Armanino Blog

Another Slow-Motion Car Crash for the Nonprofit Sector?

April 10, 2017

From the vantage point of a Southern CA accounting firm with a diversified practice including mortgage lenders and real estate developers, there were a number of troubling signs about the economy in the fall of 2007. What wasn't immediately obvious was the potential impact on the nonprofit sector. But the magnitude of the financial downturn sparked by the mortgage crisis meant that most sectors of the economy were hit hard. In the case of nonprofit organizations, particularly those relating to employment and poverty, demand for services increased at the same time revenues began dropping due to the larger economic forces.

Many nonprofit organizations were unprepared for the recession and had not anticipated the possibility of losing funding from foundations, state governments and individuals. Caught with surprise every bit as much as Wall Street and the business community, nonprofits scrambled to address funding shortfalls with a variety of strategies, including downsizing staff, freezing pay levels, cutting programs and running deficits.

The current situation is different. To date, the stock market has responded to the potential for radical change with some degree of enthusiasm. But the prospects fueling Wall Street's excitement — the potential for significant changes to tax policy, substantial cuts in discretionary funding at the federal level, and another massive overhaul of health care — bring risk to the financial stability of many nonprofit organizations.

So what should the board and senior management of a nonprofit organization do to plan for and mitigate the risk that these potential changes could cause? Drawing back on that Great Recession experience, as well as other lessons, here are some top suggestions for strategic financial actions.

1. Make sure everyone in senior leadership understands the organization's funding sources. With federal funds coming from pass-through grants, sub-recipient arrangements and medical entitlement programs, it may not be entirely obvious how much might be at-risk if the president's proposed budget is passed by Congress. Even less obvious is how budget changes might impact corporate partners that are direct or indirect beneficiaries of government contracts and policies.

2. From this base of understanding, conduct a risk assessment to rate how vulnerable your organization could be to a wholesale change in policy. A proactive approach will provide information and allow for calm decision-making even in an uncertain climate.

3. If your organization is more susceptible to the potential impact, prepare a cash flow projection for at least 24 months. Set it up so that it is easy to change assumptions that would impact revenues. Update it as new information becomes available, and monitor assumptions and performance against the projection.

4. Evaluate your reserves and working capital needs. Consider the possibility of a deficit budget. Under what circumstances are you willing to run a deficit? How long is a deficit sustainable?

5. Get a line of credit. There is a good possibility that not all of the cuts proposed will be enacted, but there is a high likelihood of a budget controversy and the potential that government shutdowns could return. Be prepared to weather a short period of delayed cash flows.

6. Determine the potential impact of policy changes on demand for your services. Organizations likely to experience an increase in demand need to proactively work with foundations and other strategic funding sources to prepare to increase capacity.

7. Make appropriate investments in advocacy, not only for direct funding but also for the importance of the work your organization is doing in addressing societal needs or contributing to community life.

8. Recognize that donors' priorities may have shifted, and may shift again. The American Civil Liberties Union (ACLU) just had a huge influx of new donors, which could mean that donors are favoring organizations directly on the frontlines of changing policy. We've also seen organizations targeted by potential budget cuts become the recipients of large amounts of grassroots funding. If your mission does not directly impact current concerns, you might want to consider delaying plans for program expansion or capital campaigns. And if your donors aren't aware of how federal budget cuts might negatively impact you, educate them and make the case for increased support.

9. Take another look at opportunities for increased efficiency in areas that support the mission, rather than drive it. Outsourcing certain administrative functions, investing in automation and discontinuing peripheral programmatic activities are all potential opportunities to do more with less.

10. Check in with your advisors. Your accounting firm, investment advisors, fundraising consultants and other professionals can help develop strategies to prepare for change.

11. Remain optimistic, even while making contingency plans. Over the past 40 years, charitable giving has trended upward except during the toughest recessions. A challenging financial outlook is not a permanent situation for organizations that remain relevant and are well-prepared for change.

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