For grantamkers, knowing how to evaluate a grantee’s current financial health is more important than ever; in today’s operating environment, even long-standing nonprofits like Jane Addam’s Hull House Association abruptly file for bankruptcy and close.

Hilda Polanco, Founder and Executive Director of Fiscal Management Associates, a financial services consulting agency with a focus in nonprofit operations, is very attuned to these struggles and also has some advice for grantmakers.   I recently posed a few questions to Hilda about the importance of reviewing more than just the Form 990 to obtain a comprehensive view of a grantee’s or prospective grantee’s financial security. 

Allison Rosenthal: What is the biggest misconception a grantmaker can have after reading a potential grantee's Form 990? Additionally, is reviewing the IRS Form 990 enough to capture the complete picture of a grantee’s financial health?   

Hilda Polanco: It’s often assumed that the financial results as presented in the Form 990 tell the operating results for the grantee.  They don't!  Only the audited financial statements present results of operations in a manner that indicates if the potential grantee had an operating surplus or deficit.  In most cases, the Form 990 presents a more favorable picture because it includes restricted funds for future operations as if they were earned in the current period being presented. 

AR: In what instances should grantmakers request prospective grantees to provide additional internal financial reports?

HP: Audits and Forms 990 are annual reports and are usually not available for many months after the end of the prospective grantee's fiscal year. If a grantmaker wishes to understand the CURRENT financial health of the prospective grantee, only interim reports through the most recent quarter can actually provide that information.  These interim reports should also include the grantee's best information about expected operating results for the rest of the fiscal year as well as the fiscal year for which the grant is being requested. 

AR: Can grantmakers overburden grantees by requesting too many reports, too often?  What are the potential consequences?

HP: Yes, this is certainly a possibility. The key to successful communication between grantmaker and grantee is that the grantmaker be clear about the financial information that they require to assess the grantseeking organization's financial health. If that information is available in the format the grantee normally reports, then terrific!  If not, there should be a clear understanding as to how this information will be presented to the funder, at the onset of the relationship.  This should avoid any misunderstandings via differing expectations regarding reporting. 

To hear more from Hilda Polanco, register now for her financial analysis training, Assessing Your Grantees' Financial Health, Today: An Advanced Training for Program Officers, where she will cover these topics and more.  The class will take place on April 18 from 9:00am-1:00pm at Donors Forum. 

~Allison Rosenthal, Member Services Associate