Transcript Decision-making Framework

Philanthropy Journal Webinar:
NONPROFITS AND THE ECONOMY:
COPING TOOLS FOR TURBULENT TIMES
Paul Bennett
Director of Analytics
Nonprofit Finance Fund
www.nonprofitfinancefund.org
Dec. 11, 2008
© 2008 Nonprofit Finance Fund
Recession: How Can We Prepare?
© 2008 Nonprofit Finance Fund
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
“We’re in the business of helping
nonprofits run better.”
© 2008 Nonprofit Finance Fund
– Clara Miller, NFF President and CEO
What is a Recession?
DOWNTURN
• Short-term
decline in
economic
activity
RECESSION
DEPRESSION
• Significant decline in economic
activity spread across the economy,
lasting more than a few months
• Longer, more
severe recession
• 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
The start of a recession can only
be seen in the rear-view mirror
© 2008 Nonprofit Finance Fund
• Loosely defined
as an economic
downturn where
GDP declines by
more than 10%
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
© 2008 Nonprofit Finance Fund
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
Percentage of Nonprofits Reporting (post depreciation) Deficits
50%
44%
45%
41%
40%
40%
35%
31%
38%
38%
FY2004
FY2005
33%
30%
25%
20%
15%
10%
5%
0%
FY1999
FY2000
FY2001
FY2002
Recession
© 2008 Nonprofit Finance Fund
FY2003
Nonprofit Expenses Outpace Revenue During
Recession
• Rate of growth in expenses generally exceeded the growth in revenue from 20012003. 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
Revenue and Expense Growth Rates
10%
8.8%
9%
8%
8.8%
8.5%
7.0%
7%
6.2%
5.5%
6%
Revenue
Growth
6.1%
5%
5.0%
4%
4.3%
5.2%
5.2%
3.9%
3%
2%
1%
0%
FY2000
FY2001
© 2008 Nonprofit Finance Fund
FY2002
FY2003
FY2004
FY2005
Expense
Growth
Recommendations For Nonprofits In Recession
1.
Review and optimize cash deposit risk, concentration of investment risk,
and concentration of revenue risk
2.
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
3.
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
4.
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
5.
Consider ways to diversify revenue, if once reliable sources seem
questionable
Avoid over-diversification (i.e. new business lines) that can increase risk
6.
If the organization offers services that will lessen the negative impact of a
recession, approach government funders more aggressively for support
© 2008 Nonprofit Finance Fund
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?
© 2008 Nonprofit Finance Fund
Visit our website for additional information:
www.nonprofitfinancefund.org
© 2008 Nonprofit Finance Fund