Insights from “2025 Financial Series: Reframing Financial Due Diligence”
As major cuts across federal and state funding negatively affect nonprofits and the communities they serve, many in the philanthropic community are increasing their support of grantees while adjusting their policies and practices.
One essential area of support is financial resilience. Hilda Polanco and Jennifer Pedroni, of BDO’s Nonprofit and Grantmaker Advisory, explain how funders can start the conversation and implement concrete practices to best assist nonprofit partners as they face the unpredictable.
During this session on April 10th, Polanco and Pedroni led PNY members in a wide-ranging conversation, unpacking the framework of financial health and exploring how grantmakers can embrace a trust-based approach to foster dialogue and provide tangible support for nonprofit partners.
This article explores key aspects of financial resilience in two parts.
Part 1: Defining Financial Resilience: What You Need to Know
To manage instability and achieve lasting impact, nonprofits need financial resilience. Polanco details three key capacities of financially resilient organizations:
- Stay focused on the long-term
- Continually assess and respond to current needs
- Understand and be able to articulate your organization’s financial story
Having a deep knowledge of their financial story and the resources at hand helps organizations adapt when circumstances require it. This also helps in identifying and leveraging opportunities for growth.
“Resilient organizations are continually assessing the needs of today [while] recognizing the long term community needs that must be met. Finding this ongoing balance acknowledges a trade off between what we have to invest in today’s work and what we need to save for the future.”
— Hilda Polanco
Such requirements of financial resilience include:
- A Strong Business Model: A strong business model is a blueprint for how the organization creates, delivers, and captures value, and a budget is a financial reflection of that strategy in action. To build a strong business model, nonprofit partners need clarity around their value proposition, a sustainable revenue and cost structure, and a clear path toward sustainability.
- Liquidity: Liquidity serves as a measure of short-term financial stability; it details the number of months that an organization can continue to pay its operating expenses with current cash balances. Having enough liquidity ensures stability in uncertain times and provides greater flexibility to an organization’s operating structure.
- Reserves: Reserves are a portion of unrestricted net assets that could be easily converted to cash, also known as Liquid Unrestricted Net Assets (LUNA). Such assets show the months of flexibility nonprofit partners may have.
Funders can reaffirm their support of their nonprofit partners by refraining from high-reserve penalization and encouraging organizations to adopt a reserve policy that outlines the goals, purpose, and uses of these reserve funds. On the other hand, when encountering nonprofit partners with low or no reserve funds, funders can help organizations build their reserves through targeted foundation investments.
Designing financial health analysis to support nonprofit partners
Supporting grantee resilience starts with an understanding of grantee financial health. For some funders, this may entail a shift in how you think about financial due diligence – from something undertaken as an exercise in compliance or risk management to a more supportive process that enables a productive dialogue with the grantee about their challenges and goals. Ensuring that nonprofit partners are able to successfully undergo a financial audit and prepare the requested budget documents is only part of the picture; shifting your approach and expectations as a funder can complete that picture.
Start by reframing your language to reflect a supportive financial health analysis process, rather than simply requesting documents to check a diligence box. This analysis can be a trust-based, equitable process conducted at multiple stages. Here is an example of what this could look like:
- Application:
- Accept a grantee’s existing budget and financial report formats, and offer a simple, flexible template if needed
- Provide applicants space to explain their financial circumstances (i.e., a budget narrative)
- Be flexible about the percentage of an applicant’s budget you will fund
- Decision-Making:
- If you use a scoring rubric, let this be as part of a discussion rather than a decision-making tool
- Understand where your due diligence process may favor well-resourced organizations.
“We hope that [the financial health assessment] is more of a tool to help you understand the organization and enter into a conversation with your nonprofit partner with some shared knowledge.”
— Jennifer Pedroni
Read Part 2 next week for funder practices and ways to start a conversation with nonprofit partners in support of their resilience.