Is your nonprofit recession ready?
7 Steps to securing the future of your organization
Do you want to know the good news?
The economy is growing faster than it has in years. The United States GDP and equity markets are in their ninth straight year of expansion. Foundation endowments, the assets of individual donors, the investments of many nonprofits: all have been steadily growing for almost a decade. Which means that however hard you and your team are working, your current challenges are happening in a time of relative and sustained plenty. Especially for nonprofits that rely on private philanthropic funding: these are the good times.
But with two-thirds of economists in the U.S. expecting a recession to begin by the end of 2020, the good times may end sooner rather than later. If a flood is coming, it’s time to build a boat.
If you aren’t sure how your organization should respond to a downturn, now is the time to plan. Preparing for a recession takes work but trying to do it during a shrinking economy is much harder. We remember the last few recessions and what it took as Executives to steer our organizations through them. If you want to be ready for bad news when it comes, we’ve got seven steps you can take right now to help make your organization recession ready.
1. Anticipate and craft the narrative
The story you tell about your organization and the importance of its work is going to sound different in bad times than it does in good. Think through how to make the case for what you do in general – and what you will do specifically – when the weather turns. Was your fair-weather pitch all about the future glories of growth, expansion, and serving more people? That’s going to sound jarring when everyone’s investment advisor is running around like their hair is on fire and the front page is full of stories about whether western civilization is falling into the sea.
You will still need to motivate and inspire during hard times. More than ever, you will need a compelling story that fills people with inspiration and urgency to act. You need to show your donors and staff that there is plenty about your organization to be excited about. Don’t let yourself be defined by the things you can’t do or have stopped doing now that the weather has turned.
2. Run Scenarios
No one can predict the future, but you can make some pretty good guesses. Take your budget projections and start running bad news scenarios. If the stock market tanks, donors and foundations will see their own assets shrink. It’s likely fundraising revenue will take a hit. Some ways to run the numbers:
- Let’s say people say yes to you 50% of the time that you ask them for gifts, what happens if they say yes only 25% of the time?
- If your multi-year pledge pipeline is looking pretty good now, what would happen if 10-20% of those pledges were canceled?
- What would happen if payment on 10-20% of those pledges were delayed by 12-months?
Some donors plan to make gifts from the sale of assets. But if the asset’s value is depressed, markets are suddenly illiquid, or buyers are running for the hills, your donors may look to postpone their giving until better times. Even donors with liquid cash may use it to weather the storm themselves or to strategically acquire things they see as undervalued.
If the past is prologue, you can expect that a good number of fair-weather friends will walk away from your organization when times get tough. But the donors and allies most invested in your work will stick around. It is likely you already have a gut sense of who is in this second group. It’s worth talking to them explicitly about what will happen when a recession hits, and how the organization will respond.
Believe it or not, some of your more loyal and invested donors will be open to increasing their giving in a recession, in part to counter-act retrenchment elsewhere. Of course, they will be more likely to do this if they’ve heard a compelling narrative and had time to get used to the idea.
3. Get back to mission-critical
If the economy contracts you may have to as well. If you don’t want to make cuts that undermine your mission, what can you do?
First, get clear on what is central to your mission. It may be a lot harder to outsource or reduce these activities because they are what makes your organization unique. It’s easier to scale back the activities that are less necessary or more experimental. In an expanding market that has people feeling optimistic experimentation is great for attracting the attention of new donors, creating innovation, and inspiring your staff. In a market where your operating budget is getting smaller and people are generally risk-averse, activities that suck up cash without bringing in revenue are activities you should consider scaling back or taking an intermission on. Be clear on what is core to your mission and alternatively what you can hit pause on until the situation improves. What does ramping down look like for your organization?
Remember, you won’t be the only ones falling back to your core. If history is any guide many foundations and grantmakers will experiment with new and innovative programs in the good times but will retreat to the tried and true during the bad times. Don’t be a fair weather friend yourself. The deeper your relationship with your foundations, the more likely you’ll be able to count on them when things get tough.
4. Make Fixed Costs Variable
In every organization, there is a chunk of costs that you can’t really change or get out of in the short term. The biggest one is your people. Layoffs are incredibly disruptive, painful, and demoralizing, even when done well. Fortunately, there are other ways to reduce your commitments as the storm hits.
Review fixed costs like rent and facilities. Long leases may save you money but also represent big liabilities. Three months into a recession, you may happily want to take office space at less rent, but if you are stuck into a multi-year lease, there may be little room to maneuver. Month to month leases may be more expensive in the short term but easier to get out of.
Another option for reducing your commitments is to review ways to outsource activities. Consider this for less mission-critical work where outsourcing would be less expensive and won’t compromise your short-term ability to have impact. Examples relevant to your organization might include human resources, design, website hosting, technology, marketing, or bookkeeping. By outsourcing, you can create more flexibility to scale your level of investment up or down as appropriate.
5. Build Cash
Build a healthy cash reserve in the good times. Once things go south, it’s too late. Did we mention? These are the good times.
For most organizations we know predicting how much revenue they’ll raise next year is an inexact science. We’ve seen many organizations make reasonable projections that later looked wildly optimistic when the stock market crashed three months into their fiscal year. In general, if you’re conservative about the money you project to raise next year, you’ll be in a better spot if the economy turns. Of course, if things go well you can save some or all of that surplus as a cash reserve.
It’s not easy to say ‘no’ to worthwhile projects in order to put cash in the bank. But remember: once the recession hits you can’t help people outside the organization if you can’t make payroll.
How Room40 Can Help
Did one of these steps made you say ‘uh-oh’? Not sure how your organization’s current strategy makes sense in the context of a howling recession? Don’t panic!
Room40 Group can help you with any and all the above. Our founders and principals helped navigate nonprofits through the worst of past recessions and out the other side. We can help you figure out the best way for your organization to face any number of challenges and make plans that will help you feel much better about the future. Get in touch!
6. Take advantage of someone else’s money
Another way to build a cash reserve is to borrow it, especially while circumstances are good. The best time to set up a line of credit is when you don’t need one. Banks need people to borrow and are far more likely to agree to favorable terms when demand for these services is low. In good times banks offer all kinds of incentives to borrow. These incentives disappear with lightning speed once the bad times arrive. If you don’t have a line of credit, now is the time to talk with your financial advisor about finding a loan that’s a good fit. If you do have a line of credit, consider negotiating for a larger limit.
In addition, pre-recessions are a good time to renegotiate your payment terms with your vendors. If you have a vendor that you pay every 15-30 days, see if you can arrange to pay every 60 days. If you ever find yourself in a tough cash position, then having flexibility here means you can hold onto cash longer and have more time to get gifts in before the bill is due. People are more likely to give you favorable terms in a good market. Once things go south your vendors are going to start looking to speed up their own collections.
Stress and isolation for nonprofit leaders are already very real and difficult parts of the job. Fair warning: they don’t get better when the future of your organization is in question.
We’ve talked so far about things you can do to prepare your nonprofit for recession. Equally important is your plan for how you are going to take care of yourself. Those of you who were leading organizations in 2002 or 2008 likely remember the stress and trauma of keeping things going when the American financial system went up in flames. It’s taxing to be the one providing stability and a way forward for others in moments of chaos. So, finding ways to manage your stress and take care of yourself is just as important as anything else you could do for your organization. If how you talk about your organization to your staff and donors is reflective of your stress and fear, then it’ll be that much harder for your message to inspire and motivate.
Do you have a mentor you can turn to? Can you identify healthy ways to manage stress that work for you? How can you make time for those activities or people even when you are completely slammed? Build the supportive network and the practices in the good times that can bolster you in the hard times.