Donors have a great deal of power and influence in the NGO sector. This section provides practical advice to donors on how to use it effectively.
As well as donors, this section may be useful for international NGOs which fund local organisations or have long-distance relationships with their own offices.
Control vs flexibility
Donors face a difficult job. They have to use their funds responsibly, to achieve their goals and avoid fraud. This means making sure that basic controls are in place. But they also aim to support effective local responses and help organisations grow. This means encouraging flexibility and learning.
Having the money puts donors in a powerful position compared to the organisations they fund - donors are very influential. If they get the balance between control and flexibility very wrong in either direction, it can be damaging to the NGO. Donors have a serious responsibility to the organisations they fund.
Money is like fertiliser: too much poisons everything.
Responsibilities of donors
The responsibilities of donors are:
- Assessing capacity
- Signing agreements / contracts
- Providing funds or other assistance
- Reviewing progress
- Building capacity
It is normal to assess an organisation's financial management capacity before funding it. This can help you judge how much additional funding they can handle. Standard approaches include a review meeting and self-assessment.
Review meetings should help build an effective relationship with the NGO you are funding: an audit-style investigation is unlikely to generate trust and respect. Advance preparation can make a big difference, for instance by reading budgets, audited accounts and an organisation chart.
See our page on partner assessment for more details.
Signed agreements are important to set shared expectations about the formal aspects of your relationship with NGOs. They are rarely the basis of legal action; the relationship between a donor and an NGO is normally different to the relationship between two commercial contractors.
Signed agreements may include details such as:
- An overall statement of the type of relationship being developed,
- The particular activities being funded and a budget,
- Procedures for changing how funds are used,
- The reports required by the donor (including timing and format),
- Audit arrangements (an annual external audit may be enough),
- When cash payments will be made,
- The donor's right of access to project sites and to financial records,
- Any additional conditions laid down by the donor (e.g. around joint publicity, or purchasing).
See a sample grant agreement
The more that it is possible to discuss and negotiate the terms of an agreement, the better. It makes it likely that the agreement will recognise the NGO's operating environment and that the terms will be reasonable (and so will be respected).
Imposing heavy-handed controls is likely to be counter-productive. They may overwhelm NGOs or simply not be appropriate in local circumstances. They risk disempowering field staff and pushing against the second golden rule of NGO field work.
Ensure there is a schedule of remittances showing the exact dates and amounts that are planned to be sent. This allows both sides to plan accordingly and communicate in good time in case there is forseen problem.
Agree in advance how foreign exchange gains and losses are to be treated.
See Mango's Top tips on managing foreign exchange risks. (TT18)
There is no substitute for regular communication, both formal (eg visits and reports) and informal (eg phone calls and emails).
Regular financial reports play a crucial role. This might include audited annual financial statements or regular budget monitoring reports (which compare actual expenditure to budget). They might be required every three or six months. An external audit can provide assurance that financial statements are true and fair.
Financial reports have to be read alongside narrative reports, so that you can build up a picture of what has been achieved with funds and whether it seems to represent good value for money.
20 questions to ask when reviewing financial information
Building capacity is a development intervention. So it means working in tune with the two golden rules of NGO field work: it has to be done in respectful dialogue with the people you are trying to help and you rely on field staff to deliver it. In particular, it takes time and commitment, and it needs the buy-in of an NGO's senior managers and trustees.
This Guide and Mango's other services, such as training courses and staff recruitment, can help NGOs build up their financial management skills and confidence. We also offer consultancy and internal audit services.