By Michael Ward
The COVID-19 pandemic has impacted nonprofits in dramatically different ways, with some organizations scrambling to meet rapidly rising demand and others shrinking to survive the ongoing crisis. Whether an organization’s situation has been one of boom, bust, or somewhere in between, scalability is a universal asset in a global pandemic.
A Case Study in Scaling for Success
In March, a local government order forced a nonprofit community-based child development center to close its campus. As a result, the organization needed to figure out how to scale back operations and sustain itself so it might return to full capacity and capability once able to reopen.
To scale back costs and ensure long-term survival, the organization needed:
- Liquidity: As with many nonprofits, the child development center—which typically operates using a combination of federal Head Start funding, state and local funding, and private-pay tuition—had far less than six months of operating reserves to pull from at the start of the pandemic. In order to stay afloat, they needed to identify and secure additional funding:
- Continued Government Funding: To maintain their partial government funding, the organization was required to provide some services while the campus was closed.
- Government Stimulus: The nonprofit evaluated their options, which at the time included: Paycheck Protection Program (PPP) loans with the potential for forgiveness offered through the Coronavirus Aid, Relief, and Economic Security (CARES) Act; Economic Injury Disaster Loans (EIDL) through the Small Business Administration; and, later, the Main Street Lending Program which was expanded to include nonprofits in July of 2020. All debt had to be taken on carefully with an understanding of the net cash flow that would need to be generated to pay the loans back as appropriate.
- Cost Containment: While looking for ways to source new funding, the nonprofit also looked to contain costs wherever possible. When spending on in-person programming was put on hold, the organization needed to both reskill workers to offer online services and manage finances to ensure the nonprofit could reopen post-crisis, requiring operational investment.
While the child development center was able to maintain its government funding, other sources of revenue fell through. Parents who were caring for their children in their own homes did not feel they should continue to pay full—or in some cases even partial—tuition for online resources provided. This left the organization to trim and manage costs wherever possible so that they could maintain their workforce and keep families engaged. However, by shuttering campus, they were able to curtail expenses, including utilities and supplies as well as janitorial and food services.
This issue is not uncommon. With limited unrestricted assets to cover overhead costs, nonprofits often need to consider cost containment measures such as furloughs and reducing variable costs when navigating lengthy COVID-19 closures.
For this nonprofit—and many others like it—scaling back while managing important functions such as government grant management and compliance allowed them to weather the storm and survive up until this point. Even with a promising nationwide vaccine rollout in progress and possible reopening on the horizon, keeping an eye on liquidity and containing costs will be important to sustaining nonprofits through the next phase of the pandemic. With so many unknowns, COVID-19 and the related impacts likely will continue to disrupt organizations for at least the near future. In times like these, only one thing is certain: flexibility in scale is key to survival, and the nonprofits that take this to heart will be best positioned to successfully carry on.
Four Levers for Flexibility of Scale
To expand or contract on a dime requires flexibility, agility, and foresight. For organizations navigating COVID-19, taking concrete steps now can ease the pain of scaling down the road.
How can nonprofits ensure the flexibility of scale to navigate economic recovery?
- Contain costs. When met with financial constraints—or the need to rapidly invest in growth areas—it will be critical to contain unnecessary expenses. Consider what costs can be pared back: Can you pause certain initiatives and reallocate funds where there is the greatest opportunity for growth? Do you need to maintain your physical workplace, or can you lose the overhead? Do you need to pay for utilities while your workplace is closed? Can you temporarily furlough workers or negotiate pay reductions or freezes until the situation improves?
- Build a safety net of liquidity. COVID-19 may continue to disrupt organizations for some time. Whether your organization needs a capital reserve to invest in areas of growth or to pay the bills while waiting out the storm, conserving liquidity will help fortify your organization’s financial health. Investigate all potential funding sources available, as well as the terms attached to potential loans and grants.
- Cultivate a nimble workforce. COVID-19 has required employees to work differently than ever before. An adaptable workforce is key to scaling your organization up or down. Be prepared to reskill and upskill existing workers to fill new roles; staff for agility so workers can serve as pinch hitters in areas with spikes in demand; and, when possible, hire contractors and freelancers instead of full-time employees to keep costs variable.
- Outsource infrastructural needs. One way to minimize fixed costs and ensure best-in-class operational agility is to hire external experts for non-core functions, such as technology, finance and accounting, and human capital resources. Such operations are critical to maximizing workforce productivity and financially navigating a challenging climate. External experts working with organizations across industries to scale during COVID-19 can offer tried and true best practices to chart what would otherwise be uncharted territory.
While it’s impossible to know precisely what lies ahead as the nonprofit sector navigates the global pandemic, organizations that take these four steps to ensure flexibility of scale will be best poised to contend with whatever comes their way—from another shutdown to an unprecedented growth opportunity.
This article originally appeared in BDO USA, LLP’s “Nonprofit Standard” Blog (May 13, 2021). Copyright © 2021 BDO USA, LLP. All rights reserved. www.bdo.com.