3 steps NFPs can take to prepare for continued uncertainty

Shutterstock_1428536456A year has passed since COVID-19 began its worldwide disruption, but the full effects have not yet been realized. The anniversary prompts us to pause and consider where we’ve been and where we’re going. A recent Not-for-Profit Section webcast offered key takeaways to help not-for-profits (NFPs) manage current disruption and prepare for changes yet to come. The overarching theme? Plan for the worst, prepare for the best.

  1. Build for tomorrow, not today.

Pandemic-related shutdowns crippled organizations that weren’t prepared to operate remotely. Those who already converted critical functions to cloud-based systems quickly pivoted to maintain business as usual. Organizations that could rapidly implement disaster-response plans and deploy operating reserves also typically fared better.  

Scenario-based planning

Thorough, scenario-based financial planning is critical for NFPs to thrive in today’s constantly changing world. Incorporating multiple scenarios into the annual budgeting process helps management identify possible triggers and look at impacts under various circumstances. Consider the following:

  • Examine each revenue stream and consider possible outcomes (for example, best case, moderate, and worst case).
  • Understand debt covenants and how various financial results might affect them.
  • Identify critical operating procedures. Are they flexible enough to respond to an unknown future? Are backup procedures built in?

While it seems obvious to consider how the organization would scale back in difficult times, think about how to scale up. Uncertainty can lead to positive outcomes, and prepared NFPs can take advantage of those opportunities.

Cash management

Stay on top of invoicing and collections so cash keeps coming in and conservatively estimate receivables. This equips an NFP to manage disruption. When forecasting, assume incoming payments will arrive after due dates and that pandemic hardships will negatively affect pledges. Cash forecasting should be frequent and transparent with both management and the board to avoid surprises.

Use calmer times to prepare for potential disruption. For example, consider applying for lines of credit before you need them. Negotiate payment terms for new contracts. Build your operating reserves. Review your operating reserve policy and update it, if necessary. Although you may not need these lifelines and leniencies today, you could in the future.

For an extensive look at timely NFP financial management topics and more, consider attending AICPA® & CIMA® Not-for-Profit Industry Conference online June 7–9.

  1. Diversify revenue streams.

From event planning and fundraising to program operations and service delivery, not-for-profits had to think differently to get through the past year. For many NFPs, the pandemic magnified the same key concern: lack of revenue diversity. Looking ahead, consider how to build additional flexibility into your revenue streams:

  • Are there new activities or programs that offer more diversification?
  • What is working well, and how can you take advantage of that momentum?

Unrelated business income is not always something to avoid. Be sure to consult a trusted CPA adviser if you need help evaluating the potential costs and benefits associated with any new activity or understanding Form 990 reporting requirements.

Invest in agile infrastructure.

For a sustainable future, organizations need to build a culture of change. Consider your infrastructure and how you might boost agility:

  • Technology systems — If you still have paper-based systems, how can you convert those to the cloud over time? How might you prioritize multiple conversions?
  • Board governance — Look at your board structure and composition, roles and responsibilities, and committee charters. Are there gaps in roles or documentation?
  • Human resources — What is your strategy for recruitment and retention in a disruptive environment? Would outsourcing certain roles provide more agility? Are your policies up to date? Is the staff cross-trained?
  • Office space and equipment — Have you embraced remote working and workplace flexibility principles? Do you need less office space or more equipment? Are there leases that warrant re-evaluation or renegotiation?

Be intentional with your infrastructure investments. Plan ahead, consider user impacts first and communicate frequently with your staff during times of significant change.

When managing uncertainty, NFPs should plan for the worst and prepare for the best. Even in the most difficult times, there are silver linings. Preparation will help NFPs survive the bumps and ride the waves.

Lana Richards, CPA, Manager, Product Management and Development, Association of International Certified Professional Accountants