ARTICLE

Fundraising in a Changed Environment

by: Smith and Howard

December 21, 2020

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This is usually the time of year when charitable giving increases, but the pandemic has upended many norms. With this in mind, Smith & Howard and Coxe Curry & Associates recently teamed up to host a discussion aimed at addressing fundraising efforts in the current environment and how nonprofits can adapt to the change in circumstances.

The panel of experts – David Eidson, President and CEO of Coxe Curry & Associates; Kimberly Bland, Assurance Partner at Smith & Howard; and Madelyn Adams, Director of Community Health at Kaiser Permanente – covered a range of topics. Top of the list was how COVID-19 has impacted nonprofits in terms of both their fundraising efforts and underlying financial strength. Additional topics ranged from budgets and cash flow projections to how nonprofits can respond to the movement on social injustice.

The pandemic has impacted everything nonprofits do, particularly their ability to draw from the capital to which they’ve historically had access. According to Eidson, organizations serving basic human needs, like shelter, food and clothing, had better access to capital in the March to July 2020 timeframe. They received more funding, but their use of those funds increased significantly and as a result they couldn’t keep up with demand. Additionally, some of the public funds available to these organizations do not cover the entire cost of delivering programs, which means private dollars are needed to fill the gaps. Meanwhile, nonprofits that are not in the food and shelter space have had to pivot and explore ways in which they can use their knowledge or resources creatively to serve the community.

Eidson added that overall financial giving from donors for 2020 will probably be flat. As a result, many nonprofits have to look at their budgets to analyze where they can take an expense reduction in order to ensure financial stability in the coming year.

Three Budget Scenarios

According to Bland, this expense reduction means budgets are a top priority. Naturally, when financial budgets for 2020 were put together, the impact of the pandemic was not included. Now, sustainability and resiliency are key and cash management is critical. Organizations need to take a broad view and get a clear understanding of the impact they want to have in the current environment. Their financial decisions should be driven by this. Among the questions that nonprofits must consider:

  • What is their current financial situation?
  • How has the pandemic affected their operating costs?
  • How much cash do they have on hand?
  • What is the diversification of their donors and how does it affect giving? (In financially challenging times, having a diverse source of funding is especially important so that organizations are not reliant on a single donor or foundation in case that funding is not sustainable.)
  • What financial assets can the organization use to deliver impact and structure financial scenarios that will enable it to carry out critical programs?

As Bland explained, the budgeting process has changed for many nonprofits. With so much uncertainty around revenue, they need to budget for multiple financial scenarios. Her advice is to create one budget for a best case scenario, another should the worst happen, and one budget that lies between the two scenarios. Since the pandemic is lasting far longer than was originally expected, budget and revenue assumptions are changing constantly throughout the year and reforecasting has become the norm.

Financial Warning Signs

Adams noted that nonprofits which count on earned revenue have seen more of an impact on their funds this year than at any other time, even during the 2008 recession. Some have lost critical earned revenue or have experienced a drop in donations.

What are some of the financial warning signs that auditors, donors and financial institutions should look for? Bland explained that accountants review management’s plans for the next year as part of the audit to determine how they are going to operate and if management can demonstrate the means to continue operations. Some of the more common financial warning signs for nonprofits and stakeholders that may be identified within the financial statements are:

  • Not meeting debt covenants, which could result in the bank calling in the loan. The debt could become current, meaning it will need to be paid off within the next year rather than according to the original repayment terms.
  • Use of restricted cash to meet current obligations/operating costs, which is becoming more common and could cause issues in the future as those funds, which were given by donors for a specific purpose, will have to be replenished.
  • The status of liquidity – funds available for the following year and funds that are restricted. It is important to ensure those aren’t co-mingled.

Staying Connected with Donors

Eidson said that response by donors in the current financial environment has been phenomenal. He pointed out that existing donors have allowed some restricted gifts to be repurposed if they are given concrete plans for the path forward. He recommends having open and honest dialogues with donors, keeping them fully up to speed on how the pandemic has impacted the organization and what action has been taken. If the nonprofit has had to pivot, he recommends letting donors know what, how and at what cost.

Adams agreed wholeheartedly with Eidson, saying the relationships between donors and nonprofits is everything. She spoke about what Kaiser has done to assist struggling nonprofits, stating that some have asked for repurposing of grants from Kaiser, usually for operating expenses. “Because of our long and trusted relationships, we’ve absolutely allowed that to happen. Kaiser wants to show flexibility to our community by supporting nonprofits that way. Being able to see a nonprofit’s long-term plans is important, so we know that investment is solid.”

The Value of Cash Flow Projections in Uncertain Times

As Adams highlighted, even corporations have been struggling during the pandemic. What can nonprofits that have relied on corporate support do to help themselves while waiting for corporate support to be built back up? Bland said that it is critical for nonprofits to have cash flow projections. These should be for a minimum of one year, but Bland recommends projections for three years. Revenue is much harder to predict than expenses, as this year has demonstrated, and a carefully-thought-out cash flow projection will help guide an organization when difficult decisions need to be made. That includes whether payroll can be distributed or health insurance coverage can be paid; an organization cannot wait until they are out of money to make these decisions. When warning signs appear, the organization’s leaders must to be able to look at cash flow projections for the next year before making decisions. This needs to be done on a timely basis and updated regularly and should become part of the closing process for monthly financial statements.

Nonprofits’ Role in Social Justice

The speakers also discussed the current social unrest. Adams talked about the heightened awareness around the call for racial equity and probed for ways nonprofits can contribute to leveling the playing field. Eidson said that there has been acknowledgement that the playing field is uneven and that communities can play a role in helping to resolve problems. He pointed out the opportunity some private schools have to increase involvement by adjusting the racial make-up of their boards, clients and employee base.

Eidson acknowledged, “The racial equity conversation is not an easy conversation for everyone to have, but I am convinced that each one of us has a role to play to shine the light on inequity and help educate our constituents in order to move the needle or begin to level the playing field.” He suggested that organizations can consider their culturally appropriate role to help contribute to social justice and recommends that nonprofits share what they do with their constituents as part of their story.

Planning for the Future: Keep Fundraising

The entire panel agreed that when it comes to the future, the time to act on obtaining funds is now. Eidson advises talking to donors, letting them know how your nonprofit is doing and what actions you are proactively taking as it relates to your mission, including how you have adapted or adjusted your service model. Earned revenue through ticket sales, for example, went away and is coming back very slowly, so revenue has been dramatically impacted. This is therefore a good time to assess needs and fundraising practices, or seek advice about how you can strengthen your efforts. “Some amount of planning and strategizing is a good idea. Finally, but most importantly, keep fundraising. Money is being raised and it is likely that your organization could use additional resources to meet new needs or fund a new way of delivering your mission. The important thing is to ask, and where possible, to approach new donors for support only after you have talked to the donors closest to you. Approach your board and long-time donors first.”

Bland emphasized the importance of having a financial stability plan for the future. It is vital to build an operating cash reserve, and to incorporate that as an expense line item in budgets going forward. Ideally, nonprofits should have at least six months of reserves, but most have three months or less. The Paycheck Protection Program (PPP) was a saving grace for nonprofits without a reserve and gave them time to develop a plan to manage through the pandemic, but having a healthy rainy day fund going forward is crucial.

As Eidson said, a nonprofit’s revenue mix may not be the same as it was six or nine months ago and help will be needed to fill that gap. “With upwards of 80% of the philanthropic dollar coming from individuals, you may need to ask more from this group than you have traditionally sought. Be creative and look for ways to add new or extra events to the mix that will open the door to different audiences, and keep the mission moments at the center of your event. Don’t be afraid to share your story and, in telling that story, look forward and define what their support can help you achieve. Be positive. Donors want to know that they are investing in a mission that provides hope.”

If you would like more information about how your nonprofit can adapt and plan for the coming year, please complete our contact form and someone from our nonprofit team will be in touch.

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