Financial Leadership in the Face of Impossible Choices

• March 18, 2020
• Curtis Klotz

Nonprofit health care, social service, and mental health organizations are deeply engaged in the response to the COVID-19 pandemic, selflessly treating those who have become ill, supporting their loved ones, and consoling the families of those who have died. Perhaps less obviously, we also rely heavily on many other nonprofits whose steady presence quietly shores up and stabilizes our communities in the midst of such distress – community centers, arts organizations, afterschool programs, food shelves, and senior drop-in centers, to name a few.

Widespread closures and service interruptions can make this vital work even more challenging. Financial instability following in the wake of the crisis can threaten the funding that supports these vital organizations right when we need them most. Today’s realities could discourage even the most resolute nonprofit leader. You may be forced to consider reducing personnel costs, decreasing or delaying program activities, or taking other drastic measures just to keep your organization afloat.

Financial leadership during times like these requires an unflinching look at your current fiscal state and a willingness to seek and share solutions across your whole organization. Holding true to your mission will guide you towards thoughtful, compassionate, and effective decisions in the midst of hardship. To help, we are offering you a few simple financial tools and some creative approaches to navigate otherwise impossible choices.

A history of past social and economic disruption

As a long-time nonprofit CFO, I have lived through and led through the tech bubble bursting in 2000, the fiscal aftermath of 9/11, the Great Recession triggered by the sub-prime mortgage crisis in 2008, and, in Minnesota, the 2011 state government shutdown that threatened many nonprofits heavily reliant on government contracts. Each occasion taught us valuable lessons. Faced with an unprecedented challenge like the current viral pandemic, your ability to provide adaptive, creative, and considerate financial leadership will be more crucial than ever.

Financial tools focused on the future

In each of the past downturns I experienced, at some point my organization faced tough choices about cutting costs to remain open. In each case, we needed to have an accurate assessment of where we stood in the present to plot our future carefully. I learned early in my career as a nonprofit CFO to use a simple spreadsheet like this one from Propel Nonprofits to map out cash flow over the upcoming six to twelve months. In practice, the process looks a lot like budgeting. However, because your cash position is so important in challenging times, the estimates you enter into the spreadsheet must be cash figures. Your entries must be accurate projections of the actual cash you are certain to receive and the actual dollars you expect to pay toward expenses. As hard as it will be in uncertain times, your estimates must be bluntly realistic. Stick to what you know is certain, not what you hope will be. Then use the truth of what you see to form strategies to fill funding gaps and/or cut costs.

In the examples below, you will notice line items for cash expenditures that would normally not show up on a nonprofit statement of activities. Items like accounts receivable collected and mortgage payments (the principal portion) involve transactions that would not normally affect the income statement. Because these items involve cash receipts and cash outlays, you must include them to create an accurate picture of where you stand on a cash basis. Be sure to include these items when setting up the cash flow projection for your organization.

The gaps become your goals

A negative bottom line translates into a shortage of cash. No one wants to see trouble coming, but identifying it quickly allows you the chance to do everything possible to push it further out into the future. The example below shows that an expected shortfall of $45,161 is looming five months out. To solve for that one amount seems simple enough. Under normal circumstances, cutting expenses or raising additional revenue could solve that problem without major hardship.

Solving for one month may be only a partial fix, but it buys you some time. While your estimates for the most immediate future will be your most accurate, you are better off running out your cash forecast as many as twelve months. However, this is not divide-by-twelve math. You cannot simply take an annual figure and assume you will receive or pay out an even amount of cash each month. You must consider when exactly each bit of revenue is received as cash and when each bill must be paid. Very few revenue or expense items actually meter out uniformly month-by-month.

In the example below, you can see that the $45,161 shortfall predicted in July balloons to a negative $387,915 by February. You need to see both the short-term and long-term views. The measures you take to counter the initial shortfall may be too little to make much difference if you are facing a far larger shortfall just six months beyond.

You have revenue levers and expense levers – use them both

Your cash projection should include only sure sources of funding that you know are on the horizon. Because the financial impacts of the current crisis are universal, you will want to be in close contact with your donors. Your ability to plan effectively depends on the accuracy of your estimates. Make no assumptions based on how revenue came in previously.

Once you have a reliable picture of your upcoming revenue streams, you can look for ways to bend it in your favor. If you are aware of payments from predictable funders scheduled more than a year out, one strategy is to approach them about granting their contribution early. Though many of your regular contributors and grantors may be facing financial stresses of their own, never underestimate their willingness to help if they can.

Another way to make foundation grants available ahead of schedule is to ask current funders to release any restrictions they have placed on your grant – both time and purpose restrictions. During times like these, you can be certain that your funders are aware of the extraordinary circumstances. If asked directly, most of your funders would consider themselves supporters of your organization’s long-term survival. Sharing the truth about your emergent situation may offer you an opportunity to expand and deepen your relationship with them – and get them to free up the money.

Another strategy is to approach individual contributors with a direct request to help fill all or part of the funding gap you have identified. Individual donors often respond well to this sort of clarity and transparency. Taking a “we’re all in this together” approach to fundraising in difficult times gives others a chance to participate in solutions they might not be able to effect on their own.

Extraordinary humans are the heart of the nonprofit business model

Most of the amazing work that nonprofits do is the result of having wonderfully dedicated staff. For many nonprofits, the combined line items for staff salary and wages, along with the accompanying benefits and taxes, are the largest expense category for the organization. Because of the relative size of this expense grouping, many nonprofits look to personnel as the first place to cut when finances tighten. At a glance, eliminating positions reduces expenses dramatically and efficiently. You may indeed have to go there when faced with impossible choices, but this is one area where your organization can hold to its values in powerful ways if you think creatively.

Do everything possible before cutting staff

While personnel may be the first place to look when cutting costs, you should explore other line items for savings, too. Cancelled events affect both expected revenue and expenses. Be sure to adjust your thinking about the expense side of each postponement or cancellation.

Another tactic to control your cash flow is to monitor your accounts payable aging report. Delaying payments to certain vendors or arranging a payment plan with them is a useful way to influence the amount of cash you are expending on a daily or weekly basis. You must consider, of course, the impact any delays might have on your vendors. Small businesses and sole proprietors are often more vulnerable to slowed payment streams. You may also consider where your vendors are located. Economic downturns have historically affected small businesses owned by persons of color and situated in communities of color more harshly than businesses in other communities. Choosing which vendors to pay and in what order is another opportunity to express the principles your organization embraces.

When you do eventually turn to personnel expenses, the first tool to use in keeping personnel costs down is to leave any open positions unfilled. Vacancy savings are a real, if obvious, way to contain costs. This is especially useful if the budget you have been working from had future expense built in for new positions.

Another tool for reducing costs is to look at all the related benefits layered on top of your salaries and wages. If your organization contributes any amount to employee retirement plans or health savings accounts, consider amending your plans to eliminate or greatly reduce the employer contribution. Yes, this reduces compensation, but most employees will appreciate the effort to sustain their employment over the long run in exchange for temporary reductions in benefits. This includes looking at other lesser benefits as well, such as paid parking or public transportation benefits. You should do the math to see if these auxiliary benefits can provide cost savings sufficient to avoid cutting staff positions.

If you have to cut staff salaries, be compassionate and creative

If drastic cuts in personnel expenses really do represent the only way to keep an organization alive, then explore ways to share the sacrifice across the organization. When facing something as all-encompassing as a global pandemic, many of us understand and expect that we are going to have to share the burden. If handled thoughtfully, how a nonprofit approaches the ensuing financial hardship could actually boost morale. Short of laying off individuals, you could try implementing alternative salary-saving initiatives that distribute the impact more equitably across the whole organization. Rolling furloughs, universal part-time hours, and temporary leveling of salaries are three creative cost-saving measures that would send a powerful message about the organization’s commitment to its staff and the belief that the organization’s financial health is a shared responsibility. You and your organization should weigh any of these temporary measures against your own culture and values. These options are only some among many choices and combinations that might offer a solution that aligns with your mission and principles.

You can implement rolling furloughs in a number of ways. One is to give all employees one week off without pay per month, staggering which employees are off at any given time. Employees receive less than their regular pay, but they also receive more time off than usual. It does not ignore the financial impact, but the time off is at least a symbolic acknowledgment that all is not normal. This method would save 25% of total salaries and some portion of benefits and taxes. There are many configurations of this basic idea. You could give two weeks off to all staff once every two months, similarly staggering which employees were out at any given time. The resulting cost savings would be the same.

Establishing universal part-time hours is another way to reduce salary expense in an egalitarian fashion. Moving all staff to a 30-hour workweek would bring the same 25% salary reduction as the rolling furlough example above. You can play with the calculations to create the needed cost savings.

Temporarily setting all salaries to the same level is the most far-reaching of any of these suggestions. The example below assumes an organization of eight employees where the CEO makes $150,000 and the lowest paid staff person makes $45,000. Leveling salaries across the board would provide over 50% savings in personnel costs. This tactic demands the most sacrifice at the top of the organizational pay scale. It also inherently honors the fact that the lowest paid staff are likely to be the most vulnerable in any financial downturn of significant duration. 

Inventive strategies still have regulatory limits

Of course, be sure to consider each of the strategies presented above within the context of wage and hour laws and unemployment regulations particular to your state. In some states, reducing employee salaries or their hours may trigger special labor requirements or unemployment eligibility concerns. At the same time, state and federal agencies are adapting to the crisis as well. There may be special programs available to you and your employees that extend unemployment benefits or offer other financial relief in response to the crisis. Knowing the details of employment regulations will help you decide which, if any, of these creative approaches are right for your organization.

Financial facts, your mission, and innovative solutions  

As nonprofit leaders, you are being asked to respond to human suffering, act as anchors to communities in crisis, and sustain your own staff and organizations with few and potentially diminishing financial resources. To survive these uncertain times, take a courageous, clear-eyed look at your current financial state and the knowable future. Where drastic measures are indicated, you have the opportunity to stay true to your mission while acting prudently and compassionately for the sake of both our communities and your organizations. Your hard work and devotion are appreciated. We are all in this together – for the duration.

 

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