Survival of NPOs in an Unpredictable Environment (COVID-19)
Posted on 27 December, 2021 at 10:10
There has never been a
more relevant time to talk about financial management in Nonprofit organisations
such as now. The Covid19 pandemic has been an eye-opener for most organisations
as it has exposed loopholes around financial planning and management. Literacy
over this is slowly proving to be the foundation of sustainability and survival
in what some would term “the new normal.â€
In order to comply with
the preventative regulation over the pandemic, organisations have been forced
to adapt to working remotely. There is a positive gradient showing the
transition to a paperless environment. Nonprofits that were earning their
revenue from face-to-face service fees are now doing so through electronic
tools such as Zoom and Skype. This is clearly indicative of the technological
age that is upon us and as such organisations should stay alert and expect even
more changes in the year 2022.
What has been popular in
all Nonprofits is the notable adverse variances in relation to budgeted
expenditure costs. For most, if not all, expenses it is now difficult to budget
for them. Various economies were grossly hit by the pandemic. It is no longer
as easy to forecast expenditure as prices are constantly changing. Some
suppliers are closing down due to irrecoverable losses that they have been
incurring due to the National Lockdowns that are on and off. The closure of
competitor suppliers has led to the exploitation of Nonprofits by remaining
service providers - having to buy at very high prices because there are limited
options.
Expenditure is now
difficult to plan for and allocate accurately. Covid19 has taught us to have an
Operating Reserve specifically kept for paying for expenses that may
possibly burst our budgets. Operating reserves provide a cushion against
unexpected events like COVID-19, losses of income, large unbudgeted expenses,
or when funding partners become slow to pay. Reserves can allow an organization
to weather serious bumps in the road by buying time to implement new strategies.
To be prudent, reserves should be used to solve temporary challenges, not
structural financial problems.
Entities without adequate
reserves are left scrambling when there is an unexpected event or cash flow
crunch. If your organization is in a position where operating reserves aren’t
meeting your needs or maybe don’t have an operating reserve at all, there are
initial steps you can take to start to build up your reserves:
Step 1:
Consider a board/management strategy session to discuss the importance of reserves.
·
Strategize on what ideal goals might be,
and how you might get there. Other considerations might be whether you want the
funds deposited into a separate bank account, and how the money will be
deposited or withdrawn in the event of need.
Step 2:
Draft a reserve policy that is agreed upon by the board.
·
The policy should include the purpose and
use of the operating reserves, including how they will be replenished if it is
needed for operating.
Step 3:
Develop a plan to start saving.
·
While a common goal is to get to 3-6
months of expenses, that doesn’t happen overnight. Reserves are generally built
up over time by generating an unrestricted surplus and intentionally
designating a portion of excess cash as a reserve fund. Some organizations
include a line item in the budget to add to reserves.
While COVID-19 has
brought this need for operating reserves to the surface, nonprofits have been
dealing with this issue for many years. More than a decade ago, The Nonprofit
Operating Reserves Initiative Workgroup released a whitepaper, Maintaining
Nonprofit Operating Reserves, which has many important points that are relevant
today for determining your ideal operating reserve level.
For a further read
on the whitepaper visit:
OperatingReservesWhitePaper2009.pdfhttps://www.nonprofitaccountingbasics.org/sites/default/files/01-OperatingReservesWhitePaper2009.pdf