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This is part 2 of a 3-part series in support of our Safe Harbors Program.
Achieving safe harbor during the current COVID-19 pandemic includes understanding how cash moves in and out of your organization week by week, creating several ‘what if’ scenarios and budgets based on that data, and finally, working with the organization’s governance and management to craft the path forward. Today, we outline the second step in the process, understanding how to build recovery scenarios and the capital needed for recovery.
As we seek to react to the current pandemic, cultural nonprofits have three concurrent needs:
Right now, many organizations find themselves focused on the response stage of the crisis, but several are also asking ‘what does it mean for us to recover?’ There is no one set path for each organization because the way the virus’ impact is felt is different across organizations and therefore, the recovery will be different for each type.
Crafting scenarios define the potential financial impact of risks and opportunities. It helps to articulate current knowns (and unknowns), identify the questions to be addressed, key variables or drivers of change, range of potential year-end results, the risks associated with alternative scenarios, and contingencies and their triggers, and finally, provide leadership a chance to be thoughtful about big decisions that need to be made quickly and under pressure.
The first step in building recovery scenarios is understanding where the organization’s operations is during the crisis. Most organizations find themselves in one of the following situations, each with their own set of questions and considerations:
Organizations that can continue operations. These are typically organizations that provide basic human services, such as hospitals, food banks, grocery stores, pharmacies, etc.
Organizations that can continue SOME operations or modify operations to accommodate SOME clients.
Organizations that must shut down because they are unable to deliver services
Due to restrictions on gathering and physical distancing, most cultural organizations have paused operations, and therefore, are facing a financial crisis. To build out recovery scenarios, many organizations must first create their own Safe Harbor, so it can be able to reengage when it is safe to do so.
The concept of safe harboring is that organizations need a way to ‘anchor’ until it is feasible to reengage in operations. It will look different for each organization, but at minimum includes:
Before an organization can enter recovery scenario planning, management and governance must prioritize elements of their own safe harbor operations. It may not be possible to continue with all elements of operations during the pause as cash is constrained, but it does lay the framework for developing several ‘what-if’ scenarios when the organization’s cash position, reopening guidelines, or public health data shifts the current operating environment.
Pausing during safe harbor means leaders of organizations are busy laying the groundwork for recovery. Specifically, this involves:
Start this exercise by engaging with trusted colleagues, board members, and partners to take in existing data. Use the following questions to help guide conversation with your stakeholders in taking stock of where you are now:
Once you have existing data from a variety of stakeholders, juxtapose that data with timeframes and circumstances of reopening/reengaging:
Mild Impact of COVID/Economic Recovery on Stakeholders
Medium Impact of COVID/Economic Recovery on Stakeholders
Severe Impact of COVID/Economic Recovery on Stakeholders
Physical distancing lasts 6+ months or longer and your stakeholders are moderately to severely impacted by the economic downturn.
Crisis Budget Scenario Planning
Once you build out a timeline and economic implications of COVID-19 on your organization, you can think about several revenue, expense, budget, and balance sheet levers over a 3-6-9-month period. Consider:
Foundation Grants: Many provide emergency revenue or are changing time/purpose restrictions.
Individual Giving: Varied ability to give, likely dependent on personal financial situation of donor and size of donor request.
Special Events/Fundraisers: If scheduled from March – July 2020, these are likely cancelled already, therefore resulting in lost revenue. However, you may realize some cost savings, but may also have sunk costs in staff time and other non-refundable expenses.
Program Fees: May have at least some disruption of program fees unless you are able to seamlessly deliver online. There may be cost savings if program does not operate.
Investment Income: Stock market declines reduce investment income and asset value.
Other Earned Income: Experiencing declines, especially if you are reliant on others’ disposable income or wealth. Typically, there are some cost savings from the cost of income generating activity.
When developing your scenarios, consider your timeline and your sphere of control. For example:
Expenses: What is within your control? What is easier or harder to change? What can still maintain programmatically? What is most necessary to reconstitute operations in the future?
Cash & Reserves (if available): Under what circumstances should you access reserves? Are they Board Designated?
Revenue: Does the crisis present any opportunities? Are there funders who can release restrictions? Advance funding earlier? Special fundraising?
Cash flow: What is the timing of your cash? Is a line of credit an option? Can you renegotiate repayment terms with vendors?
Profitability: What is our goal? Can we absorb a deficit? How much can we absorb?
Capital expenditures: Can you delay any facility projects, if necessary?
As mentioned at the top, nonprofits are dealing with response, recovery, and resiliency simultaneously in this crisis. But how does an organization combine scenarios and budgets together to move away from response to full recovery? Planning for recovery involves creating a recovery framework with re-engagement strategies and resulting budgets. When developing your recovery framework, think about the effects on core elements of your organization:
How are we envisioning that our mission will continue in a changed environment? What do our current supporters, audiences, funders envision? What will they support?
Degree of control
How can we be proactive in the outcome?
Do we have the know-how, board and staff needed? Will investments be needed? How can we reach out to our community, partners, network during this time? What type of coordination is necessary?
How long will this take? What is the urgency?
Known risks that might hinder us from success? Additional data needed? Can we do this? Should we do this at all?
What are the upfront and ongoing costs, revenues, and net income? What will this community, funding community support in the long run? Create 3, 6, 9-month budgets accordingly.
That last item, creating 3-6-9-month budgets, allows for greater visibility and flexibility given uncertainty, customized scenarios as physical distancing measures are refined, and allow for greater transparency and ease of financial storytelling. Consider your recovery assumptions to underlie these mini budgets:
In summary, its best to outline your assumptions in creating scenarios and budgeting during a crisis. Include a range of scenarios that consider multiple physical distancing timelines, economic recovery forecasts, your organization’s financial strength and health, and your organization’s mission and goals. Once that is complete, reflect on the risks and opportunities on programs, staffing, operating infrastructure, and other discipline-specific considerations for recovery. Next, create budget scenarios that are conservative and project more expenses than you think you may need. Finally, translate those scenario budgets into adaptable and easy to read 3-6-9-month budgets and share with your stakeholders.
Additional Scenario and Budget Resources:
Mass Cultural Council Safe Harbors Webinar on Building Scenarios and Crisis Budgets
Nonprofit Finance Fund Scenario Planning Tool