Economic Downturn

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A large-scale economic downturn can be devastating to the nonprofit sector. As salaries and corporate profits decrease, so can donations. Endowments can be greatly reduced, and cash-strapped governments can drastically tighten purse strings. To compound matters, economic downturns can also mean a great increase in demand for services. Preparing for ebbs and flows of the economy is essential.

Take the precautionary steps to insure your financial stability.

There are a variety of steps a nonprofit can take to improve financial stability and improve chances of weathering a tough economy:

  • Vary cash deposits among different banks, and make sure that they are insured.
  • Keep investments diversified and varied.
  • If at all possible, make it policy to maintain a cash operating reserve that will cover at least six months of expenses.
  • Remember that assets such as property or artwork are not the same as cash on hand.
  • Make sure that your revenue comes from a variety of sources rather than relying heavily on a single funder.
  • Regularly reevaluate revenue projections and adjust expenses accordingly.
  • Clearly state the responsibilities held by management and the board. Make sure that financial information is regularly available to them and that decision making happens in an efficient manner.
  • Services should not be increased when a one-off influx of capital is acquired. Instead, capital should be used for improvements or to cover temporary deficits.
  • The possibility of investing capital in assets should be considered carefully and kept as flexible as possible.

It may be useful for an organization to consult with a financial advisor who specializes in working with nonprofits. Nonprofit Finance Fund, for example, offers consulting services, workshops, and clinics that can help an organization make sure it is managing its finances in a sound, stable way.

Prepare for a loss of revenue and/or spike in demand for services.

Consider partnering with a complementary organization to share space or other resources. If your nonprofit offers services that are particularly applicable to times of economic depression, be more aggressive in approaching government sources for funds. It may also be possible to renegotiate debt or leases for better terms. In times of economic hardship, low tenancy rates and a depressed real estate market may make it possible for some donors to give free space to nonprofits, which can lead to a significant cut in expenses.

Above all, a nonprofit is most likely to survive such a crisis by being proactive. Budgets should be written with both best- and worst-case scenarios in mind, and revenue projections should be made regularly. It is important to develop a response plan to a worst-case-scenario revenue shortfall ahead of time. Organizations should also make a particular effort to thank donors and reach out to them personally.

Avoid common financial pitfalls that put the organization at risk during economic downturns.

The best way for a nonprofit to prepare for the possibility of a recession is to make sure that the organization is financially healthy from the start. There are a number of practices that many nonprofits make use of which can actually weaken their overall fiscal health, including:

  • Excessive borrowing — Organizations that borrow at attractively low rates against their endowments or based on high revenue estimates can be left holding the bag when the economy slows.
  • Owning space — Many organizations try to take advantage of real estate booms by overbuilding, gambling that the market value of property will continue to increase, or that excess space can be leased to produce more revenue. When real estate markets collapse, these organizations may have difficulty securing tenants and be faced with high fixed costs.
  • Building an endowment — This is often considered the “holy grail” of nonprofit finance, but endowments can be very unreliable sources of revenue, particularly when they would most be needed, i.e., in times of wide-scale economic distress.
  • Unnecessary spending — In good times, organizations might expand operations assuming that the organizations itself can take on all the risk of carrying the organization.  Developing partnerships, forming relationships with potential champions and advocates, and ensuring that the work of the organization is work that is most necessary puts organizations in a better position to whether a downturn.

In addition to these practices, nonprofits are handicapped by a lack of flexibility when it comes to their workforce. Where for-profit businesses can often downsize during hard times to cut costs, this isn’t always an option for nonprofits. A hospital, for example, can rarely afford to cut nurses, nor can an orchestra trim back on violin players.

When responding to a recession it is important to maintain your nonprofit's mission.

When the downturn hits, even with the best preperations, the organization will need to take additional steps to respond.  The good news is that recessions provide a great opportunity to re-focus and realign to ensure that the activities of the organization are strongly connected to its mission. These times are ripe for an analysis of the efficiency and effectiveness of an organization's operational structure. 

Ideally, the response to an economic downturn happens as early as possible, picking up on early warning signs.    At this time, the crisis management team should assemble and examine the overall financial health of the nonprofit. To do this, first examine each of the organization's revenue sources and evaluate whether  any of them are likely to be cut off or reduced because of the crisis. This examination should include government grants or contracts, foundation and corporate giving, individual donations, and attendance at special events. Revenue projections for all these sources should be carefully reevaluated to see if expenses will need to be cut.

The team should also take into account that, in times of recession, payments will most likely be later than normal and bills will be demanded more quickly. Plans for expansion or large investments such as the construction of a new facility should also be carefully reconsidered.

To prepare for the possibility of cuts, the team should take a careful look at programming:

  • Which programs are most critical to the organization's mission?
  • Which programs are least mission-critical?
  • Which programs are most expensive to operate? Could these operate more efficiently?
  • Which programs are likely to see a greater demand during a recession?
  • What programs are the organization's donors most likely to continue to support?

Asking these questions, should it become necessary, will help make these tough decisions clearer.

Click to open interactivity Conducting an emergency fundraising campaign can help you to withstand an economic downturn.

Conducting an emergency fundraising campaign can help you to withstand an economic downturn.

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