Dodge TA: Fiscal and operational strength through COVID-19

In these unprecedented times, nonprofit organizations are experiencing many challenges, including sudden changes in service delivery, shifting workforce configurations, and potential losses across multiple revenue streams.

Leaders attempting to navigate this new reality are finding their organization’s financial health and sustainability to be at risk. As you take stock of the situation and begin to chart the course forward for your organization, it is critical to stay mission-focused, care for your community, and ensure effective and responsive leadership. Equally important is a focus on financial management. This includes efforts to:

  • Understand your organization’s current financial position,
  • Identify implications to revenue and expenses, and
  • Manage your cash flow.

Understand your organization’s current financial position

When we say current, we mean at this moment. While having an audit from last year or even financial statements from last quarter is useful, you still need to calculate where you are now.

First understand where you are in terms of net assets, which are resources you’ve accumulated over time that are available for current and future operations. What do you own and how quickly can it be converted to cash? Are your net assets restricted or unrestricted?

The liquid portion of unrestricted net assets, i.e. Liquid Unrestricted Net Assets or “LUNA,” is the most important category to assess. LUNA is the amount of cash, receivables, and liquid investments that an organization has on hand that is not restricted as to timing or donor intent, and the most critical tool available to your organization to weather a crisis. In addition to calculating LUNA, it’s also important to understand funder expectations around restricted net assets. Are you in a position to meet those expectations? If not, is there a possibility the funder may be open to revising the terms of those agreements? 

As you assess your financial position, determine the status of any accounts receivable. Who owes your organization funds? Is it likely they will pay you or not? Communicate with every partner and funder with the goal of getting a realistic understanding of whether that money will be coming in and when to expect it. Accounts payable are also key. To whom do you owe money? Are your vendors offering extensions or forgiveness on bills customers may not be able to pay? Communicate with your vendors, keeping in mind that these may be long-term relationships.

Identify implications to revenue and expenses

Revenue is either earned (e.g., tuition, program fees, ticket sales) or contributed (e.g., donations or grants). For cultural institutions that rely on ticket sales and other fees, understand the revenue implications of a prolonged shutdown. Examine your sources of contributed revenue as well. Now is the time to turn to relationships with existing donors and understand if it’s possible for them to release restrictions on grants, or whether they would consider an emergency grant of unrestricted funds. Think about whether it makes sense to engage your community in new fundraising strategies and what that might look like. In addition, various emergency relief funds—government-funded stimulus packages as well as philanthropic efforts—have been established. Explore how to access these funds and whether your organization qualifies.

Workforce-related expenses, including salaries and benefits, often comprise up to 80 percent of a nonprofit’s expense budget. Think through the options for workforce shifts or reductions, keeping in mind any accrued paid-time-off that may be due employees. As you consider changes to your workforce, think strategically about retaining capacity for post-crisis and apply an equity lens to all decisions. For goods and services other than personnel, understand what costs are fixed over time (e.g., rent and insurance) and which are variable (e.g., supplies and travel) and will be reduced in the short-term as activities are curtailed or moved to virtual.

Once you’ve thought through these basic implications, gather a team of leaders at your organization and create best, moderate and worst case scenarios based on likely revenue. Compare each scenario to projected expenses. If you’re not already set up with a scenario planning tool, this simple Excel template can help you get started.

Manage your cash flow

Now is the time to make sure you’re monitoring your cash flow as precisely as possible. We know many organizations do not have reserves to fall back on, but all have money coming in and out. The ebb and flow of cash projections will tell you when you’ll need to draw on your reserves—if you have them—or when you need to start planning for contingencies. If you’re not yet projecting cash flow, here’s a simple template and video tutorial to get you started.

For organizations without sufficient reserves, accessing a credit line or other financing tool is another possible route. But understand that this is debt and you’ll need to have a plan to pay it back. In addition to bridge loans from philanthropy and low-interest loans from community development financial institutions, the Small Business Administration (SBA) is also making loans—some forgivable—available to nonprofits. For information and support related to applying for the SBA’s Paycheck Protection Program, access this toolbox of resources.   

None of us can know what direction this public health crisis will take or how long it will last. In order to navigate through these unprecedented times, it is critical for leaders to have a solid understanding of their organization’s current financial position as well as a range of scenario plans to put into action when needed.

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