A few times every year I get a phone call from a non-profit friend who is experiencing a cash flow issue. The conversation always starts off with a tinge of embarrassment and then quickly morphs into finger pointing and finally ends with a sense of resignation and desperation. I received another one of these phone calls the other day, which reminded me that I’ve been meaning to blog about this subject for quiet some time. The following are a few quick tips on how to handle your non-profit organization’s cash flow crisis.
Remain calm and confident
One of my favorite movie scenes is at the end of Animal House when Kevin Bacon’s character is trying to keep the peace in the middle of the parade-turned-riot when he is shouting, “Remain calm! All is well.”
During a cash flow crunch, it is important for you to remain calm and encourage everyone else in the organization (e.g. board volunteers, staff, donors, etc) to do the same.
Why? Simply because . . .
- People don’t follow leaders who aren’t confident and composed
- Panic and fear spread quicker than the flu
- People don’t typically make good decisions when they are panicked and fearful
Develop a 90 day plan
You have lots of short-term options that will help bridge your organization through a cash flow crisis. The following is a short list of some of those options:
- Secure a loan (this can be a traditional short-term loan from the bank or a promissory note from a donor)
- Search your donor database for LYBUNTs (e.g. lapsed, former donors) and ask them to renew their support
- Meet with your largest donors and ask them to make another contribution
- Look at your accounts receivable list and ask those donors if they would consider making a pledge payment sooner than they had indicated on their pledge card
- Ask board members to make another contribution
- Prioritize which outstanding invoices need to be paid now and which ones can wait
- Work with your Finance Committee (or key board volunteers) to develop a new budget plan for your new realities (or develop multiple budgets for a variety of revenue scenarios)
- Use unpaid furlough days with some staff to temporarily reduce payroll expenses (be cognizant of what this will do to morale and possible employee turnover)
I wrote a blog post titled “So, your non-profit cannot make its payroll obligation” a few years ago about some of these options. You might want to click-through to read more.
Understand what caused the problem
If I’ve seen it once, I’ve seen it a number of times . . . board volunteers want to hold someone accountable after the crisis passes. In my opinion, the best way to survive this dynamic is to be able to point to:
- Your calm leadership during the crisis
- Your role in developing the short-term plan
- Your understanding of what caused the problem
- Your commitment to fixing the things that cause the problem
There is a fine line between assessment and finger pointing in these situations. Whatever you do, avoid finger pointing because your board of directors will interpret it as “not taking responsibility“.
There isn’t a right or wrong way to undertake an assessment, but my suggestion is that you do it with many people sitting around the table. The more eyes you have looking at this situation, the more likely you will be to see all sides of the problem. Consider involving staff who play some role in financial management, board volunteers with a background in finance, and possibly even an external consultant who can come at this with fresh eyes.
Develop a long-term plan
Now that you’ve made it through the crisis and have a firm understanding of what caused it, it is important have a new long-term plan that keeps you from ending up back from where you just came.
As with the last section, I strongly suggest you don’t do this alone. Your plan will have more credibility if many participated in its creation. Remember, the board will look skeptically at any plan that is developed by the same people who they perceive as having played a role in creating the original crisis. Involving fresh faces with lots of credibility helps address this dynamic.
Your plan will be unique to your organization and your situation; however, the following are just a few “fixes” I’ve personally seen embraced more often than not:
- Making revisions to the resource development plan (e.g. adding more to the fundraising plan)
- Making process changes to the budget construction process
- Making process changes to billing/invoicing donors and grant providers
- Changing how the board monitors/oversees the finances
- Undertaking a re-organization of the company focused on staff/payroll reduction
Well, good luck with your cash flow crisis. Hopefully, these big picture suggestions are helpful and get you pointed in the right direction. If you have any ideas or experiences that you wish to share, please do so in the comment box below. We can all learn from each other.
Here’s to your health!
Founder & President, The Healthy Non-Profit LLC
Let me start with an apology to DonorDreams readers for my recent absence. My workload has increased exponentially lately, and the last few mornings when I’ve sat down to write the floodgates opened unexpectedly. I will try harder, but if things don’t get better, then I will have to seek out more guest bloggers and re-publish popular posts from the past. Please accept my apologies and my promise to work this problem. ~Erik
This morning’s post is top of mind because I’ve recently had the privilege of working with a non-profit organization that is encountering a cash flow situation. First, let me say that this is something many non-profit leaders have had to deal with. Second, I’ve recently come to realize that many people freeze when confronted with these situations and very little is written about how to survive such a crisis. So, I’m going to provide a few tips from my experiences of working with clients facing a cash flow and payroll crisis.
Ask board members to contribute
The people closest to your mission are board and staff members. So, when the organization is short on cash and cannot meet its payroll obligations, it is only natural to ask board members to dig a little deeper.
While this will bring in some money and help bridge the gap (at least partially), the bigger reason you need to start with the board is that no other donor will jump into the gap if they don’t see the board doing their fair share. Additionally, you won’t likely be able to get board members to jump in and help you engage other donors if it doesn’t feel like they have skin in the game.
Ask key donors to contribute
Don’t pass the basket and ask smaller, low capacity donors. Identify your larger, more capable donors and schedule an in-person meeting to explain what has occurred and ask for their support.
Don’t make your “case for support” sound like your organization is the S.S. Titantic. You might get a contribution from someone by telling them you’ll go out of business without their support, but making the ask that way makes getting future gifts significantly more difficult.
Because no one likes to through good money after bad money. Remember . . . only the captain goes down with the ship.
So, when talking to those key donors, make sure to explain what happened and why you’re in this situation. Clearly explain to them what the plan is for getting out of the hole. Make sure to keep your message mission-focused because donors are emotionally attached to your clients and programs. They are not inspired by your overhead and business challenges.
Contact your accounts receivable list
Accounts receivable can be any number of the following individuals/entities:
- individual donors with pledges that are due at a later date
- foundations or government agencies who have given you a grant and your reimbursement paperwork is still pending
- individuals or companies you invoiced for a service you provided and are still waiting for payment
Call these people and explain your situation. Ask them if they could work with you on paying their pledge early, speeding up the reimbursement paperwork, or paying their outstanding invoice sooner-rather-than-later.
Always keep in mind that you catch more flies with honey than you do vinegar. Being polite is a necessity because your crisis isn’t their problem. More importantly, you are in the relationship building business, and your words today can impact your relationships tomorrow.
Pay your bills carefully
If your organization finds itself in this mess, then the bank is probably not extending you additional credit. While managing your cash flow on the backs of your vendors is a bad thing to do, sometimes life presents you with a bunch of bad options.
Make sure to prioritize what little cash you have in the bank towards making payroll. The phone company can wait a few weeks. However, be transparent and ethical about this strategy. Pick-up the phone and call the vendors who will be impacted by this decision. Explain your situation and ask them for patience and assistance. You might be surprised at their response.
Don’t rest once the crisis passes
This crisis came to your door for a reason, and you owe it to your clients, donors, volunteers and community to make sure it doesn’t happen again. The following is an incomplete checklist of things you should consider:
- Revisit the budget and make necessary changes
- Create a cash flow project tool and keep it updated
- Invest in evaluating board composition, structure and governance practices and fill those gaps ASAP
- Evaluate executive leadership and make changes if necessary
- Conduct a resource development audit and use it as a springboard to create a written resource development plan
Has your organization ever experienced a cash flow crisis that resulted in a payroll panic? I know this can feel embarrassing, but please share your thoughts and experiences in the comment box below. We can all learn from each other, and our clients and communities can benefit from that collective wisdom.
Here’s to your health!
Founder & President, The Healthy Non-Profit LLC