By Dane S. Claussen
Nonprofit Sector News
June 8, 2020
Accountant’s best financial practices say that U.S. nonprofit organizations should always have cash reserves equal to three months to two years’ worth of operating expenses. Such guidelines typically don’t try to imagine exactly what might happen, but one can think of extreme events: a new executive director wrecks relationships with all major donors, or doesn’t raise any money, or the nonprofit loses its largest contract or grant.
On the basis of the three to 24 month guideline, some might think that many nonprofit organizations, which are expected to close by the thousands in coming months, were badly managed, or not viable to begin with, when the corona virus caused a high percentage of US nonprofit organizations to cease most or all operations in mid-March because of the novel corona virus. After all, surveys have shown that half of US nonprofits had only enough financial reserves, with little or no income, to last a few weeks or, at most, a few months.
But Rick Cohen, chief communications officer/chief operating officer of the
National Council of Nonprofits, told Nonprofit Sector News that even in normal times, more than half of US nonprofit organizations do not have enough money to meet even the usual demands they face. He said that nonprofits know that they should “set aside a little bit of funding at a time” for reserves, but more urgent is for nonprofits to spend the money they have on needed services they provide.
Cohen said three months’ worth of expense money in reserve is the “closest
realistic target” for most nonprofit organizations, that six months’ worth is “terrific,” and that few nonprofit organizations have two years’ worth of expense money in the bank. He added that nonprofits used to be evaluated largely on metrics such as percentage of overhead in their budgets and how much money they had in reserve, but in recent years there’s been a positive shift toward evaluating nonprofit organizations based on their
effectiveness. Nonprofits that have large reserves are under pressure to spend more of that money, Cohen said.
He said that after the Great Recession (technically, December 2007 to June
2009), US nonprofits made more crisis planning, but that nonprofit organizations planned for a “rainy day, not a monsoon,” his analogy for the current situation. Cohen emphasized that the present crisis for nonprofits is unprecedented and hopefully unique.
In addition to many expected shutdowns of nonprofits this year, he said that nonprofits may look to merge with other, similar nonprofit organizations in the same geographical area, but that it is “not easy” to find the “right partner” for a merger. More likely will be the continuation of a recent trend toward nonprofits co-locating—sharing office space, equipment and even staff.
According to one online resource for nonprofits, Inside Philanthropy, nonprofit leaders also already are, or should be, planning for the next disaster.
The first thing that experts say is that nonprofits need to have emergency funds, whatever they are called: reserves or emergency or contingency funds. The second thing they recommend is planning, although as Cohen noted, an organization cannot plan for everything. Still, a little planning can go a long way when an emergency plan needs to be implemented. Planning should account for nonprofits’ most vulnerable constituencies, Alan Kwok, director of disaster resilience at Northern California Grantmakers, recently told Inside Philanthropy. Mark Lindberg, program director of disaster relief and recovery at the Margaret A. Cargill Philanthropies, told Inside Philanthropy that building relationships is important, both between local governments and nonprofits, and also between first-responder national or international organizations (such as Red Cross) and the local nonprofits that know individual communities inside and out.
Nonprofits can sometimes work to help prevent future disasters. For example, not only did Bill Gates publicize the threat of global pandemics for years, but the Bill and Melinda Gates Foundation’s already are preparing for the next one. The Gates Foundation is a partner in the new Pandemic Action Network, which is working with governments worldwide to improve their responses next time and also is running the #MaskingForAFriend campaign. In California, large nonprofits are working on efforts to both prevent and limit future wildfires, including strategizing about how to limit building in high fire risk areas, Inside Philanthropy reported.
Katherina M. Rosqueta, founding executive director of the Center for High Impact Philanthropy, told Inside Philanthropy that the current crisis has shown the need to have better, and quick, coordination between grantmakers such as foundations and corporations and grant recipients, the nonprofits that carry out the work. She said this better coordination should continue always, not just in emergencies. Nonprofits also need to work with each other in crises, whether it’s a dozen in greater Philadelphia or more than 100 in California.
Kwok, at Southern California Grantmakers, also told Inside Philanthropy that funders also can assist by permanently reducing red tape for nonprofits to obtain and use grants, meaning more “trust-based” grantmaking. He also said that funders may be able to help with assistance with budgeting, technology, or other matters.
Lindberg, at the Margaret A. Cargill Philanthropies, told Inside Philanthropy that nonprofits also can help grantmakers get involved, or more involved, in policy work, since many funders are not active or interested in it. He said societal changes need to occur at all levels.
Regine Webster, vice president of the Center for Disaster Philanthropy, and
Rosqueta, at the Center for High Impact Philanthropy, both told Inside Philanthropy that nonprofit organizations generally need to focus on their core missions, both short-term and long-term because nonprofits serve needs that don’t go away. (But Erin Dearborn Coryell, program officer for disaster relief and recovery at the Margaret A. Cargill Philanthropies, said that crises may be the moment when a nonprofit makes major long-
term changes.)