Financial Management In An Unpredictable Environment
Posted on 04 May, 2021 at 16:17
By Cheryl Musumha
There has never been a more relevant time to talk about financial management in Nonprofit organisations such as now. The Covid19 pandemic has been an eye opener for most organisations as it has exposed loop holes around financial planning and management. Literacy over this is slowly proving to be the foundation of sustainability and survival in what some would term “the new normal.”
In order to comply with the preventative regulation over the pandemic, most organisations are being forced to work remotely. There is a positive gradient showing the transition to a paperless environment. Nonprofits that were earning their revenue from face-to-face service fees are now doing so through electronic tools such as Zoom and Skype. This is clearly indicative of the technological age that is upon us. Results may vary for different Nonprofits providing different services.
What has been popular in all Nonprofits is the notable adverse variances in relation to budgeted expenditure costs. For most, if not all, expenses it is now difficult to budget for them. Various economies were grossly hit by the pandemic. It is no longer as easy to forecast expenditure as prices are constantly changing. Some suppliers are closing down due to irrecoverable losses that they have been incurring due to the National Lockdowns that are on and off. The closure of competitor suppliers has led to the exploitation of Nonprofits by remaining service providers - having to buy at very high prices because there are limited options.
Expenditure is now difficult to plan for and allocate accurately. Covid19 has taught us to have an Operating Reserve specifically kept for paying for expenses that may possibly burst our budgets. Operating reserves provide a cushion against unexpected events like COVID-19, losses of income, large unbudgeted expenses, or when funding partners become slow to pay. Reserves can allow an organization to weather serious bumps in the road by buying time to implement new strategies. To be prudent, reserves should be used to solve temporary challenges, not structural financial problems.
Entities without adequate reserves are left scrambling when there is an unexpected event or cash flow crunch. If your organization is in a position where operating reserves aren’t meeting your needs or maybe don’t have an operating reserve at all, there are initial steps you can take to start to build up your reserves:
Step 1: Consider a board/management strategy session to discuss importance of reserves.
· Strategize on what ideal goals might be, and how you might get there. Other considerations might be whether you want the funds deposited into a separate bank account, and how the money will be deposited or withdrawn in the event of need.
Step 2: Draft a reserve policy that is agreed upon by the board.
· The policy should include the purpose and use of the operating reserves, including how it will be replenished if it is needed for operating.
Step 3: Develop a plan to start saving.
· While a common goal is to get to 3-6 months of expenses, that doesn’t happen overnight. Reserves are generally built up over time by generating an unrestricted surplus and intentionally designating a portion of excess cash as a reserve fund. Some organizations include a line item in the budget to add to reserves.
While COVID-19 has brought this need for operating reserves to the surface, nonprofits have been dealing with this issue for many years. More than a decade ago, The Nonprofit Operating Reserves Initiative Workgroup released a whitepaper, Maintaining Nonprofit Operating Reserves, which has many important points that are relevant today for determining your ideal operating reserve level.
For a further read on the whitepaper visit: