Monday, December 29, 2008

Is the End Near? What is Responsible Board Stewardship in an Economic Crisis? (Part II)

From Tues, Dec 23(Indy) and Dec 26(Cincy) Not-for-Profit News

Is the End Near? What is Responsible Board Stewardship in an Economic Crisis? (Part II)

By Bryan Orander, President, Charitable Advisors and Not-for-Profit News

Last week, Part of I of this article talked about the reality of funds decreasing over the next year for most nonprofit organizations and the steps that can be taken by board and staff leaders to prepare and respond to these conditions – get that cash forecast together NOW! In Part II, we begin with designated funds and then focus on what leaders should be thinking about if there are serious concerns about your organization’s ability to survive this downturn.

Is it OK to borrow from ‘temporarily restricted’ funds? – I wanted to address this because it is treated casually by too many organizations. Temporarily restricted funds are funds that are received from a foundation or donor that are designated for a specific use – say, producing your summer camp. An example would be if you have run out of unrestricted funds early in 2009, but you have a foundation grant to provide summer camp in July of 2009 - you might go ahead and use camp money and keep track of it on your books with the expectation that you will raise other funds that can be used to run the summer camp.

It is one thing to borrow to get through a temporary cash crunch and replace it quickly. However, even in prosperous times, when organizations routinely borrow into restricted program funds to pay operating expenses, they are building a house of cards. As more and more program funds are diverted to general operating expenses, the organization digs a hole that it will have difficulty getting out of and it only takes one delayed or lost grant to push the organization over the edge.

Our commitments to our organizations and clients and the recognition that many small organizations never know in January whether they will we still be around in December makes it hard for board members and staff leaders to judge when they are too close to the edge. Just keep in mind that you should not accept grant funds to perform services that you do not have reasonable confidence you will be able to fulfill.

What if you don’t see a way to responsibly continue operations?

It is the responsibility of the board to ensure that whatever direction an organization takes is done in an orderly manner, in the best interests of clients, financial supporters, and the community. In certain circumstances, closing the organization or ceasing to operate independently could be the best stewardship. Running out of cash and putting an “Out of Business” sign on your front door won’t cut it.

In far too many cases that I have seen, the board and staff were unwilling to explore partnering or merger options until they ran out of cash and it was too late. There is a mix of entrepreneurial spirit, territorialism, and a grassroots mentality about our finances and worthy causes that seems to make it hard for the people who are closest to and most responsible to view their circumstances in an objective manner. You can be exploring partnering alternatives at the same time that you are working on options to remain solvent and independent. Fortunately or unfortunately, right now most potential partners will be worried about their own sustainability as well.

Merging – what organizations do you work with already? Who has similar or complementary services? The usual approach would be to get the board chair of each organization together to see if there is any interest followed by a small group from each organization to explore it more fully. From a legal standpoint, you will usually close one corporation and transfer assets to avoid an assumption of liabilities by the other organization. There are many issues and conversations that are best facilitated by someone neutral to the organizations. And don’t forget due diligence – this is not something you should jump into without your accountant and attorney. On the plus side, some of the foundations or donors who support you might be willing to help you fund a merger.

Suspending or Hibernating Operations – Even when things seem hopeless, you don’t necessarily have to throw in the towel. Another option is to cease program operations, but not terminate the organization, and enable the board leadership to regroup and define a new strategy to proceed. I belong to a national association that saw that its current staffing and expenses could not be supported by forecasted revenues. They could have continued “business as usual” for 4 more months and burned through their cash and disappeared. Instead, they let staff go with severance and transferred administration to an association management company to keep basic communications going while the board is meeting every couple weeks to make decisions on how they can best use the $100,000 in cash they still have to re-launch in 2009.

Closing – this won’t ever be fun, but you have choices. You can fulfill as many of your obligations to clients and funders as possible, communicate with the people involved, and provide appropriate notice to employees. Or you can run right to the financial edge and strand everyone involved. An orderly closing can leave the door open for a resurrection in the future and can make sure that current clients are connected into services with others and staff has the support and some extra time to find new positions. On the legal and financial side, again look to your accountant and attorney to guide you in wrapping things up.

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Is the End Near? What is Responsible Board Stewardship in an Economic Crisis? (Part I)

Tues, Dec 16(Indy) and Thurs, Dec 18(Cincy) Not-for-Profit News

Is the End Near? What is Responsible Board Stewardship in an Economic Crisis? (Part I)

by Bryan Orander, President, Charitable Advisors and Not-for-Profit News

As you know, we look for good articles and bring them to you from publications across the country. Lately, we have been looking for articles on ways to deal with the tough economic times. Sometimes I don’t find what I want to share or it is not in the format I am looking for, so I am taking this on myself.

Over the past weeks I have been engaged in conversations with nonprofits, funders, and people who provide support services to nonprofit organizations. Anecdotally, I am hearing and seeing the following:
1) The larger or more financially sophisticated nonprofits revised their yearend 2008 and 2009 budgets and financial forecasts over the past few months. They have at least assembled contingency plans and many have restructured, even decreasing staff in response to anticipated drops in revenue. Many have also increased contacts with supporters but I have not heard the results of those efforts.
2) Most smaller or less financially sophisticated organizations, who have not yet developed many revenue streams beyond grants, look more to the cash they have in the bank than any forward looking cash forecasting. They are concerned that funds may drop off but are either being optimistic that it won’t hit them or are indecisive about how to respond.

My take, which is just one person’s opinion:
1) We hope that individual giving will hold up as the IU Center on Philanthropy tells us has happened in past economic downturns. At the same time, we have never seen a time where individuals and families decreased their spending so dramatically in such a short period of time.
2) Most foundations have lost about 1/3 of their asset value in the past year. They seem to have a couple options, not knowing how quickly or when the market will recover. 1) They can decrease their giving by the same 1/3 or 2) they can give more and decrease the funds that will be available in future years. An additional factor is that foundations who make multi-year grants have already committed substantial funds for the next year or two. That means that the funds available to grant for next year could be reduced by 50% or more for certain foundations. Some foundations are also reprioritizing their giving to put more emphasis on meeting basic needs in their communities.

How can you respond?
- Have a staff person work with a financially skilled board member to forecast your cash situation for the next year. Make sure to separate restricted and unrestricted funds.
- Examine purchasing decisions and defer what you can. Leave open staff positions unfilled as long as you can without decreasing program quality or revenues and explore hiring experienced part-time people versus less experienced full-time.
- Expand your financial options – open a bank line of credit if you can; decide how far you are willing to dip into reserves if you have them; approach major supporters about special gifts or loans to weather this time; keep communications open with your donors and ask for their support.
- Again, get your finance/accounting people from board and staff together to match revenues to expenses for each of you program areas. Look at it from a fully allocated standpoint but also from the standpoint of what the actual decrease in revenues and expenses would be if the program were discontinued – certain expenses would not go away (facility, shared staff) and some unrestricted funds could be released for other programs.
- Assemble contingency plans – either based on your cash forecast or two targets – perhaps anticipating 10% and 30% reductions in revenue. View this as an opportunity to review your processes and test some of your assumptions for how you deliver services.
o What programs are most important to your mission?
o What programs provide the strongest outcomes?
o Which programs pay for themselves?
o Which programs are you always substituting and questioning why you are still providing them?
o If you could only run one program, what would it be?
o Since staff costs make up 60-80% of the budget of most nonprofits, you need to decide now what positions would go first and which are most critical to keep filled and those people well supported.
o Are there options to outsource certain functions or share a staff person with another agency?

We welcome your feedback and comments. Also stay tuned next week for Part II “What if you don’t see a way to responsibly move forward?”