How can non-profit leaders navigate financial volatility?

Assessing the financial situation is the critical first step in navigating financial volatility. To evaluate your organization's financial health and make informed decisions, there are many steps, the following could be the most important between them in my opinion: ?Review Financial Statements: Start by examining your organization's financial statements. These documents provide an overview of your financial performance, assets, liabilities, and cash flow. ?Cash Flow Analysis: Deep analyze for the cash flow to determine if you have adequate liquidity to cover operating expenses, debt obligations, and emergencies. Cash flow statements help you understand when money is coming in and going out then decides what actions to take if necessary.

In assessing the financial situation of your nonprofit agency, one thing to consider is what priority your organization places on financial planning and budgeting. Budgets acts as roadmaps for the agency and give clarity towards the fiscal operation. In agencies that experiencing financial volatility, one step is to consider is how certain sources of revenue have experienced variability and what effect that has had on specific type of expenses. Understanding these differences from a budget vs actuals standpoint can aid in crafting a plan for resolution. At a higher level, identifying areas of risk and mitigation strategies will help move the organization to more long term sustainability.

The objective of a non-profit organization is to seek value for money. This is achieved by efficiency and effectiveness. The sources of funding could be government support, charity, donations, etc. There could be challenges in predicting the future cash inflows thereby leading to making wrong estimates/ budgets. The reason is assumptions hardly apply in this case. This makes it harder to plan expenditures against cash inflows. As a leader, to navigate financial volatility the expenditure plan must be changed constantly by prioritization and those that cannot be accommodated in the budget period will be deferred to next budget period.

When examining your revenue, expenses, assets, liabilities, etc., it is important to disaggregate each of those elements. For example, what is the percent and dollar breakdown for each of your sources of revenue and how volatile is each portion? How diversified are your sources of revenue; i.e., what percentage comes from federal government grant contracts, state contracts, local contracts, fee-for-service, individual donations, corporate donations, foundation grants, annual endowment allocations, etc.?

Navigating financial volatility is crucial for the long-term success of non-profits. Leaders must prioritize diversifying revenue streams, exploring various fundraising methods, and building both reserve and endowment funds. The latter, when well-managed, can provide sustainable returns to buffer against future uncertainty. Transparent communication is key: maintaining trust with stakeholders can be the backbone of an organization's resilience. It's also beneficial to engage in scenario planning, preparing for various financial outcomes to ensure adaptability. Lastly, a focus on the core mission ensures that the organization remains true to its foundational objectives, even in tough times.

While working on scenarios, a very careful exercise of prioritization should be conducted. Practically, leaders should establish the minimum programming needed to respond to the affected communities. this would be the bottom-line and all additional planning should be above this line. In order to conduct this prioritization exercise, non-profit leaders should be aware of the needs and more importantly should be ready to sacrifice the non-essential programmes.

Not-For-Profit Social Enterprises can enhance their financial stability by establishing a consistent monthly recurring revenue (MRR), which forms a dependable foundation of funding. This can be achieved through methods like membership fees, subscription services, extended contracts, and retainers. Consider grant money as occasional windfalls, while MRR serves as the steady, ever-flowing river of financial support.

Learning how to react to changing circumstance is more important than guessing at what risks might arise. Knowing your fixed costs (e.g. rent, utilities, salaries) and your variable costs (e.g. food for meals, supplies for construction) will help react to both challenges like a drop in donations or a surge in the number of people who need food boxes or a place to stay, but ALSO to opportunities such as delivering more food to more people when donations increase or a corporate sponsor is willing to help with a food drive or a construction blitz. Understanding your cost structure is critical to reacting to both challenges and to opportunities.

The secret sauce in communicating with stakeholders is to do it early and often. Building strong ties with stakeholders prior to calamitous times places the relationship on par with a partnership as opposed to a mere transactional association. This type of bond comes in handy when you need to make difficult requests.

Diversify Funding Sources: Relying on a single funding source can leave a non-profit vulnerable to financial volatility. Leaders should diversify their funding by seeking support from multiple sources, such as grants, individual donors, corporate sponsorships, and fundraising events. This diversification reduces the impact of any potential loss of funding from a single source

I think this is arguably the most important aspect of managing financial volatility for an NGO. Our industry needs to identify and utilise the skills and experiences that we have and use them to generate income to help fund our projects and programmes.

Diversifying funding is undoubtedly one of the most important things a non-profit can do for long-term sustainability, but it is often easier said than done. While it's never fun to spend more money outside of your programs or for professional services, it may be beneficial to hire outside experts in this arena (grant writing, fundraising events, donor engagement, etc.) This can help speed up the process (sometimes it could take years to build a sustainable donor pipeline) and will allow your ED to focus on other parts of the org as well. A good development professional will return much more than they cost and can help you strategically diversify funding sources.

Build Reserves: Maintaining financial reserves is crucial for weathering financial uncertainties. Non-profit leaders should prioritize building reserves during stable financial periods. These reserves can be used to cover unexpected expenses, bridge funding gaps, or sustain operations during lean periods.

It is important for us to accept that we are running a business so sound business principles must be used. It seems that the terms charity or NGOs cause both persons within and outside the industry to believe that we do not need good business practices. This starts with the quality of staff we hire, the compensation packages we give them and then the requirements for professional approaches to our business. It may be a charity/ngo but we are still a business.

Given donors requirement, having reserves is not always possible. Taking a step back and ask radical questions about the efficiency of non-profit programmes is one of the ways to keep looking for cuts and reductions. We all know that many of the non profit programmes are redundant and could be easily sacrificed. Keeping programmes that have the most impact of affected populations should be a priority for non-profit leaders.

Many nonprofits are encouraged by donors and foundations to grow (serve more people, expand to more communities), and this can paradoxically dilute the effectiveness of a close-knit group who know their neighborhood. What works in a under-resourced neighborhood with an established property and low rent may not scale, and the tactics that work in a wealthier neighborhood (like school auctions at wealthy schools) might not work across the tracks in an under-resourced area, where a multi-family garage sale or a festival might raise much more money for the school. A tactic that works for others may not work for you, but experiment and learn. As with so many things in life, listening is key but understanding is critical. Know your audience.

It's easy when you're in the trenches of keeping your business alive to forget about planning for the future. However, it's so important to pull your heads up from the parapet and look boldly ahead. This won't just help you avoid mistakes again in the future, but if you bring your teams along with you on the journey it'll pay dividends when difficult times arise again, and you need everyone to band together.

Another critical area learning unlearning and relearning. Continuous improvement is another critical aspect of sound business practices.

Budget projections vs real budgets comes in handy. Projections will help the institution to stay within acceptable spending limits thereby cushioning against reserves misuse.

One thing to consider is how your agency can collaborate with other nonprofits in your service area or footprint. Many funders are looking for collaboration from their grantees as it helps maximize impact. For your organization, that added collaboration may increase and diversify revenue. This type of strategy goes a long way towards bringing sustainability to your organization as it shows funders a willingness to collaborate and ensures the mission continues forward in the community.

Board Engagement and Oversight: Engaged and knowledgeable board members can provide valuable guidance and oversight during periods of financial volatility. Non-profit leaders should actively involve the board in financial decision-making, leverage their expertise, and ensure board members are well-informed about the organization's financial situation.