By Hayes Knight – 20 July 2009

The economic woes being experienced internationally have clearly been caused by excesses of the commerical sector. These impacts have been felt by the whole economy; Not-for-Profit sector included. There are however some common features that Not-for-Profits can learn from.

Funding is tightening

OK, this one may seem like a no-brainer. But it is crucial that all not-for-profits are aware of what is happening and what it will mean to their organisation. Knowledge is power…but only if you get it promptly and can react appropriately on a timely basis.

Many not-for-profit organisations have come to rely on similar levels of income from year to year from roughly similar sources. In the current climate, this basic assumption is under considerable threat:

  • Many private grantor organisations rely on their investment income in order to provide their grants.  However we’ve seen a dramatic drop in the world’s equity markets and other investment products.  This has resulted not only in reduced returns for such grantor organisations but in many cases their underlying capital base has been dramatically eroded as well.  Net result; less funds to distribute.
  • Pokie Trusts are under pressure.  Whatever your moral view on them, they have become major funders in the not-for-profit sector over the past few years.  The economic environment and the increasing regulatory measures to alleviate the damage done by problem gambling have resulted in decreasing returns.  Further regulation is due to take effect on the 1st of July which may make more machines uneconomic.
  • Entities funded for services by Government agencies in many cases are seeing their contracts and funding levels under threat due to enforced cutbacks in the funding of their agencies or the increasing concern of the same.
  • Donations from the general public are likely to be put under pressure as households tighten their belts on discretionary spending and for some the threat of unemployment may dramatically impact their ability to make charitable donations.

Accordingly all not-for-profit organisations must know where their funding comes from.

An interesting footnote to the donations point above is that we have seen one organisation that fundraises only from donations from individuals which has noted an increase in their donor levels. Their investigation into why indicates this is due to an increasing awareness of their cause (environmental protection matters) and the fact that people are feeling overwhelmed by the international economic crises but wanting to make a positive impact individually.

Accurate timely financial information is essential

This statement should please all accountants.  We are needed more than ever in times of economic pressure. Yet it still horrifies me how many not-for-profit organisations do not have a good handle on their basic finances. Or they get their financial information so late it is essentially useless. They must get this area sorted, or get prepared to shut down.

Budgeting and forecasting become more critical

The question; How many budgets does a well run organisation need? ordinarily this would seem obvious. Surely the answer is; one comprehensive financial budget based on the best available information is perfectly adequate. However we are entering extraordinary times which call for more extraordinary measures.

The level of uncertainty in the current climate surrounding many of the assumptions that we normally take for granted in budgeting is high. For example the certainty of income streams given the factors noted earlier.  Accordingly it is prudent to consider a range of possible scenarios as regards expected income.

As a result many well run organisations are operating a 3 scenario budget model.  This is quite simply an extension of their normal annual budgeting process except that they are preparing budgets on a best case, average case, and worst case scenario. By varying the income expectations, organisations can then better see if they will have to cut back on expenses and by how much under each scenario. (Or be able to identify at what point they will cease to exist!)

As a further refinement of this process it is also useful to analyse expenses into categories such as:

  • Essential
  • Linked to certain levels of services/income
  • Able to be scaled back if needed, and in what order this should occur
  • Discretionary

Taking this sort of what-if approach to budgeting at the outset helps many organisations objectively face the harsh realities that they may face before they may actually be forced into addressing such significant issues as a major decrease in funding and fighting for survival.

More good people around

It’s not all doom and gloom though. One of the sometimes positive side effects of a serious economic downturn is that there are sometimes more good people on the market. People laid off or under pressure in the commercial world tend to reassess their own jobs and future.  Likewise corporate refugees heading back to NZ are sometimes driven by getting a role where they are really making a positive difference.  These factors all play well to efficiently run not-for-profit organisations, many of whom have been struggling in recent years to attract the high calibre people to help drive them forward.

Competition exists

Many in the not-for-profit sector put their heads in the sand about this point.  It is as if because the organisation’s aims are noble that they will not have to face the cut and thrust of competition. Reality is otherwise and just like in the commercial sector some of the better managed not-for-profit organisations are not planning to “waste a good recession”  as the saying goes.  In a tougher climate it is usually easier for the better to thrive more as many of their competitors will fall by the wayside.

Know your stakeholders and communicate well

The last point from observing the more successful not-for-profit organisations is equally applicable in good economic times. It’s just that in tougher times the failure to keep close to key stakeholders and ensure their needs are being met may well spell disaster. Know why the organisation exists, who it supports and how, as well as who supports the organisation and how, and communicate these facts well.