Upswing or Downturn: How to Make Your Nonprofit Ready for Anything
You’ve probably heard the rumblings. Whether teased in the news or discussed at the office, talk of a looming economic downturn is in the air. Today’s jobs report offered more uncertainty, with mixed indicators such as continued, if moderate, growth in hiring but stagnant wages.
Following the 2008 recession, we witnessed many nonprofits sacrifice long-term business needs, like fundraising staff or improved systems, to solve immediate financial needs. Many organizations had existing staff work longer hours with sometimes less pay, using furloughs or not hiring staff rather than cutting back on services and programs.
Today, we have the benefit of the lessons learned to prepare. No one knows for sure what the future holds, but for nonprofits, this uncertainty presents an opportunity to plan, take strategic action and become even more focused on mission. This is especially important during hard times when people may need to rely on the critical services nonprofits provide. Funders also can use this time as an opportunity to consider strategies that can strengthen and stabilize their grantees now before tough times hit.
Below are some tips for both nonprofits and funders that can support financial resilience ahead of a downturn.
What Nonprofits Can Do to Prepare:
It’s tempting to focus only on funding losses during an economic downturn. However, it’s important to always start with a clear sense for what’s core to your mission and a priority for delivery, even in tough times. With this in mind, a nonprofit can do five things to maximize its ability to weather a storm:
- Communicate. Open a dialogue with staff, board and funders about how you are preparing for a potential economic downturn. Encourage an internal culture of collaboration and circle back to stay in contact.
- Assess Your Situation. Take stock of your organization’s current financial situation. Identify strengths, risks, vulnerabilities, and opportunities.
- Develop a Plan (or Two). Create scenario plans on your biggest unknowns to identify the steps your organization would take if the scenario comes to pass.
- Identify Strategies. With mission at the center, determine what changes your organization can prioritize to strengthen financial resilience, manage risk, and take advantage of opportunities.
- Stay Vigilant. Develop a sustainable way of keeping an eye on important events, indicators, and issues.
Communicate. Open and transparent communication with stakeholders ensures everyone important to the delivery of your mission knows what they can each do to support the organization in the event of a financial crunch. Staff stays focused on quality mission delivery and other actions that contribute to the organization’s strength. Boards understand their crucial role in protecting the mission, managing short- and long-term risks, and stepping up with important skills, knowledge and networks during challenging periods. Networks are engaged to act as eyes and ears, and maybe even for exploring cost sharing strategies. Finally, funders are informed about your priorities, plans for financial resilience, and ways they can best support your organization before and during difficult times.
Assess Your Situation. During a crisis, time is at a premium. Nimble decision-making requires a clear understanding of the organization’s financial footing and ability to absorb deficits. During times of planning, management can strengthen financial resilience with accurate reports on your current financial situation. Leadership should be always have answers to the following questions:
- How much cash on hand do we have to pay our staff and bills in a worst-case scenario?
- Are there reserves to absorb major financial shocks?
- For revenue shortfalls, can we quickly pull back on expenses, or will we likely have a deficit?
In addition to financial measures, it’s also important to discuss and prioritize the organization’s top risks, vulnerabilities and opportunities. This is a great way for boards to engage in the overall process. Some questions to consider:
- What might be the financial impact of a downturn?
- What will be the time sensitive decisions we’ll need to make if it happens?
- What levers do we have control over to manage the situation?
- Do we know how services or costs might be affected? Will demand increase?
- How might a downturn affect staff morale and well-being?
Develop a Plan (or Two). Armed with a sense of the financial situation and top risks or vulnerabilities, organizations may find it helpful to develop a scenario plan (or two) to provide guidance for how to respond to a downturn. This step could be just high-level or very detailed, but regardless, scenario planning can be a useful first step in preparing for a financial crisis of any kind.
Scenario plans could be tailored to many possibilities (best-/worst- case, specific event or risk, etc.), but should always include the following:
- Clear articulation of the main question or issue that the plan is looking to address
- Clear indication for marking the event, situation or trigger that prompts use of the plan
- Written assumptions that you are making within the scenario plan, and variables or factors that might affect the outcome
- Quantification of financial impact
- Strategies for action
- Benchmarks or timelines to guide implementation
- Identification of the team responsible for implementation
Remember that any scenario plan should consider both the short-term and long-term impact of employing any strategy plans. After the 2008 financial crisis, some organizations made the difficult decision to cut infrastructure or fundraising staff as a way of minimizing deficits. While understandable, strategies like this made the long-term recovery much more difficult. When considering short-term strategies, make sure to keep the long-term viability of the organization in mind. Weigh the pro’s and con’s and be prepared to make course corrections if there are unintended consequences.
Identify Strategies for Financial Strength. Armed with a clear sense of where you stand and where you are going, consider the strategies that are within your control for mitigating risks and improving short-term financial strength that don’t jeopardize long-term health. These strategies could focus on strengthening the balance sheet, enhancing your internal ability to respond to events quickly, or improving your ability to operate with a surplus. Here are some sample strategies that you might consider:
- If you’re short on cash, can you negotiate advances on contracts with delayed reimbursements or establish a line of credit?
- If cash is declining, should you consider shortening the time frame of cash flow planning from 12-months to 13-weeks to better understand the realistic inflows and outflows of cash?
- If you’re running deficits, can you address the root cause and/or adjust your budgeting practices to support surpluses? Could you reforecast the budget more frequently, discount budgeted revenue with percentages to reflect funding uncertainties, or ensure the budget includes only operating numbers?
- If your reserves are low, can you identify flexible funding to build them up? Is there flexible cash for an upcoming project that might be deferred for a short time without risk or significant financial impact?
- If your receivables are slow to convert, can you identify ways to streamline the reimbursement process by better understanding the source of delays?
- If you have difficulty getting real-time information to make financial decisions, are there systems changes or investments that can improve this ability, especially if it has the potential to increase revenue or lower costs?
- If programs struggle to cover their full costs, could a cost analysis improve your ability to advocate and negotiate for greater cost recovery?
Stay Vigilant. Finally, to ensure your organization keeps an eye on important events, indicators, or triggers in an ongoing way, look for sustainable, low-lift ways of monitoring key data points. Identify the tools or reports that can be used to share relevant information, such as a dashboard. They can get staff, management and boards on the same page about the organization’s financial situation and key data to track to gauge success, risks and progress towards goals. In addition to a dashboard, consider adding discussion points about risk management, scenario planning or potential economic downturn in upcoming leadership and board meetings.
What Funders Can Do:
First and foremost, funders can work with grantees to understand and address financial risks:
- Address the day-to-day liquidity challenges your grantees might be facing before addressing reserves. Solutions could include an internal line of credit or zero interest revolving loan fund.
- Give GOS and meet the non-programmatic needs of grantees
- Keep in mind that recommending that your grantees start up a social enterprise or explore partnerships doesn’t make a lot of sense at the beginning of a recession/downturn as both ventures are resource intensive
- Connect with other funding partners to understand one another’s strategies and consider the collective impact on grantees
In addition addressing financial needs, funders can examine other ways of supporting their grantees through a well-rounded approach that also considers the intellectual, human, and social facets of nonprofits.
- People and Skills: offer to connect grantees with outside advisors, volunteers, or other experts that can offer support to capacity-constrained leaders
- Data and Know-How: identify data, research and/or evaluation techniques that can be shared with grantees to help them make a better case for support from additional funding sources
- Relationships and Reputation: open doors for grantees to establish new relationships with government leaders, private funders, networks, or other entities that can partner and collaborate
It’s impossible to know exactly what’s coming and when, but one thing is certain: changes in the economy are inevitable. It’s always unnerving to think about preparing for a downturn, but investing time and resources into planning will pay off—regardless of which direction the economy goes.
Stay tuned for more important insights from NFF’s experts by visiting the Learn section of nff.org, joining our newsletter, and following us at @nff_news.