Are we on the cusp of an economic downturn? Most economists agree that a recession is imminent. Making it through tough economic times and even finding opportunities to thrive requires careful planning and some important decision making. But there are tools that NPO leaders can deploy in advance of a weakening economy to soften the blow for their organization and people. Here are 4 ways nonprofits can better prepare for uncertain times.
1. Understand and Build a Cash Flow Plan
A nonprofit cash flow plan is a financial management tool that identifies expected inflows and outflows of cash over a specific period of time, typically one year. The plan projects cash receipts and disbursements to help the organization identify potential cash shortages or surpluses, and plan accordingly.
A nonprofit cash flow plan includes all sources of income, including donations, grants, program fees, investment income, etc., as well as all expenses, like salaries, rent, utilities, and program expenses. The plan takes into account the timing of cash receipts and disbursements to determine the organization's cash position at any given point in time.
Sound ominous? Don’t worry and don’t be afraid of the numbers! Build something that is easy to use, and you’ll be off to the races. If your books are up-to-date (and you really should always have current books), then getting this in place is possible with a little bit of expert help.
By creating a cash flow plan, a nonprofit can better anticipate its cash needs and plan for any shortfalls, ensuring that it has sufficient funds to meet its obligations and carry out its programs. This helps the organization make informed decisions about fundraising, spending, and investing, and to maintain financial stability over the long term.
2. Do a Deep Dive Into Expenses
In a world where it's normal to “set it and forget it”, it’s not unheard for organizations to find recurring expenses and things you just don’t need anymore. As always, the devil’s in the details and now’s a good time to dig into your expenses and ensure you are using and need everything you’re paying for. Below are some common areas where you might find excess spending or an opportunity to save:
- Technology: Do you really need Google, Zoom, MSTeams and Slack? Do you need full versions or are free versions sufficient? Are there other duplicative technology solutions in your organization? Now’s a good time to do a must-have technology stack assessment.
- Office Space: With the over abundance of commercial real estate building owners, it is definitely a buyers market. Now’s a good time to negotiate your lease and get better terms. And hey, can your organization operate successfully in a fully remote work environment? The savings can be huge!
- Staffing: Is everyone in your organization contributing to your overall success? Could some roles be outsourced? Can volunteers step in?
- Travel: Do you really need to attend that event? Can one person go instead of two? Is carpooling an option? Travel has many hidden and often unexpected costs so now may be a good time to revisit your travel policy and cut back on unnecessary trips.
- Employee benefits: Now is a good time to speak to your benefits provider and understand where your team may be under-utilizing your benefits plan. Survey your staff and ask them what’s important to them. Adjust the plan accordingly.
Now is the time to be nimble. Ask yourself what costs actually lead to revenue and execution of your mission? What costs can we forego if our funding declines and we need to make a sudden change? It may be a good time to engage with a Controller to help you identify where you can be more efficient if you need to be.
3. Take a Close Look at Personnel Costs
You wouldn’t be the first, nor will you be the last to take a hard look at staffing needs when times get tough. An economic downturn may lead to some difficult personnel decisions. Here are some ways that you can lower and/or control your staffing costs.
- Hiring Freeze: One of the simplest ways to reduce personnel costs is to implement a hiring freeze, which means that the organization will not hire any new employees unless it is deemed absolutely essential.
- Reduced Hours: Another option is to reduce the number of hours that employees work. This approach can be accomplished by either reducing the number of workdays or the number of hours worked per week. A few hours across a large number of people can make a notable difference.
- Salary Reductions: Nonprofits may consider implementing temporary salary reductions, where all employees take a pay cut for a set period of time. However, it is important to communicate transparently with employees about the reason for the salary reductions, and to make sure that the cuts are equitable across the organization.
- Contract employees: Nonprofits can hire contract employees or external service providers to work on specific tasks, which can be more cost-effective than having activities completed by staff. For example, bringing in experts in accounting or IT services can help reduce personnel costs.
Personnel costs are often the biggest expense in an organization and can be a great place to start looking for savings in the face of economic uncertainty.
4. Embrace Strategic and Business Continuity Planning
As part of what should be your regular strategic planning process, now is a good time to look closely at your programs and understand which have the biggest cost, and which provide the highest returns. Perhaps it makes sense to temporarily pause high-cost programming to preserve cash for the time being. If you can do so without negatively impacting your brand, and if the communities you serve are ok with it, this is a quick way to reduce or reallocate costs to higher need areas. Best practice is to get your controller to help you with some scenario planning so that you can make decisions having reviewed all the different options available to you.
On top of strategic planning, now is probably a good time to think about organization continuity planning. If Covid taught us one thing, it’s that when the going gets rough, we have to adapt and adjust. Continuity planning is the process of identifying potential risks and developing a plan to ensure that an organization can continue to operate in the face of a disruptive event or events. Here are some important steps involved in continuity planning:
- Conduct a risk assessment: The first step in continuity planning is to identify potential risks that could disrupt the organization's operations, like a decline in donations, drop in funding, etc. Not unlike the pandemics, a notable economic downturn can have a similar impact.
- Identify critical functions and resources: As mentioned above, now is the time to Identify the key functions, processes, and resources that are essential to maintaining operations during a weakened economy. This can include people, facilities, equipment, data, and communication systems.
- Develop a continuity plan: Based on the risk assessment and identification of critical functions and resources, develop a plan that outlines how the organization will continue to operate during down times. This should include procedures for responding to funding declines, identifying backup resources, and communicating with stakeholders.
- Test and revise the plan: Continuity planning is an ongoing process, and it's important to test the plan to ensure it’s effective and up-to-date. Conducting simulations and scenario mapping can help to identify areas for improvement and refine the plan over time.
- Communicate the plan: Finally, it is important to communicate the continuity plan to all relevant stakeholders, including the Board, employees, community, suppliers, and partners. This will ensure that everyone is clear on their role and the measures being taken to weather the storm.
As we enter into uncertain times, it's important for nonprofits to remain agile, adaptive, and innovative. Reassess your budget, try to diversify your funding sources, communicate, and even over-communicate with donors to keep them close and engaged, explore new revenue streams, and perhaps most important, emphasize your mission. During tough economic times, people may be more inclined to support organizations that are making a meaningful difference in their communities. Emphasize your mission and the impact you're having to appeal to capable donors and supporters.