Future-Proof Your Nonprofit Against a Recession
World leaders are gathering this week in Davos, Switzerland, to discuss world affairs. Prior to this meeting, the World Economic Forum published the Global Risks Report 2023, which discussed a new phrase to describe our current state: “polycrisis.” While the phenomenon is not new, the term was coined last year by Columbia University historian Adam Tooze. It occurs when multiple crises converge to challenge our ability to cope and thus threaten our identity. In a polycrisis, while the shocks are disparate, they interact so that the whole is more overwhelming than the sum of its parts. We are feeling it, too — it is clear that multiple crises in several global systems have caused a “perfect storm.” Worse still, it is shaking our confidence. Not just among world leaders, but here at home — and in the social sector trying to stay ahead of all that has happened and what lies ahead.
To that end, we asked our favorite financial prognosticator — John Gillespie, Nonprofit and Social Enterprise Practice Leader, Charles River CFO — to help us sort out what nonprofits can control to ensure they remain resilient in these turbulent times.
There are aspects to any economic downturn that are beyond your control. While you must live with these, there are other aspects you can control. And they are where you should focus your energies. By knowing the difference and taking a few intentional steps to strengthen your position, you can manage risk and help future-proof your nonprofit against uncertainty.
What a Nonprofit Cannot Control
1. 2023 will be another year of economic uncertainty.
2. Inflation will continue to drive up operational costs.
3. A potential recession, even if mild and short-lived, could reduce your endowment results and may cause donors to rethink which organizations they’re supporting and at what level.
4. Rising wages at for-profit organizations are causing staff shortages for nonprofits.
5. Volunteer levels have not returned to pre-pandemic levels.
What a Nonprofit Can Control
1. Key staff retention is critical.
To retain top-performing staff and stay competitive, find ways to compensate them in other ways. Evaluate ways to engage them in new responsibilities, such as Culture Committees. Invite them to present and attend board meetings. Provide more opportunities for them to be leaders outside the organization at coalition meetings. Encourage them to author op-eds and engage in advocacy to have their voices heard. Evaluate changes to your health benefit plans and consider providing other benefits, such as additional paid time-off or professional development opportunities.
2. Manage your cost structure.
You should have a profitability scorecard for each program, social enterprise or service based on direct expenses and fees, grants and other income sources. Understand your cost structure in terms of variable versus fixed costs (including breakeven price points) and absolutely identify what can be discretionary if reductions are needed.
3. Know when to invest and when to not invest.
Re-examine every big project or expense and decide if it is still needed to fuel the organization or if it is a distraction. What expense or investment is not critical for the next six months and can be delayed, downsized or reimagined? Can a new project, staff development program or new hire be delayed for six months? Is there an investment that will pay off that we need to make now (e.g., cybersecurity)?
4. Proactively manage risk.
Have an ongoing process to identify and manage risks. If you have not done a SWOT analysis for this year, conduct one at your next executive meeting to ensure everyone is aware of threats and opportunities to your organization. Assess your current level of risk and then evaluate whether you have appropriate levels of insurance. For example, do not underestimate the importance of cyber insurance. According to NetSuite, “Cyber security is the most challenging risk to manage.”
5. Conduct real-time forecasting to produce better decisions.
Ensure that you are you getting accurate monthly financial statements that provide your team with actionable data to make decisions. Update a monthly cash flow forecast projecting out at least three months based on past experience. You want to ensure that there are not any big surprises down the road.
We love Top 5 lists and think John’s is the one every nonprofit should consider in 2023. If you want more, check out our recent post, “How Nonprofits Can Get Ahead of Inflation and Economic Uncertainty.” It includes a few more ideas, including expanding your volunteer base and monitoring your endowment and savings.
We hope your nonprofit organization already has this checklist underway and that it provides reassurance that you are doing everything within your control to respond to this polycrisis. If you enjoyed the blog, please share it with others, including your finance committee. And, if you have more ideas, please share them too.