Fiscal Stress: Be Prepared

The money giants Bear Stearns and Lehman Brothers have already fallen, yet too many nonprofit executives and board members are still waiting to see what happens before they start adapting to the current fiscal stress. Yes, you.

Even in good times, the most fundamental issue confronting nonprofit leaders is the mismatch between the compelling causes that nonprofit groups focus on and their abilities to raise sufficient money to accomplish their missions. Many organizations are perennially undercapitalized even in a good economy, and things gets much tougher in a recession.

Let’s look at the last recession. Fiscal stress swamped most American nonprofit groups at some point in 2001. It started early in the year, was exacerbated by September 11, and didn’t fully ease until mid-2006. Just a year later, by mid-2007, some nonprofit organizations began to re-encounter fiscal stress, and late 2008 feels much worse than the fall of 2001.

A declining economy increases the likelihood of nonprofit fiscal stress, an imbalance between revenues and expenses. The reasons should be clear: Less discretionary income for individuals, hence less in charitable donations; weaker stock markets, therefore lower earnings by foundations and individuals, and in turn less philanthropy; curtailed sales for corporations, and the likelihood of lower profits and tighter giving.

Exacerbating the problem is that many donors feel uncertain and less optimistic about the future, which further dampens giving. And all this is occurring at the time of end-of-the-year appeals, an important source of income for many charities.

What’s more, even if a recession has still not been officially declared, federal and state governments have seen a sharp fall in revenue.

The Center on Budget and Policy Priorities reports that 29 states have an estimated collective budget gap of more than $48-billion for the 2008-9 fiscal year, and 15 states — some are the same ones — now show a midyear gap of another $6-billion due to a shortfall in tax revenue. Because nonprofit groups depend so heavily on government money to provide services — especially urban health and human-service groups — governmental budget cutting often hurts charities more than other types of organizations. The effects can be long lasting, since government finances don’t bounce back as quickly as the economy as a whole.

But odds are most nonprofit groups are not doing nearly enough to prepare.

Another look back to 2001 offers an important lesson.

Two months after the terrorist attacks sent the economy into a tailspin, CompassPoint Nonprofit Services, in San Francisco, surveyed 198 organizations and found that 73 percent had already seen an increased number of clients, decreased attendance at special fund-raising events, or a decline in money from foundations, corporations, or wealthy individuals. Seventy-eight percent believed 2002 would be even worse.

Even so, only 59 percent had taken one or more steps to respond.

Many of the organizations were taking a wait-and-see approach, while others were probably unaware of the difficulties that would probably be on the way.

The reasons so many groups have trouble responding nimbly are varied. New and small charities may not have established enough of a track record to move quickly to diversify their sources of support. Other groups may have expanded too quickly, often with the help of seed money from foundations. Even in good economic times, groups that expand quickly often struggle, but when money is scarce, it is even more difficult to find the sources of aid needed to sustain a fast-growing group.

Other organizations lack flexibility to take steps that are needed because they have no cash cushion and cannot borrow the money they need to help them weather even a short downturn. Yet other organizations are plagued by instability due to board or staff turnover and a lack of planning and leadership by top management.

But some groups manage to overcome these problems, in large part by recognizing the signs of fiscal stress.

Most of the indications can be determined fairly easily: Has a group lost a significant percentage of its financial support? Has it fallen behind in its financial obligations or consistently been behind in meeting its financial goals or its plans for delivering services?

As soon as it is clear any of these things are happening, it is time to take action.

Many groups will seek new sources of money by stepping up fund-raising activities, finding ways to diversify revenue, and lobbying lawmakers and other government officials to restore funds or provide new types of aid.

Those efforts will take time to show results, but can make the organization stronger for the long haul.

Other groups focus on adjusting to the financial squeeze. Among the key steps they take:

Keeping costs down and trimming payroll and other expenses. Staffing is usually the biggest expense at a nonprofit group, so organizations often consider hiring freezes, attrition, early-retirement plans, layoffs, shor-term job sharing, and reduced compensation.

Adjusting programs. Some groups seek to trim programs, deciding whether some efforts are not essential to the charity’s mission, might not be effective, or lack sufficient demand. Others seek greater collaboration with other organizations, transfer programs to other organizations, or put a halt to the creation of new programs.

Making spending cuts. Organizations can consider across-the-board cuts or make reductions in specific areas; they can seek to do what they need to do through one-time deep cuts or repeated small cuts. They can also improve their cash-flow management; secure a line of bank credit or borrow money; reduce or delay purchasing; renegotiate leases or other obligations; and tap rainy-day reserves.

As managers weigh those options, they need to think about the short-term impact each approach has on revenue and expenditures and assess the longer-term impact on an organization’s mission and vision.

They must also think about how financial decisions will be viewed by the key players involved with a nonprofit organization. Grant makers, major donors, and other sources of money must be considered, along with clients, board members, employees, volunteers, and others whose support is essential for the continued long-term health of the organization.

Finally, coping with fiscal stress can lead to erosion in the quantity and quality of services provided by nonprofit groups. If all the work to cut spending and take other steps to gain financial stability would severely hamper the nonprofit organization’s performance and adversely affect clients, then it is time to rethink whether the right decisions were made.

It is all too easy to tell nonprofit groups to act “fast and smart” in a financial squeeze, or to think only about cutting at the margin, as some experts advise.

Fiscal stress presents itself in a variety of ways to nonprofit organizations, and no simple, single strategy can solve all of these conditions. Cost cutting, even in a crisis, is especially difficult in organizations that already lack sufficient resources, and layoffs are quite painful, even under extreme conditions.

In a crisis situation, savvy managers focus on the process by which the cuts are selected and made. Among the key steps groups should take:

• Make sure you understand your organization, especially what each aspect of your operations costs and what are the best measures of financial performance.
• Face and explain the financial reality affecting the organization to employees. Rapid change requires new ways to garner ideas from people in the organization. A group process is important symbolically, but at a time when information is imperfect and conditions are changing rapidly, reaching out to a lot of people will also help improve decision making.
• Be prepared to explain your actions clearly and repeatedly in a variety of ways to all of the people outside the organization who are affected by changes as well as to the news media.
• Carefully manage the organization’s image and rally key supporters to show they are behind the approach the organization is taking to handling challenges.
• With the appropriate information and analysis, decide what is necessary to cut. Remember to focus on both bottom lines — mission and money. While stressing the short-term, also remember to look at long-term implications. Because a fiscal crisis almost invariably requires asking “big” questions about how an organization achieves its mission, times of fiscal stress can also be opportunities for organizations to innovate.
• Morale is a serious issue; work to maintain a positive organizational climate during this difficult period. Treat people who are losing their jobs or key duties with respect, and provide appropriate assistance. Remember that the staff members you keep will judge you based on how you have treated their colleagues. Even under these conditions, work hard to retain the best staff members.
• Return to the new normalcy as quickly as possible. Encourage creative thinking about the tasks that have to be done, and continue to focus on results.

America is at the front end of a recession from which only a slow, multiyear recovery looks likely. At this point, the vast majority of nonprofit groups — if they haven’t already — need to rapidly begin to manage the fiscal stress they have already encountered or are likely to encounter very soon.

In their organizational life cycles, most nonprofit organizations regularly encounter conditions that induce fiscal stress. But if fiscal stress is well managed, nonprofit organizations can survive and even thrive.

Frederick S. Lane is a faculty fellow at the Center for Nonprofit Strategy and Management at Baruch College of the City University of New York, in New York. This article is adapted in part from Chapter 5 of Wise Decision-Making in Uncertain Times: Using Nonprofit Resources Effectively, edited by Dennis R. Young (Foundation Center, 2006).