#7 – COVID 19: Funding & reserves
We continue to think about the impact of COVID19 on non-profit organisations, especially the financial implications. Here are our latest thoughts on funding and reserves, and some recommendations to help.
IMPACT ON REVENUE & FUNDING
The revenue and funding of non-profits and social enterprises will likely be impacted during and after lockdown. The impact will differ across the sector:
- Some may experience a sudden decrease in revenue, especially those organisations and enterprises where revenue is generated or based on their activities, which may now have been either curtailed or stopped altogether.
- Others may experience a sudden increase in revenue in the form of grants and donations specifically in response to the COVID 19 crisis or through foreign exchange gains.
- For some organisations, the amount of revenue or funding may not change significantly as a result of COVID 19, either because funding is already secured and may already be in the bank, or revenue or available funding was already insufficient for sustainable operations.
DECREASING OR INSUFFICIENT FUNDING OR REVENUE
Social enterprises and organisations that generate their revenue through their activities will certainly experience a drastic decrease in revenue. In many cases, it may be almost impossible to replace this revenue or change their business model in the short term or even longer term. Other organisations may have been in financial distress even before the lockdown with insufficient funding to meet their operational expenses and are not successful in leveraging more funding.
This means having to face reality and putting in place appropriate measures. These measures could include following:
- Establishing the organisation’s financial position including its debts
- Assessing the organisation’s ability to meet its obligations now and in the future through cash flow forecasting
- Seeking assistance through the relief measures and concessions available
- Making decisions around temporary or permanent closure
- Informing and engaging all stakeholders
- For NPC’s there may be the option of considering a “business rescue” process.
INCREASING FUNDING OR REVENUE
Organisations may, however, find themselves in a position to be able to respond to the crisis either because of their existing essential services, or their position in the community. Organisations are finding new ways of working within their mandate while others are offering and providing essential services and support outside of their normal mandate.
In such a crisis, individuals, businesses and donor agencies are often looking for ways to contribute and support. They generally will look first to the organisations that are already trusted partners or that they are already supporting.
We recommend approaching your existing funders and supporters to donate towards or fund your COVID 19 response. For organisations which already have donor databases, we recommend that you keep your donors informed of what you are doing and how they can contribute.
Organisations that are funded through international grants may experience an increase in funding from gains as a result of the changes to the exchange rates. For example, an organisation receiving funding denominated in US Dollars will receive more Rands now that before as a result.
It will be important to consider the particular funding contract and/or discuss with the funders how to deal with this situation. There may be scope to request that gains be allocated towards specific, originally unplanned activities or the expansion of the activities.
Donations received specifically for the response to COVID 19 may be considered to be restricted funding to the extent that the donor has an expectation that the funds will be used for the purpose for which is was requested, although there may not be a specific contract signed in this regard.
We recommend keeping separate track of the revenue and funding received and how it is spent. You should also gather and record the donor information. This is not only for good accountability but is also to build your database of supporters for the future, and to keep your donors and supporters informed.
Organisations may also receive or have funds on hand that are restricted for other purposes, not related to the COVID 19 crisis. It is important that these restrictions are still honoured.
We strongly recommend that you communicate with your funders to establish if restrictions can be lifted and funds redirected or if additional funds can be secured.
SAVINGS & RESERVES
Organisations may have built up reserves over many years. These may have been built through accumulated annual surpluses or through a specific and conscious policy and practice of setting aside (saving) unrestricted funds for the future.
The motivation to set aside such funds is to drive the financial sustainability of the organisation. In some ways this crisis could be considered as “savings for a rainy day”. Surely this crisis is that “rainy day”? While the answer could be yes, sadly it is not just one rainy day but s storm of many rainy days or even months.
Remember that if reserves are spent it will be very difficult to replace or rebuild the reserves. We caution organisations against spending deeply from their reserves at this time, unless there is a prospect or plan in place to be able to not only survive after the crisis, but also to replace reserves against a realistic expectation of receiving unrestricted funding in the future.
Remember also that reserves that are not actually available in the bank to spend do not really help the organisation in a crisis. For example, the organisation may own property or other assets that may be valuable, however, may be difficult to sell to secure the cash needed to pay expenses and investments may have lost value in recent declines in the market and may not yield as much on sale as anticipated.
Whatever your situation, remember that CMDS is available to assist you to navigate these troubled times. Please do get in touch to arrange for a consultation. We also welcome your questions and suggestions.