Monday, February 2, 2009

Advice to Charities in Hard Times

This past week I was asked to speak before a group of charity leaders on what they should be doing to weather the tough economic times. My advice was clustered into two categories - margin and mission. The margin side is all about financial matters. The mission side of the equation is about actions to be taken that relate to the culture, values and overall approach of the charity.

On the margin side of things, the suggestions were as follows:

  1. Contingency budgets - a charity should be proactive in planning for potential cuts by developing budgets that assume at least a 10% and possibly up to a 30% reduction in funding. In this way the charity will be as well positioned to react when funders call with the bad news.

  2. Watching the money - every charity should hold a monthly meeting with key staff to review revenues and expenditures. Any variance of 10% or more should be carefully analyzed and action steps spelled out to address problems. A cash flow analysis should also be conducted to assure that there are adequate resources available for day-to-day operations. If there is an over reliance on credit to make payroll for example, the charity should be working to reduce it and not waste money on interest payments.

  3. Mergers and acquisitions - as we have suggested in the blog entry - Good News in a Bad Economy - this may be an opportunity for the charitable sector to finally see some improvement in overall efficiency. Charity leaders should be keeping an eye out for opportunities to merge with or acquire other charities that are struggling the most. When CEOs retire (it has been predicted that as many as 50% will over a 5 year period) it may be a good opportunity to have these discussions with that charity's Board leadership.

  4. Capital projects - should be put on hold unless you are already well down this road.

  5. Working Capital Ratio - if a charity has not done it yet, now is probably too late, but the best charities have a year or more of liquid assets in reserve to carry them through the down times.

On the mission side I spent time discussing a good book that I just read which captures much of what I believe the best charities do. The book is called Forces for Good. Through an intensive research process (interviewing charity CEO's, experts in each category of charities and many others) they drilled down to 6 practices of high impact nonprofits. Two are internal to the nonprofit's operations and four exemplify how the nonprofit relates to the outside world. The two internal qualities are adaptation and shared leadership. I believe these qualities are similar to what I described in my blog entry - Core Values are Not Just a Sign on the Wall. Adaptation is similar to a continuous improvement process and shared leadership to a team approach. In addition to these core values, I would submit that there are two additional internal approaches that are also critical to the best charities - an outcome driven culture and a focus on maintaining financial health. An outcome driven culture is one in which the charity sets clear outcome goals, gathers data on how they are being achieved, changes behavior based on the data and rewards those who achieve the best outcomes. Maintaining financial health is spelled out in the margin section of this blog entry, as well as in the other measure we review at Charity Navigator. The agency must have a culture where financial health is valued and encouraged rather than the hostility it receives from some (see Bad Charities with Heart).

On the external side, the authors of Forces for Good indicate the organization should be collaborating with other nonprofits, advocating for appropriate policies with government, working with businesses and engaging individuals. In essence, the charity needs to be an active participant in every sphere of influence. All of these observations make sense to me and I urge you to read the book to get the full lowdown on all of this. The one area where I somewhat part company with the authors is when they turn to financial measures of performance, but that is for another day.

My concluding advice to the charity leaders was that they will play a pivotal role in how their agency will fare in these hard economic times. In spite of the challenges and the fear of how bad things will get, they must be able to instill hope, vision and passion about the value of the charity's work. They also need to take care of themselves and not burn out on stress and worry. To get through these times, all of us need to do the best we can each day and then go home and recharge for the next day. "One day at a time" is very sage advice, especially when times are hardest.

P.S. Thanks to a post by Lucy Bernholz on Twitter, I see that a colleague named Michael Seltzer has also just written something helpful on the topic called - Strategies for Hard Times: How to Downsize a Nonprofit.

4 comments:

Amy Sample Ward said...

Hi Ken- This is great advice! I'm going to post a link over to it from KnowHow NonProfit's forum where folks are currently discussing the economic downturn. Thanks for sharing!

Ken Berger said...

Amy,

Glad to be of service to our friends in the U.K.!

CIW said...

Ken: Your opinions and due diligence are a true asset to those willing to take time out from chopping their individual tree's and sharpen their axes!

However, it seems to me that, despite the current economic downturn, conventional wisdom is still unwilling to change strategy and approach when the facts change.

And here is why...We recently had a meeting with a small non-profit struggling to stay afloat and what came out of that meeting yielded valuable insight moving forward.

Not having an alternative- contigency-plan, in place for times like these leaves any organization in a vulnerable position.

Sure, we all understand... conventional wisdom says, scale down program service expenses and attempt to do more with less and duplicate best practices of those able to do it better.

But, what happens when your programmatic needs are superseding funds available, traditional donor's are retracting their usual donations, existing and newly formed non-profit's are competing for the same limited pool of dollars and most importantly, what happens when you know your existing staff doesn't possess the specialized skills and creativity to duplicate what larger non-profits can afford to do, i.e., best practices duplication are not working?

In closing, Times like these are forcing both for-profit and non-profit leader's, to take inventory of false-belief's and re-examine what's no longer working now that the facts change?

C. Iglehart Williams
Founder, Chief Investment Officer
Avatar Advisors Group

Ken Berger said...

CIW,

I think that these times are scariest for the smaller non-profits who have less ability to cut their budgets. Their strength is that they can be more nimble to change their direction due to their scale. However, some very good small charities may well have to close their doors due to the mission impossible nature of the financial challenges they may face. I also hope for mergers, acquisitions and creative collaborations, but suspect that myopic, head in the sand business as usual will rule the day.