As the Chief Financial Officer, Donna Blackwell guides PHIMC’s financial strategies and executes PHIMC’s fiscal management portfolio.
If your organization is like most small nonprofits today, cash is tight and making payroll has become a concern. As a nonprofit leader, you might’ve been thrilled when you heard about the Payroll Protection Program (PPP) and the Economic Injury Disaster Loan (EIDL), but maybe your heart sank when you heard the words “credit score” and “collateral,” or felt uncertainty about being able to apply or complete the application. What’s more, you might not have known how much revenue, program expense and operating expenses your organization generated in 2019.
For nonprofit leaders, there’s the fear that the cash left in the bank will run out, and that the money from these programs may not be enough to cover the organization’s costs. In my experience with fiscal management and financial strategies, I’m especially aware of how nonprofits are coping during this crisis. Some nonprofit leaders may be wondering about other ways they can continue to support their staff and mission, and I believe that small nonprofits have important opportunities within their reach that bear consideration.
Cutting staffing to reduce your costs may seem like your only reasonable choice, but cutting staff is almost always the wrong choice. First, it involves throwing away the long-term capital investment you’ve made in your employees. Experienced program staff are the most valuable assets of a nonprofit and if you are to recover, you will need them.
If your organization is like most small nonprofits, you entered the current crisis with antiquated infrastructure, little to no reserves and little to no available credit. It is not poor management, poor leadership or excess spending that leads small nonprofits to an impasse. You are a victim of the “liability of smallness,” or a “smallness-related vulnerability [that] results from problems in raising capital, recruiting and training a workforce, and handling regulatory compliance.”
Overhead for small nonprofits is typically inefficient because small nonprofits seldom reach economies of scale. Unfortunately, micromanaging your spending to keep administrative costs down is not only not the answer but also contributes to a common problem referred to as the “cycle of nonprofit starvation.” When crises like the 2008 recession and the current pandemic arise, small nonprofits often do not have the resources or the financial strength to weather the storm.
One strategic opportunity for small nonprofits can be to combine resources with a larger organization and share their infrastructure. If you are a nonprofit with more debt than assets, or more expenses than revenue, you might consider merging with another nonprofit. My organization completed a merger last year that saved a vital community program. There are many organizations like mine, willing to legally absorb an entity and adopt the staff, to keep the program operating.
A 2016 research project, “Mergers As A Strategy For Success,” found that in two-thirds of mergers studied, the acquired organization approached the acquirer about the merger and that both organizations knew each other well before the merger. You are probably already affiliated with a nonprofit that shares your mission and would consider merging. Consulting firms who specialize in nonprofit mergers in your area can search for both suitable organizations to acquire and become acquired.
Also, a plethora of information on both mergers and fiscal sponsorship is available from the National Council of Nonprofits and Nonprofit Quarterly. There are over 200 fiscal sponsors registered with the National Network of Fiscal Sponsors, and if your project aligns with their mission, they can provide support for you during this economically challenging period. (My organization is a member of both the National Council of Nonprofits and the National Network of Fiscal Sponsors.)
Another way that small nonprofits can survive the anticipated downturns in our economy is to combine their resources with those of other small nonprofits, sharing cash flow and expenses. The most efficient way to do this, in my opinion, is through fiscal sponsorship.
What is a fiscal sponsor, and what is the nature of the agreement? According to Multiplier (formerly the Trust for Conservation Innovation), “A fiscal sponsor is a nonprofit organization that provides fiduciary oversight, financial management, and other administrative services to help build the capacity of charitable projects.”
Fiscal sponsors provide the nurturing and support that small nonprofits, with or without 501(c)(3) status, require to mature and grow their programs. To explore the possibilities, consider looking for a fiscal sponsor in your area and asking how they can help.
The nature of a fiscal sponsorship agreement depends upon the size and nature of the sponsored nonprofit, but at the heart of each agreement is the separation of program and administrative functions. Nonprofits that become sponsored programs retain control and management of all program functions.
Fiscal sponsors can provide any or all nonprogram functions, including monitoring for program compliance, grant reporting, risk management, operating policies and procedures, and managing human resources, and can often provide these services at a lower cost. Experienced fiscal sponsors have achieved economies of scale and they share those cost savings with their sponsored organizations.
Seasoned fiscal sponsors maintain cutting edge IT infrastructures that can convert to remote operations during emergencies. They maintain cash reserves that can help support smaller nonprofits when the payments of funders slow down. This means that insurance and benefits policies stay enforced, payroll is processed and invoices for program expenses are paid when due, even when cash flow is slow.
In a time of crisis, veteran fiscal sponsors already have relationships with partners who provide continuous updates on available funding. Sponsors can apply on behalf of their affiliates for programs that require credit or collateral. The best fiscal sponsors provide program-specific grant opportunities, to which their affiliates can apply when they become aware of those opportunities. A fiscal sponsor allows small nonprofits to operate like large organizations and eliminates the “liability of smallness.”
Merger and fiscal sponsorship are real solutions for nonprofits that find this current crisis has created an economic hardship they fear they cannot overcome.
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