It's All About CASH  

"Grant Makers Find Cash is Key to Solving Toughest Problems" was the headline in a recent Chronicle of Philanthropy. The title intrigued us, since so many nonprofits we know are facing serious cash shortfalls. That article and others like it address key challenges throughout the sector, but none discusses the importance of cash when it comes to a charity's ability to serve its community.

This is the first of three issues that describe what happens when nonprofits have limited cash today. More importantly, we will provide tools and suggestions for how three key players - charities, their boards, and foundations - can constructively support quality programs in an environment where resources are always in short supply. We’ll start with charities in this issue and continue the discussion about what foundations and trustees can do in our next two newsletters this fall.


The Context: The Realities of the "New Normal"

Everyone - charities, foundations, governments and individuals - feels the impact of more limited resources. They recognize that this is the "new normal" environment, one that will last for the foreseeable future. Fundamental business practices now are more important than ever. Strong, successful organizations, whether in the arts, health, or human services, embrace them as a matter of course and continue to serve their communities well. Other agencies are struggling.

State and local governments simply don't have enough cash - tax receipts - to pay for the services they provide. Like anyone in this situation, they postpone payments, including those to charities that have already delivered programs under government contracts, sometimes for as long as a year. Until state and local governments restructure to live within their means – a process that is only beginning - charities will face continued delays in getting the cash they need to serve their communities.

Foundation endowments have dropped 25-40%, forcing internal staff and program cuts. Since the stock market is unlikely to rise substantially for the next few years, foundation grant-making will not increase much either. The mounting pressure to "bet on the winners", which translates into outcomes and accountability, adds to grantees' funding uncertainty.

Many charities now target individual donors, particularly the wealthy, for their solicitation efforts. Fortunately, many have stepped into the breach, but they may not be able to fully bridge the funding gap. Besides, building strong individual donor relationships takes time, leadership, and a culture that many charities are only starting to establish.

As a result, nonprofits' cash reserves are shrinking. Instead of focusing on program delivery, CEOs are calling funders to find out when they'll get their next payment and donors to help meet payroll. We’ve seen vendor payables stretched, leases renegotiated, borrowings increase, and executive salary checks skipped. Longer government payment delays, which can occur particularly during a state's budget season, can hobble even healthy organizations.


Cash and the Charity: Control What You Can

Despite that sobering background, charity executives can manage uncertainty and make the best use of the resources they have. A few, simple yet powerful steps can make a world of difference:

Use a rolling 18-24 month cash flow projection  

The cash flow statement will tell you how much cash you expect to have each month to pay your expenses and highlight when you will experience cash shortfalls. It will tell you how long those shortfalls will last and how much cash you need to weather that period so you can begin working now to bridge the projected gap.

As you move through the year - and roll the cash flow projections forward - you can compare what actually happened against what you expected. If you're doing better than you anticipated, you have funds you can put away for those cash-short periods and to help cover next year’s expenses. If you're doing worse, you can see the future cash impact and make needed adjustments quickly.

Finally, the 18-24 month cash flow prompts you to take steps now to make sure you have the cash you need next year. Because of the long solicitation period, you can start now to identify and cultivate foundations and individual donors.

Make realistic re-estimates of your cash flow and year-end results  

As you and your CFO sit down at the end of each quarter to talk through where you are and what you realistically think will happen, you will be better equipped to make realistic, useful budget and cash flow re-estimates. If you're receiving contract payments a month or two later than last year, make that your "new normal". Take out that hoped-for grant when you haven’t heard from a funder in months. The more realistic you are, the better you can plan, manage, and make your future.

Have a Plan B, know when to act on it, and then pull the trigger

\While this is probably one of the hardest actions for nonprofit executives to take – it violates their values of doing good and serving as many people as they can - it is a key step in relieving the pressure and enabling CEOs to move forward.

Prepare a contingency plan with a budget and projected cash flow that assures your cash receipts will cover your expenses. While this probably will entail program and staff reductions and/or service delivery modifications, you will be able to continue offering good programs to at least some people. In the current environment, CEOs can't be too conservative.

Identify the key events or "triggers" that have to happen - grant commitments received, contract payments made, board give/get levels met, program milestones achieved, etc. - and by what date so that you can adjust if necessary. For example, consider when you have to set the spring season's performance schedule or decide how many students to recruit next semester. If those triggers aren't met by that decision date, implement your Plan B.

If you need any encouragement, look at your current projected cash flow compared to what it will be under Plan B. Having cash in hand at the end of the year is a lot better than having none.

Communicate, communicate, communicate.

The actions above give you the information you need to manage successfully and talk knowledgeably to your staff, your board, and your funders.

Talk frankly with your staff. Tell them what the situation is, what steps you are taking or may take, and do so frequently. Make them part of your team. It reduces their uncertainty and can increase their motivation. At a minimum, it enables them to stay focused on their jobs: delivering quality services to the community you serve.

The same thing is true for your board and your funders: telling them what the situation really is, not what you think they want to hear, increases your credibility. Having a clear action plan that your board and funders understand and support is key to their ability to raise or provide the needed cash.

We can't emphasize enough the importance of communicating frequently with all your key stakeholders, particularly funders. Reach out to them proactively, not just when reports are due. Initiate face-to-face meetings and phone calls: they are more effective in conveying information and building strong relationships than a paper report or emails.

Consider how you communicate. Focus on the key messages, the three to five points you want to make sure you convey. Use as few numbers as possible; people can't absorb a table of 25 lines and 6 columns, each cell filled with 5 or more digits. Paint a picture, but be able to provide the details if asked. Stick to the key points and the critical information that supports them. Be candid, honest, clear, and thoughtful: it will motivate everyone to share your burden, work for the health of the agency, and deliver the best service possible to your community.


We Want Your Knowledge!

Let us know what you are doing to improve your grant-making or and program effectiveness. Your insights can help strengthen the sector.


It's Tough Out There

"It has been, and continues to be, a difficult financial environment for nonprofits", according to a newly released GuideStar survey of public charities and private foundations, which sought to find out how nonprofits fared during the first five months of 2010. Some highlights:

• 40% reported a drop in contributions between January 1 and May 31, 2010, compared to the same period last year
• 63% have experienced an increased demand for services for the same 5-month period, compared to 2009
• 58% have reduced activities/services to help reduce budget shortfalls
• 8% fear danger of imminent closure due to financial reasons

For all the survey results, check out the full report, "The Effect of the Economy on the Nonprofit Sector".