Post on 28-Mar-2015
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Navigating the Navigating the financial stormfinancial storm
2009 National leadership 2009 National leadership conference conference
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What We’ll CoverWhat We’ll Cover
Today’s Economic Landscape What’s happened and what’s going to happen How it’s affecting nonprofits at large, and your
organizations
Fundamental Principles of Fiscal Management How they can help you stay on course in this
recession
Practical Strategies You Can Use Developing smart strategic responses Tools to take your pulse and keep you grounded
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What We Are FeelingWhat We Are Feeling
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Historical analysis does not guarantee future results.As of September 30, 2008Source: Federal Reserve, Haver Analytics, US Bureau of Economics Analysis and US Bureau of Labor Statistics
(10)
(5)
0
5
10
15
20
60 64 68 72 76 80 84 88 92 96 00 04 08
YoY
% C
hang
e
Recession Real Bank Credit
US Recessions and Bank Lending
Credit Expands After the Credit Expands After the Economy Has Rebounded, Further Fueling RecoveryEconomy Has Rebounded, Further Fueling Recovery
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Historical analysis and current estimates do not guarantee future results. As of December 31, 2008*Median value excluding Great Depression and current recession**AllianceBernstein forecast***Average excluding Great Depression and current recessionSource: Bureau of Economic Analysis and AllianceBernstein
Current Recession Will Likely Last Longer Than Usual
Most Recessions Have Been Mild and Short,Most Recessions Have Been Mild and Short,Except for The Great DepressionExcept for The Great Depression
Average*
Percent Decline in Real GDP
Average*** (2.2)%
16**
13
11
10
8
1011
6
16
16
43 Months
8
8
1929–1933
1937–1938
1948–1949
1953–1954
1957–1958
1960–1961
1969–1970
1973–1975
1980–1980
1981–1982
1990–1991
2001–2001
2007–2009
(26.5)%
(3.5)(2.7)(2.7)(3.7)(1.4)(0.6)(3.1)(2.2)(2.7)(1.3)(0.4)—
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Today’s Environment More Supportive Today’s Environment More Supportive of Eventual Recoveryof Eventual Recovery
Federal Deposit Insurance Corporation
Social Security
Coordinated Rate Cuts By Central Banks
Good Trade Relations Among Many Nations
Increase In Money Supply
Lower Tax Rates
Single Digit UnemploymentAs of December 31, 2008Source: AllianceBernstein
That Was Then(Great Depression) This Is Now
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Dealing With Today’s Economic Dealing With Today’s Economic LandscapeLandscape
• Business as usual won’t do anymore. It’s time to adapt and transform.
• Active engagement with today’s challenges increases your likelihood of emerging from the recession with important services in place.
• Going it alone won’t work. It is in working with others that leaders find the best ways to generate solutions and hope for the future.
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What’s HappeningWhat’s Happening
• Combination of Events Credit markets seized Stock markets plummeted Employment rate falling Housing and real estate markets in decline
• Impact on Nonprofit Organizations Downward pressure on government and
philanthropic funding Protectionist behaviors and general cost increases Limited and / or more expensive access to credit The bottom may take longer to reach for nonprofits
• All compounded by an increased need for services
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What’s HappeningWhat’s Happening
How Has This Downturn Been Different for Your Organization? 1980s “Devolution” of Services 1987 “Black Monday” stock market crash Early 1990’s Recession 1998 Credit Crisis 2002 – 2003 Recession
How Organizations are Responding Today Reducing operating budgets Putting expansion plans on hold Eliminating staff positions Merging or dissolving Dramatically transforming their business models
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How Is or Will This Affect Your How Is or Will This Affect Your Organization?Organization?
Transactional Changes: Revenue, Expenses, and AssetsRevenue
Government funding levels Individual / institutional contributions and fundraising events Fees from those who use your services
Expense Increases and cost pressures on many line items
Assets Could be financial or non-financial
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How Is or Will This Affect Your How Is or Will This Affect Your Organization?Organization?
Transformational Changes
Restructure, Reorganize, and Engage
Mission-based decisions
Strategic, operational, and cultural
Alternative service delivery strategies
Alternative staffing models
Alternative business models
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How Do I Get My Arms Around This How Do I Get My Arms Around This Situation?Situation?
• Prepare for a sustained economic crisis, but also…
• Convert fear to engagement and hope• There is power in acknowledgment – step beyond
avoidance• Know that the basics may not do it any more – you
may have to adapt to get through this
• But…there is hope and you don’t have to go through it alone
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Tool #1 – Understand Your Starting Tool #1 – Understand Your Starting PositionPosition
Start With an Honest Self-Assessment
Define what financial crisis looks like for your organization in objective, concrete, and practical terms…
…so that your organization’s leaders have a shared understanding about what must be avoided…
…and so that they buy into the need to mobilize to avert problems
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Financial Self-AssessmentFinancial Self-Assessment
• Ask Yourselves the Following Questions What has our financial track record been?
Are we operating from a position of strength or weakness?
What are our organization’s income sources and cost structures?
What kind of financial flexibility do we have?
How financially sophisticated is our board and staff?
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Tool #2 – Revisit the Fundamentals Tool #2 – Revisit the Fundamentals about Incomeabout Income
Financial health depends on having sufficient resources to fund stable programming.
What does this mean? Income fully covers program expenses Income is renewable: reasonably expected to
continue into the future Income is received from diverse sources to reduce risk
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Who Is in Control of Your Income Who Is in Control of Your Income Model?Model?
Self-Funding Those who use and benefit from services pay for them Client fees, tuition, advertising revenues, fees, donations
External Support Institutions or individuals who don’t use services but
provide support in order to underwrite services for those who can’t pay
Grants and donations
Independent Sources Products or services for sale to constituents or the general
public Space rental, gift shop, special editions
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Is This the Right Mix for Your Is This the Right Mix for Your Organization?Organization?
Is it reasonable to expect this mix will adequately sustain you in the future?
Are you reasonably comfortable with the degree of control you have over program funding?
Which sources do you want to grow?
Do you have the ability to convince these funders that your programs deserve their support?
Do your proposal budgets make the best possible use of the funds available through each funding source?
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Strategies to Maintain or Increase Strategies to Maintain or Increase IncomeIncome
Stay in close touch with customers, donors, and other key constituents
List in brainstorm fashion all the options available to you for protecting and / or increasing current income streams……and all the options for developing new ones
Articulate the principles that will guide your choices about options for further research
Research and select the best options: cost / benefit analysis and return on your investment
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Tool #3 – Revisit the Fundamentals Tool #3 – Revisit the Fundamentals about Cashabout Cash
Financially healthy organizations have adequate internal cash – or access to cash – in times of shortfalls.
Use your balance sheet to figure out what your cushion is:
Cash Receivables Line of Credit Reserves
If Your Balance Sheet Has… No cash or receivables A fully drawn line of credit Little or no reserves available
…then there is nothing to draw on in challenging times
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Prepare and Regularly Update a Cash Prepare and Regularly Update a Cash Flow ProjectionFlow Projection
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Total
Cash ReceiptsFees for Services -$ -$ 10,000$ 5,000$ 5,000$ 30,000$ 40,000$ 45,000$ -$ 10,000$ -$ -$ 145,000$
Grants, Contributions 15,000 - - - - 15,000 2,500 12,500 45,000
Other - 150 200 100 - - 1,000 - - - 1,450
Total Receipts 15,000 150 10,200 5,100 5,000 45,000 41,000 45,000 - 10,000 2,500 12,500 191,450
Cash DisbursementsPayroll 10,000 10,000 10,000 10,000 10,000 10,000 11,000 11,000 11,000 11,000 11,000 11,000 126,000
All other operating expenses 4,200 4,200 4,200 4,200 4,200 4,200 4,200 4,200 4,200 4,200 4,200 4,200 50,400
Capital purchases - - - - - - - 17,000 17,000
Total Disbursements 14,200 14,200 14,200 14,200 14,200 14,200 15,200 32,200 15,200 15,200 15,200 15,200 193,400
Cash Excess/Short 800 (14,050) (4,000) (9,100) (9,200) 30,800 25,800 12,800 (15,200) (5,200) (12,700) (2,700) (1,950)
Beginning Cash 5,700 6,500 (7,550) (11,550) (20,650) (29,850) 950 26,750 39,550 24,350 19,150 6,450
Ending Cash Balance 6,500$ (7,550)$ (11,550)$ (20,650)$ (29,850)$ 950$ 26,750$ 39,550$ 24,350$ 19,150$ 6,450$ 3,750$
CASH FLOW PROJECTIONOrganization ABC
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Tool #4 – Make the Most of What You Tool #4 – Make the Most of What You HaveHave
Protect your existing assets Cash and investments are insured Receivables are current Property and equipment are adequately insured
Activate underused assets Invest excess cash appropriately Sublease excess space Assign the right people to the right tasks and
challenges Galvanize and use volunteers efficiently
Maximize existing income streams Collect every dollar you’re owed Make sure your services / reimbursement rates are
priced right
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Tool #5 – Build a Smart Portfolio of Tool #5 – Build a Smart Portfolio of ProjectsProjects
Each project fits with your mission and culture
You have the skills and knowledge required to implement this activity
Your portfolio presents a sustainable mix of bottom lines
You have sufficient infrastructure to manage the administrative load that comes with your chosen mix of funding
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A Portfolio Approach to Program A Portfolio Approach to Program Decision-MakingDecision-Making
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H Requires Funding HI IG GH H
MissionImpact
L LO OW Generates Funding W
$ $ $ $ $ $ $ $ $ $NEGATIVE IMPACT POSITIVE IMPACT
Bottom Line Impact
How much of this can we afford?
Ideal opportunities − let's do more.
Why are we doing this?
Are we still true to our purpose?
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Tool #6 – Generate, Act on Sound Tool #6 – Generate, Act on Sound Financial InformationFinancial Information
Anticipation is one of the keys to financial stability.
What does this mean?
It means that you as managers need time to adjust if income is not coming in according to plan
Figure out what, exactly, is the problem Articulate and monetize the issues Consider carefully how to address budget variances If necessary, take adequate time to implement adjustments
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Tool #7 - Prepare Contingency PlansTool #7 - Prepare Contingency Plans
Make them easy to implement quickly if there is a major shift in funding or other event
Create several versions or scenarios of your operating budget
Consider dollar-for-dollar cost reductions (or prioritized “add-backs” in the case of better-than-expected results)
Know whether funding should be cut: Vertically: eliminate an entire program or project Horizontally: across the board Some combination
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Prepare Contingency Plans (cont.)Prepare Contingency Plans (cont.)
Articulate the trigger points that will cause you to activate the contingency plan
Qualify and quantify these triggering events
Decide whether you can afford to incur an intentional deficit
Allows an organization that has adequate cash and net assets to buy time while deciding what longer-term changes must be made. This is an interim strategy only, though…
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Tool #8 – Look for Cost SavingsTool #8 – Look for Cost Savings
You’re already lean, but chase the low-hanging fruit first…
…using cost containment strategies…
Renegotiate vendor contracts (they want to keep you in business!) Health and other insurance Printer, web hosts, phone / internet, landlord
Go digital if it means savings Reduce the need for print materials and mailings Some constituents may read an online newsletter or
appeal more readily than print
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Tool #9 – Engage and CommunicateTool #9 – Engage and Communicate
Engage and communicate with all stakeholders in an ongoing, deep, and transparent manner
Funders Keep your key funders informed about the impact and
quality of your organization’s programs Be transparent with them about your financial condition
and plans
Staff/Members Keep employees and/or members informed about the
organization’s economic realities and what you are doing about it
Fear can be your worst enemy in difficult times; it saps the energy of even the most talented staff and member volunteers and diverts their time and talent into unproductive speculation
Share good news and even small successes; find ways to help them remain hopeful about the future
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Communicate, Communicate, Communicate, Communicate, CommunicateCommunicate
Board of Directors Keep the board informed
Engage members wherever possible in contingency and communication plans
Be specific about what you need them to do
Tap their financial savvy and ability to think strategically about your organization's short and long-term success
Do not wait until problems have set in…a board that actively partners with staff leaders is an important asset when the organization must make difficult choices
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Communicate, Communicate, Communicate, Communicate, CommunicateCommunicate
Bankers: Be ready to talk beyond the numbers and show…
Evidence of self-awareness and understanding
Short and long-term organizational plans
Contingency plans addressing potential funding shortfalls
Sustainability of current funding streams
Evidence of reporting that allows course correction
Management (bench) strength
An engaged board of directors
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Tool #10 – Know WhenTool #10 – Know When the Basics the Basics Won’t Do It AnymoreWon’t Do It Anymore
Many nonprofits have already spent years cutting expenses in response to funding cuts.
For these organizations it will be impossible to continue doing what they do in the same way with fewer resources. With no fat left to cut…
…they need to find new ways of operating; waiting it out until things get back to normal is not an option…
…recognize that you may have to restructure, reorganize, and engage…
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Restructure, Reorganize, and EngageRestructure, Reorganize, and Engage
Restructure Consider spinning off activities that don’t truly fit the mission or
that require a level of subsidy your organization can no longer afford
Reorganize Merge with an organization that has a vision, mission and values
similar to yours Often seen as the last resort, this strategy must be viewed through
the eyes of those who benefit from your work Merger may be the best way to keep vital services in place for the
community you were founded to serve – to maintain your mission
Engage Identify peer organizations that are more efficient than yours in
certain aspects of the work you do and deliver Explore how to restructure and combine forces so that your
customers get the best of all efforts within the resources available.
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Managing Your Credit RelationshipManaging Your Credit Relationship
Current credit crisis occurred when financial institutions did not properly underwrite credit risk
Lenders are returning to “5 C’s of Credit”• Character• Capacity
– Increased focus on primary source of repayment-organization’s ability to repay the debt
• Collateral• Capital• Conditions
– Banking industry experiencing increasing default rates on corporate debt
– Current credit markets will have direct or indirect affect on your organization, but you can manage how
Association Debt 101: A Banker’s Perspective, ASAE’s Dollars and Cents newsletter http://www.asaecenter.org/PublicationsResources/ENewsletterDollarsandCents.cfm?ItemNumber=34553
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Managing Your Credit RelationshipManaging Your Credit Relationship
Trend in the Weighted-Average Probability ofTrend in the Weighted-Average Probability ofDefault Relative to Outstanding Loan BalancesDefault Relative to Outstanding Loan Balances
Probability of default (PD) reflects the bank’s estimate of the likelihood that a loan will not be repaid as expected, calculated using a one-year time horizon.
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Managing Your Credit RelationshipManaging Your Credit Relationship
Things you might expect in the current credit environment include
Adjustment in credit structures (ex. collateral requirements, lower LTV ratios, shorter terms)
Adjustment in interest rates and fees
Increased due diligence by the lender
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steps to manage through the current credit steps to manage through the current credit markets? markets?
Understand current terms of your credit agreement• Maturity/expiration dates• Financial reporting requirements• Covenants/financial ratios• Remedies upon default
Ensure compliance with reporting requirements; anticipate and proactively discuss covenant issues with lender
Provide your lender periodic updates on operations-avoid surprises
Make certain your lender understands unique financial considerations for nonprofits - Do they have a continuing commitment to the nonprofit segment
Surround yourself with experienced partners including CPAs and attorneys who specialize in the nonprofit segment-financial statement quality matters more than ever
Network with your peers in the nonprofit industry Understand the value of your banking relationship Communicate and be proactive