The economic meltdown that began in 2008 evoked a wide range of reactions in the nonprofit sector. “Deer in the headlights,” as one leader put it, was one common response, but nearly everyone now recognizes that the old status quo won’t be returning anytime soon. Acceptance that new times mean new approaches is a welcome shift.  

The challenge many leaders now face is determining which course of action is appropriate for their organization. This task gets to the heart of a characteristic endemic to the sector – a mere quirk in the best of times, but a potentially fatal flaw in times like these. I’m referring to a prevailing method of decision making based far more on intuition than on hard information. 

To be fair, many nonprofits lack the infrastructure to harvest data efficiently, and others face overwhelming demands for services that make investing in management systems difficult or impractical. None of this changes the fact that organizations must make critical decisions – notably, financial decisions – that will determine their trajectory for decades, and perhaps even determine if they will survive the current era. Nonprofits that can systematically generate strategic options and objectively evaluate the alternatives have far greater chances for success.

With the vantage point of capacity-constrained nonprofits in mind, we recommend a five-part methodology for organizations to analyze the fundamental components of their business models, generate potential financial strategies for addressing the economic crisis, and choose rationally among these strategies. 

A nonprofit’s funding model is the formula and underlying logic for generating enough funds to cover the organization’s costs. Understanding an organization’s funding model involves documenting revenue sources, the intended cross-subsidies between these sources, motives for donors and clients to support the organization, and the relationship of all of this to the bottom line.

Analysis of an organization’s service mix – the combination of programs and services it provides – lays important groundwork for defining financial strategy options. Using a tool called the Dual Bottom-line Matrix, we determine full costs and revenues for each program, and assign a value for how each program relates to the organization’s mission. The value of this step lies in documenting the clear, relative impact of each program on the organization’s financial performance and overall mission-related impact. It sets the stage for step three.

The funding model is tested by analyzing multiple variables, typically including direct and indirect costs, contributed revenue, prices of services (when applicable), levels of program activity and service capacity. Clarifying the relationships among these variables is the key to understanding why an organization may not be on a path to sustainability, as well as what changes may be necessary to get there. We start with historic financial and program data – again, information typically available to most nonprofits – and generate a series of financial projections for the years ahead using a tool called sensitivity analysis. This allows us to change one variable at a time and test different scenarios. The result is a set of financial strategy alternatives, with solid projections behind each one.

This step is the most technical in the process, but need not be overly complicated – think of it as a budgeting model based on historic patterns and varying assumptions for what your organization may choose to do in the future.

The analysis described above allows an organization to narrow down strategic alternatives that can address underlying financial weaknesses moving forward. Examples include:

·  Adjustments to the service mix, such as elimination or expansion of one or more programs.

·  Changes in pricing (for organizations that charge fees for services).

·  Shifts in the balance of funding sources, such as contributed versus fee-for-service income.

·  Changes to the cost structure, such as outsourcing, consolidation of facilities or combining staff positions.

·  Targeted infrastructure investments that may allow greater revenue generation or scale of operations.

·  Strategic restructuring, such as merger or administrative consolidation with another nonprofit.

Having generated, analyzed and compared alternative financial restructuring strategies, we’re now ready to make decisions. Leaders can look at alternatives and data that underlie them. They can also consider intangible factors that may not be easily quantified. This analysis allows nonprofit leaders to more clearly envision a recalibrated organization with a strong financial future. At the very least, organizations can identify what strategies will not work, and why, shedding light on what further analysis may be needed.

Methodologies like this can enable executives and board members to consider complex issues more broadly, and make better informed decisions. Data-based decision making is no longer just an option – it’s a requirement for nonprofits that are serious not just about surviving the current economy, but thriving in the years ahead.

For a more detailed description of this methodology, check out Surviving and Thriving in Tough Times: a Framework for Nonprofits Facing Financial Stress.

By Scott Schaffer, Senior Associate at La Piana Consulting. He can be reached at schaffer@lapiana.org.