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SchoolNutrition.Org Navigating the financial storm 2009 National leadership conference.

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Presentation on theme: "SchoolNutrition.Org Navigating the financial storm 2009 National leadership conference."— Presentation transcript:

1 SchoolNutrition.Org Navigating the financial storm 2009 National leadership conference

2 SchoolNutrition.Org What Well Cover Todays Economic Landscape Whats happened and whats going to happen How its affecting nonprofits at large, and your organizations Fundamental Principles of Fiscal Management How they can help you stay on course in this recession Practical Strategies You Can Use Developing smart strategic responses Tools to take your pulse and keep you grounded 2

3 SchoolNutrition.Org What We Are Feeling 3

4 SchoolNutrition.Org Historical analysis does not guarantee future results. As of September 30, 2008 Source: Federal Reserve, Haver Analytics, US Bureau of Economics Analysis and US Bureau of Labor Statistics US Recessions and Bank Lending Credit Expands After the Economy Has Rebounded, Further Fueling Recovery

5 SchoolNutrition.Org Historical analysis and current estimates do not guarantee future results. As of December 31, 2008 *Median value excluding Great Depression and current recession **AllianceBernstein forecast ***Average excluding Great Depression and current recession Source: Bureau of Economic Analysis and AllianceBernstein Current Recession Will Likely Last Longer Than Usual Most Recessions Have Been Mild and Short, Except for The Great Depression Average* Percent Decline in Real GDP Average*** (2.2)% (26.5)% (3.5) (2.7) (3.7) (1.4) (0.6) (3.1) (2.2) (2.7) (1.3) (0.4)

6 SchoolNutrition.Org Todays Environment More Supportive of Eventual Recovery Federal Deposit Insurance Corporation Social Security Coordinated Rate Cuts By Central Banks Good Trade Relations Among Many Nations Increase In Money Supply Lower Tax Rates Single Digit Unemployment As of December 31, 2008 Source: AllianceBernstein That Was Then (Great Depression) This Is Now

7 SchoolNutrition.Org Dealing With Todays Economic Landscape Business as usual wont do anymore. Its time to adapt and transform. Active engagement with todays challenges increases your likelihood of emerging from the recession with important services in place. Going it alone wont work. It is in working with others that leaders find the best ways to generate solutions and hope for the future.

8 SchoolNutrition.Org Whats Happening Combination of Events Credit markets seized Stock markets plummeted Employment rate falling Housing and real estate markets in decline Impact on Nonprofit Organizations Downward pressure on government and philanthropic funding Protectionist behaviors and general cost increases Limited and / or more expensive access to credit The bottom may take longer to reach for nonprofits All compounded by an increased need for services 8

9 SchoolNutrition.Org Whats Happening How Has This Downturn Been Different for Your Organization? 1980s Devolution of Services 1987 Black Monday stock market crash Early 1990s Recession 1998 Credit Crisis 2002 – 2003 Recession How Organizations are Responding Today Reducing operating budgets Putting expansion plans on hold Eliminating staff positions Merging or dissolving Dramatically transforming their business models 9

10 SchoolNutrition.Org How Is or Will This Affect Your Organization? Transactional Changes: Revenue, Expenses, and Assets Revenue Government funding levels Individual / institutional contributions and fundraising events Fees from those who use your services Expense Increases and cost pressures on many line items Assets Could be financial or non-financial 10

11 SchoolNutrition.Org How Is or Will This Affect Your Organization? Transformational Changes Restructure, Reorganize, and Engage Mission-based decisions Strategic, operational, and cultural Alternative service delivery strategies Alternative staffing models Alternative business models 11

12 SchoolNutrition.Org How Do I Get My Arms Around This Situation? Prepare for a sustained economic crisis, but also… Convert fear to engagement and hope There is power in acknowledgment – step beyond avoidance Know that the basics may not do it any more – you may have to adapt to get through this But…there is hope and you dont have to go through it alone 12

13 SchoolNutrition.Org Tool #1 – Understand Your Starting Position Start With an Honest Self-Assessment Define what financial crisis looks like for your organization in objective, concrete, and practical terms… …so that your organizations leaders have a shared understanding about what must be avoided… …and so that they buy into the need to mobilize to avert problems 13

14 SchoolNutrition.Org Financial Self-Assessment Ask Yourselves the Following Questions What has our financial track record been? Are we operating from a position of strength or weakness? What are our organizations income sources and cost structures? What kind of financial flexibility do we have? How financially sophisticated is our board and staff? 14

15 SchoolNutrition.Org Tool #2 – Revisit the Fundamentals about Income Financial health depends on having sufficient resources to fund stable programming. What does this mean? Income fully covers program expenses Income is renewable: reasonably expected to continue into the future Income is received from diverse sources to reduce risk 15

16 SchoolNutrition.Org Who Is in Control of Your Income Model? Self-Funding Those who use and benefit from services pay for them Client fees, tuition, advertising revenues, fees, donations External Support Institutions or individuals who dont use services but provide support in order to underwrite services for those who cant pay Grants and donations Independent Sources Products or services for sale to constituents or the general public Space rental, gift shop, special editions 16

17 SchoolNutrition.Org Is This the Right Mix for Your Organization? Is it reasonable to expect this mix will adequately sustain you in the future? Are you reasonably comfortable with the degree of control you have over program funding? Which sources do you want to grow? Do you have the ability to convince these funders that your programs deserve their support? Do your proposal budgets make the best possible use of the funds available through each funding source? 17

18 SchoolNutrition.Org Strategies to Maintain or Increase Income Stay in close touch with customers, donors, and other key constituents List in brainstorm fashion all the options available to you for protecting and / or increasing current income streams… …and all the options for developing new ones Articulate the principles that will guide your choices about options for further research Research and select the best options: cost / benefit analysis and return on your investment 18

19 SchoolNutrition.Org Tool #3 – Revisit the Fundamentals about Cash Financially healthy organizations have adequate internal cash – or access to cash – in times of shortfalls. Use your balance sheet to figure out what your cushion is: Cash Receivables Line of Credit Reserves If Your Balance Sheet Has… No cash or receivables A fully drawn line of credit Little or no reserves available …then there is nothing to draw on in challenging times 19

20 SchoolNutrition.Org Prepare and Regularly Update a Cash Flow Projection

21 SchoolNutrition.Org Tool #4 – Make the Most of What You Have Protect your existing assets Cash and investments are insured Receivables are current Property and equipment are adequately insured Activate underused assets Invest excess cash appropriately Sublease excess space Assign the right people to the right tasks and challenges Galvanize and use volunteers efficiently Maximize existing income streams Collect every dollar youre owed Make sure your services / reimbursement rates are priced right 21

22 SchoolNutrition.Org Tool #5 – Build a Smart Portfolio of Projects Each project fits with your mission and culture You have the skills and knowledge required to implement this activity Your portfolio presents a sustainable mix of bottom lines You have sufficient infrastructure to manage the administrative load that comes with your chosen mix of funding 22

23 SchoolNutrition.Org A Portfolio Approach to Program Decision-Making 23

24 SchoolNutrition.Org Tool #6 – Generate, Act on Sound Financial Information Anticipation is one of the keys to financial stability. What does this mean? It means that you as managers need time to adjust if income is not coming in according to plan Figure out what, exactly, is the problem Articulate and monetize the issues Consider carefully how to address budget variances If necessary, take adequate time to implement adjustments 24

25 SchoolNutrition.Org Tool #7 - Prepare Contingency Plans Make them easy to implement quickly if there is a major shift in funding or other event Create several versions or scenarios of your operating budget Consider dollar-for-dollar cost reductions (or prioritized add-backs in the case of better- than-expected results) Know whether funding should be cut: Vertically: eliminate an entire program or project Horizontally: across the board Some combination 25

26 SchoolNutrition.Org Prepare Contingency Plans (cont.) Articulate the trigger points that will cause you to activate the contingency plan Qualify and quantify these triggering events Decide whether you can afford to incur an intentional deficit Allows an organization that has adequate cash and net assets to buy time while deciding what longer-term changes must be made. This is an interim strategy only, though… 26

27 SchoolNutrition.Org Tool #8 – Look for Cost Savings Youre already lean, but chase the low-hanging fruit first… …using cost containment strategies… Renegotiate vendor contracts (they want to keep you in business!) Health and other insurance Printer, web hosts, phone / internet, landlord Go digital if it means savings Reduce the need for print materials and mailings Some constituents may read an online newsletter or appeal more readily than print 27

28 SchoolNutrition.Org Tool #9 – Engage and Communicate Engage and communicate with all stakeholders in an ongoing, deep, and transparent manner Funders Keep your key funders informed about the impact and quality of your organizations programs Be transparent with them about your financial condition and plans Staff/Members Keep employees and/or members informed about the organizations economic realities and what you are doing about it Fear can be your worst enemy in difficult times; it saps the energy of even the most talented staff and member volunteers and diverts their time and talent into unproductive speculation Share good news and even small successes; find ways to help them remain hopeful about the future 28

29 SchoolNutrition.Org Communicate, Communicate, Communicate Board of Directors Keep the board informed Engage members wherever possible in contingency and communication plans Be specific about what you need them to do Tap their financial savvy and ability to think strategically about your organization's short and long- term success Do not wait until problems have set in…a board that actively partners with staff leaders is an important asset when the organization must make difficult choices 29

30 SchoolNutrition.Org Communicate, Communicate, Communicate Bankers: Be ready to talk beyond the numbers and show… Evidence of self-awareness and understanding Short and long-term organizational plans Contingency plans addressing potential funding shortfalls Sustainability of current funding streams Evidence of reporting that allows course correction Management (bench) strength An engaged board of directors 30

31 SchoolNutrition.Org Tool #10 – Know When the Basics Wont Do It Anymore Many nonprofits have already spent years cutting expenses in response to funding cuts. For these organizations it will be impossible to continue doing what they do in the same way with fewer resources. With no fat left to cut… …they need to find new ways of operating; waiting it out until things get back to normal is not an option… …recognize that you may have to restructure, reorganize, and engage… 31

32 SchoolNutrition.Org Restructure, Reorganize, and Engage Restructure Consider spinning off activities that dont truly fit the mission or that require a level of subsidy your organization can no longer afford Reorganize Merge with an organization that has a vision, mission and values similar to yours Often seen as the last resort, this strategy must be viewed through the eyes of those who benefit from your work Merger may be the best way to keep vital services in place for the community you were founded to serve – to maintain your mission Engage Identify peer organizations that are more efficient than yours in certain aspects of the work you do and deliver Explore how to restructure and combine forces so that your customers get the best of all efforts within the resources available. 32

33 SchoolNutrition.Org Managing Your Credit Relationship Current credit crisis occurred when financial institutions did not properly underwrite credit risk Lenders are returning to 5 Cs of Credit Character Capacity –Increased focus on primary source of repayment-organizations ability to repay the debt Collateral Capital Conditions –Banking industry experiencing increasing default rates on corporate debt –Current credit markets will have direct or indirect affect on your organization, but you can manage how Association Debt 101: A Bankers Perspective, ASAEs Dollars and Cents newsletter arsandCents.cfm?ItemNumber= arsandCents.cfm?ItemNumber=34553

34 SchoolNutrition.Org Managing Your Credit Relationship Trend in the Weighted-Average Probability of Default Relative to Outstanding Loan Balances Probability of default (PD) reflects the banks estimate of the likelihood that a loan will not be repaid as expected, calculated using a one-year time horizon.

35 SchoolNutrition.Org Managing Your Credit Relationship Things you might expect in the current credit environment include Adjustment in credit structures (ex. collateral requirements, lower LTV ratios, shorter terms) Adjustment in interest rates and fees Increased due diligence by the lender

36 SchoolNutrition.Org steps to manage through the current credit markets? Understand current terms of your credit agreement Maturity/expiration dates Financial reporting requirements Covenants/financial ratios Remedies upon default Ensure compliance with reporting requirements; anticipate and proactively discuss covenant issues with lender Provide your lender periodic updates on operations-avoid surprises Make certain your lender understands unique financial considerations for nonprofits - Do they have a continuing commitment to the nonprofit segment Surround yourself with experienced partners including CPAs and attorneys who specialize in the nonprofit segment-financial statement quality matters more than ever Network with your peers in the nonprofit industry Understand the value of your banking relationship Communicate and be proactive

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