Government funding can be transformative for nonprofits. Federal, state, and local grants help organizations provide shelter, food, transportation, childcare, workforce development, victim services, healthcare, and countless other services communities depend upon.
But government funding also carries a risk that nonprofit leaders and Boards should understand: The more dependent an organization becomes on a small number of government funding sources, the more vulnerable it becomes to decisions outside its control.
A nonprofit can be well managed, produce excellent outcomes, meet every grant requirement - and still lose funding.
Funding Can Change Faster Than Your Mission
Government funding is influenced by appropriations, legislative priorities, agency budgets, administrative policies, eligibility requirements, and changing political priorities.
There is another complication: what appears to be state or local funding may actually originate with the federal government and pass through another agency before reaching the nonprofit. A change at the federal level can therefore ripple through state and local funding systems.
None of this means nonprofits should avoid government grants. For many organizations, government funding is essential. It means they should understand their exposure.
Consider a nonprofit with a $750,000 annual budget that receives $450,000 from government sources. If a $200,000 program disappears, the organization suddenly has a 26.7% hole in its operating budget.
The organization's mission didn't change. Community need didn't disappear. The organization may have done absolutely nothing wrong. The funding environment changed.
Restricted Money Creates Another Risk
A large grant award also doesn't necessarily mean an organization has significant financial flexibility.
Government grants frequently restrict how money can be spent. An organization may have substantial program funding while still struggling to pay for technology, fundraising, staff development, facilities, administrative capacity, reserves, or unexpected needs.
Government reimbursement schedules can create another problem. An organization may have an award on paper while waiting weeks or months to be reimbursed for expenses it has already paid. That makes adequate reserves and unrestricted revenue especially important.
Diversification Means More Than Finding More Grants
Replacing one government grant with three other government grants may increase the number of awards without meaningfully reducing the organization's exposure.
A resilient funding portfolio can include a combination of government grants, private foundations, corporate philanthropy, individual donors, recurring giving, major gifts, sponsorships, earned revenue where appropriate, and unrestricted operating support.
The right mix will be different for every organization.
The objective isn't to eliminate government funding. It is to avoid allowing one funding source to become an organizational single point of failure.
Questions Every Nonprofit Board Should Ask
- What percentage of our revenue comes from government funding, and what percentage ultimately originates from the same source?
- What are our five largest funding sources, and what would happen if one disappeared?
- How much of our annual revenue is unrestricted?
- How long could we operate if a major reimbursement were delayed?
- Which programs would be affected by a 10%, 20%, or 30% funding reduction?
- What are we doing now to develop alternative funding sources?
Those aren't simply fundraising questions. They are organizational sustainability questions.
Diversify Before You Have To
The worst time to build relationships with new foundations, develop an individual-giving program, improve funder-facing communications, or begin searching for new funding sources is after receiving notice that a major award will not be renewed.
Diversification takes time. Relationships take time. Organizational readiness takes time. That's why funding strategy should happen while funding is stable.
The writing isn't the hard part. The readiness is.
A strong grant proposal can help an organization win funding.
A strong funding strategy can help ensure the organization is still serving its community when the funding landscape changes.