Navigating the Generosity Crisis: Post-COVID Funding Surge – What’s Next?
Jason Kruger, Founder and President of Signature Analytics, shared invaluable insights on The Nonprofit Exchange Podcast, emphasizing the importance of understanding every aspect of your nonprofit organization—even those outside your expertise.
In the wake of the COVID-19 pandemic, nonprofits experienced an unprecedented surge in donations fueled by heightened public awareness and generosity. However, as the world stabilizes, this surge has tapered off, presenting new challenges for these organizations.
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Or, read on for strategies for managing the decline in donations, ensuring financial stability, and preparing for future uncertainties.
Understanding the Current Landscape
During the pandemic, nonprofits saw an extraordinary increase in donations as people rallied to support various causes. However, this spike was not sustainable, and many organizations are now facing a decline in contributions. To adapt, nonprofits need a strategic approach to budgeting, financial management, and operational planning.
Key Strategies for Managing Declining Donations
1. Reevaluate Your Budgeting Process
Start Early: Effective budgeting is the cornerstone of financial management. Begin the budgeting process well before the start of the fiscal year—ideally in February or March. This early start provides ample time to gather insights from various departments, make necessary adjustments, and engage with the board in the planning process. By involving key stakeholders early on, you can ensure that your budget aligns with the organization’s strategic goals and reflects any anticipated changes in funding.
Adjust as Needed: A static budget can become a liability if circumstances change, such as fluctuations in donation levels or unexpected expenses. Regularly review and adjust your budget based on actual performance and evolving financial realities. Monthly or quarterly reviews are essential to keep your financial plan aligned with your organization’s needs. This iterative approach helps you respond to financial challenges proactively and ensures that your budget remains relevant throughout the year.
Incorporate Scenario Planning: Consider incorporating scenario planning into your budgeting process. This involves creating multiple budget scenarios based on different potential outcomes, such as varying levels of donations or unexpected costs. Scenario planning helps you prepare for a range of possibilities and enables you to develop contingency plans that can be quickly implemented if needed.
2. Prioritize Cash Flow Management
Regular Forecasting: Implementing a weekly cash flow forecast is crucial for managing day-to-day financial operations effectively. This practice involves projecting cash inflows and outflows, which helps you track your organization’s liquidity and make informed decisions about payments and financial commitments. Accurate cash flow forecasting ensures that you have the necessary funds to meet operational expenses, invest in strategic initiatives, and handle unforeseen financial challenges.
Handle Reimbursements: Be mindful of cash flow challenges associated with grants, particularly cost reimbursement grants that require upfront expenditures. To manage these challenges effectively, plan and budget for the timing of reimbursements. Ensure that you have sufficient liquidity to cover these costs until reimbursement is received. Consider setting up a line of credit or maintaining a cash reserve specifically for covering these interim expenses, if necessary.
Optimize Receivables and Payables: Review your accounts receivable and accounts payable processes to identify opportunities for improving cash flow. For example, you might offer incentives for early payment of invoices or negotiate extended payment terms with suppliers. Streamlining these processes can help you manage cash flow more effectively and reduce the risk of liquidity issues.
3. Build and Manage Reserves
Create a Safety Net: Building financial reserves is a strategic way to cushion against unexpected expenses or funding shortfalls. Aim to accumulate a reserve fund that represents a percentage of your annual budget or operating expenses. This safety net provides flexibility for investment, growth, and managing financial strain during challenging periods. A well-managed reserve fund can help you maintain operational stability and continue pursuing your mission even when donations decline.
Strategic Allocation: Reserve funds should be strategically allocated to support your organization’s long-term goals and mitigate risks. Consider creating different reserve categories, such as an operating reserve, a capital reserve, and a contingency reserve. This approach ensures that your reserve funds are used effectively and aligned with your organization’s strategic priorities. Regularly review and adjust your reserve allocation based on changing financial conditions and organizational needs.
Establish a Reserve Policy: Develop a formal reserve policy that outlines the purpose of the reserve fund, the target amount, and the guidelines for using and replenishing the reserves. This policy provides clarity and accountability, ensuring that reserve funds are managed consistently and in line with your organization’s financial strategy.
4. Develop Robust Financial Processes
Establish Processes: Implement clear and consistent financial processes for day-to-day activities, including bill payments, fundraising, and financial reporting. Standardized processes help maintain financial stability, improve transparency, and ensure compliance with accounting standards. Establishing well-defined procedures for financial transactions and reporting also reduces the risk of errors and enhances overall financial management.
Monthly Closures: Perform monthly account reconciliations to ensure accurate financial reporting. This practice involves comparing your financial records with bank statements and other external documents to identify and resolve discrepancies. Monthly closures support effective management decisions by providing timely and accurate financial information. Additionally, regular reconciliations prepare your organization for audits, making the audit process smoother and more efficient.
Implement Internal Controls: Develop and enforce internal controls to safeguard your organization’s assets and ensure the integrity of financial reporting. Internal controls may include segregation of duties, authorization requirements for transactions, and regular audits of financial procedures. Effective internal controls help prevent fraud, errors, and mismanagement, contributing to overall financial stability.
5. Leverage External Expertise
Seek Advisory Support: For smaller organizations, hiring a full-time CFO may not be feasible due to budget constraints. Instead, consider engaging with fractional CFO services or seeking advisory support from board members with financial expertise. Fractional CFOs provide high-level financial guidance and strategic insights on a part-time basis, offering a cost-effective alternative to a full-time hire. Advisory support from board members with financial backgrounds can also provide valuable perspectives and help you navigate complex financial challenges.
Consult with Financial Experts: Engage with external financial experts, such as accountants, auditors, or consultants, to gain specialized knowledge and support. These experts can assist with specific financial issues, such as optimizing tax strategies, conducting financial analysis, or improving financial systems. Leveraging external expertise ensures that you have access to the knowledge and resources needed to address financial challenges effectively.
Build Relationships with Financial Partners: Establish relationships with financial partners, such as banks, investment advisors, and grantmakers, who can provide additional support and resources. These partnerships can offer valuable insights, funding opportunities, and financial tools that help strengthen your organization’s financial management and resilience.
Final Notes
Navigating the post-COVID funding landscape presents unique challenges for nonprofits, but with strategic planning and effective financial management, organizations can adapt and thrive. By reevaluating budgeting processes, prioritizing cash flow management, building reserves, developing robust financial practices, and leveraging external expertise, nonprofits can ensure stability and prepare for future opportunities.
Embracing these strategies will help organizations navigate the generosity crisis and continue making a meaningful impact in their communities.
How Signature Analytics Can Help Your Nonprofit
Signature Analytics’ nonprofit accounting services help you make financial decisions based on the highest quality accounting practices, while our day-to-day outsourced accounting teams implement the highest quality donor and government accounting standards.
For additional assistance with cash flow management, developing detailed nonprofit budgets, and audit support, contact Signature Analytics today.
