March 31, 2020; SeaChange Capital Partners
Whenever a major failure occurs among nonprofits, we generally get an instructive piece by John MacIntosh at SeaChange Capital Partners. This time out, SeaChange has published a piece entitled “Tough Times Call for Tough Action.” Though we might see it as a bit too tough in some sections, we wanted to excerpt a few selections from it we found especially useful. One is a very handy sorting mechanism to guide some of your strategic thinking as you consider your survival over the next few months; the other is an assortment of bullet points.
In response to COVID-19, organizations appear to fall into three broad categories: hibernators, responders, and hybrids.
- Hibernators are completely unable to operate during this crisis. (They may pretend otherwise, but this will waste time and resources.) Hibernators include arts organizations whose venues are closed, after-school providers who no longer have students, technical assistance firms whose clients have gone away, etc. These organizations need to reduce their monthly cash burn-rate to the absolute minimum and mothball themselves in the hope of surviving until spring with enough resources to restart.
- Responders have seen the demand for their programs go up because of COVID-19. At the same time, they face increased difficulty and cost in delivering these essential programs safely. (One large responder has seen weekly costs increase by $50,000 to keep front-line staff in place with appropriate masks and cleaning supplies; another is paying double-time.) Responders include primary health clinics, homeless shelter operators, food pantries, operators of residential facilities for the developmentally disabled, etc. The challenge for responders is having the cash to maintain services. Early action by government suggests that it will eventually get the required resources to responders, but timing is likely to be an issue. The government is aware—or should be made aware—that the failure of any large responder will wreak havoc in the local community.
- Hybrids offer programs that can be provided, to some degree, despite the COVID-19 crisis but which are not directly related to reducing its spread or mitigating its short-term impact. These programs might include workforce training and development, advocacy, reentry programs for the formerly incarcerated, etc. The decisions facing hybrids are more complicated than those facing hibernators or responders since they have greater degrees of freedom with respect to how they deliver their program(s)—lower dosage may still mean higher costs given COVID-19 related challenges—and how they approach staffing levels. They also face the greatest uncertainty with respect to how funders will view their importance during the crisis and its aftermath.
As for the odds and ends below, the first is something with which we have direct experience; it happened to a financially stressed agency we knew that subsequently closed. The second has to do with a common “worst practice” some nonprofits fall into in times of stress, and the other two are just useful.
- A lender—if it also holds the deposit accounts—can freeze a nonprofit’s accounts for nonpayment, so the nonprofit should consider opening new accounts at another bank and moving its money in advance.
- Unpaid payroll taxes expose board members to joint and several personal liability.
- The restrictions on a gift cannot be challenged by creditors or vendors even in bankruptcy court. For example, a grant which says—“Must be held in a separate account and used only for payroll”—cannot be used to repay debt or rent.
- A nonprofit that shuts down may be able to cancel some insurance coverage and get a rebate. On the other hand, it should reserve the funds to renew coverage which may run out but is critical at this moment (for example, D&O).
We thank SeaChange Capital Partners for these newest notes on how to rethink our strategies, at least in the short term, and NPQ will continue to bring you this kind of strategic financial thinking, so keep checking back as we enter more deeply into the COVID crisis.—Ruth McCambridge