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This issue marks a number of changes for us. First, unlike previous issues, we are devoting the entire newsletter to a single issue -- the declining economy's impact on the nonprofit sector and what executives and board can do to maintain their agency's financial health. Second, we mark our fifth anniversary as a firm. We have grown and expanded over the years, in large part due to the support from many of you. So we revamped our website to reflect who we are today and the work we do. We welcome your feedback and suggestions on both our website and this newsletter. As you will note in the sidebar, your comments are invaluable to us. The American Economy and Nonprofits: Challenging Times in 2008 We are all well aware of the recent stock market gyrations, increasing oil prices, and concerns about the country sliding into a recession. Already New York's mayor is talking about an anticipated reduction in tax revenues and across the board cuts for the city's budget. What does all this mean for the nonprofit sector? From the last recession in 2001 and those before it, we can project that funding for nonprofits will decline in the next year or two and perhaps longer. City, state, and federal funding will decline as government at every level reduces its budget and services. Nonprofits may receive reduced funding and in some cases contracts for certain programs may be cut entirely. These moves will only add to nonprofits' existing pressures as government agencies shift to performance-based contracting with its less predictable revenue stream and even slower cash flow. Moreover, New York City agencies have been consolidating contracts for programs in children and youth, foster care, and now elderly services, which has and will continue to weed out those with weaker programs or limited ability to manage in a changing fiscal environment. From prior stock market declines, we know that foundation giving also will be affected. Their grant-making is based on a three-year moving average of their endowment's market value. While a decline in the market this year may not affect their current activities, it will in subsequent years. History has shown us that foundations may not wait to cut spending but may decide to use anticipated funding reductions as an excuse to begin limiting their grant-making right away. They may reduce funding somewhat across the board, end certain programs, or consolidate their funding around a fewer grantees. What Can Nonprofits Do to Address the Upcoming Financial Challenges? It is all too easy for people to deny or put off dealing with difficult issues in the hopes that the problem will be less severe than feared or even somehow go away. Unfortunately, we have seen that the longer executives and boards wait to act, the fewer options they have available. In the worst case, they are suddenly faced with limited cash and the need to merge or close. We have learned from our work with nonprofits that the most successful are those who can adapt quickly to changing circumstances. While it is difficult to predict how steep or long a recession will be if it occurs, it is still possible to make contingency plans so an organization can adjust to changing economic circumstances. Nonprofits can talk to their long-time funders earlier rather than later, to assess if they should anticipate any change in funding. But executives should not stop there. Nonprofit executives and their boards can "stress test" their agencies by developing different budget scenarios where their revenue drops five, ten, or twenty percent. At what point are they in serious trouble? What actions would they take to bring their expenses into line? What activities are ancillary to one's mission that the agency could shrink, shift to another nonprofit, or discontinue? How could it improve performance and generate more revenue or cost savings on performance-based contracts? What new programs, recruitment or other initiatives could be postponed until the requisite funding is in place? What steps can be taken now to raise additional funds in an increasingly competitive environment for limited dollars? As nonprofits consider their options, it is important to keep their mission and the needs of their community front and center. Keeping one's corporate structure may not be the best answer to ensuring that a critical program continues. We have seen more than one agency with good programs merge with another because it realized it would not be able to raise sufficient funds long term to maintain programs' quality. A nonprofit can take steps to ensure program quality, fulfill its mission and serve its clients. But it takes a willingness to anticipate a downturn, clearly face the potential consequences, and plan to mitigate them. Executives and boards who do so can control their own destiny, rather than be overwhelmed by events. View printable version of this newsletter.
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