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Building Organizational Scenarios and Testing Budgets

Michael Ibrahim, Program Manager

Leonora's World, a production by Double Edge Theater.
Leonora’s World, a production by Double Edge Theater.

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:

  1. Response: What is necessary to address the COVID-19 crisis as it manifests for our organization? How is this different given the situations organizations find themselves in?
  2. Recovery: What will it mean for our organization to operate immediately after the crisis in the new reality? What changes do we need to make to operate in the new reality and return to a ‘set point’?
  3. Resiliency: Preparing for the next time a crisis inevitably hits, working with funding partners to develop long-term financial resilience strategies.

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.

Building Recovery Scenarios

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:

  1. Operational

Organizations that can continue operations. These are typically organizations that provide basic human services, such as hospitals, food banks, grocery stores, pharmacies, etc.

    • Questions: Is there an increase in demand? Are there emergency resources or reserves available? Have staff taken on additional personal and organizational obligations?
    • Considerations: Length of crisis and impact on demand
  1. Limited/Reduced Services

Organizations that can continue SOME operations or modify operations to accommodate SOME clients.

    • Questions: Is the organization providing services? Are you getting paid for them? Is there enough cash on hand? Has staff been furloughed?
    • Considerations: Restart costs and viability.
  1. Paused

Organizations that must shut down because they are unable to deliver services

    • Questions: What impact will this have on staff? What is health of the organization’s balance sheet?
    • Considerations: Restart costs and viability.

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.

Near-Term Goal for Paused Organizations: Create Your Own Safe Harbor

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:

  • Maintaining baseline operations, as defined by the executive team and board.
  • Ensuring that the organization’s essential functions are delivered. This can include:
    • Relationship management: donors, funders, members, marketing/external communications
    • Facilities: repairs, emergencies, general maintenance
    • Human resources: submitting paperwork, etc.
    • Artistic/creative: curatorial mandates, safety of collections, intellectual property
    • Infrastructure: IT, financial office

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.

Planning for Recovery While in Safe Harbor

Pausing during safe harbor means leaders of organizations are busy laying the groundwork for recovery. Specifically, this involves:

  1. Taking in existing data about programs, operations, finances, people, etc.
  2. Imaging that data reconfigured under different sets of ‘what ifs’
  3. Projecting the ‘what if’ outcomes in a written plan

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:

  1. How have operations and programs changed due to the pandemic and physical distancing? Where are our areas of immediate risk and variability?
    • How long do we have to operate, given the changes to revenue streams and expenses? (Use those cash flow projections from our previous blog post.)
    • Given this, are there any programs and operational activities that can continue as is, or in a re-imagined way? Which programs or activities must be reduced, and which need to pause altogether?
    • What are the revenue and expense implications?
    • How will the programmatic and operational changes affect how much time we have? (use cash flow projections)
    • How does our financial situation change with potential funding sources, loans, etc.? Will they come soon enough? (use cash flow projections)
    • Are there opportunities for making changes that we have been wanting to make that, ironically, this current crisis makes easier to push through?
  1. What do operations and programs look like in this current situation? What risks and opportunities do we face? When will we need to make changes?
    • Given this, which programs and operational activities can continue as is (more or less), which need to be reduced, and which need to pause altogether?
    • How long do we have to operate, given the changes to revenue streams and expenses?
    • What are the revenue and expense implications of the changed situation?
    • How will the programmatic and operational changes affect how much time we have?
    • How does our financial situation change with potential funding sources, loans, etc.? will they come soon enough?
    • Are there opportunities for making changes that we have been wanting to make that, ironically, this current crisis makes easier to push through?

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

  • Physical distancing lasts 3 months and your stakeholders are mildly to moderately impacted by the economic downturn

Medium Impact of COVID/Economic Recovery on Stakeholders

  • Physical distancing lasts 3 months and your stakeholders are mildly to moderately to severely impacted by the economic downturn
  • Physical distancing lasts 6 months or longer and your stakeholders are mildly to moderately impacted by the economic downturn

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:

Short Term

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?

Medium Term

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?

Long Term

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?

Putting it Together: Moving from Response to Recovery

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:

Mission impact
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?

Capacity requirement
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?

Time horizon
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?

Financial impact
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:

  • Revenue losses and expense cost savings
  • Emergency funding and revenue released from restrictions
  • Increased expenses directly related to COVID-19 mitigation efforts (protective gear, increased technology software and hardware cost)
  • If your FY is slated to end at the 3-month mark, what does this crisis mean for your next fiscal year?

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

Read Also

Part 1 in this series: Organizational Cash Flow Planning in a Crisis
Part 3 in this series: Managing in an Age of Crisis

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