©2009 Nonprofit Finance Fund


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  • Prepare for sustained crisis: Our financial and political leadership are telling us this could be long and painful . We can’t just hunker down and wait out the storm, assuming to resume business as usual when it all passes. The impact on NPOs is only beginning to materialize –most foundations are planning to cut more in 2010 than 2009. Planning must go beyond this year –we must do a hard evaluation of what we do and what we can sustain for the foreseeable future --in different times, with different levels of support. Identify what is CORE to our mission , and determining whether we can support it either alone or in partnership with others . It’s about making decisions that are hard, now, even if with imperfect information. While we don’t want to minimize how painful these decisions can be, we can also see the downturn as an opportunity –to focus on what you do well and how to do it more efficiently and effectively. So, what can we do today and tomorrow? step back, assess our current situation and plan a realistic response . 1. The first step is to make sure your organization has the information it needs. 2. U nderstand where you are today 3. how much risk you can tolerate and for how long . Every organization is in a different place and has a different capacity to manage/tolerate the risk . Some of You understand your revenue and expense drivers, and you have a sense of your financial health. Some of you are relatively small orgs with liquid balance sheets that would suggest some amount of flexibility. Some of you have more cash cushion than others and can therefore handle more risk. Some have buildings that need constant care and feeding. When we think about our response, therefore, it’s important to remember that there is n o one-sized fits all approach . That said, if your mission has no end date in sight , you have a responsibility to think about making sure your organization is well positioned for the future. That means starting to evaluate your options today, so that you are prepared to put them into action before your program quality begins to suffer. Once you have assessed and addressed, then you can explore. Some options here are alliances, pships, mergers. We’ll come back at the end to this issue of communication – NFF firmly believes that your staff and board need to be part of your assessment and planning efforts and that your funders need to understand your financial constraints and resource needs in the context of your mission goals.
  • In your experience with NFF, you will undoubtedly hear us drill home on the importance of owning your numbers –and using them to inform your plans for the future. You can’t own your numbers if you don’t have access to information that is accurate and timely –by which we mean prepared at least quarterly, and preferably monthly in these times. Many of you may not have a full-time finance person –perhaps for some of you, finance is just another hat worn by the ED. Still, there are a number of reports that we recommend every organization try to prepare and monitor on a regular basis All of these reports can be as simple or complex as you need them to be. The level of detail you put into them will depend on your size, goals, staffing, etc. Just as important –these are not documents that sit on the shelf; they should be useful to you as managers and to your board as fiduciaries (different stakeholders may need different levels of detail). Small organizations should not get too hung up on the perfect format but on the reliability and usability of the information. Ask audience about tools they use and describe each YTD actuals: are you running behind where you thought you would be? Is it time to mid-course correct? Can help you determine when Plan B might need to go into effect Balance sheet: How much risk can you tolerate and for how long? Do you have enough cash to weather a period of shortfalls? Cash flow: Sources vs. uses on a monthly basis. Provides visibility into your cash flow cycle –and also lets you know when a cash flow problem (timing) may be turning into a cash problem! Line of credit may be appropriate if you have seasonality to your cash, perhaps from a late-paying govt. contract. Program economics: rev/exp by program: which of your programs are contributing or detracting from your financial health? How do the economics align with mission? With these tools in place, you have all you need to start thinking about your options and how they will impact your financial condition and health. Take the pressure of yourself –make it a collaborative effort among board and staff. And, understand that it won’t be perfect. You will do it once, circumstances will change and you will be forced to do it again. It’s not enough to have a tool-kit in place. Leadership is about making tough decisions based on what we know and when we know it! PAUSE FOR Q’S AND COMMENTS _Rodney anything to add?
  • We’re going to dive a little deeper into all of these issues we’ve just surfaced and put them into the context of today’s economy and what questions you should be asking yourselves. First, the assessment: Balance sheet is your starting point. Your ability to manage risk –but also to pursue new opportunity. From a financial standpoint, the answer is on your balance sheet –how strong is it currently and how can you make choices now so that it will remain strong on the other end of this. Some questions you could be asking yourselves: Some questions you could be asking yourselves? Cash – How much? How “liquid”? Receivables – Are they slow to collect? Are any at risk for collection ? Fixed assets – How will you address maintenance issues? Line of Credit – Do you have one? Accessible? How do you manage cash flow? Are you using debt appropriately? 19% have a line of credit, 20% are actively seeking. Of those who have LOC, 93% state that have no problems accessing cash. Temporarily Restricted Net Assets – Do they support your core programs? Is there an opportunity to talk to your funders about re-allocation of these dollars (47% are pursing these conversations) Reserves – Do you have them? Suitable to your needs? Agreement on use? (60% have less than 3 months) Debt is only appropriate when there is a foreseeable ability to pay it back Depending on the health of your balance sheet, the urgency and the magnitude of the response will be different . Some organizations may plan and choose to run a deficit in a difficult year rather than make painful cuts. Others, really can’t afford to. I would say planning (for a deficit) is key, don’t just end up with one.
  • Debt is only appropriate when there is a foreseeable ability to pay it back Depending on the health of your balance sheet, the urgency and the magnitude of the response will be different. Some organizations may plan and choose to run a deficit in a difficult year rather than make painful cuts. Others, really can’t afford to. But this decision should be based on an understanding of your financial wherewithal.
  • Once you know how much risk your organization can tolerate, it’s time to ask yourselves some tough questions about the steps you can take to preserve your financial stability. The answers to these questions kicks off your scenario planning process. Revenue analysis –Looking at your major categories and beginning to evaluate the likelihood of receipt. Will government contracts be affected by state and local budget cuts? How about foundation giving? What is your exposure to corporate philanthropy, particularly from the financial sector? Which major donors might be at risk? Can you rely on your Board to compensate for any other funding losses? Have you updated your fundraising message to include the strongest, most urgent case for your impact and accomplishments? 2) Expenses Many of you are already asking yourselves some tough questions: Will staff, often the largest expense, need to be furloughed or let go? Might benefits needs to be dialed back? Have you considered collaboration as a cost-saving strategy? Will growth and capital campaign plans need to be phased or delayed? When looking at the expense side, it’s important to consider mission-financial tradeoffs. Are your proposed cuts in mission critical areas? Can you identify reductions that will have less social impact and, if so, will they be enough? This doesn’t mean cutting capacity –or the systems and non-program staff who are critical to the health of the enterprise underlying your programs. 3) Demand – Will the recession lead to increased demand for services and, if so, how will you respond? What if there is increased need for service but no combination of payers to fully fund the demand? Remember, demand in our sector always outstrips supply -by stretching ourselves too thin, we risk jeopardizing the impact we have on our existing clients. 4) Net Once you’ve done the revenue analysis –and identified possible cost savings strategies – calculate the net result. Was it enough? Too much? 5) Balance Sheet Implications Might you need to dip into cash or board-designated reserves? Might there be pressure to take on debt or delay payments to vendors? How will you respond to this pressure? PAUSE FOR QUESTIONS
  • As you think through these questions, some scenarios will begin to materialize. Developing explicit contingency plans and knowing when to move to each can help prevent situations where you wake up and realize it’s too late to act. As you are asking yourselves some tough questions and begin to identify options, it’s important to keep in mind what is core or non-negotiable when you consider both the present and the future. What you must do vs. what you want to do. In an ideal world, these priority activities would also be net positive. But if they are not, that just means that they need to be supported by something else in your budget. Now is the time to allocate your dollars and your staff to the activities that are most critical to your mission. Contingency planning can be a complex, program by program exercise, or as simple as asking yourselves what you would do if revenue fell by 10%, 20%, etc. Prepare for the worst case –it’s always easier to add back then to be forced to make decisions your staff, clients and board aren’t ready for Leadership is not expected to solve by itself –some of best solutions come from outside management, from the people delivering your services. Your staff may in fact be in the best position to help you think about your options –your board has a fiduciary duty to help you prioritize and implement the alternatives that get identified. Specify the triggers that will cause you to move to your Plan B or C. For example, an X% decline in govt funding might lead us to do Y. If our membership or number of clients is X% below where it was last year at the same time… Growth can be destabilizing in the best of times. Opportunities should be fully funded. Among the hardest things for organizations to acknowledge is that it is possible that a given situation is not solvable –that viable options include substantial reduction in activities, exploration of restructuring opportunities (including downsizing, partnering, merging). Some of these options may in fact be temporary depending on what opportunities present themselves.
  • ©2009 Nonprofit Finance Fund

    1. 2. Summary of Key Findings for California Nonprofits <ul><li>The Financial State of Nonprofits </li></ul><ul><li>Nonprofit Finance Fund recently conducted a survey of nonprofit organizations on how they are handling the current recession. </li></ul><ul><li>Only 11% of all respondents expect to operate above break-even this year. </li></ul><ul><li>Just 9% anticipate being able to cover their operating expenses in both 2009 and 2010. </li></ul><ul><li>31% don’t have enough operating cash in hand to cover more that one month of expenses, and another 35% have less than three months’ worth. </li></ul><ul><li>In 2009: </li></ul><ul><ul><ul><li>45% anticipate a decrease in funding from government </li></ul></ul></ul><ul><ul><ul><li>61% anticipate a decrease in funding from foundations </li></ul></ul></ul><ul><ul><ul><li>45% anticipate a decrease in funding from individuals </li></ul></ul></ul><ul><ul><ul><li>38% anticipate a decrease in earned revenue </li></ul></ul></ul><ul><li>50% of respondents expect the recession to have a long-term (2+ years) or permanent negative financial effect on their organizations. </li></ul><ul><li>100% of lifeline organizations that provide essential services anticipate an increase in demand in 2009. </li></ul>
    2. 3. Key Findings for California Nonprofits Compared to Organizations Nationally <ul><li>California as a “Bellwether” </li></ul><ul><li>California Nonprofits experienced a sharper increase in demand in 2008 than organizations nationally, but now all organizations are expecting significant increases in demand for 2009. </li></ul><ul><li>Possibly because of the California Budget Crisis, California Nonprofits have been more proactive in reducing expenses compared to organizations nationally: </li></ul><ul><ul><ul><li>Reduce staff or salaries – 20% more </li></ul></ul></ul><ul><ul><ul><li>Reduce staff hours (short weeks, furloughs, etc.) – 45% more </li></ul></ul></ul><ul><ul><ul><li>Freeze all hires and current staff salaries – 15% more </li></ul></ul></ul><ul><ul><ul><li>Reduce or eliminate programs – 13% more </li></ul></ul></ul><ul><li>But have not taken other drastic options: </li></ul><ul><ul><ul><li>Fewer have reduced staff benefits – 29% less </li></ul></ul></ul><ul><ul><ul><li>Fewer have delayed payments to vendors – 22% less </li></ul></ul></ul><ul><li>California Nonprofits are more concerned about meeting expenses in 2010 than organizations nationally. </li></ul><ul><li>California Nonprofits are experiencing significantly longer delays in government funding than organizations nationally. </li></ul>
    3. 4. Planning for the Future <ul><li>Prepare for a sustained economic crisis. </li></ul><ul><ul><li>Avoid “fake it ‘till we make it” behavior and business-as-usual spending. </li></ul></ul><ul><ul><li>Don’t wait until the wolf is at the door: Recognize and address the situation now. </li></ul></ul><ul><li>Use financial planning tools to guide decision making: </li></ul><ul><ul><li>Assess your exposure and risk. </li></ul></ul><ul><ul><ul><ul><li>How might your revenue and expense components be affected? </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Understand the strength of your income statement and balance sheet </li></ul></ul></ul></ul><ul><ul><li>Address risk: Plan your response. </li></ul></ul><ul><ul><ul><ul><li>Identify and quantify your options </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Know when to implement Plan B (before you have to) </li></ul></ul></ul></ul><ul><ul><li>Explore : Strategic Alliances, Partnerships, Mergers. </li></ul></ul><ul><ul><li>Communicate early and often. </li></ul></ul>
    4. 5. Developing a Financial Toolkit <ul><li>Good financial decision-making requires timely, accurate and transparent financial information </li></ul><ul><li>First things first: What financial planning and management tools do you currently use and are they giving you the information you need? </li></ul><ul><ul><li>Year-to-date actuals vs. budget </li></ul></ul><ul><ul><li>Balance sheet </li></ul></ul><ul><ul><li>Monthly cash flow </li></ul></ul><ul><ul><li>Revenue and expense by program </li></ul></ul><ul><li>Tools are only as good as the assumptions behind them </li></ul><ul><li>Tools are not a substitute for making difficult decisions. </li></ul>
    5. 6. Assess Risk: Know your Balance Sheet <ul><li>First things first: Know where you stand </li></ul><ul><ul><li>Cash – How much? How “liquid”? </li></ul></ul><ul><ul><li>Receivables – Are they slow to collect? Are any at risk for collection? </li></ul></ul><ul><ul><li>Line of Credit – How do you manage cash flow? Are you using debt appropriately? </li></ul></ul><ul><ul><li>Fixed assets – How will you address maintenance issues? </li></ul></ul><ul><ul><li>Temporarily Restricted Net Assets – Do they support your core programs? </li></ul></ul><ul><ul><li>Reserves – Do you have them? Suitable to your needs? Agreement on use? </li></ul></ul>
    6. 7. Assess Risk: Know Your Balance Sheet <ul><li>Are you operating now from a position of strength or weakness? </li></ul><ul><li>If your balance sheet has… </li></ul><ul><ul><li>No cash or receivables </li></ul></ul><ul><ul><li>A fully drawn line of credit </li></ul></ul><ul><ul><li>Little or no reserves available to management </li></ul></ul><ul><ul><li>Significant wear-and-tear of fixed assets </li></ul></ul><ul><li>…There are no dollars immediately available to draw on in challenging times </li></ul><ul><ul><li>Borrowing to replace lost income is rarely appropriate </li></ul></ul><ul><li>Your condition will inform the urgency and types of action your leadership should take </li></ul><ul><ul><li>What is your risk tolerance? </li></ul></ul>
    7. 8. Assess Risk: Questions to Consider <ul><li>How might the reliability of your organization’s revenue streams be affected in an economic downturn? </li></ul><ul><li>Will costs have to be cut, and if so, which costs? </li></ul><ul><li>Will the recession lead to increased demand for services and, if so, how will you respond? </li></ul><ul><li>How will your organization deal with these potentially competing effects? </li></ul><ul><li>How might changes in revenue streams and cost reduction strategies affect operating results? </li></ul><ul><li>How will changes in your operating performance affect your organization’s balance sheet? </li></ul>
    8. 9. Address Risk: Plan Your Response <ul><li>Identify and quantify your options. Some may include: </li></ul><ul><ul><li>Which activities are core to your mission? Are they positive financial contributors? </li></ul></ul><ul><ul><li>What are some ‘non-negotiables’ in your budget? </li></ul></ul><ul><ul><li>How might you mid-course correct? </li></ul></ul><ul><ul><li>Will you/can you afford a deficit? (i.e., tap cash reserves) </li></ul></ul><ul><ul><li>How will cuts impact delivery of mission? Economic viability? </li></ul></ul><ul><li>Engage your staff in these conversations. Bring your alternatives to the Board </li></ul><ul><li>Determine the triggers (early indicators) that lead to Plan B </li></ul><ul><ul><li>Different for every organization (for example, if X% of revenue doesn’t arrive by Y, we will cut Z% of expenses) </li></ul></ul><ul><li>Re-evaluate growth plans </li></ul><ul><ul><li>Consider postponing large investments in infrastructure and launching new programs </li></ul></ul>