SchoolNutrition.Org

Navigating the Navigating the financial stormfinancial storm

2009 National leadership 2009 National leadership conference conference

SchoolNutrition.Org

What We’ll CoverWhat We’ll Cover

Today’s Economic Landscape What’s happened and what’s going to happen How it’s affecting nonprofits at large, and your

organizations

Fundamental Principles of Fiscal Management How they can help you stay on course in this

recession

Practical Strategies You Can Use Developing smart strategic responses Tools to take your pulse and keep you grounded

2

SchoolNutrition.Org

What We Are FeelingWhat We Are Feeling

3

SchoolNutrition.Org

Historical analysis does not guarantee future results.As of September 30, 2008Source: Federal Reserve, Haver Analytics, US Bureau of Economics Analysis and US Bureau of Labor Statistics

(10)

(5)

0

5

10

15

20

60 64 68 72 76 80 84 88 92 96 00 04 08

YoY

% C

hang

e 

Recession Real Bank Credit

US Recessions and Bank Lending

Credit Expands After the Credit Expands After the Economy Has Rebounded, Further Fueling RecoveryEconomy Has Rebounded, Further Fueling Recovery

SchoolNutrition.Org

Historical analysis and current estimates do not guarantee future results. As of December 31, 2008*Median value excluding Great Depression and current recession**AllianceBernstein forecast***Average excluding Great Depression and current recessionSource: Bureau of Economic Analysis and AllianceBernstein

Current Recession Will Likely Last Longer Than Usual

Most Recessions Have Been Mild and Short,Most Recessions Have Been Mild and Short,Except for The Great DepressionExcept for The Great Depression

Average*

Percent Decline in Real GDP

Average*** (2.2)%

16**

13

11

10

8

1011

6

16

16

43 Months

8

8

1929–1933

1937–1938

1948–1949

1953–1954

1957–1958

1960–1961

1969–1970

1973–1975

1980–1980

1981–1982

1990–1991

2001–2001

2007–2009

(26.5)%

(3.5)(2.7)(2.7)(3.7)(1.4)(0.6)(3.1)(2.2)(2.7)(1.3)(0.4)—

SchoolNutrition.Org

Today’s Environment More Supportive Today’s Environment More Supportive of Eventual Recoveryof Eventual Recovery

Federal Deposit Insurance Corporation

Social Security

Coordinated Rate Cuts By Central Banks

Good Trade Relations Among Many Nations

Increase In Money Supply

Lower Tax Rates

Single Digit UnemploymentAs of December 31, 2008Source: AllianceBernstein

That Was Then(Great Depression) This Is Now

SchoolNutrition.Org

Dealing With Today’s Economic Dealing With Today’s Economic LandscapeLandscape

• Business as usual won’t do anymore. It’s time to adapt and transform.

• Active engagement with today’s challenges increases your likelihood of emerging from the recession with important services in place.

• Going it alone won’t work. It is in working with others that leaders find the best ways to generate solutions and hope for the future.

SchoolNutrition.Org

What’s HappeningWhat’s Happening

• Combination of Events Credit markets seized Stock markets plummeted Employment rate falling Housing and real estate markets in decline

• Impact on Nonprofit Organizations Downward pressure on government and

philanthropic funding Protectionist behaviors and general cost increases Limited and / or more expensive access to credit The bottom may take longer to reach for nonprofits

• All compounded by an increased need for services

8

SchoolNutrition.Org

What’s HappeningWhat’s Happening

How Has This Downturn Been Different for Your Organization? 1980s “Devolution” of Services 1987 “Black Monday” stock market crash Early 1990’s Recession 1998 Credit Crisis 2002 – 2003 Recession

How Organizations are Responding Today Reducing operating budgets Putting expansion plans on hold Eliminating staff positions Merging or dissolving Dramatically transforming their business models

9

SchoolNutrition.Org

How Is or Will This Affect Your How Is or Will This Affect Your Organization?Organization?

Transactional Changes: Revenue, Expenses, and AssetsRevenue

Government funding levels Individual / institutional contributions and fundraising events Fees from those who use your services

Expense Increases and cost pressures on many line items

Assets Could be financial or non-financial

10

SchoolNutrition.Org

How Is or Will This Affect Your How Is or Will This Affect Your Organization?Organization?

Transformational Changes

Restructure, Reorganize, and Engage

Mission-based decisions

Strategic, operational, and cultural

Alternative service delivery strategies

Alternative staffing models

Alternative business models

11

SchoolNutrition.Org

How Do I Get My Arms Around This How Do I Get My Arms Around This Situation?Situation?

• Prepare for a sustained economic crisis, but also…

• Convert fear to engagement and hope• There is power in acknowledgment – step beyond

avoidance• Know that the basics may not do it any more – you

may have to adapt to get through this

• But…there is hope and you don’t have to go through it alone

12

SchoolNutrition.Org

Tool #1 – Understand Your Starting Tool #1 – Understand Your Starting PositionPosition

Start With an Honest Self-Assessment

Define what financial crisis looks like for your organization in objective, concrete, and practical terms…

…so that your organization’s leaders have a shared understanding about what must be avoided…

…and so that they buy into the need to mobilize to avert problems

13

SchoolNutrition.Org

Financial Self-AssessmentFinancial Self-Assessment

• Ask Yourselves the Following Questions What has our financial track record been?

Are we operating from a position of strength or weakness?

What are our organization’s income sources and cost structures?

What kind of financial flexibility do we have?

How financially sophisticated is our board and staff?

14

SchoolNutrition.Org

Tool #2 – Revisit the Fundamentals Tool #2 – Revisit the Fundamentals about Incomeabout Income

Financial health depends on having sufficient resources to fund stable programming.

What does this mean? Income fully covers program expenses Income is renewable: reasonably expected to

continue into the future Income is received from diverse sources to reduce risk

15

SchoolNutrition.Org

Who Is in Control of Your Income Who Is in Control of Your Income Model?Model?

Self-Funding Those who use and benefit from services pay for them Client fees, tuition, advertising revenues, fees, donations

External Support Institutions or individuals who don’t use services but

provide support in order to underwrite services for those who can’t pay

Grants and donations

Independent Sources Products or services for sale to constituents or the general

public Space rental, gift shop, special editions

16

SchoolNutrition.Org

Is This the Right Mix for Your Is This the Right Mix for Your Organization?Organization?

Is it reasonable to expect this mix will adequately sustain you in the future?

Are you reasonably comfortable with the degree of control you have over program funding?

Which sources do you want to grow?

Do you have the ability to convince these funders that your programs deserve their support?

Do your proposal budgets make the best possible use of the funds available through each funding source?

17

SchoolNutrition.Org

Strategies to Maintain or Increase Strategies to Maintain or Increase IncomeIncome

Stay in close touch with customers, donors, and other key constituents

List in brainstorm fashion all the options available to you for protecting and / or increasing current income streams……and all the options for developing new ones

Articulate the principles that will guide your choices about options for further research

Research and select the best options: cost / benefit analysis and return on your investment

18

SchoolNutrition.Org

Tool #3 – Revisit the Fundamentals Tool #3 – Revisit the Fundamentals about Cashabout Cash

Financially healthy organizations have adequate internal cash – or access to cash – in times of shortfalls.

Use your balance sheet to figure out what your cushion is:

Cash Receivables Line of Credit Reserves

If Your Balance Sheet Has… No cash or receivables A fully drawn line of credit Little or no reserves available

…then there is nothing to draw on in challenging times

19

SchoolNutrition.Org

Prepare and Regularly Update a Cash Prepare and Regularly Update a Cash Flow ProjectionFlow Projection

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Total

Cash ReceiptsFees for Services -$ -$ 10,000$ 5,000$ 5,000$ 30,000$ 40,000$ 45,000$ -$ 10,000$ -$ -$ 145,000$

Grants, Contributions 15,000 - - - - 15,000 2,500 12,500 45,000

Other - 150 200 100 - - 1,000 - - - 1,450

Total Receipts 15,000 150 10,200 5,100 5,000 45,000 41,000 45,000 - 10,000 2,500 12,500 191,450

Cash DisbursementsPayroll 10,000 10,000 10,000 10,000 10,000 10,000 11,000 11,000 11,000 11,000 11,000 11,000 126,000

All other operating expenses 4,200 4,200 4,200 4,200 4,200 4,200 4,200 4,200 4,200 4,200 4,200 4,200 50,400

Capital purchases - - - - - - - 17,000 17,000

Total Disbursements 14,200 14,200 14,200 14,200 14,200 14,200 15,200 32,200 15,200 15,200 15,200 15,200 193,400

Cash Excess/Short 800 (14,050) (4,000) (9,100) (9,200) 30,800 25,800 12,800 (15,200) (5,200) (12,700) (2,700) (1,950)

Beginning Cash 5,700 6,500 (7,550) (11,550) (20,650) (29,850) 950 26,750 39,550 24,350 19,150 6,450

Ending Cash Balance 6,500$ (7,550)$ (11,550)$ (20,650)$ (29,850)$ 950$ 26,750$ 39,550$ 24,350$ 19,150$ 6,450$ 3,750$

CASH FLOW PROJECTIONOrganization ABC

SchoolNutrition.Org

Tool #4 – Make the Most of What You Tool #4 – Make the Most of What You HaveHave

Protect your existing assets Cash and investments are insured Receivables are current Property and equipment are adequately insured

Activate underused assets Invest excess cash appropriately Sublease excess space Assign the right people to the right tasks and

challenges Galvanize and use volunteers efficiently

Maximize existing income streams Collect every dollar you’re owed Make sure your services / reimbursement rates are

priced right

21

SchoolNutrition.Org

Tool #5 – Build a Smart Portfolio of Tool #5 – Build a Smart Portfolio of ProjectsProjects

Each project fits with your mission and culture

You have the skills and knowledge required to implement this activity

Your portfolio presents a sustainable mix of bottom lines

You have sufficient infrastructure to manage the administrative load that comes with your chosen mix of funding

22

SchoolNutrition.Org

A Portfolio Approach to Program A Portfolio Approach to Program Decision-MakingDecision-Making

23

H Requires Funding HI IG GH H

MissionImpact

L LO OW Generates Funding W

$ $ $ $ $ $ $ $ $ $NEGATIVE IMPACT POSITIVE IMPACT

Bottom Line Impact

How much of this can we afford?

Ideal opportunities − let's do more.

Why are we doing this?

Are we still true to our purpose?

SchoolNutrition.Org

Tool #6 – Generate, Act on Sound Tool #6 – Generate, Act on Sound Financial InformationFinancial Information

Anticipation is one of the keys to financial stability.

What does this mean?

It means that you as managers need time to adjust if income is not coming in according to plan

Figure out what, exactly, is the problem Articulate and monetize the issues Consider carefully how to address budget variances If necessary, take adequate time to implement adjustments

24

SchoolNutrition.Org

Tool #7 - Prepare Contingency PlansTool #7 - Prepare Contingency Plans

Make them easy to implement quickly if there is a major shift in funding or other event

Create several versions or scenarios of your operating budget

Consider dollar-for-dollar cost reductions (or prioritized “add-backs” in the case of better-than-expected results)

Know whether funding should be cut: Vertically: eliminate an entire program or project Horizontally: across the board Some combination

25

SchoolNutrition.Org

Prepare Contingency Plans (cont.)Prepare Contingency Plans (cont.)

Articulate the trigger points that will cause you to activate the contingency plan

Qualify and quantify these triggering events

Decide whether you can afford to incur an intentional deficit

Allows an organization that has adequate cash and net assets to buy time while deciding what longer-term changes must be made. This is an interim strategy only, though…

26

SchoolNutrition.Org

Tool #8 – Look for Cost SavingsTool #8 – Look for Cost Savings

You’re already lean, but chase the low-hanging fruit first…

…using cost containment strategies…

Renegotiate vendor contracts (they want to keep you in business!) Health and other insurance Printer, web hosts, phone / internet, landlord

Go digital if it means savings Reduce the need for print materials and mailings Some constituents may read an online newsletter or

appeal more readily than print

27

SchoolNutrition.Org

Tool #9 – Engage and CommunicateTool #9 – Engage and Communicate

Engage and communicate with all stakeholders in an ongoing, deep, and transparent manner

Funders Keep your key funders informed about the impact and

quality of your organization’s programs Be transparent with them about your financial condition

and plans

Staff/Members Keep employees and/or members informed about the

organization’s economic realities and what you are doing about it

Fear can be your worst enemy in difficult times; it saps the energy of even the most talented staff and member volunteers and diverts their time and talent into unproductive speculation

Share good news and even small successes; find ways to help them remain hopeful about the future

28

SchoolNutrition.Org

Communicate, Communicate, Communicate, Communicate, CommunicateCommunicate

Board of Directors Keep the board informed

Engage members wherever possible in contingency and communication plans

Be specific about what you need them to do

Tap their financial savvy and ability to think strategically about your organization's short and long-term success

Do not wait until problems have set in…a board that actively partners with staff leaders is an important asset when the organization must make difficult choices

29

SchoolNutrition.Org

Communicate, Communicate, Communicate, Communicate, CommunicateCommunicate

Bankers: Be ready to talk beyond the numbers and show…

Evidence of self-awareness and understanding

Short and long-term organizational plans

Contingency plans addressing potential funding shortfalls

Sustainability of current funding streams

Evidence of reporting that allows course correction

Management (bench) strength

An engaged board of directors

30

SchoolNutrition.Org

Tool #10 – Know WhenTool #10 – Know When the Basics the Basics Won’t Do It AnymoreWon’t Do It Anymore

Many nonprofits have already spent years cutting expenses in response to funding cuts.

For these organizations it will be impossible to continue doing what they do in the same way with fewer resources. With no fat left to cut…

…they need to find new ways of operating; waiting it out until things get back to normal is not an option…

…recognize that you may have to restructure, reorganize, and engage…

31

SchoolNutrition.Org

Restructure, Reorganize, and EngageRestructure, Reorganize, and Engage

Restructure Consider spinning off activities that don’t truly fit the mission or

that require a level of subsidy your organization can no longer afford

Reorganize Merge with an organization that has a vision, mission and values

similar to yours Often seen as the last resort, this strategy must be viewed through

the eyes of those who benefit from your work Merger may be the best way to keep vital services in place for the

community you were founded to serve – to maintain your mission

Engage Identify peer organizations that are more efficient than yours in

certain aspects of the work you do and deliver Explore how to restructure and combine forces so that your

customers get the best of all efforts within the resources available.

32

SchoolNutrition.Org

Managing Your Credit RelationshipManaging Your Credit Relationship

Current credit crisis occurred when financial institutions did not properly underwrite credit risk

Lenders are returning to “5 C’s of Credit”• Character• Capacity

– Increased focus on primary source of repayment-organization’s ability to repay the debt

• Collateral• Capital• Conditions

– Banking industry experiencing increasing default rates on corporate debt

– Current credit markets will have direct or indirect affect on your organization, but you can manage how

Association Debt 101: A Banker’s Perspective, ASAE’s Dollars and Cents newsletter http://www.asaecenter.org/PublicationsResources/ENewsletterDollarsandCents.cfm?ItemNumber=34553

SchoolNutrition.Org

Managing Your Credit RelationshipManaging Your Credit Relationship

Trend in the Weighted-Average Probability ofTrend in the Weighted-Average Probability ofDefault Relative to Outstanding Loan BalancesDefault Relative to Outstanding Loan Balances

Probability of default (PD) reflects the bank’s estimate of the likelihood that a loan will not be repaid as expected, calculated using a one-year time horizon.

SchoolNutrition.Org

Managing Your Credit RelationshipManaging Your Credit Relationship

Things you might expect in the current credit environment include

Adjustment in credit structures (ex. collateral requirements, lower LTV ratios, shorter terms)

Adjustment in interest rates and fees

Increased due diligence by the lender

SchoolNutrition.Org

steps to manage through the current credit steps to manage through the current credit markets? markets?

Understand current terms of your credit agreement• Maturity/expiration dates• Financial reporting requirements• Covenants/financial ratios• Remedies upon default

Ensure compliance with reporting requirements; anticipate and proactively discuss covenant issues with lender

Provide your lender periodic updates on operations-avoid surprises

Make certain your lender understands unique financial considerations for nonprofits - Do they have a continuing commitment to the nonprofit segment

Surround yourself with experienced partners including CPAs and attorneys who specialize in the nonprofit segment-financial statement quality matters more than ever

Network with your peers in the nonprofit industry Understand the value of your banking relationship Communicate and be proactive