Managing Financial Uncertainty

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In the past 12 months, we have seen significant declines in the stock market, an increase in the rate of unemployment, terrorist attacks, and actions to bolster our economy by the Federal Reserve System through numerous interest rate cuts.

Some organizations have received significant contributions for victim assistance programs and similar activities. Other organizations have seen funding reductions from private foundations, with reduced distributions as a result of the current bear market, reduced membership receipts as members seek more value from their membership dollar, and redirection of charitable giving as a result of September 11.

Last October, our firm organized a workshop, “Weathering Funding Reductions,” that brought together leadership from 70 nonprofit organizations to collaborate around a central question: “How will giving be impacted across time by the current realities and how will my organization be impacted directly?” The result of this workshop was the identification of several fundamental strategies from nonprofit organizational leaders who have experienced past crises or navigated their organizations through uncertain times (see Reconnecting to the Vision box).

This should be your number one priority. Communicate the situation frequently and openly with your staff, board, funders, donors, and suppliers. Ask for the same open communication from them, especially about potential reductions in funding. New relationships with donors and funders take time to establish. Focus on existing relationships and building trust with these stakeholders. Engage donors in other capacities (such as volunteering) to expand relationships in non-financial areas. Communicate what your organization is accomplishing to anchor their support.

The organization’s financial resources should be expended on activities that are mission-critical—activities that support what the organization was established to do. Organizations need to bring the board and staff together to refocus their efforts around the organization’s mission. This involves identifying the organization’s activities (such as programs and member services) and evaluating them against the mission. You should decide if it is worthwhile to expend valuable financial and human resources on activities that are outside your core mission.

Organizations and their leadership may have to enact an almost ruthless prioritization of their activities to focus on what is critical in achieving the mission. Strengths and weaknesses need to be reviewed even when carrying out mission-critical activities. If there is another organization that is better at delivering the service or program, consider partnering or transferring the entire program to it. What is important is outcomes and long-term survival.

The reverse is also true. Determine what your organization is best at and focus on or expand that area by shifting resources.

Program reductions should be one of the last steps an organization takes (see next section for ideas on other ways to cut back). Start with non-mission-critical programs—evaluate the impact and cost of less mission-critical activities and consider curtailing them.

Be certain to consider the indirect costs associated with operating the program or service you are evaluating. On the one hand, such costs can be significant and make the decision to cut easier. However, will the program reduction mean that administrative positions can be curtailed or eliminated? Could infrastructure requirements (office space and equipment, accounting systems, and so on) be reduced or restructured for an additional cost savings? Or will the reduced demand for indirect services cause other inefficiencies that must be weighed as a factor in cutting non-mission-critical programs?

Organizations also should be on the lookout for mission creep, pet projects from board members or staff that do not necessarily further the organization’s primary mission. Some of these drain financial resources while many are “silent killers” because they may use up few direct dollars but take up valuable staff time.

Take a hard look at your organization’s situation. Organizations must identify and evaluate their risks from reduced funding. Review the major sources of revenue and assess which are most likely to be impacted and by how much. This may involve contacting major funders and reviewing historical trends. With this information you must plan for the best, most likely, and worst case scenarios for your organization and develop strategies to deal with each one. Involve your board and make the hard decisions now, so that you can react quickly to any crises. Create a budget or financial plan for each scenario and identify what costs you can curtail or delay while delivering on your mission. Your strategies in the face of risky funding may include advocacy, especially in league with strategic partners, to keep funding secure (see the Advocating box).
If you are reliant on federal funding or state and local pass-throughs of federal funds, engage the donor agency so that you may evaluate the effects of September 11, the current war and other redirection of federal dollars that may affect your future funding levels.

If you are confident that all such risks are minimal, begin developing a contingency plan for future years by establishing an operating reserve and annually contributing to it. For organizations that are fortunate enough to have even a reasonable reserve, now may be the time to use, but use it wisely.

During times of economic uncertainty, organizations must be aggressive and steady with their fundraising efforts in terms of raising dollars and recruiting volunteers. Take steps to draw closer and ask more from those who have given before and have a special place for your organization. Focus on your organization’s outcomes and accomplishments when fundraising. Do not just tell them how much you need to raise, show them what you have done in the past and what you will do tomorrow with the money raised. Increase volunteer recruitment efforts to leverage your financial resources. Identify key areas where you may need to expand your strengths, like volunteer recruitment, retention, and management.

Establish or enhance strategic partnerships. Foster open lines of communication with organizations that are complementary to your organization’s mission. Find a common ground and focus on identifying overlaps and each organization’s strengths and weaknesses. Find ways to capitalize on each other’s strengths so both organizations can deliver on their missions. Examples of this are co-location of meetings and conferences or partnering and resource sharing to carry out social programs.

There are several steps every organization can take to curtail expenses without eliminating entire programs, activities, or people. Some things to avoid are across-the-board expense reductions or the elimination of staff across all departments. This may work temporarily, but it is not a long-term solution because it does not consider the organization’s ability to deliver on its mission. Following are some of specific areas on which to focus.

Know your true expenses and revenues. Financial information is the most critical piece of information you will need to manage your costs. You need to know the true costs of each of your programs and activities, and how your actual revenue and expenses compare to your budget.

Eliminate or delay unnecessary expenses such as travel, entertainment, and training. Look for ways to accomplish the same result in a less expensive way. Consider approaching vendors for payment terms to delay expenses previously incurred but not yet paid or for upcoming expenditures that cannot be avoided. Printers will frequently allow payment terms to keep your business. Your auditor may be able to reduce the fees if you allow them to complete the work during a period that is slower for them. On a larger scale, landlords may be willing to forgive some rent now in exchange for extending the terms of the lease in the future. A debtor may be willing to do the same.

Review compensation and ben-efits by carefully considering salary freezes. Keep raises to a minimum, defer bonuses, or reduce unnecessary perks. Benefit programs can also be reviewed for cost savings and might entail changes in health insurance options and increased deductibles.

Delay purchases of capital assets (furniture and equipment) as long as it does not adversely impact your mission-critical activities. If an item is mission-critical, consider other sources of financing such as leasing or explore in-kind donations.
Review investment strategies to ensure portfolio diversification focusing on a more stable investment mix. In a turbulent market, nonprofits should take fewer risks to guard against potential costs and restraints associated with declining portfolio values.

Offer incentives and discounts to get cash in the door. Offer reduced rates to participants who register early for conferences and other workshops in order to speed up cash flow. The costs of offering the incentives should be weighed to ensure they are offset by the benefits of the accelerated cash flows.

Review vendor contracts for supplies and other items to make sure you are getting the most competitive price. Get several competitive bids for the same service or item.

Monitor your cash flow daily and keep an updated cash flow projection to identify potential shortfalls. Prioritize payments and pay those bills that are critical to your organization first. If you are one of those groups on the edge, make certain that the first dollars in cover your payroll and related taxes and benefits. Once you have a few payrolls covered, then look to pay the other necessary expenses in some logical order: utilities, rent, and so on.

If you do not have a line of credit, consider getting one while your organization is financially healthy. But be certain to obtain a solid understanding of your financial needs prior to signing your organization on for additional debt that may strap it in the years to come. Know the difference between temporary trouble with cash flow—a case in which a line of credit can be an invaluable tool—and the problem of overall decreased revenue for the fore seeable future. Repaying a deficit in installments over a period of time (typically years) can have real effects not only on your budget but also on your ability to carry out your mission. Many funding sources resist helping to pay back previously incurred debt. This means that in order to pay back the loan, you would have to use precious unrestricted income, which many agencies count on to provide some margin for flexibility. This is often bad news for an organization’s ability to stay responsive to constituents—not to mention keep up with infrastructure upgrades and so on.

This is not to say that debt is bad; you simply need to distinguish when it is appropriate, and obtain the right form and amount of the loan for the circumstances, always identifying the source of repayment. Having the assets to collateralize the loan should not be considered sufficient comfort to borrow. But once the determination to borrow is made, do not wait, as it is true that “When you need credit the most you can’t get it.”

Tom Raffa is the founder and managing partner of Raffa, PC, a consulting, accounting and technology firm based in Washington, D.C. (www.iknow.org). Robert J. Cocchiaro is a partner with Raffa, PC and has 14 years of nonprofit consulting experience.

“After September 11 everyone was saying that you need to do three things: first, take care of yourself and your staff; second, make any necessary cuts sooner rather than later; and lastly, continue building capacity to further your mission. The only way I know to do all three of those things is to go back with my team to the vision that animates and brings life to the mission, helping everybody to see and claim their place in it. It roots people back to what has significance and meaning to them. If you do need to make cuts, you’ve already laid a foundation, because people are willing to make sacrifices when they are in tune with the vision. You can face the hard realities together. Nothing is more valuable and less expensive than renewing the sense of purpose and mission.

“In terms of capacity building, the danger is that we get drawn into high-level superficial capacity building when it is the core capacity building that’s most needed. At our retreat, we got back to the vision, and we spent hours sharing. There was a sense of gratitude for being involved in something that really matters—that was a key thing. It deeply ministered to everybody and brought everybody together. It put us on a solid foundation for weathering the storms to come.”
—David Erickson, president and co-founder, Samaritan Inns, Inc., Washington, D.C.

“The State of Virginia is dealing with a major budget deficit, and one measure that gained early momentum was severely cutting the budgets for social services that protect at-risk families and children, at a time when at least twice as many people are in need due to the recession. Social services leaders and citizens around Virginia jumped into action and together made sure that the legislators heard from all angles that these cuts would be unacceptable. The efforts culminated in a Richmond advocacy day for Healthy Families with full media coverage. The budgets for Healthy Families were restored at the eleventh hour (though other social services may still suffer cuts). We respect that our legislators face very hard decisions. We need to make abundantly clear that the usual tradition of slashing health and human services first has to end.”
—Mary Agee, CEO, Northern Virginia Family Services, Falls Church, VA