Cash Flow

Nonprofits: How to Survive the Downturn

Five lessons that previous recessions have taught us.
Sarah JohnsonFebruary 13, 2008

Unlike their corporate compatriots, nonprofit CFOs generally don’t have the luxury of a rainy day fund to keep their organizations running during tough economic times.

In fact, many of them are still reeling from the last significant downturn, following the events of September 11, 2001, according to the Nonprofit Finance Fund (NFF), which makes loans and offers consulting assistance to the not-for-profit sector.

“We haven’t built our capacity very well,” says Clara Miller, president and CEO. “It’s particularly true of organizations funded by government, and that comes from a variety of government contracting rules that undermine built capacity on the nonprofits.”

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Consider the dilemmas of the nonprofit finance executives who receive most of their funding from the government: Often they have to return any profit to its funding source, eat any deficit, and spend reserves on current services, before collecting additional funding. Still, many of them have to provide services to those who need it most and, during a downturn, become stuck with what Miller calls “heroic behavior” — which means keeping the business going beyond its means.

In general, nonprofits took three years to stabilize after the 2001 downturn, according to NFF’s analysis of 6,500 midsize organizations. More than 40 percent of them reported a deficit during those years. Also during that time, nonprofits’ expenses grew faster than their revenue.

To avoid a similar long-term affect on nonprofits’ finances during the next recession, NFF has offered these five tips:

Don’t fake it. Sustained spending without the resources will make nonprofits weaker, NFF says. The organization recommends nonprofits be open about their financial concerns with their boards and funders, and anticipate getting by on decreased revenue for the next year or two.

Remember the customer. Make a contingency plan for how the nonprofit can maintain services.

Keep large investments in check. Nonprofits should avoid new hires, service expansions, and capital expenditures. They “often have liquidity problems in the best of times,” Miller notes. “Liquidity becomes even more of an issue during a downturn, when there is a temptation to maintain or increase services, and hence expenses, even if revenue is declining.

Analyze revenue patterns. In contrast, some nonprofits may find their revenue actually increased during the last recession. If that’s the case, they could actually work on growth.

Get active. Miller believes unified nonprofits could effect change in the government’s contracting rules. These regulations “undermine the capacity of the sector to be ready for tough times,” she says. “What we’re saying is that in order to get ready for tough times, we should band together to see what we can do about this.”