The rumblings have started. We’ve heard the R-word bandied about. At least one major economic indicator is predicting a recession. From history we know that what goes up must come down, at some point. The stock market and employment have been trending upward for about a decade… we don’t know when, but we can be pretty confident a downturn is closer to the horizon than it was yesterday.
What does this mean for nonprofits? Should you do anything about it? And more to the point, should you do anything about it NOW?
Short answers: a lot, yes and yes.
It’s no fun to talk about hard times, but this is actually a positive story that starts with straight talk about conditions that are likely to happen at some point. I’ll begin with a hike down into the canyon…
A recession happens when the economy contracts for a period of time, usually defined as six months or more. When this happens, employment drops, consumers spend less, the tax base decreases and, often, stock values decline. Even a moderate recession can clobber nonprofits. A major event, like the economic landslide that started in 2008, can throw many organizations off their rails.
Let’s assume that a moderate recession will hit North America in the next year. From the standpoint of nonprofit leaders, what would the impacts be?
For starters, revenues are likely to be crunched, to varying degrees. Let’s start with fundraising. Individual giving is directly affected by donors’ sense of how much discretionary income they have and are likely to have in the forseeable future. Donors who rely on employment income may likely give less if they feel jittery about job security (or, obviously,if they’re unemployed). Donors who rely on investment income will see their assets drop if markets fall, and contribution levels may also decline. Corporate donations are also very sensitive to economic conditions.
Foundation resources are primarily a function of investment markets. The bad news is that if the market drops, the pool of grant funds available to nonprofits will decrease. The worse news is that even a one-year stock market slide can negatively affect grant funds for three years (for US nonprofits), because of IRS rules governing foundations.
So far, so bad. But it gets even more dicey for organizations that rely on government funding. Federal, state and local funding of human services, housing, environmental projects, and arts and culture typically gets crunched following a recession, sometimes for years, until the tax base recovers. Discretionary programs are at greatest risk, but even essential services, such as child welfare, emergency shelter and mental health are often affected. Government agencies can’t spend money they don’t have, despite the fact that needs often rise when the economy falls.
I should note that there can be limited countertrends. For example, fundraising for basic needs can rise when fortunes fall, as the case may be more poignant during a recession. But the overall funding pool generally shrinks and takes time, even years, to recover.
Most nonprofits haven’t planned for the possibility – much less the near certainty – of a recession. Research shows that nonprofits have, on average, between one and 1.5 months’ cash on hand, which puts many on the brink of running out of money should a storm arrive. No plan and little cash is a bad combination.
Can your organization simply wait and see what happens, and then react? The honest answer is yes, and most nonprofits will do exactly that. Reacting to a crisis is a time-tested response. Unfortunately, the test results are really poor. Organizations often go into bunker mode, trying to emerge at the other end where, they hope, clearer skies will prevail. Many that take this reactive approach do in fact survive, but in weakened condition. The bunker period can take a toll on morale, performance and financial position.
Ok, this doesn’t sound too pleasant, but thankfully we’re now at the bottom. How does this story become uplifting?
The good news is that (at least as I write this, in August) the economy remains strong. This is a great time to plan for the future – a future that may include new programmatic challenges, growth and, likely, weathering economic storms.
The key is to be proactive. I recommend three short-term actions to promote long-term organizational health:
1. Discuss recession planning at leadership meetings
What will a recession look like for your organization? What funding sources would be affected? How can you adjust expenses and services? What relationships are key to resolving resource challenges? These questions may not have immediate answers, but the discussion is essential, and it needs to start somewhere. One specific discussion may be the organization’s investment practices and short-term asset allocation.
2. Develop contingency budgets
Most budgets are inherently optimistic. I always favor a degree of fiscal conservatism in budgeting, but even a conservative budget may not help in the face of an unexpected economic shock. A contingency budget can empower you to react quickly and thoughtfully in the middle of a fiscal year.
3. Develop a business plan
Last, but not least, every organization, for-profit or nonprofit, needs a business plan that charts where it’s headed and how it will get there, with operational and financial specificity. This is far more practical and useful than a high-level strategic plan, which will likely get buried when an unexpected recession hits. A good business plan is built on solid market research and financial modeling, both of which can easily be revised to accommodate changing conditions. Because it includes in-depth financial analysis, a solid business plan addresses fiscal scenarios head-on. It’s an ideal tool for proactive leadership and management.
Based on experience – I’ve led four nonprofits, three of which weathered recessions and emerged stronger than before – business planning is a key to adaptive leadership. This is the essence of why I’ve made business planning a core service of Public Interest Management Group.
The key to long-term organizational sustainability is resilience.
What builds resilience? More than anything else, it’s discipline. Proactively responding to challenges and opportunities is disciplined leadership.
A recession will come and a select group of nonprofits will shake it off and thrive afterward. Hopefully you, dear reader, will be in that group…