Charitable institutions and not-for-profit entities (NFPs) are particularly vulnerable to financial distress because of the COVID-19 pandemic. Like most for-profit entities, NFPs are experiencing a momentous disruption in their business operations and the revenue derived therefrom. That in itself is likely to trigger a financial crisis for many NFPs. However, as a "double-whammy," many NPFs can anticipate a significant future reduction in donor contributions and support from other constituencies because of the economic downturn. This disruption in contributions and non-operating revenue may have an even more devastating and longer-lasting impact on NFPs than the loss of business directly caused by the pandemic.
The bottom line is that NFPs should not just focus on surviving the short-term, but they should also consider longer-term subsistence and resource-allocation issues. This is especially important for NFPs that struggled financially before the on-set of the pandemic.
What should NFPs do to address their short-term financial issues?
As is the case with for-profit entities, NFPs should immediately consider each of the following financial issues as they attempt to navigate the pandemic in the short-term:
- What is the NFP's current
liquidity situation and how long can it sustain itself during a
prolonged pandemic? We recommend that financially vulnerable NFPs
immediately prepare a 13-week cash flow projection.
- Can and should the NFP draw against
any available lines of credit to build liquidity or sustain itself
in the short-term?
- Does the NFP qualify for specially
enacted COVID-19 economic relief, such as a forgivable loan under
the SBA Paycheck Protection
Program or an SBA Disaster Assistance
Loan?
- Is the NFP in a positon to make a
special appeal to its key donors or other constituents?
- Are there any alternative income
streams available to support the NFP and its mission in the
short-term?
- Can and should any programs
(particularly non-core programs) be eliminated or curtailed in
order to reduce expenses?
- What other expenses can be curtailed or eliminated in the short-term?
What longer-term issues should NFPs consider?
Unlike for-profit entities, NFPs are not beholden to shareholders. However, NFPs should be beholden to their mission as set forth in their articles of organization. Consequently, NFPs should continuously ask themselves how they can best steward their resources in fulfilling their mission – not just in the short term, but more importantly, in the long-term. It is, therefore, important for NFPs to consider the following issues as they navigate the current financial crisis:
- What is the NFP's long-term
chances for survival and how can the NFP best steward its resources
to fulfill its mission?
- Are the NFP's financial problems
primarily related to the COVID-19 pandemic or are they more
universal?
- Can the NFP be successful in the
long-run if its current obligations are restructured and its
short-term liquidity crisis is alleviated?
- Do other organizations currently
serve the same mission as the NFP, and should the NFP consider a
partnership, joint venture, merger or sale?
- Can the NFP better fulfill its mission by winding down its operations and deploying its resources in some other way?
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.