Improving Nonprofit Decision Making amid Economic Crisis

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A $3 million nonprofit in Wisconsin, Youth Horizons had built a reputation for quality programs and had received positive press for its efforts in drawing dropout students back to an alternative high-school program with low student-to-teacher ratios and personalized attention. At their meetings, board members usually heard stories about successful students, grateful parents, and impressed community leaders.

But at the same time that newspaper articles praised Youth Horizons’ programs, the finance committee had received financial reports that showed a growing deficit. The organization’s executive director explained the shortfall by describing timing problems with grants, fundraising campaigns that didn’t meet goals, and a state contract that had been “promised” and then rescinded. She assured the committee that Youth Horizons had been through such lulls before and that, by the end of the year, income would “catch up” to the budget.

Near the end of the first deficit year, several committee members met with the executive director and finance manager to discuss the shortfall and review the draft of the following year’s budget. Everyone agreed that it was a productive meeting and that, based on planned fundraising and contracts, the new budget was achievable. Four months into the following year, however, the financial report revealed another deficit and a worsening cash position. This time, the finance committee chair insisted that the organization’s board respond to the urgency of the situation by drafting a new budget to present at the following quarterly board meeting. But when the finance committee suggested reductions in the school’s staff costs and increasing the student-teacher ratio as solutions to the budgetary crisis, the director was appalled.

After a few additional meetings, the finance committee devised yet another budget for the board. But by then, the situation had deteriorated and the board received the bad news. After three hours of discussion, the board appointed a task force to recommend which programs to close. What went wrong? With red flags flying for nearly two years, why hadn’t the organization’s director and board taken action to avert the crisis?

Decision Making under Financial Duress

In a different economic environment, an organization such as Youth Horizons might have been lucky and continued to attract support based on its reputation. But with today’s downturn, an organization’s luck can run out, especially when decision making isn’t quick, responsive, and sound. Youth Horizons’ story illustrates the con­sequences of delay and indecision. Over the next year or two, budgetary challenges are clearly in the cards, and there are likely to be successive and different situations requiring action. Change may be inevitable, but the impact of this change on an organization depends on which decisions are made and how.

In Youth Horizons’ case, despite evidence of financial problems over the course of 18 months, the necessary decisions were not made. The roles and relationships of staff and board did not serve the organization well. The director offered excuses and the finance committee accepted them, relying on a false sense of security after having weathered bumps previously. When the finance committee finally insisted on a new budget, members argued with the director about program priorities and allowed the cash problem to fester until it became a crisis.

Critical Considerations for Organizational Decision Making

When your organization has faced serious and urgent questions in the past, how has it responded? Do these practices serve you in the new economic environment? Right now your leadership may require a combination of learning new skills and approaches and also unlearning previous behavior. Nonprofits may well come through this downturn with changes not only to their budgets and programs but also to organizational culture.

Let’s consider how some of these changes take shape and the considerations involved. Understanding the environment in which you make decisions empowers you to understand the impact of potential decisions.

Recognize what has changed. Investment advisers must disclose that past performance does not guarantee future results. We need the same kind of disclosure for board reports and management plans. Just because an organization has weathered rough times previously doesn’t guarantee that “riding it out” will work right now. The severity of the downturn mandates that nonprofits recognize the signs of distress as far in advance as possible. Too often, financial deterioration is overlooked or excused until an organization’s cash account runs dry. Every piece of information about fundraising, contracts, revenues, finances, and cash flow must be scanned for triggers or warning signs. It’s time to be on high alert.

Create a sense of urgency. There is a difference between panic and urgent action. Decisions made in panic mode are often reactive and poorly thought out. Urgency can be maintained as an action mode over time. In the face of economic crisis, organizations that can work with a sense of urgency are better able to respond forcefully and decisively.

Stop being comfortable. The organizational values of many nonprofits encourage trust and consensus. But over time, a positive atmosphere can evolve into a culture of conflict avoidance and ambivalence. Staff members stay focused on their own programs, and board members don’t like to ask too many questions. Today’s best leaders—among both staff and board—are those who ask the right questions. Meetings may be less comfortable, but they better serve an organization. And the questions that emerge from them will launch the necessary analysis and decisions.

For most organizations, the key decisions concern programs and services driven by budget changes. When faced with income reductions, which expenses will be cut? Which programs are most important to support the mission, and which should be scaled back or closed? How can an organization collaborate effectively to serve the community? Each of these important questions is answered through a series of decisions. Timely and strategically aligned decisions require a few foundations: shared goals, good information, and clear roles and authority.

Know your starting point. What do you know, and how reliable is the information? Compile and analyze the financial picture with real, unvarnished facts. Which organizational income is certain, highly probable, and committed? Be honest about the types and sources of income that raise concern. What do you know about cash and liquidity? This information sets the stage for your options. An organization that can rely on 80 percent of budgeted income has different choices from one where only 30 percent is certain or highly likely. Cash is always important, especially now, and nothing limits your options more than running out of cash. Take the time to create a cash flow projection (a template is available on the Nonprofits Assistance Fund Web site)1 to understand the ebbs and flows that provide breathing room or cause problems. The time horizon for decisions is driven by available cash. An organization with less than one month’s operating budget in cash may need to make short-term decisions, while a nonprofit with reserves of six months can step back for more detailed scenario plans.

Agree on the goals. Do you, staff, and board leadership, agree about the program and community nonnegotiables? This level of agreement may be evident in strategic plans, mission statements, and evaluations, but organizations with multiple programs and recent expansion may have different internal or external stakeholders with their own top priorities. If everyone involved understands the urgent need to focus, an organization’s stakeholders can arrive at agreement about top priorities. This agreement grounds decisions within the core mission.

Make the right decisions. In this environment of urgency and uncertainty, it’s useful to acknowledge that not every decision is a top priority. Focus on making the right decision for an organization and let the implementation questions follow. This requires that you take a step back to consider the order. In general, specific cost reductions are not the most important decisions, but they can easily dominate a meeting, especially among those whom the decision affects.

Clarify authority. Decisions require information and process as well as action and conclusion. And they require defined authority: ultimately someone has to make the decision. If the location or scope of authority is unclear or placed inappropriately, the process can come to a halt or drag on for too long. At Youth Horizons, the executive director, finance committee, and board all fumbled in their responsibilities. When an organization faces urgent demands, too many meetings without conclusion signal that authority is not clear. Authority can be delegated wholesale to an executive director based on agreed-upon goals similar to John Carver’s ends-and-means governance model. Alternately, authority can be assigned based on triggers that have been defined by an organization’s board or task force. In this approach, different scenarios (10 percent, 20 percent, and 30 percent reductions) are sketched out and an executive director is authorized to implement as needed. Whichever approach is used, remember that urgent action requires timely and clear decisions that are supported by an organization’s leadership.

Taking a Hard Look

During critical times, nonprofit decision making becomes all the more important to organizational survival. Indeed, your nonprofit’s decisions may affect the full range of issues, from budget to staffing to the nature of your mission. So making the right decisions may require not only adopting new practices but also unlearning entrenched behavior. And of course, better decision making requires that you have reliable information—and that you act on it with a sense of urgency and clarity. In tough economic times, how you make and communicate decisions can be the key to unlocking the potential of your organization.


 

1. Nonprofits Assistance Fund Web site, Cash Flow Template.

 

Copyright 2009. All rights reserved by the Nonprofit Information Networking Association, Boston, MA. Volume 16, Issue 1. Subscribe | buy issue

  • Jams Neils

    Unfortunately, this is going to be an increasing trend among agencies and groups that depend on grants and contracts for either or both state and federal governments. The issue is not simply what to do in the short of long term, rather how do we change the funding model that provides no consistent source of revenue, regardless of the performance of the agency or group.

    The disconnect here is that regardless of the success of the programs, there was really no connection between programs and continuing funding. The funding model used by many charitable non-profits is simply not as diverse as it needs to be and rarely considers a for-profit enterprise.

    Think about how this agency could have established their own for-profit enterprise that could have employed the same young people it targeted with its programs. Not only would it have served as an additional source of income for the programs, but provided a service to the community and jobs and served to build a work ethic for its young people. Was it possible, Yes and No. Yes because they could have, No because sadly they might not have ever considered it as an option.

    The answer to what went wrong is more complex this or many boards see. There are no rules or regulations that prevent a non-profit from setting up a for profit enterprise, except the widely held and incorrect notion that non-profit means no profit. Sadly too many people in the charitable non-profit sector have added to the problems by pretending “administration or overhead” could be reduced or listed as near zero. Not educating boards and the general public about the true costs has only widened the misunderstanding. Having leaders who disdain, object and do not understand how a for profit enterprise can actually build a program has also added to the problems.

    Too many of the current leaders, boards and stakeholders have bought into the notion that nonprofit mission and for profit enterprises do not mix. Sadly, they have followed the sirens of disaster singing the song of mission drift so that any discussion of a for-profit enterprise was and is unfortunately still today seen as heresy.

    The future will require non-profits to adapt to and seriously consider for-profit enterprises to offset the loss of government support and the fickleness of foundation and grants. Non-profit mission and profits can work and have been working for many years. The rise of the Social Benefits sector will continue to grow as more and more people realize how unstable grants and governments contracts will be in the future. Unless current non-profits leaders and boards recognize the funding model used has never been as diverse as needed, they face a future where money will never be provided as it once was and will lead more, even great programs, to close their doors.

  • Edie Patterson

    I have several reactions: One is, this is a reprint of an article from 2009! Whether intentional or not, how sad that we must continually reinforce the same learning points for financial management.
    Second: having served as both an ED and a board chair, ideally there should be what I call “creative tension” between staff and board. The board, especially the finance committee and executive committee, must hold the staff accountable for providing information, hold themselves accountable for learning what is appropriate and also for asking tough questions.
    Third: there is now a set of standards for companies, whether NGO’s or for-profit, to use in financial decision making. The Global Fiduciary Standard of Excellence (GFSE) which functions like ISO 9001 (quality management) and ISO 26000 (social responsibility) standards for fiduciaries, is an excellent tool and blueprint for boards. Every organization which professes to use best practices should be familiar with these and implementing them.