Perry Maddox explains the importance of leaders facing into downturns early and explains how to ensure organizational sustainability through lean times.
My second week as a Country Director, I was told to urgently cut the entire budget by 35 percent.
Not a dream start, but if you lead long enough, you will face lean times. Whether it’s a donor decision or an economic recession, we all feel the financial pain on occasion.
And on occasion, that pain puts a social change organization out of business. The difference between closing your doors and surviving lean times can come down to leadership.
Here are the three steps to make it happen.
Step One for Lean Times: Assess Your Revenue Risk
When economies stall or contract, it won’t be long before you get the calls from donors.
Slowing economies often hurt non-profit and charity revenue. Each revenue stream carries its own unique risk to watch for:
- Major Giving. When investment portfolios earn less for major donors and foundations, less big giving may follow.
- Small Giving. When small individual donors tighten their purse strings to make ends meet at home, they’re less able to donate.
- Corporates. When businesses need to balance the books, CSR is an easy cut.
- Earned and Event income may be less certain when people are less economically certain.
- Government & Official. While contraction is often slower to work through the budgets of government and official donors, a drop in tax revenue often leads to smaller program portfolios.
When facing lean times, your first step as a leader is to assess your revenue risk. To do this, assess your:
- Revenue Mix. Cluster your revenue streams. Which revenue streams make up the majority of your income? Which streams provide vital, unrestricted income? Assess the impact of potential loss on your overall organizational health.
- Revenue Risk. How much contraction could each stream face? How susceptible are they, and how soon? This step is about the likelihood of lost funds.
Piece together an overall picture of your exposure, combining the impact and likelihood of risk to your revenue streams to create your overall risk profile.
Step Two for Lean Times: Cast a Vision.
Nobody cuts their way to greatness.
Cost reduction may be involved, but leaders should first envision success on the other side of this crisis. Avoid the fire sale.
Instead, take a few moments to imagine the future. Ask where you want to be as an organization when this crisis is over. How do you want to be positioned? Considering how the big picture may change over the coming years will help to prepare for that future now.
Once you have a sense of this direction, communicate it with your teams and use it to guide the changes that you must make. Done well, each step that you take to survive the lean times will move you toward your “exit vision.”
You’ll also reduce much of the stress and unfairness in the process for your people along the way.
Step Three for Lean Times: Use the 4 R’s
Now that you understand your risk and your exit strategy, it’s time to make the changes.
Use these four R’s to guide you.
Revenue. Too quickly we jump to cost reduction. First, check in on your income.
- Collect What You’re Owed. Do you have outstanding accounts receivable or overdue donor payments (looking at you, United Nations)? If you have outstanding funds you are owed, collect them now, before things get tighter for those who owe you.
- “Don’t cut sales in a downturn,” a board member once counselled. You may not retain all of your fundraisers and marketing capability, but avoid cutting so deep that you can’t generate the income you’ll need to exit this crunch.
- Talk with your Donors. Where you have strong relationships, open dialogues with your donors. They may be willing to allow you to spend funds more flexibly, but you’ll never know if you don’t ask.
Reallocation. Use two different techniques to leverage two key types of funding:
- Maximize Restricted Funding. Without breaking the rules, allocate as much of your restricted donor budgets to cover core costs as you are allowed. You may be surprised just what you can embed into the true costing of a program. Like part of the CEO’s time, part of the finance team, part of the office costs, part of insurance, part of audit costs. Think of the full cost of running a program here, which includes a share of support costs, and see if the donors will allow you to use more grant-restricted funding to cover these areas.
- Leverage your Lifeblood. Now to the flexible, undesignated and unrestricted income. Reallocate flexible funds to core costs needed for survival, reducing the use of flexible funds elsewhere. That usually means covering core costs with flexible funds. While it hurts to reduce programs or operations, it’s worse to close your doors. Once you survive these lean times, you can reinvest into programmatic scale.
Redesign. Disruption is a great time to consider new designs for your work. If you have to shrink your work, be clever about it:
- Rethink operations. Could we deliver in different way? Through a different blend of staff, technology and partners? Do we really need an in-person workshop this year, or could we do it virtually?
- Rethink programs. If we can’t deliver our programs and services normally, why not use this as a time to trial, test and innovate new approaches that will move us toward the exit strategy? Balance a decrease in program scale with an increase in program innovation.
- Rethink staffing. Don’t just cut headcount. Instead, first identify the core group of people who you must retain. Build up a structure and a plan around them, rather than just cutting budgets down. What could you do with a leaner team of your top talent? Be creative with staffing. When we offered people the option to go part time during the pandemic, many chose to, saving us plenty and helping them balance life demands.
- Rethink what you don’t do. Disruption is a great time to let go of stale ways of working. Do we really need that meeting? Those reports? You can’t expect them to do the same volume of work with fewer people, so help your people to see what they can stop doing.
Reduction. Now, and only now, do we get on to cost control.
- Challenge your Fixed Costs. Are they as fixed are you think? Nothing made me smile like ending our office rental contract during pandemic. A year before, we would have never considered that huge saving. Challenge yourself here, and you might find that many fixed costs are more optional than you think.
- Reduce The Non-Essentials. Start reducing non-essential variable costs well before you have to; starting early can save you from worse cuts later. Consider hiring freezes, halting travel, delaying major new expenditure and any non-essential expenditure. Model a cost-conscious culture personally as a leader.
- Reduce Staff Costs. Finally, if you are forced to let staff go, be quick and be kind. Remember, nice isn’t kind. Clear is. Don’t drag it out, treat people as well as you can, communicate transparently about the plans, and be decisive.
Putting it All Together: Don’t Wait.
The earlier you act, the better prepared you will be.
A defining sin of non-profits is how slowly they react to bad economic times. Whether it’s too timid, too nice, or too unaware, many wait too long to make the changes needed.
Every saving that you make now accrues over time. Every cost you carry depletes your budget by the day.
Take a look at the three steps above, and you’ve got the bones of a workshop agenda. So get your leadership team together to assess your revenue risk, envision your exit strategy, and start brainstorming with those 4Rs. Whatever you do, don’t do it alone. Gathering insight from your leaders is essential to this exercise.
Then get on with it. That’s what we did when we cut our budget 35%. And it’s precisely why we were able to grow our income by 250% and reach by 400% over the two years that followed.
Markets rise and fall. So do budgets.
Lead through the lean times to come out stronger on the other side.
