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Strategic funding considers the way different types of financing options meet the broader goals and objectives of an organization. It attempts to find an optimal mix of funding that is appropriate for the part of the business being financed and ultimately maximizes value. A strategic funding approach can be appropriate for both for-profit and nonprofit entities.
Organizations can typically choose between various options when financing operations. A for-profit company can use a combination of equity and debt financing. Equity financing raises money from investors in exchange for an ownership interest in the company. A company that uses debt financing takes out loans or issues bonds. Both types of debt financing require the periodic payment of interest and the repayment of principal.
The financing mix that a for-profit company uses is its strategic funding approach. Developing the strategy behind these decisions is usually the job of the chief financial officer (CFO). The CFO attempts to find the mix of financing that maximizes profits. This mix can be affected by tax benefits or breaks, current interest rates, the state of the economy, or even public perception concerning the appropriateness of one type of funding over another.
Nonprofits approach strategic funding differently than for-profit companies. In the nonprofit context, strategic funding is the mix of charitable contributions made to the organization from different sources. The options include donations from individuals, grants from private foundations, grants from corporations and grants and contracts from government agencies. The percentage of an organization's income that comes from these various sources is its funding mix.
Executive directors and an organization's board of directors try to steer the organization's charitable options so its funding mix gives it the most operational flexibility. Strategic funding for nonprofits is an exercise in vetting funding options, determining the types of restrictions placed on the funds and making conscious decisions to pursue those that place fewer limitations on the use of their donation. An organization's funding portfolio is typically expressed as a pie chart. Strategic funding theory for nonprofits says that an organization should strive to have most of its funding come from unrestricted individual donations, which provide the most usage flexibility.
Another strategic decision a nonprofit makes is the acceptance and allocation of donations geared to programs rather than general operations. Every time a nonprofit accepts a program grant, it creates a contract that obligates the organization to use the funds for that exact purpose. For some organizations, the cost to run a program that is inadequately funded can put the whole nonprofit out of business. Strategic funding regarding this type of issue concerns the ability of the organization to recognize program grants and contracts that will create a deficit and to decline those funds when appropriate.