Developing a response to the current economic downturn that will leave nonprofits in a strong position once business picks up means doing more than cutting costs today.
AMS consultants working with foundations and health care, human services, educational and other tax exempt organizations are advising them to consider the following steps:
Develop multi-scenario, rolling budgets. In addition to updating the budget put in place at the beginning of the current fiscal year, it is good practice to update alternative budgets based on a five or 10 percent drop in revenue, as well as a worst-case scenario. Doing so will enable the organization to switch gears rapidly if general conditions deteriorate unexpectedly.
With many states expected to cut appropriations and grants, it will be critical to react. Involve your staff in this process. The staff that spend the money are the ones most able to identify cost cutting opportunities. This also helps engage them in a more effective process.
Develop "triggers" that tell you when to act. These are leading or coincident indicators of business conditions and will likely be different for each organization. They can be metrics, such as year-to-date comparisons of total contributions and commitments from the top 20 percent of your donor list. If the ratio falls below, say, 90%, that may be the trigger for the organization to switch to an alternate budget.
Track and estimate cash flow monthly. An uncertain environment dramatically increases the need for accurate cash flow projections. Often-and accurate-projections will signal if it's time to tap a line of credit to forestall an expected cash crunch. If your organization is in good shape but doesn't have a line of credit, apply for one as a hedge against a potential cash flow crunch.
Close the gap between expenses and income. Start by determining how much time elapses between the point when expenses are incurred and when you receive payment for them. The bigger this gap, the more the organization is at risk. Think of ways to reduce the gap, including billing more frequently.
Re-assess internal financial reports. Reports must be timely to be effective and allow an organization to react quickly. Developing budget vs. actual variance reports for each department lets those managers take ownership of the numbers - and develop ways to help the organization respond to tough times.
Allocate general and administrative expenses across the organization. This helps justify all expenses and highlights expenses that may not be needed. This is an especially important exercise if you are considering cuts in programs. This will allow you to understand the true cost of programs, which will allow for more informed decisions.
Cut costs with care. The goal is to prune prudently and think creatively. Re-assess insurance coverage. Consider renegotiating your lease when it is up for renewal; this may appeal to a landlord who otherwise may have empty space. Consider re-organizing and consolidating your office space and sub-leasing unused space. Buy in bulk with other nonprofits. Barter for needed services. Seek new competitive bids for services you need. Go green: Install energy efficient light bulbs, recycle paper by printing on both sides, program your thermostat to lower temperatures during non-business hours.
Reduce staff carefully. If you must cut back on administrative staff, take care not to impair the organization by eliminating the people who know how things run. Even if you aren't cutting back staff, you may experience unexpected turnover. For this reason, document all policies and procedures to avoid downtime resulting from gaps in staff. This is also a great time to hire the right talent. Assess your staffing needs and determine where you have gaps, this could be a great opportunity to reorganize.
Monitor debt covenants. Market volatility can play havoc with your balance sheet and quickly put your organization out of compliance with requirements imposed by your lender or funding source. More stringent reporting requirements with the new Form 990 will highlight such problems, which could jeopardize your ability to raise funds.
Monitor your endowment. If you rely on your endowment spending to support operations, determine hoe much the markets would need to drop before your spending is impaired. Assumptions should be applied for two years going forward. Many organizations with endowments less than 10 years old may find themselves with no ability to spend from their endowment and, worse yet, a requirement to fund the endowment in the event that market value drops below corpus. This is a good time to reassess your investment policy to determine whether the asset allocations and investment management decisions are still prudent.
Speak with your banker. Be pro-active by keeping your banker informed of any potential problems-and quantify them-instead of leaving it to your banker (or funding source) to discover those issues You'll build this important relationship by connecting with your banker when things are stable, especially if you present a solid business case for your organization.
Consider shared services and mergers. As you assess your strengths and their relationship to your mission, you may consider the cost effectiveness of working with other organizations to help you achieve your mission. This will allow you to focus on your strengths. Should you be considering a merger, do not wait until you are out of money to hold discussions. Many foundations have grants available to help organizations considering mergers go through strategic planning.
Give your board and management the right tools. Your board members and management need current information that will let them do their job, which is to set and monitor strategy. Highly detailed financial statements, which many board members lack expertise to fully understand, are not as helpful as clearly stated projections of income and spending. Bullet points summarizing implications of optional course of actions also help.
"We have been seeing more of our clients requesting training for their board, committees and management to help them understand financial statements and their role as a strategist. This is even more critical now", says Rebeka Mazzone, the Director of the RI Region of AMS.
For more information or for board fiduciary and fiscal responsibilities Training, please contact Michael Whitney in New York at 347-554-1783, Barb Breen in Boston at 781 419-9221, or Rebeka Mazzone in Rhode Island at 401-374-3222.
