Nonprofit Finance: Preparing for the "New Normal"
By Ken Holub, VP Commercial Division Manager
August 12, 2015
While the nation’s economy keeps growing and job numbers are improving, the financial challenges in the nonprofit world are not diminishing. Despite Illinois nonprofits’ track records of doing “more with less”, the current budget crisis – on both the state and local levels – makes those challenges more acute. These challenges offer nonprofits an opportunity to get their financial houses in order, and to explore funding alternatives.
According to CBS Chicago: “Illinois nonprofits who contract with the state were already operating under severe constraints resulting from years of state underfunding and a history of late payments … while the state is legally unable to pay for services rendered after July 1 until a budget is approved, it will be able to issue checks for services performed months ago.” While those payments may help in the near term, the need to create or adjust long-term financial plans – along with funding alternatives – is crucial.
Included in the sector experiencing financial stress in Illinois is public education. Chicago schools – including charters – are facing significant financial hurdles. On July 2, Chicago Public Schools Chief of Innovation and Incubation Jack Elsey informed charter schools that their quarterly payments would be only 15% of what they were expecting.
While the unpaid funds have since been received, the concern for many in the space is the ability for CPS to withhold funding in future quarters.
Donors are only a part of the answer
As the Chicago Donors Forum expressed it, “Because the primary role of most private and community foundations is to provide funding, the public often overestimates their charitable resources. Foundations are also sometimes seen as having the resources to fill government budget gaps, especially in difficult economic times.”
But the reality is starkly different. Compared to government expenditures in the nonprofit sector, the Donors Forum says foundation giving represents a small fraction of the total: Illinois foundation giving in 2013, the most recent year for which data are available, was $3.1 billion compared to $30 billion from the state’s General Revenue fund.
Taking advantage of a challenge
The Chicago and Illinois fiscal crises may give a glimpse of the “new normal” – at least for the near future. And while these are trying times for nonprofit administrators, the current challenges do provide an opportunity for executive directors, board members, grant writers, CFOs and other finance managers to focus on developing new financing strategies and funding alternatives.
One resource for nonprofits seeking funding alternatives is a community development financial institution like IFF.
“For organizations whose plans call for building enhancements or the purchase of new property or equipment, a strong partnership with your bank and a non-profit lender like IFF can be a big benefit. Together, we can help plan and finance projects with flexible, affordable financing, including the use of more specialized tools such as New Market Tax Credits”, says Dana Lieberman, IFF Managing Director of Lending.
When exploring alternative funding sources, a good place for administrators to start is with their banker who can help develop both short- and long-term strategies.
Get to know your bank
Being prepared to talk with your banker or lending source is particularly important in challenging times – especially if your needs are immediate. Bankers “have their antennas up,” and those who work closely with nonprofits are keenly aware of the most current Illinois and Chicago budget headlines.
- Get input on information important for a credit review. All three ratings agencies – S&P, Moody’s and Fitch – have established credit rating criteria for nonprofits.
- Match your audit engagement requirements to what your bank wants to see.
- Be prepared to manage your finances while waiting for credit approval.
- Review your financials with your bank at least once a year. With an understanding of the organization’s goals and mission, your banker can play an important role in your strategic planning and help you be prepared for challenges such as state and local budget issues.
Before meeting with your banker
To make your meeting as productive as possible be sure to compile pertinent financial documents including budget, cash flow statement, balance sheet and income statement. Also, update your cash flow projections on a monthly basis, design your spreadsheets to be flexible and document assumptions on your spreadsheet.
While every organization faces financial challenges at some time, nonprofits have their own unique set of funding issues to manage. Collaboration with your bank could be the key to managing through an uncertain state or local budget climate. Make sure your bank understands the nonprofit sector and mission-driven organizations.
Contact an MB relationship manager for more information.
Disclaimer: The information contained within this report has been obtained from sources deemed to be reliable; however, we do not guarantee its accuracy. You should make your own independent evaluation of the relevance and adequacy of the information contained in this material and make such other investigations as you deem necessary, including obtaining legal, financial and/or tax advice. Back to top