Downturns are a natural part of the economic cycle. Recessions also present challenges for businesses, communities, and nonprofit organizations. To weather economic uncertainty, the prescription is the same for nonprofits, businesses, and families—budget carefully, plan wisely, and shore up income while cutting expenses.
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In this article, we will examine some tips for nonprofit budgeting during times of economic uncertainty or downturns. Having a plan for what to do in the best case, most likely case, and worst case is essential. A solid financial management and budgeting system can help maintain laser-like focus on the budget and real-time visibility into changing revenue and expenses. In each of the following tips below, we will demonstrate how Sage Intacct can help.
Tip 1: Review the sources of your revenue
Recessions can hit revenue in many ways. Recessions usually reduce household income and make people more cautious about their spending. Donations to your organization from individuals may start to decline. If grantmaking foundations start to struggle, your organization could have grants that are not able to be renewed. Finally, if your organization has an endowment and investments, those assets may underperform. In a very deep recession, nonprofits can get hit from all sides, forming a perfect storm for declining revenue.
Study overall revenue and consider each source of revenue. Will each source be more likely to increase or decrease in a recession? Are there other sources of recession-resistant revenue you haven’t pursued?
Sage Intacct nonprofit accounting software delivers customizable financial reporting and dashboards so you know exactly where your revenue stands at all times. The CFO’s role-based dashboard can include at-a-glance data visualizations such as year-to-date revenue, revenue by entity, and sources of revenue.
Tip 2: Study the impact of downturns on demand for services
Depending on your organization’s mission, demand for services may increase during an economic downturn. For example, human services and healthcare organizations usually have more clients needing help. Animal welfare organizations need to take in more owner-released pets.
Other types of nonprofits may find demand for services decreases. For example, organizations that focus on theatre and the arts may see demand for tickets decrease and public funding shift toward more human services priorities.
For the purposes of budgeting, being able to accurately forecast the increase or decrease in demand is just as important as knowing where your revenue is headed. Demand will drive expenses. Keeping a good pulse on what is happening within your community and with your clients will help you better predict demand changes.
Having a robust financial management system with data that stretches back across one or more prior recessions is very helpful for modeling the potential increase in demand for services. Sage Intacct turns data into insights by tagging transactions and operational data with Dimensions to add important context, such as location, entity, project, department, and more. Being able to slice and dice data on multiple dimensions helps organizations identify patterns of demand and delivery across time.
Tip 3: Make plans for best, worst, and most likely forecasts
No one can know exactly how deep or long an economic downturn is likely to persist. Similarly, recessions impact different nonprofits in different ways, according to the unique mission and delivery models of each organization. To deal with uncertainty, it is best to model several forecasts and budget accordingly. Experts recommend setting up a best-case scenario, worst-case scenario, and a most-likely scenario that falls somewhere in between. With these three plans, leaders can adapt more quickly to the changing environment.
Sage Intacct Planning provides a real-time single source of financial truth that empowers agile decision-making while reducing budgeting and forecasting time and effort by 50% or more. It enables nonprofit leaders to put best practices to work in their planning and budgeting, with tools for forecasting and modeling and easy-to-understand data visualizations and reports.
Tip 4: Keep an eye on cash flow and spending
Cash is a much-needed resource during economic downturns, and nonprofits will strive to manage it carefully. Ideally, an organization is in a solid cash position prior to the start of a recession. Cash-strapped organizations will have a greater struggle, and this could become acute if they are depending on lines of credit that shrink or disappear.
Study your current cash position and practice cash flow planning. Identify revenue sources that often pay late versus those that are always early or on time. Are there any cash drains on the organization you could get ahead of now? Do you have major funders that might stop paying their bills temporarily, for example, the Federal government during a budget shutdown?
In the best case, your cash position is strong enough to fill gaps or slowdowns in revenue. For most organizations, some adjustments may be needed to strengthen cash flow. For example, if an asset may need to be sold, it could be better to do that before the worst of the recession arrives, and prices for the asset become depressed. Organizations may need to shore up lines of credit for short-term financing or try to secure a longer-term loan with better terms.
Sage Intacct core financials include Cash Management automation that provides complete, up-to-date visibility of your cash position. It also helps you increase control over your cash by automating and strengthening cash-management processes. In addition, Sage Intacct Spend Management makes it easy to streamline your purchasing and payables process and ensure your organization's spending stays within budget.
Tip 5: Diversify revenue
Individual donations and fundraising events with the public may not generate as much revenue during a recession. Nonprofits may want to focus more efforts on high net-worth donors, foundations, and government agencies for funding. In most cases, this will mean stepping up your grant-seeking activities.
Sage Intacct helps nonprofits automate grant management and tracking. Compare budget to actuals on grants and manage delivery milestones. Report on grant delivery, financial data, and impact metrics needed to receive reimbursements, access restricted funds, and earn renewals.
Tip 6: Cut expenses as early as possible
If a recession is coming, knowing where you can cut the budget is essential. So is taking decisive action. Making difficult decisions earlier enables your organization to build up some reserves to weather the downturn.
Cutting in the right places helps preserve as much revenue as possible for the greatest mission impact. That is why it is essential to have a financial management system that can help you identify which programs and entities perform best financially and deliver the most impact. Sage Intacct tracks and reports on both financial metrics and operational outcomes, like how many meals, classes, or treatments were delivered.
Tip 7: Consider changes to staffing and volunteers
No one likes to think of layoffs. But if labor expenses are too high, organizations might have to trim staff during a recession. Nonprofit leaders need to know the numbers on labor costs and empower employees to become as productive and efficient as possible.
Another planning consideration is volunteer staffing. During a recession, volunteers may pull back on their hours as their families have to work harder to stay ahead.
If you have revenue and expenses under control, a recession can actually be a strategic time to hire nonprofit professionals with exceptional qualifications who have been displaced from other organizations. Your organization may also be able to recruit talented new graduates and interns.
Sage Intacct nonprofit financial management software streamlines financial processes and infuses automation into time-consuming areas such as monthly reporting, consolidations, accounts receivable, and accounts payable. By freeing up staff to focus on more strategic work, organizations may be able to save on labor costs and run a leaner team. This may help avoid layoffs or even free up funds to make a great hire when an opportunity arises.
Ready to strengthen your organization’s budgeting capabilities?
While the economy in the U.S. has not been declared a recession, there is uncertainty about the economy in 2023. Many financial experts are predicting a recession soon. Regardless of timing, downturns are a part of the business cycle. The best antidote to uncertainty is a flexible strategic plan, resilient financial management, and good nonprofit budgeting tools and processes. To learn more about how to strengthen budgeting and planning, read the 8 Signs Your Nonprofit Has Outgrown Excel for Budgeting and Planning e-book.