Markets rise and fall. History says this is 100% predictable – only the exact timing is a mystery.
The U.S. stock markets have been on a tear since early March, 2009, and “experts” have been warning of an impending “correction” (meaning a substantial drop in major indexes) for several years. So far, their predictions haven’t come true. But, like earthquakes along the pacific coast, they’ll eventually be right.
A correction (which essentially means that stocks were overvalued, and some or all of the excess value goes away in a short time) isn’t the same as a crash (which is a bigger drop, with more dramatic results), but it can still hurt. There will be direct and indirect impacts when it happens. Some of them are likely to hit your organization.
Why should nonprofits care about this? Even if your endowment or reserves do not include a lot of stocks, this will impact you. Consider the effects on fundraising. After past market disruptions, individuals and institutional funders cut their giving. One reason is that folks start to feel poorer (and on paper, they are). Corporations need to trim expenses to regain their financial position. Government agencies will see tax revenues decline, which means cutting some expenditures, for example funding for social service, housing or environmental programming. Foundations are required by law to give away a portion of their assets each year, and that portion is calculated on a rolling three-year average of asset valuation; a big loss in one year will impact grant-making for the next three years. In the past, market adjustments have led to changes in funding priorities, and a reduction in overall resources available to nonprofits.
None of us can control the market, so why worry about this now?
Waiting until it happens is always an option. Just not a good one. Most nonprofits will be caught flat-footed, scrambling to adjust, creating a degree of chaos inside their organizations.
Here are a few better options, to help ensure you’re prepared when the bad news hits:
1. Have an adaptive plan in place
I once went to a seminar where the group leader opened with “Those who fail to plan, plan to fail.” He had a point. But it’s not just having a plan – it’s having the right kind of plan that matters. We’ve written about PIMG analysis showing that organizational strategies with a set of specific characteristics appear to be much more successful. Many nonprofits (over 75% in our study) don’t have substantial strategies. Crafting a high-performance strategy is the first step.
But there’s another essential piece: your plan needs to be adaptive. This means it’s designed to be adjusted to changing, even unexpected, circumstances. Staffing, operations, fundraising, programmatic focus and financial projections can all be modified to quickly refocus the organization. You've heard the term risk management; this is what I'm talking about.
An adaptive plan will allow you to respond quickly. No deer in the headlights. And no three months planning for a 9-month strategic planning process!
Diversity is quite the rage in nonprofit circles. (Actually, this has been true for around 30 years.) That’s about equity and inclusion, which are important. Here’s the other diversity: diversity of your revenue mix.
Revenue mix is simply the pie chart of where your funding comes from. We recently issued a white paper on the essence of the nonprofit business model, which describes the revenue structure as the fifth of five business model dimensions. Our research shows that diversification of the pie slices correlates to organizational success. Successful nonprofits don’t necessarily have more eggs, but they tend to have more baskets.
You also need to know full costs and the dynamics of cross-subsidies between activities. Whoa, did I write that in a blog post? Yep. That’s pretty geeky analytical stuff, but can be the difference between sinking or floating through the storm. (For those tracking, I think I’m up to 5 clichés in this post, with time still on the clock.) You don’t just need diversity, you also need the right pie slices for your organization, and it’s not something you should decide off the cuff. These are critical parts of a good planning process.
Also, I need to mention something you’re probably familiar with: diversifying your investment portfolio. This is different from your funding mix, but really is the same concept applied to your assets. Don’t invest your reserves too heavily in one type of asset (such as stocks) or one particular asset (such as one company’s stock). And if you can’t tolerate much risk, consider less volatile (and probably less lucrative) investments. Most investment advisers will tell you the same thing (but they’ll charge you more than I just did.)
3. Use your plan to compete
Most folks agree that fundraising is a competitive market. The pond is a limited size, and many organizations are thirsty. In a drought the pond shrinks, and the competition heats up. Are you prepared?
Nonprofits need to be effective at making their case for support. What’s your case based on? History? Heart strings? Relationships? Pleading? Possibly, but an increasing number of donors want to see evidence of impact, thoughtful strategies, and clear responses to emerging needs. A solid business plan does all these things. But how many organizations use their business plan to make the case that they – and not their many less-prepared competitors – are worthy of funding? Not many – and that present an opportunity to distinguish themselves.
After you’ve developed a good plan, share it. This will make a stronger case than yelling the loudest or speaking in hypotheticals!
When the dust clears...
After you’ve successfully navigated through an unexpected crisis (which won’t be unexpected, since you’ve read this post), you can build your brand value by sharing your tale of adaptation. You may be among the few who emerge stronger than you were before the crash. What did you do differently? What did you learn? Your frazzled peers will appreciate your ideas.
As consultants specializing in helping nonprofits define and sustain healthy business models, we love getting calls for folks who are preparing for an unknown future. We also get calls from folks near panic, and it’s a lot tougher to help in those cases (though we can try).
Another definition of preparation can be, “panic avoidance.” Highly recommended.