Not Enough Pain, Not Enough Gain

Editor’s Note: This article was originally published here on the Nonprofits Assistance Fund (NAF) blog. It has been reprinted here with permission.

One of the least favorite things to do here at Nonprofits Assistance Fund is to walk a client through the financial reality that they haven’t had enough pain—yet. It’s a frequent conversation that usually starts like this:

Client: “We just need more time to realize new revenue from Project X, which will someday become self-sustaining. So, a short term loan (y’know—just a few years) would be great!”

NAF: “Project X may become profitable some day, but in the meantime the cash losses from everything else are really damaging you. You’ve got to cut expenses now, and grow slowly into Project X when you’re not losing money anymore.”

Client: “But we did cut expenses!” (Client shows list of cuts, usually including salary freezes, elimination of travel and training, reduction in supplies)

NAF: “Yes. But now you have to cut more, including some staff and programs completely. If you don’t, you’re heading down a path that risks the whole organization.”

It is at this point that the client offers great reasons why they can’t stop providing services. Real people will face real consequences. More reductions aren’t possible, so they just have to borrow to start Project X, wait for it to get profitable, and then they’ll be able to pay the money back.

The reality is that the first round of cuts was painful, but it simply wasn’t enough to bring total expenses under the real revenue for today—not the proposed revenue that may be possible in the future. The idea that cuts were tried and now new revenue is needed is a natural reaction, but new revenue takes time to build, and running deficits against that possible revenue is actually just making things worse.

Cutting expenses deep enough—and that does mean real people lose jobs and real programs stop helping real people in the community—is a level of pain most organizations will do anything to avoid. The short-term pain, while very real and very intense, can serve for some real gain.

This is a mission communication opportunity. Tell your supporters that Program A is losing money, and will have to be stopped unless they can come up with new support for it. Set a deadline and stick to it. You may be able to turn a previous loss into a break-even or better.
If you stop losing money now, Project X may survive. If you take all the earned revenue out of Project X before it even starts, it is going to fail from the cash loss.
You may force allies into action. The cut program may have been difficult to lose, but may be impossible for someone else. They may not pay you to do the program, but they may step into the breach and provide that service—maybe even for less cost than you were able to manage.

Ultimately, there will be difficult and real consequences. These are likely the lesser of two evils if it can preserve the other parts of your nonprofit mission.

Steve Boland is a loan officer and trainer with the Nonprofits Assistance Fund.