Your Financial Readiness for COVID-19

Your nonprofit is so much more than just a business. But it is a business, with income to collect and bills to pay. Unfortunately, many nonprofits are at extreme financial risk over the next few months, and most are not prepared to meet the challenge. 

For nonprofits that have struggled in the past with cash flow, the numbers may be worse than usual, but the skills for addressing the situation are likely in place. Nonprofits more accustomed to relative financial stability may be finding themselves in profoundly unfamiliar territory. Leaders of these organizations must start asking unfamiliar questions, using unfamiliar financial tools, and defining bottom lines they never thought they’d need—so that they can be ready to make very painful decisions.

Assess Your Financial Readiness. Nonprofit leaders must start by candidly assessing their access to and comfort with financial information. Ask yourself: 

• Am I receiving timely financial information about both income and expenses? 

• Have I seen an updated monthly cash flow projection in the last two weeks? 

• If not, and I asked for it, could I get it by tomorrow? 

• Does the Board—or at least the Board chair and treasurer—understand our financial situation? 

• Am I prepared to explain to others our current financial status, the strategy we’ve been pursuing and what needs to change?

Many nonprofit leaders won’t be able to answer each of these affirmatively. But if your organization may be at financial risk, you do need to get there—fast. 

Sophisticated financial acumen is not generally valued as an essential quality of nonprofit leadership, so it makes perfect sense that so many nonprofit leaders are not strong financial strategists. If this is true for you, GET HELP! You need the active participation of someone with the skills to help you navigate the financial aspects of this crisis. This could be a senior staff person, a board member or an outside adviser. Worst case, email me. But don’t put yourself in the position of making critical decisions without fully understanding the financial implications.

Define Your Bottom Line. 

Determining your organization’s most essential objectives is vital to making extremely hard decisions and to equipping others to understand those decisions. Will you prioritize retaining staff as long as possible, keeping the nonprofit in business, continuing to serve constituents or ensuring that the organization’s most important work survives? Last month, these were all mutually reinforcing, but that may no longer be the case. 

Whether or not your objectives are realistic depends in large part on the larger social and economic context that we’re all just beginning to wrap our heads around. Despite the extreme uncertainties, you still have to make some educated guesses about what the future will look like. A goal of keeping staff employed throughout the crisis means very different things depending on whether you anticipate the crisis will last two months or twelve. However flawed and provisional your assumptions may be, they provide an essential lens through which to assess your nonprofit’s financial situation and then to update your plans. 

Update Your Financial Plan. You had a plan for the year—a budget—that encapsulated a set of goals, expectations and assumptions. Now you have new goals, expectations and assumptions, so you also need a new plan. Like your budget, the new financial plan has three main ingredients—money in the bank, income and expenses. Unlike your budget, the new plan will need to be much more dynamic, able to adapt in a rapidly changing environment. 

Your essential financial tool will be a cash flow projection (an example can be found here). The cash flow projection allows you to see how money in the bank, expenses and income interact on an ongoing basis. This enables you to respond effectively to evolving circumstances. The tool also allows you to forecast potential impacts of different decisions and events. 

Managing the three ingredients. Financial crises require an aggressive reckoning with money in the bank, income and expenses. Here are just a few aspects of each to consider:

Money in the bank. Normally, a cash flow projection should exclude both donor restricted funds intended for future time periods and funds that have been designated as reserves. Such limitations may be counterproductive if survival is on the line. Authority to make such funds available will normally rest with the Board of Directors or the funder who imposed the restrictions. 

Income. Of course, there’s probably nothing here that you haven’t already considered. But just in case. . .

Relief funds. The federal government is rolling out a $2 trillion relief package with a substantial portion intended to support small employers. Find out whether you qualify either directly or through state or local intermediaries.

Pledges and receivables. In the normal course, you may wait patiently for donors, government clients and others to get around to honoring their commitments. Now, consider pushing for payment.

Loans. Wealthy supporters and foundations may be willing to provide emergency loans, particularly if you have a good financial track record and solid prospects for income post-crisis. If you own property or other assets, they can serve as collateral for commercial loans. You may also be able to borrow against or liquidate contract receivables.

Foundations. The philanthropic community is stepping up in meaningful ways to support nonprofits. Many are offering emergency operating support. A number have publicly committed to do so, many others may be willing to if you ask. If you have preexisting relationships with funders, your chances improve.  

Existing donors. Donors who were planning to give later in the year may be willing to advance their gifts. Some may be willing to increase gifts. Ask. 

New opportunities. If you haven’t previously needed to prioritize fundraising efforts, giving this your attention could be significant. Think broadly about who values the work that you do, whether or not they’ve supported you in the past. Be creative, but also realistic: brand new income from brand new sources is a long shot. Make sure you’re using your time and energy where they’re most likely to have the biggest impact.

Expenses. Some payments for expenses may be deferred. Deferring payments may buy you time to get to a point where income rebounds while limiting painful cuts. If you do have to make substantial reductions in expenses, do so consistent with the bottom lines that you’ve set. 

Compensation. Before you start laying off staff, consider benefit reductions, salary reductions or partial furloughs. Consider options that spread the burden as evenly as possible or that are disproportionately borne by senior staff.

Program costs. As you formulate cash flow projections, incorporate the fact that as the organization does less work, it may be spending significantly less money (no travel, canceled events, etc.). 

Rent. Occupancy costs can be substantial. Landlords may be willing to defer some or all of your payments. Review the lease, discuss with a lawyer and then consider your options.

Both deferring and cutting expenses may have legal consequences. Do not make these decisions without the benefit of competent legal advice. Many state bar associations provide nonprofits with pro bono legal support directly or can help you to make connections. If you can’t find anyone to help through a personal connection, start cold-calling (or emailing) law firms and ask to speak to the pro bono partner.

Leaders—Not Accountants—Own Financial Choices.

Nonprofit leaders often prefer to view financial decisions as technical. This is almost always wrong. Financial choices are shaped by priorities, values and approaches to risk. As a result, they can be difficult, emotional and consequential—the type of decisions that require the full engagement of accountable leaders.

At the same time, do not carry this by yourself. Take advantage of the financial expertise you have on staff. Engage members of your Board, particularly the Treasurer and the Chair, who can also carry accountability for these decisions. Seek outside help if internal support is inadequate.