Decision-making Framework

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Philanthropy Journal Webinar NONPROFITS AND THE
ECONOMYCOPING TOOLS FOR TURBULENT TIMES Paul
Bennett Director of Analytics Nonprofit Finance
Fund www.nonprofitfinancefund.org Dec. 11, 2008
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Recession How Can We Prepare?
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NONPROFIT FINANCE FUND (NFF)

• NFF connects nonprofit finance to nonprofit
  success
• Serving thousands of nonprofit and funder clients
  nationwide since 1980
• 175 million in loans over 1 billion in capital
  leveraged for nonprofits
• Over 500 customized financial consultations
• Hundreds of strategic partnerships to advance the
  nonprofit sector
• Thought-leadership to advance friendlier funding
  practices across the nonprofit sector
• Experts in nonprofit finance
• Nearly 30 years of experience as a 501(c)(3)
  Community Development Financial Institution
  (CDFI)
• Serving nonprofits nationwide from seven local
  offices
• New England Boston, New York
• Mid-Atlantic Philadelphia, Washington, DC,
  Newark, NJ
• Midwest Detroit
• West Coast San Francisco

Were in the business of helping nonprofits run
better. Clara Miller, NFF President and CEO
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What is a Recession?
DOWNTURN
RECESSION
DEPRESSION

• Short-term decline in economic activity

• Significant decline in economic activity spread
  across the economy, lasting more than a few
  months
• Usually visible in real Gross Domestic Product
  (GDP), real income, employment, industrial
  production, wholesale-retail sales
• The National Bureau of Economic Research (NBER)
  ultimately decides whether the economy has fallen
  into a recession

• Longer, more severe recession
• Loosely defined as an economic downturn where
  GDP declines by more than 10

The start of a recession can only be seen in the
rear-view mirror
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What Happens to Nonprofits in a Recession?

• Nonprofit Finance Fund studied the financial
  health of 6,500 mid-sized nonprofits to analyze
  the effects of the 2001 recession on their fiscal
  year-end data
• Economic hardship was widespread in the nonprofit
  sector during the recession
• Over 40 of sampled nonprofits reported deficits
  from 2001-2003

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More Nonprofits Experience Deficits During and
After Recession

• Over 40 reported deficits from 2001-2003
• Nonprofits suffering deficits grew by 20 in 2001
  from the previous year

Recession
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Nonprofit Expenses Outpace Revenue During
Recession

• Rate of growth in expenses generally exceeded the
  growth in revenue from 2001-2003. Organizations
  may have provided more services than they could
  afford in response to increased need from
  constituents.
• It was not until 2004 that both revenue and
  expense growth rates realigned

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Recommendations For Nonprofits In Recession

• Review and optimize cash deposit risk,
  concentration of investment risk, and
  concentration of revenue risk
• Avoid fake it till we make it behavior and
  sustained spending, which weaken nonprofits even
  in good economic times
• Consider how to get by on decreased revenue
  before increasing expenses
• Engage with board members and funders in
  contingency planning on how to respond to higher
  demand for services
• The goal is to ensure you stay afloat to serve
  the community
• This may mean partnering with other
  complimentary organizations
• Avoid large investments in fixed assets and
  infrastructure (e.g., a building purchase, new
  hires or expansion of services)
• To the extent possible, work with funders and
  the board to build a cash cushion to allow
  flexibility and course corrections
• Consider ways to diversify revenue, if once
  reliable sources seem questionable
• Avoid over-diversification (i.e. new business
  lines) that can increase risk
• If the organization offers services that will
  lessen the negative impact of a recession,
  approach government funders more aggressively for
  support

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Asking the Tough Questions
PROGRAMMATIC What are the programmatic priorities? What will current and prospective funders support? How will the organization respond if there are not reliable sources of revenue (contributed and earned) for all programs? How important are deficit programs to our mission? FINANCIAL/MANAGEMENT Is financial/programmatic information available for management in a timely manner? How accurate and agile is the decision-making culture? Do management and the board hold each other accountable for achieving agreed upon goals? Are responsibilities clearly stated? Which programs contribute to the bottom line? Which need the most general operating support to subsidize the gap between total expenses and direct revenue? Will there be an increase of demand on our services? If so, how will growth impact our fixed versus variable cost structure? What can we deliver without adding administrative or other fixed costs? What is the cost of each additional client served?
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information www.nonprofitfinancefund.org