Steps to prepare for what’s next
As the light at the end of the COVID-19 tunnel shines brighter, nonprofits are assessing the past year’s impact on their businesses and are focusing on the next steps to achieve success in the year ahead.
Today, the economy is making a positive shift, supported by the equities market, as well as the expansion of both federal programs and other types of aid. So the question for boards becomes: What lies ahead in 2021, and what next steps can we take to ensure that our organization successfully rebounds?
Flex and evolve your structure
An area that nonprofits are focusing on is the evaluation of both their overall governance structures and operating policies, to ensure they are keeping pace with the changing environment. Not long ago it was customary not to have an audit committee, or to have one staffed with individuals who did not possess the necessary or appropriate depth of financial, internal control and risk acuity.
Now, however, organizations need to be mindful about recruiting board members with the appropriate skills to respond to these challenging times. This means attracting, recruiting and retaining diverse individuals to help broaden perspectives, inform strategy, and aid in decision-making. Moreover, it is essential to ensure that your board is a reflection of the constituents served by your mission.
Take these two significant steps:
- Be introspective when considering the skill sets of future board members. As the operating environment continues to change, and new risks emerge, identify the specific skills that are needed.
- Focus on the size of the board. To increase a board’s effectiveness, its size is an important factor. Now may be a good time for you to consider whether reducing or increasing the number of members is right for your organization. Fewer members can help make a board more nimble and responsive to nascent risks and opportunities, as well as to operating challenges and strategy changes. On the other hand, it may be appropriate to increase the size of the board to bring on individuals with skills that you now lack but need in this new environment.
Take note that the days of meeting annually, biannually or quarterly have changed over the past year. Committees — particularly audit, finance and investment — are now meeting more often to be responsive to new challenges and provide more guidance and oversight to management.
Institute a well-defined enterprise risk management system
“Unlike its commercial counterparts, the nonprofit sector has been slower in developing a more varied and holistic risk register,” stated Dennis Morrone, National Managing Partner of Grant Thornton’s Not-for-Profit and Higher Education practices. “To help respond to this reality, a good first step is to ensure your management team and the owners of risk among your key functional areas align in terms of identifying, inventorying and mapping risk throughout the organization.” This should include financial, operational, strategic, personnel, IT, reputational, compliance, legal, insurance and investment risk.
Keep in mind that risk isn’t necessarily a negative; however, it does need to be identified, understood and managed. Make sure to have the right controls and discipline around all your activities, and that your audit committee performs an oversight role and is routinely kept abreast of the risks confronting the organization. It is crucial to align your finance and investment committees as well, and allow for some overlapping members between these committees to allow for the coordination of efforts and alignment of resources to accomplish and provide for mission fulfillment.
Finally, when developing or updating investment policy statements, the investment committee needs to be mindful of socially responsible investing. Consider focusing your portfolio on positions that align with the organization’s philosophy and mission.
Consider new approaches to budgeting and forecasting
Financial leaders are beginning to shift from annual budgeting to scenario planning. By creating a scenario plan based on a variety of assumptions, your organization can develop multiple iterations of its budget in anticipation of varying financial or operational challenges or modalities.
“Determine the assumptions to include in your model,” suggested Morrone. “Many nonprofits are creating assumption banks and toggling with those assumptions quite regularly to model performance.” Models are then provided to boards — specifically, finance and investment committees — to give them the information they need to make decisions about future financial performance and resource alignment. This will enable an organization to be better positioned to react to the uncertain operating environment that may lie ahead.
During COVID-19, organizations moved away from simply rolling forward previous budgets with an incremental growth rate and, instead, embraced zero-based budgeting. They also significantly reduced costs and only funded core activities. And now, as we emerge from the pandemic, it may be appropriate to revisit your mission and strategies, and adjust your budget in order to reinstate previous activities and make new investments to gain or re-establish market differentiation.
Explore added investment and finance committee responsibilities
Reach a consensus among committees — especially finance and investment — for three reasons that are often not considered:
- Understanding the impact on endowment spending. From what market data has signaled, it appears that institutions of higher education have had effective endowment draws of approximately 4.5%. However, that does not contemplate any supplemental draws most institutions took from their endowment funds to provide for shortfalls due to the loss of revenues and their inability to either quickly scale their operations or further reduce cost structures during COVID-19. As the economy continues to heat up, and despite concerns of inflation, nonprofits should carefully weigh the importance of preservation of capital with prudently spending endowment reserves in support of operations.
- Realizing the need for a broader perspective and understanding of strategy. A close connection between committees of the board and organizational leadership is important to help in developing investment policy statements, so that projected investment returns and the extent of portfolio liquidity align with strategy execution and related resource demands.
- Optimizing your debt structure. There is currently a great deal of activity within the debt markets, with organizations rethinking and optimizing their portfolio to drive down the cost of borrowing. Many are also taking advantage of low interest rates to secure debt for additional capital expansion and to begin prioritizing capital needs and addressing deferred maintenance.
The way forward
While the path through the pandemic was turbulent, the lessons learned offer us new ways to conduct our operations that will hopefully be better than before. By taking the steps described above, your organization can launch and pursue a successful recovery, and build an enduring foundation for the future.