Nonprofits traditionally are opposed to businesses because not money but charity is in focus there.  But this naïve misconception can turn into significant money loss. Nonprofits have something to learn from businesses to manage their finance effectively. For these purposes Grantmaking Pyramid strategy was invented.

 

Why pyramid model and who needs it?

There are a lot of cases that prove that it is difficult for nonprofits to manage money they receive from funds wisely. According to a Bridgespan survey of 300 grantees that account for a third of the combined spending of the top US foundations revealed that: more than half suffer from frequent or chronic budget deficits; 40 percent have fewer than three months of operating reserves; and, 10 percent showed no reserves. For example, in 2005 Communities in Schools, one of the most successful nonprofits requested colleagues of a bailout. It turned out that the organization was accepting the most common kind of payments from foundations, such as result-driven grants, and the money were spent on expanding programs. But basic needs of nonprofit such as staff training, tech upgrades, facilities costs were neglected. As a result, CIS’s operating costs became so limited, that the nonprofit had to struggle to keep up its standards.

In order to avoid such an incidents and to make nonprofits work like a charm, a Granmaking Pyramid was unveiled by Bridgespan and Ford Foundation. The pyramid aims at building strong, resilient nonprofit organizations that can achieve results. According to Bridgespan Partner Michael Etzel and vice-president of the Ford Foundation Hilary Pennington who developed the pyramid, it offers a systematic approach to helping organizations be successful. As he says, the goal is “to take a step back from the sector’s “relentless pursuit of increasing impact” to ensure investments help a group smartly evolve”.

 

How does it work?

Let’s take a closer look at the Grantmaking Pyramid system. As Michael Etzel mentioned, the original inspiration was kind of “Maslow’s hierarchy” – to design it as a model of multiple layers.

The pyramid should be considered from the bottom to the top.

First of all, ground level implies building strong foundational capabilities in order to cover the actual costs of core functions. These are information technology, staff development, utilities, rent, strategic planning, and travel. In addition, nonprofits have certain differentiating capabilities essential to satisfy their missions (for example, a gender equality organization requires excellence in communications, and a cancer research lab requires special facilities). These capabilities should be the basis of conversation between funder and grantee on where to focus investments. This combination of foundational and differentiating capabilities is the hidden strength of any nonprofit, and provides the platform for development effective campaigns. It is extremely important to identify and invest in the capabilities that are in the basement of everything, because in is not just a matter of securing money to cover costs. It takes organizational commitment to devote the time and energy to ensure that organizations address these issues.

The second layer is accumulating the net and to asset balances. After covering all the initial costs, nonprofits need to add organizational resilience based on financial health. Without sufficient unrestricted balances (both working capital for predictable timing issues and operating reserves to unpredictable shortfalls), it is impossible to  give adequate attention to the most critical, strategic questions facing their organizations. Nonprofits should precisely formulate what they actually need by relying on the experience and long history of donors supporting core functions. Also, they have to learn how to ask for support.

The peak of the pyramid is that nonprofits need to deliver effective programs, the springboard for increasing impact. Third layer is the public face of nonprofits and the place where, understandably, funders and grantees focus their attention. Every nonprofit starts with a goal in mind. Funders are ready to support those goals. While outright growth or scale is not always the right goal for nonprofits, success fuels a desire to increase an organization’s impact against its ambitious mission. But all too frequently, money intended to programs trickles down the pyramid to fill the foundational cracks caused by neglect of basic capabilities and financial health.

 

Grantmaking Pyramid in action

“The result of implementation of the pyramid is making investment in a right order”, Michael Etzel said in news release. The Ford Foundation, on the other hand,  has made the Grantmaking Pyramid the centerpiece of its new BUILD Initiative, a $1 billion investment over five years to strengthen the resilience and effectiveness of its key grantees.

“Ford believes that its grantees must be equipped to play the long game, which means doing more to strengthen their core capabilities and financial health, not just fund programs,” Pennington said.

Designing Grantmaking Pyramid was a meaningful turn of the tide in the work of thousands of nonprofits. May be from now, after releasing this simple but significant system, the work of charitable organizations will become more effective and as a result the better world is soon to be built.

 

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