Nonprofit Planning Strategies During Economic, Political Uncertainty

If we’ve learned anything from the COVID-19 pandemic and our current economic and political environment, it is the need for planning, diversifying, and risk management.

Nonprofits already face many challenges with aging donor bases and workforce constraints, and an uncertain economic and political environment can ignite additional challenges. Consider areas your nonprofit could address to help sustain and strengthen your organization.

Understand and diversify revenue streams

When the debt ceiling debate arises, differing political parties take control of government, or legal rulings are made, it can dramatically impact government funding and grants that support nonprofit activities. Review your nonprofit's revenue streams regularly for concentrations and diversification opportunities. This could include seeking new grants, soliciting donations in a new way, and creating new programs.

Maintain a deep understanding of the current political landscape and how legislative changes may impact funding so plans can be put in place if funding would be capped, stopped, or rescinded. Revenue diversification is all about mitigating concentration risks — and then pair it with cash flow modeling and strategic planning. Complete cash flow modeling and strategic planning regularly with multiple scenarios in mind, so liquidity, solvency, and longevity are not called into question when changes arise.

Determine how economic uncertainty and new legislation could impact donors and members. During higher inflation or when there are changes to restrict charitable giving deductions, donations and participation may fall, causing a relatively stable revenue stream to become more unpredictable. Knowing how your supporters and participants and their disposable income are impacted enables your organization to better plan, diversify, and pivot if needed.

Create short- and long-term reserves

Many nonprofits were forced to deplete investments and reserves as programs and activities were altered or stopped as a result of COVID-19 restrictions. As nonprofits come out of the pandemic, now is the time to better plan for future challenges and opportunities.

Creating short- and long-term reserves — potentially including establishing donor-restricted or board-designated endowments — can help prepare for future events. These reserves can range from a rainy-day fund covering three to six months of general expenditures to capital improvement and workforce development funds designed to improve facilities and attract and retain organizational talent.

Build these reserves into the budgetary process, investment policies, strategy discussions, and cash flow and strategic planning models and give them equal attention. Having well-established reserves and endowments can help your nonprofit move its mission forward without sacrificing liquidity or longevity.

Prioritize debt payments

In times of high interest rates, having a lot of outstanding debt can significantly increase interest payments. Like in personal finance, list all debt arrangements and then prioritize and pay them starting with the highest interest rate. If you have variable interest rates, monitor those rates closely and frequently, reprioritizing if needed.

For debt secured before the pandemic with very low rates, it may be advantageous to stick to the longest repayment plan and invest excess cash in low-risk options currently available with greater than 5% returns.

Monitor interest payments in tandem with the Federal Reserve’s interest rate hikes and as the U.S. government negotiates its debt ceiling and creates new legislation. As seen in the 2011 debt ceiling negotiations, even when governing parties reached a resolution, the debate still led to a downgrade of the U.S. credit rating. The same could be true from the resolution of the current debt ceiling.

Another downgrade in U.S. debt could impact U.S. Treasury notes, which could increase the cost to borrow money since many banks and lenders base interest rates on their yields.

Stay the course with investment portfolios

During periods of economic uncertainty, market performance may be more volatile and can cause investors to question their investment portfolios and allocations. Technology makes it quick and easy to transfer investments via phone or online — and make quick and irrational decisions.

Instead, be thoughtful. Regularly confirm your investment portfolio is still aligned to your organization’s needs. Most often, investments are designed to support future aspirations; therefore, resist the urge to make sudden changes and trust the long-term performance of your portfolio.

Then, review the current market landscape so you are not missing opportunities. For example, many nonprofits made investments in money market funds or treasury bills versus having their cash sitting in bank accounts accumulating little to no interest. Consider taking advantage of opportunities like these to put your cash to work and capture some additional needed return.

Monitor bank balances and FDIC limits

As we have seen over the last six to 12 months, banking challenges can arise during economic uncertainty. Understand current FDIC limits and review your cash management policies and practices. It is all about diversification, mitigating risk and exposure, and balancing that with rates of return and the need for or availability of cash. There are many different cash management opportunities to deploy — it is simply finding what works for you.

How we can help

In the words of Benjamin Franklin, “By failing to prepare, you are preparing to fail.” Act today. Bring these topics to your next board meeting. Drive change, help reduce risk, and, ultimately, better position your nonprofit for future challenges and opportunities.

If this is overwhelming, reach out and don’t go at it alone. CLA’s nonprofit professionals and seamless leaders are here to help.