Programs will only be as good as the organisation implementing them, which is why the move towards capacity-building grants is so important for the nonprofit sector.

Of all the ways grantors can help nonprofits scale impact, capacity-building is the most effective over the long term. Grantors often think about impact in terms of the specific programs they fund, but these programs will only be as good as the organisation implementing them. When organisations are more resilient, efficient, adaptable, and effectively led, they will be in a stronger position to maintain and expand programs.

There are many different forms of capacity-building: strategic planning, financial management, performance measurement, workforce support, improved communication and collaboration, and so on. But all these elements come together around one goal: helping nonprofits operate more sustainably so they will be able to consistently scale impact. The COVID-19 pandemic has exposed the fact that many nonprofits are operating on razor-thin margins and at perpetual risk of either drastically scaling back their programs or even closing. This is a status quo that grantors and nonprofits have to change, and capacity-building is a reliable way to do so.

With all the different forms of capacity-building available to grantors and the organisations they work with, it’s essential to determine where investments are likely to have the greatest success. Let’s take a closer look at all the ways capacity-building can forge stronger relationships with nonprofits and ultimately lead to dramatic benefits for the communities they serve.

The need for capacity-building has never been greater

Although the nonprofit sector has been crucial for helping communities cope with the dire economic and public health effects of COVID-19, the pandemic has stretched organisations to their limits. In the USA, a report by Candid found that our nonprofit sector could “realistically” face almost 35,000 closures, 22,000 of which are attributable to COVID-19. The worst-case scenario would be almost 120,000 closures. By December 2020, the sector had already lost 930,000 jobs.

One of the most pressing problems in the sector, no matter where an organisation is based, is the lack of reserve funds organisations have to help them survive a crisis like COVID-19. According to BDO, 53% of nonprofits in the US have six months or less of operating reserves and 13% don’t have any reserves at all. While these harsh financial realities are driven by the fact that the vast majority of nonprofits have extremely small budgets (88% spend less than $500,000 per year), it’s simply not feasible for so many organiations to risk permanent closure with the emergence of any future crisis.

A key element of capacity building is financial planning and management, including fundraising, which will help organisations climb onto firmer financial ground. But there are many other ways nonprofits can use resources more productively, which won’t just ensure that they’re equipped to handle future crises – it will help them have a greater impact in their communities.

There are many types of capacity-building

Grantors often decide to work with nonprofits on the basis of particular programs they want to support, so they tie their donations directly to those programs. This is known as ‘restricted funding’, and it prevents organisations from directing resources as they see fit. While grantors have traditionally viewed this as a way to hold nonprofits accountable and make sure their donations are being put to good use, it can actually have a negative long-term impact on an organisation’s operations – including the effectiveness of the programs themselves.

For example, a nonprofit could be overseeing several successful initiatives while simultaneously attempting to improve fundraising processes. Instead of tying donations to certain programs that may or may not be able to use them efficiently, grantors can allow nonprofits to deploy resources where they’re needed most. Consider the fact that many donors have become more generous in the aftermath of COVID-19 (or any crisis, for that matter). In this environment, organisations may want to increase their fundraising budgets to pursue new donors or reach out to existing donors, which will have a multiplier effect on the programs they offer. Crucial to this outreach is ensuring that the real cost of running the organisation, and not just programmatic expenses, is baked into grant requests and budgets.

Then there are all the other ways nonprofits can increase their capacities: through hiring and retention efforts; improved outcome tracking; better communication with grantors, communities, and other stakeholders; and so on. Nonprofits have the on-the-ground perspective to know if their programs need a financial boost or whether resources can be more productively used elsewhere. Grantors should consult with them about how they can effect the most change.

Building trust between nonprofits and grantors

Grantors and the organisations they support have to build their relationships on a foundation of mutual trust. When grantors provide nonprofits with unrestricted funds, they’re expressing confidence that their investments will be deployed responsibly. According to a survey conducted by the Center for Effective Philanthropy, nonprofit leaders say general operating support (GOS) and capacity-building grants “have the most impact on strengthening their organisations.” However, just 30% of these leaders said they received capacity-building support within the preceding fiscal year.

While the pandemic was painful for many nonprofits, it also led grantors to reconsider which types of support they provide – a shift that could have a significant positive impact. In the USA, two-thirds of foundations say they’ve loosened or eliminated restrictions on existing grants since the beginning of the pandemic, while 57% made “new grants as unrestricted as possible”. This is clear evidence that grantors now recognise the value of capacity-building. When nonprofits receive unrestricted support, they often use it to make their organisations stronger – a decision that will benefit their programs and their communities in the long run.

One of the most valuable aspects of capacity-building is the fact that it’s a self-correcting form of support. By increasing communication and data collection, grantors and nonprofits can have more informed discussions about which types of support are working. By improving fundraising and financial management, organisations will have more resources to devote to operations, programs, and so on. The sector will continue to make capacity-building a top priority in the years to come, and this decision won’t just make nonprofits healthier – it will make communities healthier, too.

Marta Ferro is the founder of Starfish Impact. Marta founded Starfish Impact in 2005 to connect nonprofits and philanthropic organisations with resources in a strategic and effective way. She is also a Managing Director at Angeles Wealth Management, leading their Philanthropic Families practice. Prior to Starfish, she worked with Goldman Sachs’ investment management division and was a member of the firm’s Diversity Committee.

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