The Case of Coping During Difficult Financial Times

This is the third Sam Sector III case. If you check on a regular basis you can follow the escapades of Sam “the greatest and only nonprofit detective in the world” as he answers the questions facing today’s nonprofit leaders. Each installment will take only a couple of minutes to read, will provide you with some information, and will end in a bit of a cliff-hanger so that you will return in about 7-10 days to find out what happened. This of course is fun for me, and a different way to get information out to all of you who have an interest. Please let me know if you like it, hate it, or wish that Sam would find a real job that pays.


← Read the third installment

Teddy’s strawberry blond head was easily seen at the sushi bar; the yellowfin tuna, shrimp and roe roll was just being presented to her as Sam took the stool on Teddy’s right. Within five minutes, Sam had ordered mackerel and a Sapporo beer and turned to the statuesque consultant whose primary work is serving as an interim director for nonprofits.

“Given your experience, Teddy, what are the most important tips you have for nonprofit executive directors who are trying to deal with today’s economic environment?” While Teddy mixed ginger with soy sauce, she identified several tips that she said were learned the hard way when she faced a shortfall in revenue:

  1. Divide the problem into thirds and use three strategies to solve the overall problem:
    1. 1/3 cut expenses
    2. 1/3 raise additional funds
    3. 1/3 shift money from one fiscal year to another, from one grant year to another, etc.
  2. Get your board members committed to raising money for the organization by using their networks to either get funds directly or open doors for the staff to ask for funding.
  3. When trying to raise funds from foundations, recognize that they are looking to fund proposals that are one-time efforts that will take the organization to another level, or will lead to sustainability. Therefore, don’t forget to think through where you are in your life stage and play to it.

Sam took a sip of his beer and turned to Teddy just as his raw fish arrived. “I get the first two tips, Teddy, but say more about the third one — help me understand how to do this.”

Teddy swallowed a bite of her roll. “First, Sam, you need to select a nonprofit life stage model, and figure out where your organization is. Once you know where you are and where you are moving to, you can make a case for how one-time funding can make a difference and move the organization to the next level. For example, if you are in the Founding Mother/Father stage and are getting ready to move to the next stage, you can make a case for getting one-time funding to build the systems that will enable you to move to the next stage by focusing on infrastructure development. Funders like to support these kinds of efforts for three reasons: First, it can make a significant difference in advancing the work of an organization. Second, this is not an ongoing commitment to an organization, it really is one-time funding. Third, and more subtly, many foundation leaders appreciate the fact that nonprofit leaders are thinking about where they are today and where they need to go tomorrow.”

Sam nodded as he munched on some fish, and Teddy continued after a sip of her white wine. “When you are making cuts in your programs, consider the following ideas:

  1. It is often preferable to make a few big cuts rather than lots of little cuts. This will make certain that you do not “starve” the whole organization — while you may lose one program, your other programs will be able to maintain quality and quantity.
  2. Keep the key people on the board and staff aware of the cuts so that there are no surprises. Over-communication is rarely a problem at times like this.
  3. Pay attention to the implications of cuts on direct and indirect costs, as well as on any donor restrictions, before you make any cuts. This will avoid starting an unanticipated domino effect.”

Sam again asked for some clarification on the last point that Teddy was making. “Well, Sam, I think that as leaders start to work on shrinking their budget and are focused on the organization’s bottom line, it is easy to lose sight of the restrictions that some funders place on their grants, including limits on amounts that can be spent for administration and infrastructure. So, as you know, all dollars are not equal in the funding world, and a big no-no is spending dollars restricted to a program for general operations. The domino effect may happen if you lose funding for a program that supported one-quarter of the fundraiser’s salary — you cannot just replace those salary dollars from other restricted support.”

Teddy was warming to the tips as the bones, head and tail of the mackerel were returned to Sam having been deep fried for crunching with his beer. “Furthermore, Sam, other things to remember about administrative costs include:

  1. Make sure overhead cuts won’t jeopardize your ability to be accountable; in other words, make certain that your infrastructure which enables you to evaluate what you do and report the results to others is not damaged by cuts — this is vital given the current environment.
  2. Review grants for overhead or administration requirements or limits — this is important since some grants specify the amount that can be allotted to administration and overhead and cannot be violated as you shift financial support.
  3. Pay attention to the impact of cuts on the administration’s percent of budget; if you cut programming then you may be inadvertently raising the percent of the budget that is being applied to indirect or administrative costs. If this percent gets too high then you will take yourself out of the running with some foundations.
  4. Think about the internal and external messages that are sent — if you start clamping down too hard on some of the important perks for staff (training, attending conferences, providing travel opportunities, etc.) then you will send a message that the organization is facing financial problems. Internally, this may cause your “stars” to look for work elsewhere (since they have the best chance of getting a job) and externally, funders do not want to provide support to an organization that is having financial problems and may not make it.”

Sam finished his fried fish head, tail and bones and finished his beer. “Thanks, Teddy, these ideas will put the finishing touches on the report that I want to send to Joe, in D.C. I can’t tell you how helpful you have been. If you ever need anything…”

“Yeah, yeah, Sam, I know who to call if it ever comes to that. Now you better get going so that you can write up your report for Joe. I think that I will have some sake to round out the meal.” With that, Teddy waved her hand to place her order.

By the time that Sam got back to the office he had figured out all the different parts to the report for Joe. “Stella, I got the whole report figured out, it’s all up here,” Sam said, pointing to his head. He implored his secretary, “Please help me get it written up on your Mac SE.”

Stella smiled, knowing that she would have another paycheck coming once the report was sent to D.C. “Okay, Sam, I am ready to help you get the report done, and we’d better get going on it before you forget what you learned in all your meetings. Besides, we need to get everything wrapped up by tomorrow at noon, ‘cause that’s when your next paying client will be stopping by to lay out her problem.”

Sam smiled his crooked smile. “Who is she and what is the problem?”

“Dunno all the specifics, Sam, but she is an executive director whose organization is looking at shutting its doors. Rita, that’s her name, said she needs some help thinking it through, and her friend Gracie said that you were the man to help her think through the next steps.”

With that, Sam got word of his next big case: To close or not to close, that is the question.

If you have ideas that can help Sam as he works on his current case, or if you have "cases" that you would like to see Sam take on, please email me.