We all know the importance of having an annual budget and fundraising plan. As you create your annual budget, start with what costs you are expecting to incur to manage the organization at the desired level over the next 12 months.
Place these costs in categories including 1) programs, 2) management, 3) administration, 4) working capital, 5) capital expenses, and 6) reserves. Next you want to decide the type(s) of funding needed for these different cost categories. Grants (government, corporate and foundations) are generally good funding sources for programs. They typically cover the direct service delivery costs of a program plus a small amount (usually 10% of direct costs) for management and administration. This leaves the remaining amounts needed for items 2 and 3 and the full amounts needed for items 4 thru 6. These are typically funded through traditional fundraisers, individual giving, and other forms of unrestricted funds. In addition, there are certain grants that will cover general operating costs (items 2 thru 6).
Let’s look at an example. Your organization has a $1,000,000 annual budget. When doing your cost analysis, you calculate that 65% ($650,000) represents direct costs to manage your programs. This leaves 35% ($350,000) of remaining costs included in management, administration, working capital, capital expenses and reserves. Now, the $650,000 can normally be funded through grants that provide “restricted” funding to services and programs providing outcomes. In addition, grants provide a 10% fee (often referred to as indirect cost) to cover a portion of the remaining 35% of costs of operation. Using our example, 10% of $650,000 equals $65,000. This means that grants may be used to cover $715,000 of our total budget of $1,000,000. The remaining $285,000 must come from other sources including fundraisers, special events and other forms of individual giving. We refer to this as “unrestricted” funding meaning it can be used to cover any general operating expense of the organization.
This information becomes key in creating your fundraising plan to ensure you have the right mixture of grants (primarily restricted to programs) and other forms of giving (unrestricted for operating expenses). Failure to do so can leave an organization “grant rich, but organization poor.” Be sure and understand the makeup of your costs (items 1 thru 6), and then create your fundraising plan to source the proper types of funds.
It is not imperative to have grants at all. Some organizations do not like the restrictions that come with grants, particularly government grants, and tend to focus on other ways of raising money. Without question, unrestricted dollars offer many advantages in flexibility to reimburse any organizational cost. Grants, however, can help you quickly scale a program, attract new partnerships and enhance your impact on whatever problem your organization is addressing. Each organization has to decide what approach is best for them.