By Molly Penn
Planning for a recession is not a topic anyone wants to talk about, but history does have a way of repeating itself. The Covid recession notwithstanding, we are due for another, and pundits are making noise that we may be there already. So what can you do, as a nonprofit, to plan for a recession? Here are 10 tried and true strategies:
- Build your think tank
Leaders need thought partners – find a few people in your organization who are savvy about money to help you think through a recession plan. Beef up your bench on the finance committee with specialists in related areas like downsizing or even bankruptcy as a tool for recovery. Also, recruit some close colleagues to form a regular network you can touch base with to share strategies for managing through the recession.
- Center the needs of those you serve
What will your constituents be facing if we head into a recession? What will be their most important or pressing needs? How might you barter your services with others to be there for your constituents during this time of need? Recessions can often be a time to think strategically about partnerships to ensure that you can take care of your constituents. They may have needs you don’t address, so can you partner with another organization that does address those needs so you can ensure they remain safe through the recession?
- Review your budget
Look for places where you can cut back on unnecessary expenses. We use a tool called a Mission/Money Matrix, which plots your main program activities on a 2×2 matrix, with profitability as one axis and mission impact as the other. It is important to fully load the expenses of your programs, with pro rata portions of staff, benefits and overhead. Do a risk/benefit analysis of what you will gain or lose by making certain cuts. Keep reviewing the budget on a regular (and more frequent than usual basis) – look for patterns of expenses that could be cut back or redistributed for greater effectiveness. Monitor your revenues closely – forecast out the timing of various contributions so your cash flow management is secure.
- Minimize your debt
Many organizations, particularly those with large government contracts or grants, use lines of credit to manage their cash flow. As interest rates are predicted to continue rising, the cost of debt will continue to grow. Therefore, anything you can do to pay down, reorganize or minimize your debt early and reduce the amount you are carrying will be a benefit to both your balance sheet and cash flow. Obviously, don’t put yourself in a position where a cash flow crunch will wreak havoc with your sustainability, but try to reduce your debt where possible to reduce your exposure to rising interest rates.
- Embrace adaptability
You may not be able to offer all of the programs and services you did before the recession. Be open to how you might pause or temporarily shut down some programs in favor of others that are more resonant during times of need. Prepare for how to redeploy your fixed staff costs in programs you anticipate pausing (see our note above about the Mission/Money Matrix).
- Build Your Reserves
Anything you can do to build up your reserves will be hugely beneficial. Best practice is six months of carrying costs in reserves. Most nonprofits have around 3 months of carrying costs in reserves. If you have capacity building funders, now would be a good time to request that some portion of your grants be allocated to building your reserves to ensure consistency of service during a potential recession. Even if you already have open capacity building grants where you’ve told the funder they were for something else – you might want to talk to the funder about reallocating a portion of the funds to reserves to prepare for the recession.
- Talk to your Staff
Your staff will know that a recession is coming – so talk to them – share with them all the things you are doing to be prepared. This will help them realize that you are being cautious –if the worst happens and you have to make cuts – it will not be for lack of planning. If you have reserves and can afford it, you might even go the extra mile and get a financial counselor to come spend a day or two on site to offer planning advice to staff on their personal finances.
Every time we do strategic planning with organizations, the final component is reviewing how the plan will affect the organization’s budget over the next 3-5 years. What seems reasonable to expect in terms of funding growth, what can the organization invest its own money in, and what will you need funding to achieve? Consider various possible scenarios of what happens in different severities of recession. Take the extra step of casting out financial scenarios as well so you have a sense that you’ve thought through every possibility with a level head before you are faced with a crisis.
- Share your plans with your donors!
Your donors have faith in your mission – they have invested their hard earned money or the assets they steward in your success. Let them know that you are planning for this and being a smart and careful steward of their precious gifts to you. This will go a long way in building their confidence in your leadership – and you never know how they might surprise you!
- Diversify revenue streams
If you didn’t before, it’s not too late to think about diversifying your revenue streams. Individual annual fund donors and corporations will likely feel the recession first, so you might see them starting to cut back. Prioritize institutional funders and major donors (who tend to be more recession proof) in the first year! It usually takes about a year for funder portfolios to start to fall, in turn causing them to cut back their grantmaking. Even though your lower level individuals might start pulling back, now is a great time to start investing in deepening your individual giving program – either more smaller gifts, or fewer gifts that can be significantly increased.
Talk to us if you need a thought partner to help you build your plans to weather the recession.