Nonprofits and the Recession


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Nonprofits and the Recession

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  • NOTE: this exercise can be taken out of the agenda if you want to spend more time with the board presentations. The purpose of this exercise is to continue to get the participants to flex their financial analysis “muscles” and to understand why the “enterprise” finance side is important.
  • Nonprofits and the Recession

    1. 1. Philanthropy Journal Webinar: NONPROFITS AND THE ECONOMY: COPING TOOLS FOR TURBULENT TIMES Paul Bennett Director of Analytics Nonprofit Finance Fund Dec. 11, 2008
    2. 2. Recession: How Can We Prepare?
    3. 3. <ul><li>NFF connects nonprofit finance to nonprofit success </li></ul><ul><li>Serving thousands of nonprofit and funder clients nationwide since 1980 </li></ul><ul><ul><li>$175 million in loans; over $1 billion in capital leveraged for nonprofits </li></ul></ul><ul><ul><li>Over 500 customized financial consultations </li></ul></ul><ul><ul><li>Hundreds of strategic partnerships to advance the nonprofit sector </li></ul></ul><ul><ul><li>Thought-leadership to advance friendlier funding practices across the nonprofit sector </li></ul></ul><ul><li>Experts in nonprofit finance </li></ul><ul><ul><li>Nearly 30 years of experience as a 501(c)(3) Community Development Financial Institution (CDFI) </li></ul></ul><ul><li>Serving nonprofits nationwide from seven local offices </li></ul><ul><ul><li>New England: Boston, New York </li></ul></ul><ul><ul><li>Mid-Atlantic: Philadelphia, Washington, DC, Newark, NJ </li></ul></ul><ul><ul><li>Midwest: Detroit </li></ul></ul><ul><ul><li>West Coast: San Francisco </li></ul></ul>NONPROFIT FINANCE FUND (NFF) “ We’re in the business of helping nonprofits run better.” – Clara Miller, NFF President and CEO
    4. 4. What is a Recession? The start of a recession can only be seen in the rear-view mirror DOWNTURN RECESSION DEPRESSION <ul><li>Short-term decline in economic activity </li></ul><ul><li>Significant decline in economic activity spread across the economy, lasting more than a few months </li></ul><ul><li>Usually visible in real Gross Domestic Product (GDP), real income, employment, industrial production, wholesale-retail sales </li></ul><ul><li>The National Bureau of Economic Research (NBER) ultimately decides whether the economy has fallen into a recession </li></ul><ul><li>Longer, more severe recession </li></ul><ul><li>Loosely defined as an economic downturn where GDP declines by more than 10% </li></ul>
    5. 5. What Happens to Nonprofits in a Recession? <ul><li>Nonprofit Finance Fund studied the financial health of 6,500 mid-sized nonprofits to analyze the effects of the 2001 recession on their fiscal year-end data </li></ul><ul><li>Economic hardship was widespread in the nonprofit sector during the recession </li></ul><ul><ul><li>Over 40% of sampled nonprofits reported deficits from 2001-2003 </li></ul></ul>
    6. 6. More Nonprofits Experience Deficits During and After Recession <ul><li>Over 40% reported deficits from 2001-2003 </li></ul><ul><li>Nonprofits suffering deficits grew by 20% in 2001 from the previous year </li></ul>Recession
    7. 7. <ul><li>Rate of growth in expenses generally exceeded the growth in revenue from 2001-2003. Organizations may have provided more services than they could afford in response to increased need from constituents. </li></ul><ul><li>It was not until 2004 that both revenue and expense growth rates realigned </li></ul>Nonprofit Expenses Outpace Revenue During Recession
    8. 8. Recommendations For Nonprofits In Recession <ul><li>Review and optimize cash deposit risk, concentration of investment risk, and concentration of revenue risk </li></ul><ul><li>Avoid “fake it ‘till we make it” behavior and sustained spending, which weaken nonprofits even in good economic times </li></ul><ul><ul><li>Consider how to get by on decreased revenue before increasing expenses </li></ul></ul><ul><li>Engage with board members and funders in contingency planning on how to respond to higher demand for services </li></ul><ul><ul><li>The goal is to ensure you stay afloat to serve the community </li></ul></ul><ul><ul><li>This may mean partnering with other complimentary organizations </li></ul></ul><ul><li>Avoid large investments in fixed assets and infrastructure (e.g., a building purchase, new hires or expansion of services) </li></ul><ul><ul><li>To the extent possible, work with funders and the board to build a cash cushion to allow flexibility and course corrections </li></ul></ul><ul><li>Consider ways to diversify revenue, if once reliable sources seem questionable </li></ul><ul><ul><li>Avoid over-diversification (i.e. new business lines) that can increase risk </li></ul></ul><ul><li>If the organization offers services that will lessen the negative impact of a recession, approach government funders more aggressively for support </li></ul>
    9. 9. Asking the Tough Questions <ul><ul><li>PROGRAMMATIC </li></ul></ul><ul><ul><li>What are the programmatic priorities? </li></ul></ul><ul><ul><li>What will current and prospective funders support? </li></ul></ul><ul><ul><li>How will the organization respond if there are not reliable sources of revenue (contributed and earned) for all programs? </li></ul></ul><ul><ul><li>How important are deficit programs to our mission? </li></ul></ul><ul><ul><li>FINANCIAL/MANAGEMENT </li></ul></ul><ul><ul><li>Is financial/programmatic information available for management in a timely manner? </li></ul></ul><ul><ul><li>How accurate and agile is the decision-making culture? </li></ul></ul><ul><ul><li>Do management and the board hold each other accountable for achieving agreed upon goals? Are responsibilities clearly stated? </li></ul></ul><ul><ul><li>Which programs contribute to the bottom line? Which need the most general operating support to “subsidize” the gap between total expenses and direct revenue? </li></ul></ul><ul><ul><li>Will there be an increase of demand on our services? If so, how will growth impact our fixed versus variable cost structure? </li></ul></ul><ul><ul><li>What can we deliver without adding administrative or other fixed costs? </li></ul></ul><ul><ul><li>What is the cost of each additional client served? </li></ul></ul>
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