It is no surprise that the pandemic had significant and sometimes catastrophic financial effects on business and nonprofit organizations. Organizations were left reeling with questions: what do I do now? When do I do it? How can I bounce back when things get back to normal? What can I do now to prevent this situation in the future?
In this article and the next, we will examine the types of financial crises that may befall an organization, what to do when you’re in one, how to see one coming, when to take action, and how to set yourself to be best insulated for the future.
Types of financial crises explained
There are three common financial crises that an organization can find itself dealing with unexpectedly:
- A major loss of revenue
- An unexpected cash expense
- A major change in cash position
A major loss of revenue can come in various forms. Perhaps your organization lost a major donor, had to cancel a large fundraising event, is sunsetting a long-standing and significant grant, had to halt production of goods, had to halt delivery of services, or had to shutter a venue. Any of these can create an immediate shortfall in planned or expected revenue.
Perhaps your organization has faced an unexpected large expense like legal fees, termination settlements, or unexpected facilities repair. Some of these might impact your bottom line, and some might impact your cash flow, but both types are equally important to understand and plan for.
It’s clear that both a loss of revenue and an unexpected expense, alone or in combination, can result in a change in cash position, which may range from manageable (everyday business) to major – which is when help is needed.
What do we do now?
What to do when your organization is in a financial crisis
The catastrophe happened. There was no way for anyone to see it coming, or to understand the impact it would have. But now, here you are, wondering: what do we do? The knee-jerk reaction is often to slash expenses and (in the nonprofit world at least) fundraise like your hair is on fire. This begs the question: is there a right or a wrong way to go about this strategically?
Yes, we believe so.
How to weather a financial crisis strategically
- Look to your biggest expenses – Few organizations ever solve a budget crisis by cutting back on office supplies. Real gains are to be made in more expensive parts of the business. Consider: What is the low hanging fruit you can easily cut? Can you postpone any planned projects to a date in the future?
- Right-size staffing – Now is the time to revisit your Org Chart. Is it too luxurious, too top-heavy, or imbalanced among programs and departments? Do you have open positions that you can delay hiring for? Do you need to hire certain positions that will directly help the crisis at hand? Can you consolidate positions, or utilize outsourcing to assist with functions you may not have a full-time need for?
- Analyze program performance – Do a deep dive into the financial and non-financial performance of your programs or departments. Are there projects that are doing very well that you can expand upon? Are any sputtering along, which you could consider closing? Is there any way to reallocate resources into your highest performing areas?
- What-if scenarios – play with the numbers. Have you ever wondered if it would be more cost-effective to be open 7 days a week for 5 hours or 3 days a week for 12? Now is the time to find out! This type of work is part projection of the unknown, and part analysis of the known. Use your existing data and understanding of both your organization and market to extrapolate possible outcomes so that you can anticipate all your options.
- Zoom out and re-envision – Look at your overall organization. Is there a way to pivot your operations to survive your financial crisis? Are you a non-profit organization entirely dependent on earned revenue, or entirely dependent on philanthropic giving? Consider diversifying your revenue sources to minimize highly concentrated risk.
- Look at the optics – Determine what the narrative is that you will need to share with boards, donors, investors, and other key stakeholders. Are you planning a deficit year? If so, what surpluses have previous years accumulated that you can use to support this? What is the recovery plan and how long will it take? What changes should you make to your organization to insulate you from future crises?
- Break the proverbial piggy bank – ask yourself, what do we have that we can harness? Is now the time to use that rainy day fund? It is, in fact, pouring out. Do you have a line of credit that can be used to supplement unavoidable dips in cash? Can you make a case for having a large deficit year? Build out a cash flow forecast to ensure this is possible. In fact, build out a cash flow forecast even when you are not in the midst of a financial crisis!
Now is also the time to increase the Cash Conversion Cycle. To do this, focus on decreasing the length of time between pledge and receipt of payment at the same time as increasing the length of time between receipt of bills and their payment. If it’s a Net 30 bill, pay on day 29 but no sooner. Decrease inventory if applicable for your organization.
In our next article on this subject, we’ll explore how to forecast a financial crisis before it starts, prepare effectively, and weather it well.
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