Recession-Proofing Your Giving Program
How to Recession-Proof Your Giving Program
How to Prepare for a Recession:
What do we know about previous recessions?
A recession is a significant, widespread, and prolonged downturn in economic activity. A common rule of thumb is that two consecutive quarters of negative gross domestic product (GDP) growth mean recession, although more complex formulas are also used. It’s not always perfectly clear when a recession is going to hit, but an indicator that is commonly used is looking for an inverted yield curve. Before every recession, there was an inverted yield curve. There have been 11 recessions since 1948, averaging out to about one recession every six years. However, periods of economic expansion are varied and have lasted as little as one year or as long as a decade (The Balance). Numerous economic theories attempt to explain why and how an economy goes into recession. These theories can be broadly categorized as economic, financial, psychological, or a combination of these factors. However, no specifically defined formula has been a perfect predictor. Sometimes, the things that cause a recession are not predictable, a great example being the Covid-19 pandemic; the sudden restrictions and steps taken to mitigate the virus lead to an economic shock as people scrambled to adjust to the new normal.
How to Analyze Where You’re At:
Figuring out where your nonprofit is at in the midst of all the craziness is the first step to creating a game plan. Companies can use a PESTLE analysis in financial analysis, risk analysis, and strategic planning. The PESTLE analysis is a tool to identify external forces an organization faces in its business. More specifically, PESTLE analysis studies the external challenges of a business and provides a guide to overcoming them. The acronym stands for external challenges Political, Economic, Social, Technological, Legal, and Environmental. Taking a look at these factors will give you insight on what issues you may be facing as a business or nonprofit. It will help to give you a bigger picture of the world as it currently is and the best way to navigate through it.
Donor Behavior:
What are donors’ patterns during recessions?
Charities themselves also face rising costs of energy and other essentials – and potentially increasing wage pressures. Those that rely on public donations may also be concerned that people will cut back on their giving as their own budgets are squeezed. “Analysis of data for the period from 1968 to 2007 found that overall donations were affected by fluctuations in the economy. But they were more sensitive to economic upturns than to economic downturns. In other words, economic booms were more likely to lead to an increase in donations than recessions were likely to reduce them (Economics Observatory). There’s a strong relationship between how much money Americans give to charity and their after-tax income. There is a similar correlation between giving and the stock market’s performance. That means people give more when they feel that they have money to spare.
How do financial crises affect donors?
The rising cost of living and the threat of a recession will be a major concern to the charity sector. Demand for the services of many charities that help the most vulnerable is likely to grow. In the United States, for example, an “estimated 1% of the population gave close to 40% of total donations, while the top 0.01% accounted for a striking 14%. Many of the wealthy elite saw their wealth increase during the pandemic and they are likely to be immune to the cost of living crisis” (Economic Observatory).
How Recessions Affect Charities:
Are more people utilizing charitable resources during a recession?
“In 2008 and 2009, giving fell by a total of 15%. But giving to nonprofits such as food banks and homeless shelters that provide essential social services grew by 10%” (The Conversation). Many people are looking to allocate their resources in a utilitarian way, closer analyzing the way supplies are being dispensed and provided. People tend to pay closer attention to the impact their giving has.
How to account for need growth during a recession.
Generally, in times of crisis, there are ways to source what you need in addition to private philanthropy. During hard times, the government has also worked to help nonprofits. Some qualifying nonprofits may be able to apply for government aid, loans, or exemptions. Crises force organizations to think creatively about new ways to engage and serve constituents. Take stock of what you’re doing right now to solve the problems of the moment.
Ways to Recession-Proof Your Nonprofit:
Things you need to expect in a recession are increased unemployment rates, increases in evictions and homelessness, a decrease in disposable income, and an increase in demand for nonprofit services. The best steps to take are to assess your current state, taking into account your financials, VRIO, stakeholders, and how your team can realistically perform. Preparing for the unexpected and planning for the worst-case scenario is key, ensuring that you’re equipt to weather anything that comes your way. The best tips include the following:
Make sure you’re not spending more than you’re bringing in.
Adjust your spending and make sure you are only focusing on the need-to-haves.
Create a new budget that constricts your spending to the “bare bones” of what it takes to successfully sustain your operation.
Minimize your debt.
Don’t make any big investments during this period.
Many nonprofits maintain a line of credit (LOC) with a local bank that enables them to pay their bills during months when cash flow is negative. The risks associated with this kind of borrowing are simple. In a tumultuous revenue environment, nonprofits may not be in a position to pay off a line of credit within the parameters of the contract, which may cause the loan to be converted to long-term debt.
Have 30-90 days worth of cash on hand.
Check your cash flow and monetary ratio of how much your nonprofit needs.
Have an understanding of the true costs of all programs to create realistic and accurate budgets, and monitor the financial status of the organization as a whole and its individual programs on an ongoing basis.
Check with your investment advisor.
Nonprofits tend to rely more heavily on fundraising and donations to stay in operation. These things can ebb and flow. Plus, depending on the type of nonprofit, it may rely on grants and have an endowment to consider.
Your financial advisor can help develop a plan for the crisis while offering invaluable advice when it comes to making tough decisions about your organization—all so your nonprofit can reach its goals while keeping your donors happy.
Be proactive in your fundraising plans.
Set your priorities for the year and prepare comprehensive goals to send out to your donors.
Prepare a 12-month grants and communications calendar, creating an outline of an estimated budget for the year.
Let technology do the heavy lifting.
Use social media to share your needs, priorities, and also gratitude towards your donors. Create links to wish lists or funding pages on your posts to direct donation traffic where you need it to go.
Allow the software you use to stay organized and provide data for your decision-making.
Works Referenced
https://www.thebalancemoney.com/the-history-of-recessions-in-the-united-states-3306011
https://www.economicsobservatory.com/what-happens-to-charitable-giving-in-a-recession
https://theconversation.com/what-happens-to-charitable-giving-when-the-economy-falters-133903
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