In this ever-changing time, a financial plan can make all the difference for an organization to weather the storm and come out on top. Using the following steps may assist your organization in completing its mission.
Budgeting- Know your Past Successes and Challenges
Knowing the importance of a budget may be paramount for your nonprofit’s financial success. One common mistake made when drafting budgets is being too “optimistic” in their estimates for expenses and revenue. Too many organizations overestimate their potential for fundraising while underestimating the cost of nonprofit expenses.
Keep in mind the business environment we are currently in with executive orders placing a freeze on federal grants, which may play a role in financial uncertainty. This highlights the importance of building access to unrestricted and liquid dollars. Identify which programs aligned with the organization’s mission and were economically feasible.
You should ensure that your financial institutions suit your needs, be sure to reduce and control any fees the organization is incurring for delinquent payments or insufficient funds, have your board cultivate any relationships they may have with the bank or financial institution.
Review your Operation Costs
Your operation costs are a primary reason for your nonprofit to function and keep the doors open. Notable operation costs are staffing employees and office expenses. A high-yielding office environment ensures your organization has a suitable place to go to work every day and get its tasks done efficiently. However, the rent and utility expenses are a consistent fixed cost for your organization. Investing in a space that you can use now and prepare for future growth is crucial.
Making Sound Decisions
We know your nonprofit may be struggling to create a financial plan that will help you get through these difficult economic times. One thing that you should have a handle on is your cash flow. The Organization should know they have a certain number of months in which they can cover expenses.
To know what your reserve is you can do a calculation such as:
(Net Assets Without Donor Restriction – Fixed Assets) ÷ Typical Month’s Expenses
This will determine when leadership needs to make decisions in the best interest of the organization. Items such as purchases and capital investments may need to be postponed or put off for a given time. Are these funds adequate for planned growth?
This would be a suitable time to review any internal requirements regarding funds for the use of endowments or reserves for cash flow purposes. Start having the conversations before the situation reaches a critical point.
Know where your funding is generated, in what proportion do you receive public support from donations, federal grants and support, local government, or foundations. Also, how many different sources feed into each category. If your organization relies heavily on a few sources, it may be more vulnerable to immediate cash flow issues. In such cases, you may want to consider a marketing plan to obtain additional sources of funds. You should also be aware of the limits of your restricted funds, is there workability within to spend as needed or is it operating on a specific agenda.
Stay abreast of your local situation as related to their revenue streams and funding. Even though you may not directly receive federal funding, your local contributors and the government that funds your mission may. It is essential to stay informed about how their funding is received and if they are cut, how it would directly or indirectly affect your organization.
Maintain Transparency with your Supporters and Team
While funding may decrease, your organization should also be in communication as to which programs may be reduced or remain open. Have regular meetings and updates to keep a pulse on your program expenditures so as not to draw your cash flow to thin.
This is the time to share the benefits of your organization with the public, engaging your entire team in promoting what your organization does and its significance in the community and area. Let them know what your needs are, and if they are fulfilled, how it will in turn serve the community.
Using these strategies in conjunction with knowing what the expectation is for revenue and funding allows your organization to develop a picture of revenue risk. Each organization is different and has different levels of uncertainty; for some companies, knowing a certainty of 70% of their funding is coming from each year is acceptable, whereas another organization would need to have that percentage be 90%. Using prior performance as well as future trends would be helpful in this analysis. Once again, the board and staff need to communicate on how much budgeted revenue will be from committed sources.
Have an Action Plan
Based on our discussion thus far, your organization should establish an action plan to identify what is in the best interest of the organization to accomplish its mission while being able to fulfill its expense burden.
Organizations with a nominal or token expected impact should expect to maintain their current operations. They might focus on controlling expenses that do not significantly impact staffing or their mission, such as arranging updated terms on current contracts with providers or exploring new vendors to engage at better rates.
Organizations with a moderate risk of revenue decrease may need to investigate significant changes, such as program cancellations. This may include reductions to program framing and staffing. Leaders of organizations in this category should consider how long reserves can support operations. If the organization has been diligent in setting aside funds for this situation, this is the time to utilize those resources.
The nonprofit landscape has always been vigorous, requiring adaptability and creativity. As new trials emerge, leaders should expect their organizations to move along this risk continuum. Those who recognize that risk need not be synonymous with threat will be best positioned to benefit from new opportunities for expansion and respond to participants’ needs when they arise.
While the business models the nonprofit sector has historically employed may be undergoing significant change, understanding your organization’s current financial situation remains critical to determining the path forward. By identifying future plans to address your risks, you can make thoughtful decisions about your organization’s strategy to serve the community in the future.
By John Bilotti, CPA