating organizations looks to the sustainability of an organization over time.  It is in this category that a Board’s direction for the Foundation’s long term planning and strategy are most obvious.  Again, when viewed from a donor’s perspective, the issue of donating to an organization which shows financial sustainability is much more attractive, indicating a strong financial future and directly reflecting the board’s commitment and leadership.  Sustainable growth reflects an organization’s ability to survive economic downturns or the loss of targeted donors.

While current economic conditions may change the growth horizon for foundations, the following statistics are generally acceptable in viewing charities over the past 8 years:

Primary revenue growth (income from corporations, foundations, grants and general donors as well as from member fees and/or program fees) for the strongest public charities is at or above 6.3%.

Program expense growth for the strongest public charities is at or above 10%.

Working Capital Ratio :  Charities depend upon their reserves of liquid assets to survive downward economic trends and sustain their existing programs and services.  Charities that BUILD working capital develop a greater capability for expanding and improving their programs and for protecting their programs from economic downturns.  A charity’s working capital ratio is determined by examining working capital against total expenses.  The goal of this view is to determine how long (in years) a charity could sustain its current programs without generating new revenue.

The most successful and strongest organizations could sustain their current program offerings for one or more years without generating new income.  The least successful programs could sustain their current offerings for three or fewer months.

The clearest reflection of a Board’s leadership is in crafting financial policy that supports an active and sustainable non-profit organization.  Doing so demonstrates the board’s commitment to the mission and programs of the organization, allows the transparency required by engaged donors and results in a foundation whose short term goals are met and whose long term strategies are secure. 

Thoughtful planning will create a financial strategy that allows an organization to offer programs and services that fully support its mission but also allows it to sustain those programs and services over time.

1. Public view:  Program cost vs Administrative dollars
2. Strategic view:  Program growth vs Revenue growth
3. Sustainability:  Revenue goals, funding diversity and Mission-driven program expansion

The most successful and highest rated non-profits

1.  Maintain fund raising expenses at or below 10% of total working capital budget
2. Maintain administrative expenses at or below 15% of total working capital budget
3. Devote 75% or more of each year’s working capital budget to programs and services
4. Grow their primary revenue at or above 6.3% annually
5. Grow their program expenses (offerings) at or above 10% annually
6. Protect long term investments to allow reserves to support the working capital budget of the foundation for at least one year