Planning for Uncertainty: What to Do When Funding Changes

A major grant is not renewed. A government contract is delayed two quarters. A reimbursement rate changes. A large donor's circumstances shift. None of these are unusual, and most nonprofit leaders have lived through at least one.

What separates organizations that come through intact from those that are damaged is rarely the size of the shock. It is whether the decisions were made in advance, deliberately, or in the three weeks after the news arrived, under pressure, with the whole staff watching.

You cannot predict which disruption will come. You can decide now what you would do about a range of them, and that work is worth doing while nothing is wrong.

Know your exposure

Start with a clear picture of where the money comes from and how fragile each source is.

• Concentration. What share of revenue comes from your largest source? Above 30 percent from one funder is meaningful exposure; above 50 percent is a strategic risk that belongs in front of the board.
• Renewal timing. Which agreements end within eighteen months, and when will you know? A grant ending in June that announces in May leaves no room to respond.
• Restriction. How much of your revenue is restricted, and to what? An organization can look adequately funded while having almost no money it can direct.
• Reserves. How many months of operating expense could you cover with unrestricted liquid assets? Three is a common target; many organizations are well below it.
• Structural dependency. Which programs cannot operate at all without one specific source?

Put this on one page and review it at least annually with the board. Most boards have never seen their organization's revenue concentration stated plainly, and the conversation it prompts is a valuable one.

Decide what is essential, before you have to

This is the part organizations resist, and it is the part that matters most. In a funding crisis, every program has advocates, the conversation becomes political, and decisions get made on the basis of who argues most effectively rather than what the organization most needs to protect.

Doing it in advance, when nothing is at stake, produces a different and better conversation. Sort your activities into three tiers.

• Essential. Without this, the organization is no longer meaningfully pursuing its mission, or it faces a legal, contractual, or safety obligation. Protected under almost any scenario.
• Important. Real value, real beneficiaries, and the organization continues to exist without it. This is where reductions land first, and where most of your programs will sit.
• Discretionary. Worth doing when capacity allows. Suspended early and without much debate.

Sorting is not a commitment to cut. It is a pre-agreed sequence, made by people thinking clearly, that you can follow if you need to.

Build three scenarios

Not a forecast. Scenarios are planning tools, and three is the right number.

Expected. What you currently believe will happen. This is your operating budget.

Downside. A meaningful revenue reduction, commonly 15 to 25 percent, or the loss of your largest single source. Work out what the organization looks like at that level. Which tiers continue, what the staffing structure is, what it costs to wind something down, and how long it takes.

Severe. A reduction large enough to change the organization structurally, often 40 percent or more. This one is uncomfortable and worth doing anyway, because it surfaces questions that should be considered outside a crisis: whether a merger or a formal partnership would better serve the community, whether a program should transfer to another organization, and what an orderly reduction would look like versus a disorderly one.

For each scenario, write down the specific decisions, the order in which they happen, and roughly what each saves. Keep it to a few pages.

Set the triggers

A scenario plan without triggers tends to sit unused while leadership hopes the situation improves. Decide in advance what conditions cause you to act.

Triggers should be observable and specific. Reserves fall below a stated number of months. A renewal decision is not received by a named date. Committed revenue for the coming year is below a threshold by a particular point in the calendar. Two consecutive quarters of a defined shortfall.

Name who monitors each trigger and who has authority to act when one is hit, including what requires a board vote. A board meeting scheduled six weeks out is not a decision mechanism in a fast-moving situation, so agree in advance what the executive can do alone and what needs the board, and whether the board can convene quickly.

Protect the capacity to recover

There is a version of cost-cutting that solves the immediate problem and leaves the organization unable to come back. Reductions that eliminate fundraising capacity, remove the ability to report on outcomes, or gut financial management make the organization both less fundable and less able to demonstrate results, which deepens the original problem.

When you build the downside scenario, identify the small number of functions that must survive because recovery depends on them. Usually that is the ability to raise money, the ability to account for it properly, and the ability to show what your programs achieve.

Communicate earlier than is comfortable

Staff generally know when something is wrong. Silence does not protect them; it produces rumor, and the strongest performers, the ones with options, leave first.

You do not have to share every detail. Say what you know, what you do not yet know, when you expect to know more, and what you are doing about it. Then follow through on the date you gave. For funders and partners, early honest communication frequently produces flexibility that a late disclosure will not, because a funder given notice has options that a funder told at the last moment does not.

Keep the destination, change the route

A funding disruption is a change in conditions, not necessarily a reason to abandon strategy. The strategic priorities you set should be stable for three to five years; the implementation path has to flex with funding, policy, and capacity.

Organizations that treat every shock as a reason to start over lose years of accumulated direction. Organizations that hold the destination and revise the route arrive later than planned, which is a much better outcome than arriving nowhere.