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(Strategic Guidance for MNFR Appendix One, Challenge #1)
The ongoing underfunding of nonprofits described as a perennial and worsening problem in our last blog post requires strategic action and a willingness to do things differently. Here are several actionable strategies for organizations contending with underfunding, framed with an eye toward building long-term resilience.
Don’t wait for a funding crisis to hit. Anticipate it. Adopt a Lean Risk Management approach to spot and address funding risks early. For instance, conduct a periodic risk inventory with your team to identify where underfunding might impact your operations, such as upcoming grant expirations or insufficient overhead coverage. Develop a risk register that prioritizes issues and assigns owners to each risk. Then implement a recurring risk cycle – periodic check-ins (say, monthly or quarterly) to monitor financial indicators, update funding scenarios, and adjust strategies proactively.
This structured process, part of the Foundations for Growth (FFG) framework developed by Risk Alternatives, decentralizes risk management and ensures everyone is scanning for early warning signs. By treating underfunding as a known risk that can be mitigated rather than an inevitable fate, you empower your nonprofit to respond with timely actions – whether that’s ramping up fundraising, controlling costs, or pursuing bridge financing before a shortfall becomes dire.
Keep in mind that risk management can be a net cost savings for your nonprofit. Avoiding unforced errors reduces unexpected costs, while a solid risk management process will also uncover opportunities for capturing additional upside value for your organization. The takeaway: Aim to become radically aware of the issues you face so that you can take the next reasonable step to deal with what is most important now.
Traditional static multi-year plans fall apart when funding assumptions change. Instead, use Lean Strategic Planning to stay agile and aligned with reality. Lean strategic planning (an approach inspired by my book) rejects the idea of a set-it-and-forget-it plan. It incorporates the FFG's “early warning system” for threats and opportunities, so your strategy is continuously updated as conditions evolve. If a major grant is delayed or costs spike, a lean plan allows you to pivot by adjusting timelines, finding alternative revenue, or scaling projects appropriately.
The goal is a strategic plan that is as responsive and fluid as your daily operations. Engaging your board and staff in this adaptive planning keeps everyone on the same page when trade-offs arise. For example, you might develop best-case, middle-case, and worst-case budget scenarios (a lean planning technique) and outline actions for each. This preparation avoids panic cuts; instead, you have a roadmap ready if underfunding hits. The takeaway: Plan for uncertainty. A lean plan linked to real-time financial monitoring means underfunding will be met with a considered strategy, not chaos.
You all know this, but don't to put all your eggs in one funding basket. Nonprofits reliant on a single source like a one government grant or an annual gala are extremely vulnerable. Pursue a mix of funding sources – individual donations, grants, earned income, corporate partnerships, etc. – to ensure that no single setback will debilitate your finances. Within each category, seek to maximize reliability: for example, cultivate donors into monthly givers or multi-year pledge commitments to smooth out cash flow.
It’s also worth investing time in relationships with funders who can offer multi-year unrestricted support. Many grantmakers are increasingly open to this: many nonprofits have seen grant restrictions ease in recent years. Make the case to institutional funders that general operating support will amplify your impact and provide data on what you achieve per dollar when you can allocate funds flexibly. Of course, this takes time. The best time to have cultivated this relationship is long before you make an ask.
Similarly, explore earned income ventures that align with your mission. Even a modest fee-for-service program or social enterprise arm can create an unrestricted revenue stream that cushions against lean times. Finally, build your operating reserves methodically. Even if you start with setting aside 1-2% of surplus each year, over time, you’ll create a reserve fund that can cover a few months of expenses. Having a financial buffer is one of the strongest antidotes to underfunding; it turns a potential crisis into a manageable short-term gap. Boards should prioritize policies for reserves and contribute to their growth by allocating unexpected windfalls or budget underruns to the reserve. Resilience requires flexibility. Together, diversification and reserves provide that flexability so you’re not living paycheck to paycheck.
Nonprofits must shed the fear of talking about money. Educate your stakeholders about the real cost of your work. This means being transparent with donors, grantmakers, and the public that programs require overhead and that investing in administrative strength is investing in impact. Show how better staff training improved outcomes, or how new software (an "overhead" expense) allowed you to serve more people. Some nonprofits include a “True Program Cost” breakdown in grant proposals, clearly showing the portion of administrative and infrastructure costs embedded in program delivery. This emphasizes that there’s no clear distinction between “program” and “operations.”
Internally, cultivate a culture that rejects the scarcity mindset. Encourage your team and board to think strategically about growth. They must come to understand that saying “we can’t afford any admininistrative costs” is a path to burnout and mediocrity. Instead, set financial health goals. For example, aim to fund depreciation and technology upgrades each year, or to gradually increase salaries to liveable levels, and communicate these goals to potential funders as part of your case for support.
On a sector level, nonprofits should band together to advocate for policy changes that address underfunding. This could include lobbying for reinstatement of expanded charitable tax deductions to encourage more giving, and pushing for government grant reforms (like allowing adequate indirect cost rates on contracts), and telling your stories to the media. The takeaway: The more we normalize that nonprofits need adequate flexible, full-cost funding, the better chance we have of breaking out of the underfunding trap.
In challenging times, collaboration can be a lifesaver. Look for ways to partner with other organizations to share costs or unlock new funding. Joint programs or coalitions can attract funders interested in collaborative impact. Back-office collaborations (like sharing IT, HR, or office space with fellow nonprofits can reduce expenses for everyone involved. Also, leverage technology and process improvement to stretch dollars. Many nonprofits are adopting tech solutions to operate more efficiently amid funding challenges. For instance, cloud software can automate tasks and free up staff time, and data systems can help demonstrate impact to donors. Just be mindful that tech investments themselves require funding; this is where making the ROI case to funders or using reserve funds strategically comes in.
If underfunding is chronic and severe for your organization, it might even be time to consider strategic alliances like mergers or acquisitions. While not a first resort, conventional wisdom understands that merging with a like-minded organization can consolidate resources and eliminate redundant costs, ultimately preserving programs that might otherwise fail due to lack of funds.
Here, however, I take things a step further than mere convention. As a matter of stewardship, every year, every nonprofit should formally consider whether it should merge or collaborate to use donor resources more effectively.
The takeaway: Be strategic and creative in overcoming resource gaps – resilience often means adapting the model, not just cutting more. Every dollar saved or gained through efficiency or partnership is a dollar that can go back into your mission.
By implementing these strategies, nonprofits can better navigate the underfunding challenge. The solutions require both internal action (better planning, risk management, and cost control) and external action (advocacy, relationship-building, and education of funders). It’s not easy – essentially, we are asking nonprofits to work on long-term capacity even as they fight fires in the short term. But this balance is exactly what managing for resilience is about. The tools and frameworks like Foundations for Growth and Lean Strategic Planning exist to guide leaders through this process. The tone to strike is one of pragmatic optimism: underfunding is a daunting challenge, but with clear-eyed strategy and collaborative effort, nonprofits can sustain themselves and thrive.