In our last article, we started considering ways that organizations can respond effectively to financial crises. This is more relevant than ever as organizations try to weather the pandemic and navigate their recovery.
We considered the kinds of financial crises organizations face and strategic responses to these crises when we find ourselves in the middle of a crisis.
In this article, we’re considering how to see a financial crisis coming, when to take action, and how to set yourself to be best insulated for the future.
Telling the future
How can we forecast trouble and what should I do?
With the understanding that not all financial crises can be predicted (read: Global Pandemic), what can organizations do to learn to spot trouble brewing? Learning to track and identify trends should provide the data that you need to see trouble on the horizon and take action.
In all organizations, long before a crisis hits, trends should be tracked in the following areas:
- Income/revenue streams – are they trending up, down, or flat? Are they cyclical? Be sure to look at your revenue streams over a long enough period to get good data, especially if you are an organization with a seasonal influx followed by a spend-down period. It’s important to look at each revenue stream separately so that gains in one area don’t mask an area that needs attention. Ensure that non-recurring revenue is separated (i.e. COVID-related relief grants), to see the trend of the underlying operations. The pandemic has impacted organizations differently and it can be difficult to identify trends with several unprecedented years in the data set.
- Expenses trending above income —track headcount of your organization as a % of revenue and expenses. Ask yourself if you have enough staff to carry on development and operations. Also ask: can you afford the staff you have and/or need? Have you adjusted salaries to retain your most valuable staff? The cost of turnover can be disruptive to an organization financially and otherwise.
- Cash management —calculate your cash burn rate. How much are you using a month? Ideally, your monthly income is higher than your cash expenses. If not, you are burning cash every month. If that is the case, is the burn rate increasing or decreasing? And how long can you sustain operations?
Let’s consider these factors in more detail.
Identify what the leading indicators are for your financial stability and success.
Is it cash burn rate? Is it a fundraising efficiency ratio (i.e. how much you are earning for every dollar spent on fundraising activities)? Leading indicators should be tracked and reviewed regularly, and parameters should be identified for when the organization would take action based on each particular indicator.
For example, if Cash on Hand is a leading indicator for your organization, and you have identified that any balance less than three months of cash on hand will require some action, define what that action is, calculate this ratio on a regular basis, and take action immediately when the indicator slips into that warning zone.
The earlier you act the better.
Take, for example, a non-profit organization that has just been informed that a major funder of theirs is changing direction and support will end in one year. Their cash burn will be ($250) starting next year. This can be thousands, hundred-thousands, millions, etc.
While the organization searches for new contributions or determines if they want to continue the work funded by this Foundation they can:
- Maintain status quo – continue operations with the belief that additional funders can be cultivated in the final year of this grant.
- Act later – Continue operations for the final year of funding and cut expenses by $150/month beginning when this grant ends.
- Act now – cut expenses by $150/month immediately.
Let’s consider the potential outcome of each course of action:
- Maintaining the status quo will result in cash running out within 1.5 years.
- Acting later (i.e. when the grant ends) will result in cash running out within 2.5 years
- Acting now, BEFORE the grant terminates will result in the organization being able to operate for seven more years without replacing that funding.
What should we be doing now?
Organizations should always be operating with a little bit of that Doomsday Prepper spirit. Hoarding cash (and toilet paper!) is great – just make sure that you don’t amass so much that it creates other problems with optics, especially for non-profit organizations. You want to ensure you are serving your mission while remaining fiscally responsible for the future.
- If your organization has built up a significant amount of cash, consider an investment strategy and have your board help you set a policy and guardrails for the management and diversification of those investments. If you are a non-profit organization, consider starting an endowment.
- Set SMART Goals today and revisit them regularly. SMART Goals are Specific, Measurable, Achievable, Relevant and Time-Bound. Set a goal for each of your leading indicators. Define a fundraising or development goal, and don’t forget to develop a strategy for achieving your goals.
- Budget and forecast – and not just once per year. Organizations should have at least 1-3 years of forecasted budget AND cash flow—a detailed one-year forecast and a more summarized second and third year. Don’t forget – multi-year gifts increase revenue once and cash many times. Make a plan for the spend-down of that influx.
- Develop your board to advise your organization. Evaluate whether you have the internal resources to assist in analysis, crisis management, goal-setting, budgeting and forecasting. It can be helpful to consider outside, objective input in contingency planning, so your organization may consider consulting a specialist for one-off or ongoing support.
With some careful planning, a watchful eye, and strategic, creative and timely actions, your organization can better anticipate and weather any storm that may come your way!
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