Today, the overwhelming majority of restricted project grants tend to hollow out nonprofits’ operational capacity and cash reserves. Using financial metrics that Fiscal Management Associates, The Nonprofit Finance Fund, SeaChange Capital Partners, and other leading experts recommend, we examined the financials of 300 nonprofits that account for a third of the combined spending of the top 15 US foundations. We found more than half (53 percent) suffer from frequent or chronic budget deficits, and 40 percent have fewer than three months of reserves in the bank. One in 10 had zero reserves.

There's a better way. In collaboration with the Ford Foundation, Bridgespan developed a simple Grantmaking Pyramid that reframes how funders and their grantees think about building strong, resilient organizations. The pyramid rests on a sturdy base that requires securing adequate funds to cover the actual costs of core functions. Specifically, funders must pay their fair share of grantees’ true indirect costs, and grantees must know and share their costs to make that happen. We aim to change grantmaking practices to make indirect cost recovery a reality for nonprofit grantees.

After establishing a strong foundation, grantees should partner with funders to accumulate a surplus of unrestricted funds. With these two elements firmly in place—recovery of true costs and strong operating reserves—nonprofits are best positioned to deliver effective programs with funds from program grants.

Bridgespan is working with leading foundations and collaborating with sector experts, such as the Nonprofit Finance Fund, GuideStar, and Independent Sector, to change the way funders and nonprofits work together on these issues.

We are also advancing research on how different nonprofit “business models” inform strong foundational capacity, financial resilience, and organizational capabilities. This knowledge will benefit funders and grantees—helping them make more strategic and informed decisions about how to invest capital to build successful and financially resilient organization.