9 Steps to Recovering from a 30% Deficit
by Shuey Fogel
The following is a “nice” story. An example of a charity’s CEO showing fiscal responsibility and financial leadership. It is the kind of story we all-to-often don’t hear about as the media chooses to focus more on misleading reports about the lack of financial know-how in nonprofit organizations rather than on organizations that “get it.”
Recently, I had the pleasure of getting together with the aforementioned strategic CEO for coffee.
Two year ago, this female colleague applied for an Executive Director (ED) position at a particular charity knowing that the organization was facing a 500 thousand shekel (approximately $130 thousand) deficit. After about nine months, the nonprofit was back on track and on the road to a surplus for the following year.
What was this ED’s technique and how could other nonprofits benefit from her experience?
To put things in perspective, the organization’s budget was 1.5m shekel or $385k. This means that the impending deficit stood at approximately 30% of the charity’s budget. Yikes.
This ED’s financial challenge was twofold:
- Entering the position at the beginning of the fourth quarter, she first had to make sure the organization finished the year without a deficit.
- In the slightly longer term, she needed to return the charity to sustainability.
I asked this ED to delineate on some of the key decisions that helped get the organization back on track and that might be of assistance to nonprofits facing a similar budget crisis:
1. A Deficit Isn’t a Temporary Problem
Credit of any sort is only a band-aid that doesn’t address the source of the budget problem. Budget problems require budget solutions – expenditures must be adjusted for reduced income. Even meeting next year’s budget does not solve a current year’s cash crunch. Expenses need to be cut, even if only temporarily.
2. Cutting Staff is Sometimes the Hardest but Quickest Solution
There was no avoiding the fact that more than a third of the 1.5m shekel budget was comprised of salaries. With only four months left until the end of the fiscal year and facing a 500k shekel deficit, drastic action was required. The quickest way to address the organization’s insolvency problem was to reduce the staff, which it did, shrinking to a staff of two from a staff of five. The hope was that the reduction would be temporary until the charity once again stabilized the budget.
3. Get the Board on Board
The director was quite explicit that she couldn’t have pulled off the recovery by herself; the board of director’s support was critical. The board was very aware of the precarious financial state of the charity and was looking for a CEO that was just as self-aware, willing to make the hard choices. The board then supported the director 100% during the recovery period.
4. Be Patient When Re-Hiring Staff
The director made the decision to rehire back the staff to their original jobs only after (1) all debts were covered (2) funds for the reinstated budget were promised and (3) there were no cashflow problems in the horizon. (And in case you’re wondering, it has been seven months since the re-hiring and there have been no additional cashflow glitches.)
5. Government Grants Might Be Good for the Budget but are Bad for Cashflow
As of my coffee conversation, this charity had yet to accept any government grants. While secure in their funding (when an organization is accepted, of course), Israeli government grants arrive only after expenditures have been made and can wreak havoc for cashflow (see previous post, “Israeli Government Grants: The Broken Promised Land”). The CEO made the decision that having a more stable cashflow was better than extra padding for the budget. A serious consideration for charities with budgets below the 2 million shekel mark.
6. Understand the Benefits and Limitations of Funding Sources
To prevent future budget and cashflow problems, this director rethought the organization’s funding sources. Specifically, in the future to rely more on smaller local (Israeli) funders and less on restricted funds. While this approach diversified the sheer number of donors, making the organization less in danger should a supporter choose to pull out, the fundraising process was more labor intensive. On the other hand, a more local approach allowed the organization to consider – and secure – in-kind donations, a source that had yet to be utilized. It should be noted that the charity is a grassroots organization and this local-donor-approach appealed very much to its inherent character.
7. Prestige Can be Just as Important as Cash
The organization didn’t drop foreign grants altogether. It was more strategic about whom it approached and secured a very well-known foundation grant. More important that the money was the prestige associated with getting a grant from this particular foundation. Simply receiving the grant opened doors with local foundations. For this charity it was a double-win (money and connections) that made the pursuit of this foreign grant worth the effort.
While the next two items weren’t used to help this organization climb out of the hole, the director did tell me that these tips are critical to helping the charity stay on-track:
8. Create Two Budgets
Hope for the best but plan for the worst, or more accurately, the less-than-best. The first plan reflects a fully funded budget and the full execution of the nonprofit’s activities. The second plan reflects more modest expenditure should promised funds not materialize. Essentially, this director was putting into practice what the Nonprofit Assistance Fund refers to as a Rolling Financial Projection (Paragraph 1.2).
9. Prepare Early
At the time of this meeting in early November, this CEO had more than 70% of the following year’s budget promised. While this is a tad early, this is certainly the right thinking. No organization wants to be caught fundraising to cover the current year’s expenses, ideally not past the first quarter and most definitely not passed the second quarter. Otherwise, the charity is forced to focus on immediate needs and incapable of developing a more long-term financial strategy.
While there is certainly no one-size-fits-all solution for financial management, these tips certainly strike me as a skeleton key capable of opening most doors.
Disclaimer: This blog houses my personal opinions and is for informational purposes only – not advice. As charity laws can be quite complex and ever-changing, please refer all questions to qualified and licensed professionals. Read the full disclaimer.
Shuey Fogel is a nonprofit professional turned banking specialist. He is currently Director of Solutions for Nonprofits for an Israeli Bank. Shuey shares relevant conversations, articles, and experiences on his blog, nonprofitbanker.com.