The Gateway Center for Giving publishes a capital and endowment campaign report to inform grantmakers, nonprofits and other community leaders about resources being allocated toward restricted funding activities in the St. Louis region. We just released the 2011 edition.
The internal assessment of financial management has led to new or refined tools for financial analysis. The economic conditions of the past few years have exacerbated the variable revenue and expense cycles that are part of daily operating realities for nonprofits. Delayed reimbursements, program reductions or eliminations, and reduced contributions have necessitated careful cash management to remain viable. The economic downturn also affected access to working capital/lines of credit which many organizations use to bridge expenses during variable revenue cycles. Nonprofits in St. Louis know all too well how tough things got during the downturn. Gateway Center for Giving and The Rome Group’s 2009 Philanthropic Landscape report indicated 49% of organizations had less than three months of cash on hand, including reserves, and fewer than 24% had less than one month of cash. IFF considers one to two months of cash plus access to a line of credit as an average measure of liquidity and many organizations were well below that benchmark. Nonprofits faced with fixed expenses, an uncertain revenue environment, reduced reserves, and limited access to a line of credit have the opportunity to focus on the concepts of liquidity and cash management and develop tools and strategies to weather the storm including:
- Understanding cash flow and revenue cycles including site based budgeting to quantify the net revenue impact of programs and an assessment of reimbursement protocol to identify operational issues which may result in delays.
- Identifying and monitoring key policy issues or threats including state and federal changes to program funding and eligibility.
- Creating a financial dashboard for senior staff and board to closely monitor ratios which can indicate financial challenges and implementing proactive strategies to address issues.
- Renewing and/or revisiting the primary banking relationship and exploring options for access to a line of credit or engaging in a conversation about the impact of proposed changes to an existing line of credit grounded in an operating analysis.
- Exploring the strategic use of flexible financing to address deferred maintenance issues or urgent capital improvements in an effort to preserve cash to weather operating cycles. Many organizations have used limited reserves and unrestricted cash for repairs which could have been financed by entities like IFF and are then hard pressed to identify a line of credit and/or access to operating funds.
Organizations that have taken the opportunity to reflect, analyze, and then create tools to manage liquidity and cash flow internally are well positioned to evaluate new external partnership opportunities that have materialized in the past few years.
The economic downturn has led many entities to re-examine the nonprofit landscape and relationships with potential collaborators and competitors. IFF has seen a number of organizations evaluating and executing mergers and the development of joint ventures, occasionally including for profit entities, to enhance the long-term viability of both partners. There are a number of new players in the nonprofit sector as the slowly recovering commercial market has led for profit developers and building owners to take a second look at nonprofit projects as potential development opportunities.
Falling property values have led some building owners to consider donating buildings to nonprofit organizations. These opportunities can be an excellent option for a nonprofit but it is important for nonprofits to carefully investigate every aspect of the potential gift to ensure that the property is a fit and the organization can manage/afford the project long-term.
Several for profit developers are working on structuring joint ventures with nonprofits to harness tax credit equity and leverage the resources and operating track record of the nonprofit. There can be many benefits of this type of arrangement for the nonprofit including access to an experienced development team, the ability to leverage an additional balance sheet or asset base, and most importantly, access to the benefit of tax credit equity which would not be accessible to the nonprofits without the involvement of the for profit partner.
More nonprofits are exploring tax-exempt bond financing and New Markets Tax Credits as creative strategies to lower borrowing costs and access equity in deals. Sophisticated nonprofits and their partners are combining financing sources to strategically maximize leverage.
Nonprofits planning facility development or expansion have the opportunity to capitalize on new partnerships and structures but need to carefully evaluate options focusing on:
- Assessing mission fit with a nonprofit or for profit partner to ensure that the goals of the project are shared.
- Evaluating organizational capacity to identify gaps in expertise and assembling a team of qualified professionals to assist in the highly technical aspects of project analysis and implementation.
- Researching the financial and operational impact on the partners at every stage of the project from due diligence through the exit strategy.
- Performing a cost benefit analysis to determine if the proposed partnership is beneficial and to quantify the benefit.
The economic downturn has presented opportunity. IFF’s strongest borrowers have responded to the downturn with a sharper focus on liquidity and an openness to capitalize on new opportunities based on an informed analysis both of which will position them for long-term viability and success.