We have developed the following tips to assist not-for-profit entities to manage through tough times. While many of the issues that not-for-profits will encounter in tough times will be the same as those encountered by other types of businesses, some issues are unique.
Perform a financial health check
If your entity is struggling, you should regularly analyse your financial position. You can derive a significant amount of information on the financial health of your not-for-profit entity by using financial ratios to analyse your financial statements.
These ratios include:
- fundraising costs to funds raised
- net surpluses from fundraising to total funds raised
- total cost of services provided to total costs
- total cost of services provided to gross income
- liquidity ratios, solvency ratios, management ratios and return on investment ratios.
The benefit of such analysis is significantly enhanced when these ratios are compared with past performances and those of similar not-for-profit entities.
If your entity also undertakes trading activity, a ratio analysis of such trading activities will assist you determine whether such activities are contributing as effectively as possible to your entity.
Improve your cash flow
Typically in tough times, the most significant issue faced by entities of all types is poor cash flow. Ideas to improve your cash flow:
- prepare regular cash flow forecasts
- improve your debt collection processes so that outstanding debts can be converted into cash in a shorter timeframe
- skew promotions of trading and fundraising activities towards activities that can be turned into cash quickly
- measure and reward behaviour of employees that improves cash flow
- make full use of your terms of trade
- if you are undertaking trading activities, reduce stock levels and replace slow-moving and obsolete stock with stock that has a faster turnover
- consider the deferral of capital investments or discretionary spending
- look to sell unnecessary assets
- seek finance from external sources such as government grants.
In difficult times, it is important that your entity focuses more than usual on controlling costs. However, cost control is not about looking critically at every transaction. Focusing excessively on costs can save you a few dollars but can cost you much more in lost revenue or other costs. Instead, you should:
- focus on costs within the control of the entity – look at cost centres rather than individual transactions
- take a critical look at underperforming fundraising activities, and divisions or locations with excess capacity
- do a quick audit of resource wastage and take corrective action – simple things can save money (such as paper recycling, stopping excess energy use, better control of consumables, and stationery)
- be flexible with your staffing arrangements.
Review the profitability of your trading activities
It is important that while you improve your cash position, you should also seek to be generating surpluses, particularly from your trading or investment activities.
Ideas to improve your return on your trading activities:
- prepare regular financial statements and analyse them
- focus on sales that give the highest margin
- don’t discount on low margin products and services
- don’t discount unless the same or better gross profit can be achieved through increased sales volume
- control the costs of trading activities
- don’t chase any sale – chase profitable sales.
Improve access to funding
Additional funding can be provided from debt, donations, government grants, sponsorship and internal sources.
Ideas for improving access to funding:
- disclose all necessary information, including financial information and plans for how the money is to be spent, to the organisations and individuals you regard as possible sources of funding, including significant potential donors, banks (if you are seeking debt finance) and government (if you are seeking grants). This may increase their confidence in the viability of your entity
- start early in seeking funding, and if financing from a bank, shop around
- if borrowing, be sensible about the amount actually needed and be able to justify to yourself and the lender that you can afford to borrow that amount
- take time preparing the application for debt finance or government grant. A well prepared proposition is a good sign of your commitment to a prospective lender or government agency
- if you fail in your loan or grant application, try to find out why
- if you are looking for greater donations, see if you can find ways to provide some form of benefit or return to your donors and sponsors. For example, a discreet form of recognition, such as certificates, ads or notices in the local press.
Review your activities
In tough times you should adopt a risk management mindset and therefore you should review all your activities. Such a review could include the following steps:
- find out how your tough times are affecting donors and sponsors and the users of your products and services
- find out if similar not-for-profit entities are experiencing tough times as well and if so, how they are responding
- review how your entity operates and look for underlying improvements, including rationalising, maximising efficiency and focusing on growth areas.
Refine your marketing plan
In tough times, it is more important than ever to focus your marketing plan on achieving the key objectives of your organisation and seeking value for money.
Ideas to incorporate in your marketing plan:
- focus marketing on fundraising activities and chasing sales (from your trading activities) that have a high margin and bring in the cash quickly
- reward employees for sales of higher margin fundraising activities and products (on your trading activities) and when payment is received
- only discount your prices if it can lead to a better gross profit through increased sales volume
- measure the success of each promotional activity or campaign
- recognise, in an appropriate way, the gifts of large or regular donors. See whether you can help them to gain recognition or benefit from their links to your organisation
- focus on encouraging trading customers to pay at the point of purchase and contributors to fundraising activities to pay early
- focus on donors – for the high-value or frequent donors, make sure they know how their donations contribute to your work and keep in contact with them. For the smaller or infrequent donors, contact them in a low-cost method occasionally, for example email or a simple letter or postcard, to encourage them to contribute once again
- encourage donors to sign-up to, for example, monthly contributions through direct debit. This may increase the annual level of gifting.
Review your risk management strategies
Tough times may expose or highlight problems in an entity, that were not previously apparent or were considered unimportant, and which may threaten the entity’s viability. Risks include:
- relying too heavily on a small number of major donors or customers from your trading activities
- relying too heavily on a few major fundraising events
- providing credit in your trading activities.
Ensure operational risk management is adequate to reduce the risk of losses from poor practices, losses from fraud and losses from unethical behaviour or overly risky behaviour of employees and volunteers. The activities of employees and volunteers and the risks they take should be managed by using of codes of conduct that articulate the entity’s values, supported by sanctions for any breaches of the codes. Not-for-profit entities should spend time selecting employees and volunteers with values similar to those of the organisation and getting an ongoing commitment to those values.
Tackling problems with revenue through additional fundraising events or trading activities is risky in tough times. You will have to weigh these risks against the risks posed by relying on too few income streams.
Look after your employees and volunteers
If your entity is experiencing tough times, this is also likely to affect employees and volunteers, so keep a lookout for signs of stress and be ready to provide support.
It may help to ensure that you set roles and performance levels relevant to a volunteer or employee's age, and their physical and mental condition. Some employees of not-for-profits take the organisation’s values so much to heart that they work many more hours than they are paid for. Don’t take this willingness to work for granted because you could end up facing a claim for unpaid wages.
Other things to consider
Other issues to consider in tough times include:
- the possibility of tightening your terms of trade and reviewing other contractual issues, such as rights of recovery, with your customers
- breaches of debt covenants, value of security and personal guarantees provided to secure finance from a bank
- the possibility of reducing the size of your workforce, or alternatives such as reducing hours.
Know what needs to happen in the event of your entity closing
The vast majority of not-for-profit entities will manage through the tough times, some with greater success than others. However, some will not survive. How you wind up your not-for-profit entity will depend on how the entity is established, its constitution or memorandum and articles of association and the jurisdiction it is under.