Economic downturns come and go, as do dry periods when fund-raising takes a dip. Fluctuating revenues are a fact of life for Canadian non-profit organizations (NPOs). Making it through tough economic times and finding opportunities to thrive requires careful planning and critical decision-making. However, there are tools that NPO leaders can deploy in anticipation of revenue down periods to soften the blow for their organization and people. Here are four ways nonprofits can better prepare for uncertain times.
1. Build a Cash Flow Plan
A non-profit cash flow plan is a financial management tool that identifies expected inflows and outflows of cash over a specific period, typically one year. The plan projects cash receipts and disbursements to help the organization identify potential cash shortages or surpluses and plan accordingly.
A non-profit cash flow plan includes all sources of income, including donations, grants, program fees, investment income, etc., and all expenses, like salaries, rent, utilities, and program expenses. The plan considers the timing of cash receipts and disbursements to determine the organization's cash position at any given time.
Steps for Non-Profits to Create a Cash Flow Plan
- Define Purpose and Time Frame
- Determine why you need the cash flow plan.
- Decide the period it will cover (e.g., monthly over 12 months).
- Gather Financial Information
- Collect past financial statements and current budgets.
- List confirmed funding commitments and outstanding receivables/payables.
- List All Cash Inflows
- Identify expected income sources, including donations, grants, fundraising events, program fees, membership dues, and investment income.
- Estimate amounts and when they'll be received.
- List All Cash Outflows
- Identify expected expenses:
- Operating costs (salaries, rent, utilities).
- Program expenses (staff, materials, travel).
- Capital expenditures, debt repayments, and other obligations.
- Estimate amounts and payment timings.
- Identify expected expenses:
- Create a Cash Flow Projection Spreadsheet
- Set up columns for periods and rows for inflows/outflows.
- Input estimated amounts for each period.
- Calculate total inflows, outflows, net cash flow, and ending balances.
- Analyze the Cash Flow Projection
- Identify periods of cash shortages or surpluses.
- Assess timing mismatches between inflows and outflows.
- Make adjustments as needed.
- Develop Strategies to Manage Cash Flow
- Increase inflows: accelerate fundraising and apply for grants.
- Decrease outflows: negotiate payment terms and reduce expenses.
- Consider financing options like a line of credit.
- Review and Update Regularly
- Compare projections with actual cash flow monthly.
- Adjust the plan based on new information or changes.
- Communicate with Stakeholders
- Share the plan with the board and management.
- Inform donors or funders if significant issues arise.
- Implement Financial Controls
- Establish financial policies and procedures.
- Ensure segregation of duties and conduct regular audits.
- Seek Professional Assistance if Needed
- Consult accountants or financial advisors experienced in non-profit finance.
- Provide training for staff and board members.
Sound ominous? Don’t worry, and don’t be afraid of the numbers! Build something 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 ones), then getting this in place is possible with expert help.
By creating a cash flow plan, a nonprofit can better anticipate its cash needs and plan for any shortfalls, ensuring 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, as well as maintain financial stability over the long term.
15 Must-Track Metrics & KPIs for Nonprofit Success
2. Do a Deep Dive Into Expenses
In a world where it's normal to “set it and forget it,” it’s not unheard of 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 an excellent 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: Consider trying to negotiate your lease and get better terms. If 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: Speak to your benefits provider and understand where your team may be underutilizing your benefits plan. Survey your staff and ask them what’s important to them. Adjust the plan accordingly.
Be nimble. Ask yourself what costs lead to revenue and execution of your mission. What costs can we forego if our funding declines and we need to change suddenly? 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 to 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 reducing the number of workdays or hours worked per week. A few hours across many 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 vital to communicate transparently with employees about the reason for the salary reductions and ensure 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 most significant 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 most significant 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. A best practice is to get your controller to help you with some scenario planning so that you can make decisions having reviewed all the options available.
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 must adapt and adjust. Continuity planning identifies potential risks and develops a plan to ensure an organization can continue operating in the face of a disruptive event. 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, a drop in funding, etc. A pandemic or a notable economic downturn comes to mind quickly.
- Identify critical functions and resources: As mentioned above, now is the time to Identify the key functions, processes, and resources 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 downtimes. 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 identify areas for improvement and refine the plan over time.
- Communicate the plan: Finally, it is vital 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.
Non-profits need to remain agile, adaptive, and innovative in uncertain times. 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 importantly, emphasize your mission. During tough economic times, people may be more inclined to support organizations making a meaningful difference in their communities. Emphasize your mission and the impact you're having to appeal to capable donors and supporters.
