|Taking Stock in a Time of Crisis|
|Monday, 08 December 2008 04:57|
Recently, I was talking with an executive director of a youth-serving organization in New York City about how his agency was fairing and responding to this downturn in the economy.
He explained the contingency planning they were implementing—scenarios for budget cuts of 5%, 15% and 25%; direct “asks” to the board for immediate and increased giving; and more frequent conversations with institutional supporters. However, it wasn’t his own situation he really wanted to discuss. His greater concern was about his peers and the sector at large. “I’m not seeing the planning by executive directors that’s so needed at economic times like these. Many of them seem to be conducting business as usual, and I’m worried about how they will survive an [extended] downturn without contingency planning today. What can we do to help these managers?” he asked.
Because nonprofits usually operate close to the edge financially, we may feel like we are, in some ways, “equipped” to make it through tight times. This downturn, though, is expected to be broad and lengthy, and nonprofits will be relied upon even more than usual to sustain the social and cultural fabric of our communities. It’s incumbent upon nonprofit leaders to assess their financial strengths and weaknesses and focus on communication, transparency, and planning rather than “fake it ‘til we make it” behavior.
For nearly 30 years, Nonprofit Finance Fund (NFF) has worked with thousands of organizations and funders to help strengthen the financial health of nonprofits and improve their capacity to serve their communities. We have seen how critical it is, especially in tough times, to balance nonprofit mission, capacity and capital. During these economic times, NFF recommends nonprofit leaders examine the financial strengths and weaknesses of their organizations, assess potential financial risks, and create a plan to respond to those risks.
1. Ask ‘How might the economic downturn affect business?’
• Determine possible reductions, delays, or losses of particular revenue streams, including government contracts or grants, foundation and corporate giving, individual donations and special events.
• Conduct program economics analyses. Know whether surpluses in some programs are subsidizing deficits in others. Assess which program results impact overall financial health most substantially and evaluate their mission impact. Consider whether demand for specific programs will increase or decrease in a recession.
• Assess current levels of liquidity, using multiple measures such as months of expenses covered by cash, working capital (current assets less current liabilities), and liquid net assets (not all unrestricted net assets are available for general operations). This will help you understand what sits on your balance sheet—your cash management capacity and cash cushion for risk.
• Assess possible risk for cash deposits and investments. Is your money insured, or distributed among a number of banks? Are your investments diversified and varied?
2. Evaluate opportunities and plan a response to economic challenges.
• Determine the availability /use of any reserve funds for “rainy days”. Explore if restricted funds can be repurposed.
• Budget conservatively with best and worst case scenarios. Assume cash will arrive later than you think and bills must be paid sooner than expected. Plan your response to unanticipated or worse-than-expected revenue shortfalls. Ensure that cash flow projections are performed on a regular basis (monthly, weekly). Develop a strategy to address timing mismatches.
• Assess the board’s ability and willingness to cover possible revenue shortfalls and/or tap into existing cash and investments.
• Reevaluate growth plans. Reconsider any plans for program expansion or development of new programs. Assess current programmatic priorities in light of program economics analysis. Communicate with board and staff regarding any possible cuts to programs or personnel.
• Investigate options for renegotiating payables, debt, or leases. You may be surprised to find wiggle room. For example, your organization may be able to re-sign its lease early, extending the term in exchange for a price break.
3. Keep the lines of communication open.
• Keep internal lines of communication open. Ensure that organizational decision-making processes are sufficiently agile.
• Clarify financial responsibilities of the management and board members. The board will be required to participate in strategic and financial planning, helping management think through contingency scenarios in the current economy.
• Communicate with employees. What is the staff’s understanding level of the information provided, their responsibilities, and the impact of their day-to-day decisions on financial results?
• Stay in front of funders. Be candid about the impact of the economic climate and your specific strategy to adjust. Share specifics from your financial analysis so that funders can understand your short-term needs and the long-term impact of gifts. Emphasize your commitment to mission and the urgency of need your programs address. Thank donors frequently, and make outreach personal.
• If your organization offers services that will lessen the negative impact of a recession, approach government funders more aggressively for support.
4. Avoid common pitfalls.
• Diversify revenue with caution. Consider new revenue streams but be aware of risks related to new lines of business—accessing new revenue often creates new costs.
• Consider postponing large investments in fixed assets and infrastructure, such as a building purchase, new hires or expansion of services. If it’s necessary to proceed with these investments, then nonprofits need to work with funders and board to build a cushion to allow flexibility and course corrections in what will be unpredictable times.
• Start planning now. If you don’t have deep financial expertise in house, reach out to your board, a service provider, or a partner who does.
Nonprofit organizations are our social and cultural “front lines.” During this economic downturn, the burdens on our already-strained sector will only increase. The ultimate risk is to the most vulnerable people the nonprofit sector serves: children in foster care, home-bound elders, people living with HIV, special needs adults in assisted living and working environments, unemployed workers, homeless families and others.
There is no single roadmap to improved financial health. One example of sound planning in action: a New York workforce development organization examined the economics of its organization and realized a pressing need for flexible capital going forward. With a clear idea of the balance sheet needs, the organization was able to come to an agreement with their board and lead funder to repurpose their endowment as a board-designated reserve, managed and released based on board approval and organizational need.
The thoughtful planning and hard conversations happening at nonprofit organizations across New York will have an impact on the sector and our communities and will reach far beyond the downturn. How do we better connect money and mission? How can we mitigate financial risk? What creative ways can we work together – with other nonprofits, with funders, and with the community – to ensure our financial stability and increase our impact? How do we build fiscally stable and sustainable enterprises? How do we communicate our value to our funders?
Understanding the full cost of operations and the relative strength of the balance sheet is always important to an organization’s ability to serve its mission. It is this meeting of the “head” and the “heart” of a nonprofit organization that becomes the critical line of defense in times of economic uncertainty. Those organizations who ask the tough questions of themselves—around revenue, expense, and liquidity—and who clearly and regularly communicate their financial story to stakeholders will be better positioned to weather this economic storm. Most importantly, New York organizations will be able to continue to serve our communities in a time of great need.
Kristin Giantris is Vice President, Northeast Region at Nonprofit Finance Fund (NFF), a national leader in nonprofit, philanthropic and social enterprise finance (http://www.nonprofitfinancefund.org).