How to Operate in a Down Market

By Thomas Schulte

Widespread economic weakness presents a particular set of challenges for nonprofit organizations. When the economy falters, many nonprofits experience both reduced cash inflows and rising demand for services. This is particularly true for organizations that provide food, housing and job-search support.

Even if you’ve built up reserves for such situations, you can’t depend on them to last through a long recession. What then, can your organization do to avoid getting caught in the crunch?

Manage Your Investments

If you cringe when your monthly or quarterly investment statements show that your organization lost more than it contributed last month, you’re not alone. Unfortunately, this is often the case in a bear market.

What’s important to remember about your investments, particularly if they’re in permanently restricted endowment funds, is that they exist to preserve your organization’s longevity. The funds are in your investment account in perpetuity. While it may seem like those investments are losing a lot of money, those losses are, in fact, unrealized. Until you actually sell the investments, those losses aren’t real — and can, and likely will be, recovered when the market bounces back.

Nonetheless, it’s prudent to meet with your financial advisor and ensure that your investments are sufficiently well-diversified among stocks, bonds, cash and other securities, according to your organization’s investment goals and risk tolerance. You don’t want all of your eggs in one basket — for example, all funds invested in the stock of several companies. If the equities market tanks, for example, your endowment funds could be wiped out.

Take a look at your organization’s formal investment policy, particularly if it hasn’t been reviewed and revised in a while. Ensure that it reflects not only changes in the economy, but changes to your organization as well.

Monitor Financial Results

Your bookkeeper or accountant may provide financial results for monitoring your cash position, revenue intake and expenditures on a monthly or quarterly basis. Consider bumping up the frequency of these reports, and request them weekly or biweekly. By monitoring your financial results more often, your organization can react quickly to cash crises or drastic revenue declines by cutting expenditures immediately.

Ensure that your bookkeeper or accountant understands your need for accurate and timely financial information, and be sure they keep up with the bookkeeping in a timely manner. That way, they won’t have to spend much extra time when reports are actually needed.

Pinpoint Where to Cut

You’ll want to get feedback from your staff on where you can save money on an ongoing basis — and begin right away. While it may be wise to initiate a hiring freeze — just make sure that you think it through. For example, if your marketing director resigns, now may not be the time to forgo that important position that can bring new revenue to your organization.

Likewise, you’ll want to halt purchasing except for items you presently need. If, for example, you ax your monthly office supply order and buy items on an as-needed basis, you might benefit more from that cash preservation than from quantity discounts. Or, suspending the search for a permanent employee and using temporary help may be less costly in the short run, which may make sense if you’re focused on today’s cash position.

Also take a look at your budget. Does it provide for inflationary increases or set-asides for future payments? Now may be the time to eliminate both.

The public is aware of budget pressures facing all organizations — businesses as well as nonprofits. So communicate with your donors, supporters and the community about the difficulties facing your nonprofit. Give them the facts, particularly when you can quantify the effects of smaller contributions on your future program services.

Turn to Your Peers

You and your organization are not in this alone. Contact other nonprofits and brainstorm with their leaders on how to get through these tough times. Your conversations may lead to some great ideas — or even collaboration. And remember, working through an economic downturn will only make your organization stronger.

Thomas Schulte
Partner-in-Charge
Nonprofit Services Group

For more information about this article, click here to send Tom an email.

When it’s time to prepare annual audited financial statements, you may find it difficult to determine where the responsibilities lie. With your auditor on one side of the equation and your management and board on the other, it’s important to clearly define — and understand — each party’s roles and responsibilities. Remember, both sides have a similar goal in mind: an end product that fairly and accurately represents your organization’s financial health.

Auditor vs. Management

At the most basic level, your auditor is responsible for expressing an opinion on your financial statements. Beyond that, the auditor is responsible for obtaining reasonable assurance that your financial statements are free of material misstatement — be it from error or fraud.

Management, on the other hand, is responsible for developing estimates, such as the allowance for bad debts, adopting sound accounting policies, and establishing, maintaining and monitoring internal controls, as clearly outlined in the American Institute of Certified Public Accountants’ standards. Although your auditor may make suggestions about these items, it isn’t his or her responsibility to institute them or to ensure they’re working properly.

What your auditor can do is evaluate whether the assumptions that management used to make decisions on internal controls, accounting policies and deterring and detecting fraud are current and applicable — and won’t materially misstate the financial statements. But deciding what to use, and when to use it, is strictly management’s responsibility. If the audit is performed in accordance with Government Auditing Standards, the restrictions on what an auditor can do to assist are even more stringent.

Leadership Team

During these processes your auditor and board of directors can be great resources for your management team. Your auditor, however, can’t help management pick and implement policies. The auditor must maintain independence, in both fact and appearance, in the public eye.

Conversely, your board — often an untapped resource — can assist you. As your organization’s watchdog, it has significant fiduciary responsibilities that dovetail many of your duties. Often, members have related experience and suggestions for completing the job that they’re willing to share. Also see “Get a Board That Can Help” later on in this article.

Format and Comparisons

Annual financial statements are designed to help you manage your organization. Financial statement items — such as debt ratios, program vs. administrative expense ratios and restricted vs. unrestricted resources — can indicate how a nonprofit is doing. So when your nonprofit’s leadership team is preparing them, you want to make sure the statements are as user friendly as possible.

One of the best ways to see the big financial picture is to compare your budget, your year-end internally generated financial statements, and the financial statements generated during the annual audit. This comparison can be completed more easily if the format of your annual audited statements is as close as possible to that of your internal financial statements and budgets.

Through a review of internal vs. audited financial statements, you can look for any large differences in individual accounts resulting from correcting audit adjustments — these are often an indication of an internal accounting deficiency. You’ll also be able to spot any significant discrepancies between what was budgeted for the year and the actual outcome.

These variances will help you to evaluate your organization’s performance and plan for the following year. Also, your financial statements should make it fairly easy to determine which of your resources are restricted for particular purposes or time periods.

A nonprofit’s statement of activity and statement of financial position could show a strong financial status overall. But if the financial resources giving rise to the positive results are restricted to a particular purpose beyond regular operating activities, your management and board could come away with a mistaken impression of the organization’s financial health.

For example, donations — either investments or cash — given strictly to keep a maintenance fund for your building could show assets at a higher value even though your organization was barely able to break even on its basic programs. So, statements should clearly identify restricted resources when they are received and while they are held by the organization at any point in time.

A Takeaway Point

In the end, auditors and management have the same goal: a correct and user-friendly set of financial statements. Although most of the responsibility rests on management’s shoulders, only by working together can the two sides be successful.

Michael Cantrill
Director
Nonprofit Services Group

For more information about this article, click here to send Mike an email.

For charities that depend largely on donations, these difficult financial times probably mean a downturn in giving. Or do they?

Although not as cheery of an outlook, a report from Giving USA, which follows trends on charitable giving, found that giving slows during recessions, although only by about 1%. Longer recessions generally show a giving decline of about 2.7% annually.

A survey for the first nine months of 2008 from information provider GuideStar showed that 35% of nonprofits had a downturn in giving compared with the same period the previous year. And 38% reported an increase in contributions.

Older Americans Planning to Increase Volunteerism

Four of every 10 Americans age 50 and older plan to increase their volunteer work in the next five years, according to a report released by AARP. The report, More to Give, was a joint effort between AARP and Civic Enterprises and studied volunteerism trends in the baby boom and “silent” (one generation older) generations.

Other key findings showed that the main motivations of these generations to volunteer are to “help people in need” and to “stay healthy and active.” The biggest obstacles preventing older generations from volunteering are lack of time and the need to make money.

Is Your Postage Meter Compliant?

The United States Postal Service set a deadline for the replacement of all rotary/mechanical postal meters with digital ones by the beginning of 2009. This replacement process began in 1995 and removed more than 750,000 rotary meters, which were more susceptible to tampering and fraud than their digital successors.

Although you can no longer download funds to a rotary meter, postal meter customers have until June 30, 2009, to apply for and receive a refund for any remaining postage on a rotary meter. For more information, contact USPS Postage Technology Management at ptm@usps.gov.

E-mail Marketing Tips

In a down economy, using some of your marketing budget on e-mail can be a good investment. E-mail has a return on investment of $45.05 for every dollar spent, according to an October 2008 report by the Direct Marketing Association. This compares to other noncatalog direct marketing that has an ROI of $15.55. MailerMailer publishes an Email Marketing Metrics Report every six months, and its latest report indicates that:

• Sundays and Mondays are the best days for sending e-mail marketing messages
• E-mails with shorter subject lines generally are more successful, and
• Personalized messages receive higher click rates on their links, but tend to get lower opening rates (probably because they’re blocked by spam filters).