For nonprofit resilience, think like a for-profit

We’ve all seen the action movie (or cartoon) drama: a character flees from the ‘bad guys’ at full speed and suddenly, the path ends at the top of a cliff! Even though it looks like a guaranteed disaster, somehow the hero always finds a way to complete the mission.

Unfortunately, when USAID funding was suddenly cut, many nonprofits were left at the top of that proverbial cliff — with no movie magic to save the day.

Humentum recently worked with a European organization, who, while not on the edge of a cliff, still didn’t have a strong path forward. Leadership realized their existing business model and financial strategies were not fully aligned with their vision, leaving them vulnerable to sector shifts and funding uncertainties.

One of those vulnerabilities was reserves. Even for those who have more than three months of funding, that’s not enough. “When the organization started looking at their long-term revenue forecasts and realized they were going to be making deficits year-on-year, they knew that was unsustainable. Something — many things — needed to change,” said Chris Sutton, a Humentum consultant who works with NGOs on finances and business models.

How do you avoid the scramble and the panic? How can your funding be resilient and sustainable, versus unpredictable and uncertain?

Here are five recommendations. None of them are easy, but with a mindset shift and the right tools and guidance, a nonprofit can avoid teetering on the edge of a cliff.

1. Focus on forecasting

One built-in barrier to resilience is reactive reporting, which, in essence, is the focus on donor reporting — the bulk of where many nonprofits spend their time and energy. The annual reporting, too, is designed to look at what’s already been done, versus looking ahead to what could or is happening.

“Many teams are built for auditor-type compliance, and they don’t have a way of picking up the forward indicators that would show when a problem is coming up,” said Sutton. “In many cases, the financial reporting lags the spending by several months. It’s hard to be agile when you’re always looking at the past.”

Financial forecasting is critical. Without that discipline and skill set, you won’t know how long reserves will last, or what to change when. “When you work for a nonprofit, especially if you’re passionate about the cause, you can look at the numbers and not really see them if your reserves have always looked healthy,” said Sutton. “But with no forecasting data to accompany them, that number doesn’t tell you much.”

2. Know all your costs

Cost recovery is a major issue for many nonprofits. Partially it’s the hesitation to ask for “overhead” costs; but it’s also the challenge of first knowing your full costs before you can build them into funding requests.

“People have a tendency to continue with things that are losing money by not knowing how much things actually cost,” said Sutton.

Understanding true costs is the only way to mitigate risk. Without knowing what you need to fund, inevitably you’ll run into deficit spending. “We always talk about cost recovery when we talk about managing risk,” said Shila Nhemi, technical director for Humentum. “People want to bucket cost recovery only under financial management, but it’s a factor that pervades all areas of management for any nonprofit.”

(You can find a total cost recovery reconciliation tool here.)

3. Share information to see the bigger picture

Beyond the time lag and the lack of visibility into total costs, another barrier to sustainability is silos. In addition to making day-to-day operations difficult (think about all the unnecessary meetings, incomplete reports, and redundant work because one team didn’t know what another team was doing), they also lead to an incomplete view of organizational health.

“Some NGOs and nonprofits have silos of information, where for example one team might track the win rate for proposals, but that’s not shared with the finance team, so there’s no comprehensive view of what programs are most appealing to the marketplace or deliver desired outcomes,” said Sutton.

In order for forecasting to work, all the elements of cost and revenue need to be understood.

4. Think like a revenue-generating organization

Nonprofits need forecasting and key performance indicator (KPI) capability. That can sound foreign to many NGOs — something that only for-profit companies need to worry about. Not so. “As a leader, you have to instill the mindset of looking at the market,” said Sutton.

For nonprofits, that means looking at not just the needs in the community (like food or education) but also what’s being funded by donors. It also means looking at competitors. That’s not a concept or term often used in the nonprofit sector, but with limited dollars, every grant is competing with other grants.

5. Test your assumptions

This sounds obvious, but it’s not. Ask yourself, what are we doing that’s marginal? What’s taking up our time (on reporting, on communications, on staff-related costs) that isn’t leading to revenue?

“Traditionally, there’s always been more money, so nonprofits could focus on managing their projects,” said Sutton. “That’s no longer true. Leaders need to have a sense of urgency. Just because something was funded in the past doesn’t mean it will be in the future.”

It can be financially dangerous for an NGO to retain expertise from a program that has ended in the hope that a new donor will come along with a new project in that specific area. Test those assumptions rigorously, because that money might be invested with more impact in a different area. If deficits are mounting, seriously consider stopping paying for expertise that the market is no longer buying from you.

You may be surprised at how these costs add up — staff costs, marketing, writing reports, attending conferences — all because no one has been monitoring non-funded costs in enough detail.

Aligned to this is the cost of trying to offer too many services in too many places. It becomes a drain on leadership resources. Focus is essential in difficult markets. NGOs need to focus on using leadership and financial resources on what is important for today and the future. Ultimately, for-profit or commercial principles apply here, just as they do in other sectors.

Some nonprofits may try to resolve these challenges by hiring a financial leader with for-profit experience, thinking that a different background is the solution. That may not be as useful as one would think. Sutton, who has worked in both for-profit and nonprofit sectors, has seen this in action. “Data in the nonprofit sector can be hard to find, so the CFO is then confronted with incomplete data. You need to know how to work with that, instead of waiting for it,” said Sutton.

The mission of an organization depends on the bottom line, whether you’re leading a nonprofit or for-profit. That means understanding both the market forces as well as all your internal costs, and always looking ahead.

“Finances can be seen as just line items,” said Sutton. “You have to take a multi-dimensional view to sustain your mission.”

If you’d like help with forecasting and aligning your business model, we’d be happy to talk with you. We also offer a number of financial training courses to build your skills, any of which can be offered to your entire team at the same time, through our in-house training.