Steps to help get struggling nonprofit groups through trying economic periods

Published in the December 26, 2008 edition of Columbus Business First

Recent headlines in the nonprofit press read “Nonprofit Groups Struggle as Economic Crisis Spreads.” This kind of news reminds us that all nonprofits are subject to the business cycle. 

Indeed, nonprofit revenue historically declines during economic downturns and rises during economic recoveries.  For some nonprofits, this effect is compounded by a surge in demand for their services during economic downturns.  It's little surprise that some of the hardest hit nonprofits provide food, housing, financial counseling, and jobless support.

At the same time, and without exception, endowments decline when the economy falls.  Endowment wealth does not inoculate nonprofits from the economy. 

The only reliable protection is to build operating reserves during good times so that the nonprofit can sustain services during difficult times by using those reserves for operations.  Building reserves means budgeting for surpluses, even when donors demand to see immediate results from their gifts. 

Monitor weekly

Given the depth and breadth of the current economic decline, even the most prepared nonprofit managers must take steps to preserve their agencies' services.  The first step is to monitor cash every week.  Key questions to ask and resources for managing through crisis can be found at http://www.linkingmissiontomoney.org/responding_resources.html.

One good tool is a spreadsheet that lists anticipated cash receipts and anticipated bills by week, including payroll and related tax and benefit payments.  Before approving any check run, use the spreadsheet to see if the unrestricted cash balance will go negative from that check run and identify any bills that can be deferred in order to preserve enough cash to pay other bills that are more essential to maintaining services.  Reschedule the deferred bills to future weeks in which projected cash appears sufficient.

If this exercise indicates too many bills appear unpayable, then the nonprofit must move into cash crisis mode.  Once a cash crisis has been identified, the board and senior management need to take immediate steps to stop or slow the momentum of spending and the drain on remaining cash. 

These steps are designed to achieve three purposes:

• Buy time for the nonprofit to establish control over the current situation so it does not become a passive victim of events.
• Provide a tool to spot quickly the new problems which are highly likely to appear during a crisis.
• Initiate changes in reporting and governance to enhance the nonprofit’s ability to anticipate problems and respond earlier when the next crisis occurs. 

Being aware

Even when problems are well known, one must confront the tendency to continue routine purchasing, hiring, and contracting.  Routine is most effectively disrupted by imposing an immediate freeze on purchasing and hiring.  The purpose of a freeze is to buy time to identify and implement permanent spending changes.  Any freeze must have exceptions, but they should be carefully chosen. 

If your budget has made provision for inflationary increases, those increases should be immediately removed from the budget.  All set-asides for future payments should be cancelled and restored only after careful review of the nonprofit’s contractual obligations and the mission priority of the purchase.

While micromanagement must be avoided in normal times, the board and senior management must be vigilant and hands-on during a cash crisis so they can discern whether the disruption in spending is succeeding. 

Detailed implementation plans need to be developed for major savings targets.  This is most effective when staffers know their efforts are being closely monitored and that any effort to postpone the spending reductions will be foiled.

Even with close monitoring and spending freezes, a temporary cash shortfall may be unavoidable. 

External financing may be obtainable through a line of credit with a bank or from a temporary loan from a major benefactor. 

Internal financing may be obtainable from restricted funds but note this:  Any borrowing from restricted funds must be preceded by a credible plan that demonstrates the ability to restore that money before the end of the fiscal year. 

Power of the public

It is counterproductive for a nonprofit to maintain public silence through crisis.  Experience has taught that donors and supporters respond when they are promptly and regularly informed of the crisis and the response plan.  That demands reaching out to the public and media.  But the outreach should be limited to facts; avoid speculation or idle threats of worst-case spending cuts. 

Once a way to slow spending has been implemented, short-term financing arranged, and a media effort undertaken, it is time for reflection and reform. 

The nonprofit should first view the crisis as an opportunity to develop more effective ways to anticipate future problems.  Reporting and monitoring processes should be re-evaluated. 

It is also a useful time to decide how to manage differently during economic recovery in order to be in a stronger position when the next downturn occurs. 

Allen J. Proctor was formerly chief financial officer of Harvard University and is the author of Linking Mission to Money(R) Finance for Nonprofit Board Members. Subscribe to his free newsletter at www.proctorconsulting.org.

Copyright 2008. Reprinted with permission, Business First of Columbus Inc.