Budget Strategies for Tough Times
Last month my article on funding was intended to provide some reassurance that even during tough economic times, the American public continues to be very generous. Depending on your mission and your level of individual contributions, the next months and years could be more difficult, or a bit easier as a result – we hope it’s the latter.
Obsessing on the unknown can spread panic during tough times, which in the end helps no one. That is why we delivered a positive thought in the last article. This article addresses some initial thoughts that are a bit less positive, but we think essential steps to better ensure perseverance through a bad economy.
First we remind you of the factors to monitor for sustainability – unrestricted cash income and reserves; the right people on the staff and board working in partnership; collaboration and strategic partnerships to enhance outcomes; and disciplined focus on the organization’s mission and core competence. During tough economic times the most important sustainability factor is the focus on an organization’s mission and core competence. From that point, we can then make the right decisions on all the other factors.
Unfortunately, nonprofits have a tendency to spread themselves too thin. Many of you have heard me remind the sector that as a group, we are “professional co-dependants.” We want to make sure that anything that can be done in pursuit of the mission will be done. In good times, this behavior can be a problem. In tough times, it will lead to disaster. When funding is limited, we must re-think what is truly most important. It will serve no one if we assume the notion that we must do more with less. Instead we would suggest that the mental approach to best serve our constituents is to do the best we can with what we have. We must muster the discipline to not over-extend our capacity. If we make wise decisions, identify and then pursue the most important functions, we can actually improve our overall performance during a crisis. In other words, systems can actually benefit from what seems to be a disaster. From disaster, we can actually emerge healthier.
For example, think about a forest fire. When it starts and expands, it can be frightening. There can be loss of property, habitat, scenery and even life. But forest fires are part of nature. We know that after a fire the forest will come back – often times healthier than it was before the fire. After watching economic markets for many years, I have come to understand that the economy is also an organic entity, subject to the randomness that can lead toward catastrophe for no predictable reason. Nature tells us it will come back, eventually, and hopefully stronger.
I have witnessed the nonprofit organizational version of a forest fire. Organizations like all living creatures can benefit when tested, reduced to their bare essence and forced to renew.
In order to help you make wise decisions so that when this crisis passes your organization you will flourish, we offer a few strategies to consider:
- As soon as possible develop the right financial tools.
- The most important tool is a month-to-month income/expense analysis that compares the current month and year-to-date for each line item with the past few years’ performance. A good analysis is a tool to use all the time, but in times like these, when we have no clear picture of the future, such an analysis is crucial. An income/expense analysis can provide an early warning system. When income does not produce or expenses exceed in relation to past performance, we can make better-informed decisions on what to reduce, and when to reduce it. Make sure you track the most significant income streams such as donations, memberships, earned revenue as well as grants you depend upon. On the expense side, make sure you understand the basic ongoing expenses in relation to expenses that can be more seasonal, or sporadic. It is time to become an expert on your numbers and keep them on paper, in your thoughts, in your key staff’s head, in your finance committee’s bones and with your board’s total understanding.
- Make sure your financial reporting is in compliance with the Rasmuson Foundation’s guideline where unrestricted cash is clearly displayed – use this reporting format. Unrestricted cash is the Holy Grail of all income in good and bad times. We have provided numerous reasons why nonprofits need unrestricted cash, the sources of unrestricted cash, and how unrestricted cash is one of the major factors for sustainability. Now that we have a real financial crisis, it is imperative that you have a handle at all times on the level of unrestricted cash available for your operations. This is the perfect opportunity to dig deeper into your data to monitor unrestricted cash and create real information for decision making. If you do not have adequate unrestricted income or reserves, it may seem impossible to even consider increasing unrestricted income during these times. However, we would suggest that if there is any way to do so, do it. At the very least, now you have a real appreciation of why this type of income is so important.
- In addition to an analysis, we would encourage you to stay in frequent conversations with your significant funders. So far during this recession, our experience is that even the funders are struggling to get a handle on the severity of the situation. In order for you to make wise decisions for the future, maintaining appropriate communication with your organization’s key funders is a critical strategy.
- Stay calm. During crisis, enlightened leaders help everyone make better decisions by staying calm. Keeping one’s cool does not negate the fact that tough decisions must be made. But when organizations are in crisis, hysteric leadership leads to quick, often negative results. There are a few ways leaders can keep centered during tough times including:
- Keep an appropriate sense of humor.
- Accept that while we all must do all we are capable of to survive, some things are out of our control. Worrying about those things will hinder our efforts to address what we have the ability to impact.
- Connect to peers – communicate with them on a regular basis. Stay focused on positive actions. Share the strategies others use to weather the storm. Work to engage in discussions centered on potential solutions and stay away from unproductive whining sessions – those will only increase the collective capacity to fail.
- Keep appropriate work-life balance – we will not help our organizations nor our constituents if we kill ourselves doing more than any individual can sustain.
- Develop a few scenarios (at least two) on cost reductions you can achieve while maintaining critical services. If scenario planning is new to you, try these few steps to get you started:
- Using cash analysis information and projected income after speaking with your major funders, define a worst case and a best case scenario for total income you can anticipate. If possible, develop a third scenario in the middle of the extremes. The more you intimately understand your numbers, the better you can make the right decisions quickly.
- Once you identify scenarios for probable income, review the mission, the core purpose and/or the organization’s core competence, then reflect on what must be done to satisfy the mission.
- Next, review all programs. Rate the programs by identifying which best address what must be done as compared to those programs that are less critical to core mission. Even if all programs seem critical, it is imperative that they are prioritized based on the organization’s mission.
- Then do a similar review of all staff positions – employee costs are the largest expense for most nonprofits. Identify employees that must be kept in order to support the programs that were identified in the previous step. Review open positions and re-think how important filling such a position really is – recessions are not the best time to fill open positions, or expand into new positions unless grant funding pays all cost, or unless the open or new position can be justified as critical to the accomplishment of the mission.
- Finally, the last expenses to be reviewed should be all other items such as rent, travel, training, memberships, benefits, etc. We encourage you to look at these expenses last, not because they should be the last things to cut, but often you will make a better decision of which of these items are truly critical if you want to maintain the core mission. For example, if your mission requires ongoing certification for staff and you cut the training budget, you may not be able to deliver on the mission.
- Once the staff completes these steps, present the scenarios to the finance committee and then the full board. Request feedback on all the assumptions made by staff, and adjust the scenarios as needed.
- Complete the final plan. Triage (prioritize) the positions or expenses you would cut in each scenario based on informed decisions which are based on the numbers (cash flow and income projections), based on a critical review of the mission and core purpose and the positions needed, and based on the review of other expenses and board comment.
- The final strategy we suggest is to not beg or threaten donors. The worst strategy for any organization would be to tell a donor that without their immediate support, you will close your doors. What donors need and want is for you to do all that can be done with what you have, and that most times you will not only meet, but will perform beyond their expectations. Donors need to feel their past support was given to an organization that makes things happen regardless of difficulties. They need organizations to persevere in spite of these difficult times. While this strategy may be the hardest to do on an emotional level, it is the most critical of all to accomplish well. Everyone is suffering during this recession. To date, no one seems to be able to shed light on the severity, the duration, nor the long-term impact of this event. We may be providing human service or enhancing the quality of life for our community – our missions vary – but regardless, we are all in the people business – in the community business. In times like these, we are the leaders who should set the example of caring and sharing for all.
We need your comments. As part of this newsletter, we are distributing a brief survey to Alaska nonprofits. Please let us know how you are doing. Let us know what kind of services may be the most beneficial for you, your staff and board during these times. The entire Foraker family wants to help the sector survive, re-focus and renew. Let’s stay focused on the positive future and deal the best we can with whatever challenges come our way.