If there is one thing nonprofits have in common, it’s that at some point they’re likely to face a version of tough times. Maybe the trigger will be a sector-wide challenge, such as an economic recession, or a shock distinctive to the fields or locations the nonprofit serves. Or perhaps it will be an organization-specific hardship, such as the loss of a major funder’s support. No matter the cause, tough times force hard choices.
Tough times can also linger. It takes the nonprofit sector 1.5 times longer than the for-profit sector to recover from a recession, according to the Nonprofit Finance Fund (NFF), which conducts the State of the Nonprofit Sector survey. “With recessions, organizations take a financial hit, but it is a psychic hit on the sector—we lose talent and then we lose connections,” warns Sandi Clement McKinley, vice president at NFF.
So what to do? Not surprisingly, there are no easy, or even particularly novel, answers to that question. But learning from what others have done before in the face of financial crises can be extremely useful. To that end, we’ve collected insights and advice from our clients, other nonprofit leaders and experts, and our own leadership—distilling them into a set of eight steps for managing through tough times. Note that although we crafted this advice with tough times in mind, the truth is these practices will help keep your organization in shape any time.
It’s critical to take each of these steps with an eye towards how decisions could differentially affect people of color—both inside and outside your organization. Building the better world that we are all working towards requires that social sector actors deliberately embed racial equity considerations into their decisions, and tough times are not an excuse to let that focus slip.
1. Act quickly, but not reflexively, and plan contingencies.
Tough times call for immediate action: managing costs aggressively; doing away with nice-to-haves (not only because they are easily expendable but because of the signal it sends to the entire organization); and holding off on new initiatives. But even before your organization is feeling any pain, explicit contingency plans are a must. Keeping a pulse on emerging developments in your field will help you keep an eye out for potential roadblocks ahead.
Always plan for the worst, recognizing that troubles may unfold in fits and starts. Having Plans B, C, and D in place and knowing when to move to each can mean the difference between pacing your organization through a marathon and a slippery slide into financial and organizational exhaustion.
Many organizations start by asking themselves what they would do if they had to cut their budget by 10 percent, 20 percent, and 30 percent. They also specify the tripwires that would cause them to move from Plan A to Plan B, C, or D: an X percent fall in fee-for-service revenues, for instance, or a Y percent drop in donations or foundation funding, or a Z percent decrease in cash reserves.
A community-based after-school program with multiple sites, for example, might establish contingencies that call for renegotiating rents immediately; reducing staff and filling positions with volunteers as Plan B; consolidating one or two sites as Plan C; and consolidating to a core site as Plan D. Painful as each shift would be, both for clients and staff, the pacing signals clearly that the organization is doing all it can to preserve services and to keep the core of its mission alive.
2. Protect the core.
While the bad news is that financial constraints may mean you cannot pursue all of your current activities, the good—or at least the less bad—news is that not all of them are equally important in terms of impact. Now is the time to allocate your unrestricted funding and critical talent to the programs and services that have the greatest impact on those you serve. It is also the time to consider whether you need to cut back or discontinue less critical activities—and to ask yourself, "If not now, when?"
Simply identifying which programs are highest impact is not enough. You also have to be mindful of where your discretionary dollars are currently going. (Program contribution analysis is a helpful tool here.) Programs that aren’t covering their costs (thus commanding discretionary-dollar subsidies) deserve even more critical scrutiny—especially if they are less closely aligned with your organization’s mission and impact. Decisions about programing cuts also have to be made with racial equity implications in mind to ensure that people of color are not disproportionately burdened.
Your organization’s leadership may already be clear about what the most important priorities are. But if they aren’t, we strongly recommend bringing key staff and board members together to wrestle with three critical questions that can help to create that clarity:
- What results are we trying to achieve, and for whom?
- How do we achieve them?
- What does that really cost?
Until everyone has agreed on the answers to these questions, it will be hard to develop a real consensus around which programs and activities are truly core and which ones, however reluctantly, can be let go.
3. Identify the people who matter most and keep that group strong.
Every organization has a small group of people who are critical to its success—current and future. Perhaps it’s because they’re strong leaders, or they bring distinctive expertise, or they’re culture carriers. If you were to name these critical individuals, who would they be? Odds are not all of them are your direct reports. These decisions about who “matters most” must be viewed through a diversity, equity, and inclusion lens, to ensure a variety of identities and viewpoints infuse your organization’s vision and work. One helpful tool is Race Matters Institute’s Racial Equity Impact Analysis, which includes five racial equity questions for weighing policy and personnel decisions.
These are the people who should be receiving the lion’s share of your attention, so that they can feel like allies and partners in keeping the organization focused on its mission and pulling through. This is a time for shared goals and creative solutions, not individual priorities and business as usual.
Getting clear about who your most critical staff are also will stand you in good stead should layoffs become necessary. It won’t make the process less painful, but it can reduce the odds that the layoffs will compromise the organization’s current and future effectiveness.
4. Stay very close to your key funders.
The individual donors and organizations that know you best are the ones that are most likely to help you navigate a downturn. Remember that you don’t have to wait for your key funders to call you. You can—and should—use this as an opportunity to pick up the phone and call them: let them know what you’re seeing and how you plan to respond; to explain the choices you’re making or expect to make; to ask whether they can be equally transparent with you about what they expect their payouts or donations to be over the next six to 18 months. See "A Tough Times Call to Action for Funders: Be Even More Attentive to Leaders of Color.")
“Know where your key funders’ priorities are and how your nonprofit fits in,” advises Maya Winkelstein, executive director of Open Road Alliance, which offers emergency funding for impact-threatening roadblocks during project implementation. “If you’re not sure where you sit, ask. Seeing your work through your funder’s eyes can help nonprofits to better understand when their funding is at risk.” In fact, a nonprofit’s financial volatility is sometimes inadvertently caused by changes in funder strategy or disbursement delays. (See "How Funders Can Avoid Inadvertently Triggering Tough Times.")
You might also consider asking your existing funders to talk with their peers on your behalf. Downturns are usually a time to be cautious about trying to establish new funding relationships. But a referral from a trusted source might induce others to co-invest, at a time when they wouldn’t willingly do so on their own.
As a general rule, work to free up as much funding as possible for your highest-priority activities. You could try to do this by renegotiating the guidelines on restricted grants. It’s also worth taking the time to analyze your sources of revenue and to categorize each according to whether it is "in the bank," committed, fairly certain, or at risk. Such analysis will allow you to think through more nuanced financial scenarios over the coming year.
5. Shape up your organization.
Beyond helping you stretch limited funds, belt-tightening changes can make your operations more efficient and your impact greater in enduring ways. Similarly, tough times can be the catalyst for taking advantage of low- or no-cost opportunities to improve internal operations and make it easier for people to work smarter—and not just longer and harder.
For example, identifying the organization’s critical decisions and then being explicit about whose responsibility they are can dramatically reduce the amount of time spent on inconclusive discussions (and the attendant frustration). Establishing formal or informal linking mechanisms, such as cross-functional teams, can make it easier for people to coordinate their efforts and share knowledge. Clarifying and refining essential work processes will allow everyone to take advantage of best practices and avoid reinventing the wheel.
Finally, if it’s a recession that’s sparked the tough times, it ironically may be the moment to add to your leadership team—bringing someone onboard with skills you previously might not have been able to access. Chief financial officers are a prime example. In the face of huge demand for financial talent, nonprofit organizations typically have great difficulty filling this position. But, in an economic downturn, a less robust for-profit job market can create hiring opportunities for nonprofits. Sticking to your hiring standards and screening process is important, though, to avoid bringing someone onboard who is merely looking for a short-term stop while the economy recovers.
6. Collaborate to reduce costs and expand impact.
This is the time to take some classic advice to heart: don’t go it alone. Sometimes the most innovative solutions come from unexpected partnerships. Could you combine operations with another nonprofit provider to lower back-office costs, create economies of scale, or share best practices? Could you consolidate purchasing with another organization? Might you even be ready to merge with or be acquired by another organization? There are many opportunities across the collaboration spectrum.
Collaborations, of course, require time and effort to make work—and some fail despite that investment—so take care to weigh the likely costs, benefits, and risks before proceeding. And if you are considering the formal M&A route, keep in mind that struggling nonprofits typically are not attractive to acquirers. Better to start thinking about this option before tough times are upon you.
7. Involve your board.
Now more than ever, your board needs to be both well informed about the organization’s financial health and a central part of the planning process. In times of financial hardship, everyone expects to step up to the plate. As the organization’s fiduciary trustees, your board members are very much part of the "everyone."
Board members can make important contributions in multiple ways: by providing experience and expertise from other domains and sectors; by helping to pressure test your assumptions and plans; and by playing an especially active role in the organization’s fundraising efforts. They may also be able to provide focused operational support to complement staff efforts or to fill a gap if staff must be laid off.
During the toughest times, board members should expect to be called upon. They should also expect that what they will be called upon to do will be well considered and appropriate. Effective work on their part, therefore, will likely require thoughtful and tactful management, not only on your part but also on that of your board chair.
8. Communicate openly and often.
Leading an organization through tough times calls for open and frequent communication from the top. People need to know that leadership has a handle on the problem and a plan to address it. They want to know where they stand, what the organization’s prospects are, and what they can do to help. Develop consistent talking points for staff and your board to help manage perceptions.
Leaders who have weathered past downturns find such transparency is one of the best ways to keep teams engaged and enthusiastic—focused on the needs of the people they are serving and not on the organization’s woes. Here, too, small gestures count: rewarding with frequent praise when staff redouble efforts and tighten belts; serving as a role model in reducing a non-essential expense, or rolling up your sleeves to fill a gap on the front line. Remember that there is a world of difference between reactive pessimism and hard-headed determination. People will look to the leader who sees and conveys the brighter future.
Steps taken to manage through tough times tend to endure. Making the wrong choices—ranging from across-the-board cuts that weaken everything you do, to fostering mistrust and fear by failing to communicate—will have long-term consequences. But so will making the right choices: reinforcing the organization’s core values and mission focus; identifying leaner ways to execute business as usual; partnering with other nonprofits to be more effective; getting in the habit of making hard choices; becoming increasingly strategic taking new things on.
The road to financial stability for nonprofits is a marathon not a sprint. How we run it will make all the difference to whether—and in what shape—our organizations are able to cross the finish line.
Unfortunately, sometimes it is a nonprofit’s own funder that triggers tough times.“Nonprofits don’t need a recession to fall on hard times. All they need is a funder to change their pay schedule from Q1 to Q4, and that can mean they’re no longer able to survive,” says Maya Winkelstein, executive director of Open Road Alliance (ORA).
ORA considers itself a nonprofit “emergency room.” It offers short-term loans and grants to nonprofits facing unexpected financial hardships that threaten impact. Funder-created obstacles are the most common reason applicants reach out for its support, accounting for nearly half of the triggers ORA documented in its recent analysis of five years of applications. The most frequent types of funder-related causes were disbursement delays and changes in funder strategy. Although funders often aren’t intentionally creating these obstacles, they nevertheless are disrupting their grantees’ work and in doing so threatening the impact of their grant-making.
To ease the disruptions, funders can increasingly weigh how their decisions (big and small) will affect grantees’ financial health. For example, if a grantee’s cash flow is tight and its reserves are small or non-existent (not an uncommon scenario), even minor delays in grant payments could cause great hardship. “We tell foundations that when it comes to financial decisions, if something would be an inconvenience for you then it would be a crisis for your grantee,” says Winkelstein.
As for changes in funder strategy, funders can help prepare grantees by communicating openly and being transparent about potential shifts—using clear and direct language. A funder’s words matter; reassuring a grantee that pending changes in strategy will not affect them might have devastating results if final decisions shift direction.
Beyond these approaches for mitigating harm caused by their own actions, funders can also put themselves in a better position to help grantees navigate tough times caused by other factors. To avoid the philanthropic emergency room all together, funders can take preventative measures in the form of risk management. One helpful practice here is to include contingency funds in annual grant-making budgets—allowing funders to more nimbly help grantees overcome the financial emergencies that are bound to happen between grant cycles.
More generally, Winkelstein would like to see the concept of risk increasingly baked into the grant-making process. Fewer than 20 percent of foundations currently budget for the unexpected, according to ORA. “If we don’t talk about what could go wrong, it implicitly creates the guarantee of a perfect project and false expectations,” says Winkelstein. “The problem is, things happen unexpectedly all the time—that needs to be considered the norm.”
Research has repeatedly shown that bias-related barriers to capital result in leaders of color having weaker funder networks, making their organizations among the sector’s most financially vulnerable. Funders, therefore, have a special obligation to grantees led by people of color during tough times.
“There is a starting point of imbalance in funding streams and funding amounts going to people-of-color-led organizations,” says Shawn Dove, CEO of the Campaign for Black Male Achievement (CBMA). “The feeling of scant dollars is very real. Forget ‘managing through tough times’—leaders of color are often already operating in tough times.” Dove has experience as both a grant seeker and a grant maker as he launched CBMA at the Open Society Foundations where he spent seven years before CBMA became an independent organization.
The Building Movement Project reports in its Race to Lead study that 41 percent of nonprofit leaders of color consider “the lack of relationship with funding sources” as one of the main challenges of their job, compared to 33 percent of their white counterparts.
As part of Bridgespan's supplement on big bets for the Stanford Social Innovation Review, Cheryl Dorsey, president of Echoing Green and Bridgespan board member, noted the “multiple, overlapping, systemic barriers” that leaders of color face when it comes to funding. Dorsey specifically flagged the “like funds like” pattern as a significant barrier, with funders being more likely to invest in people who share the same ethnic, educational, and career backgrounds.
Of course, any ongoing funding challenges faced by nonprofit leaders of color are only compounded if the entire sector is also taking an economic hit. This reality can make tough times even tougher for these nonprofits.
What can funders do to help? Simply put, double down on the tough-times supports for grantees led by people of color. Stay in close touch, so you know when challenges emerge and what shape they take. When tough times come, act quickly: deploy your own resources to help them navigate financial hardships, and aggressively tap your connections to help broaden the base of support. Leaning in like this can make all the difference in the organizations’ ability to continue their critical role in driving the transformative social change we all seek.