by Dick Larkin, CPA, MBA
This article is aimed at helping nonprofit organizations plan to cope with the new challenges imposed by the coronavirus pandemic. The first part of the article focuses on matters external to the organization, while the second part focuses on internal matters. The article is intended to raise questions and get people thinking, not to provide pat answers; such would require a book. These challenges are in some ways pervasive among all organizations; in others there will be different effects on different types of organizations, e.g., educational institutions, the performing arts, membership organizations, religious organizations, charitable organizations, healthcare, etc.
The coronavirus has changed our world in ways unimaginable a year ago. The events of Sept. 11, 2001 resulted in permanent changes to air travel. The coronavirus has resulted and will result in permanent changes to a much wider variety of aspects of our personal and business lives. Some of these changes affect both businesses and governments, as well as nonprofits. These articles will focus on those aspects unique to, or that will have a disproportionate effect on, nonprofits.
The most recent events of comparable nature, magnitude, and pervasiveness were the influenza pandemic of 1918-19, which killed tens of millions of people, and the Great Depression of the early 1930s. But, you are thinking: what about 9-11? World War II? 9-11 was over in a few hours; it directly affected only a small number of places and a limited number of people, and was unlikely to happen again. World War II, for most Americans—except those actually in battle and their close families—was not here; it was almost entirely “over there.” Yes there was rationing, and unavailability of some consumer products like new automobiles, but the daily impact of those was relatively small, and not dangerous for most people.
Coronavirus is here, it directly affects everybody everywhere, it is dangerous, and there is as yet no way to predict how long even its direct effects—much less the indirect effects—will last. Even if a preventive vaccine—and a cure for those already sick—were to be discovered tomorrow and made widely available next week, many of these changes still will not ever be completely reversed.
Effect on organizations’ revenue and financial health
Except for healthcare organizations (which of course are working overtime), the nonprofit sector is largely shut down. Educational institutions have closed their facilities and many are conducting classes online, but bookstore sales have largely ceased and athletic department income has completely dried up. Performing arts organizations are silent. Museums are closed, which reduces both admissions income and gift shop sales (some gift shops continue to sell online). Many houses of worship are conducting services online, which has resulted in a drop in “plate” collections. Membership organizations still have their dues income, for now, but meetings are canceled or postponed. Many charitable organizations are seeing increased need for their services, but trying to increase revenue to cover those added costs is challenging because many donors are themselves in financial distress. Many individuals have lost their jobs or seen a reduction in pay. The 2017 income tax act had already reduced the incentive for some to make charitable contributions by doubling the standard deduction for individuals. Now Congress has eliminated the year 2020 required minimum distribution from deferred compensation plans (IRAs and the like), so seniors over age 70½ will have less incentive to make direct charitable rollovers from those plans. On the more incentive side, there is now a $300 charitable deduction available to donors who do not itemize. Foundations have seen their investment portfolios lose value, so they have less available to make grants. State and local governments are seeing declines in sales, gasoline and income tax revenue, so they have less to distribute as support. Only the federal government is pumping money into the economy, some of which is flowing to nonprofits, but this cannot possibly make up for all the other revenue losses.
There are some offsets. It is well known that many performing arts organizations lose money on every performance they put on, so by cancelling performances, they may save more in expenses than they lose in revenue. The real losers there (besides the audiences) are the performers: actors, singers, orchestra musicians, etc., and the supporting staff: stagehands, technicians, ushers, etc. Those organizations that can afford to are doing what they can to keep some of these people on the payroll (there is a limited federal grant program expressly for that purpose), but that does not make everyone whole, and cannot go on indefinitely. Residential educational institutions have lost room and board revenue, but do not have to pay for food and kitchen staff (again a hardship for that staff), or pay for most dormitory current operating costs.
These are short-term effects. But what about the longer term? Will an orchestra or chorus or theater that has had to cancel the rest of its current season be able to attract its audience back when things are able to reopen? Will the performers still be available? (What will a choral concert sound like if all the singers are wearing face masks?) If half of this concert season has been canceled, will donors continue the same level of annual support next season? Will college students re-enroll next semester? Will individuals and companies that have had to cut back on expenditures due to lost income return to their previous levels of charitable giving? Will association members renew their memberships? Will people be willing to resume participating in and attending events in spaces with large numbers of other people, for example, classes, concerts, conferences?
Planning for how to survive these effects is made even more difficult by the current uncertainty about when things will return to anywhere close to normal, if ever. Mounting a museum exhibit or a theater production, or getting all the pieces of a college curriculum in place, or organizing the annual convention of a trade or professional association cannot be done in a week, but at this point no one can be certain when, for example, colleges will be able to fully reopen: This summer session? The coming fall semester? Next year? None of the above? The answer will likely vary by locality. And what if there is a resurgence of the virus during the flu season next fall, as some healthcare experts are predicting is possible?
Internal Effects on Nonprofits
Given the external effects discussed above, how will they affect the internal operations of nonprofits? The governing board and the CEO will take the lead here by first thoroughly understanding the organization’s current situation, then communicating that to the staff (including volunteers), donors, clients (members, students, etc.) and the community. For example, how many months of anticipated expenditures do we now have available in liquid assets?
Some things are obvious. With less income and greater uncertainty, organizations must manage their expenditures even more carefully than they normally do. Expense budgets must be pared; revenue, expense and cash flow budgets must be closely monitored on a timely basis. Difficult choices may have to be planned for and made:
Do we continue this program (academic department, publication, concert series, location) or that one? We no longer may be able to count on the availability of resources to do both.
Should we consider pursuing a merger with [other nearby organization whose programs are similar to ours]?
Do we have access to a line of credit? (If not, why did we not arrange for one before this crisis?)
Would [Major Donor X] be willing to convert a previous restricted gift into an unrestricted gift, or to allow re-purposing of the gift to what is now a more important program?
We are ok for the moment, but what are our Plans B, C, and D if next year’s revenue falls by 20%? 30%? 50%?
Donor and customer relations take on greater importance. Timely and clear communication is vital. Organizations must make every effort to keep the ones they have, motivate donors to increase their giving level, and to attract new donors to make up for the inevitable lost ones. Ditto for educational institutions (students), associations and houses of worship (members), museums (visitors), performing arts organizations (audiences), etc.
Management should become aware of all available governmental resources and take advantage of the ones that may pertain to the organization, such as the Paycheck Protection Program or the SBA Loan Program. Find out what insurance coverage is in place for things like cancelation of events. Would coverage be different depending on whether the cancelation was due to governmental quarantine regulations or the closure of a rented venue versus proactive action by management? Are there foundations which might be willing to help?
Many smaller nonprofits with few staff have always found it challenging to maintain adequate internal controls over their accounting and operational functions. With many staff now working off-site, this challenge is even greater. But the need for these controls is greater, not less. And remember, the responsibility for designing, implementing and monitoring these controls lies squarely with management, not with the auditors. Auditors will (and must under their own professional standards) continue to ask questions of management such as: “How do you satisfy yourself that (for example):
All revenue intended for the organization—especially contributions—has been collected and properly recorded?
All expenditures are for appropriate purposes, consistent with any applicable donor restrictions, in proper amounts, have been properly recorded, and that commensurate benefit has been (will be) received?
All assets that properly belong to the organization are adequately secured, managed, and properly valued and recorded?
All liabilities, and only true liabilities, of the organization are properly recorded and paid?
The organization is in compliance with applicable laws, regulations and funder (private or governmental) restrictions?
All of the organization’s activities are being conducted in an ethical manner? Another way to phrase this is, “Is there anything about the organization, its personnel, or its operations that would cause embarrassment if reported on the front page of tomorrow’s local newspaper?”
Auditors, in turn, are subject to various constraints in performing audit work. They may not have normal access to the client’s personnel, office or other facilities, and thus may be unable to examine hard copies of documents or observe inventory of gift shops or bookstores. Examination of documents and interviews with client staff may have to be conducted electronically, and extra steps taken to verify the authenticity of documents and the proper functioning of internal control procedures.
With the greater risk that staff (including volunteers) may become infected and unable to work at all, and/or infect others, organizations should be sure that every function is backed up by at least one other person or that outsourcing arrangements are in place if needed. Government healthcare privacy regulations probably forbid explanation to the rest of the staff as to why “Mary” is not going to be at work for the next month. But if a virus case is identified in the organization, quarantine regulations may require that that fact (alone—no names) be disclosed to those who may have had contact with the infected person. Legal advice may be needed here.
Some operational areas that may be affected include anything involving travel—especially international, such as students studying abroad, bringing visiting performing artists in from other cities, travel by athletic teams to away games, out-of-town speakers at conferences, members traveling to attend conventions, etc. Technology is already being used in some of these areas, and such use will likely increase. (Ok, technology will not work for team sports: football, soccer, basketball, hockey or racquet sports such as tennis; but maybe it could if golf or a racing-type event such as track and field, swimming or skiing could be contested simultaneously in both home facilities, so the race is effectively against the clock.)
Organizations such as homeless shelters and soup kitchens will need to rearrange their spaces to allow for more social distancing by their clients. Even after the immediate threat of infection has largely passed, would-be users of such facilities may want to feel comfortable that they are adequately separated from their neighbors. An extreme example would be a charity dental clinic, which will have to take extraordinary steps to keep both its patients and staff feeling safe. These and similar organizations should also be certain they have adequate insurance coverage to protect from claims by someone who has accidentally been exposed while in their facility.
Houses of worship have some special challenges: how do they handle group events (apart from regular services) that often involve close personal contact, such as weddings, funerals, baptisms, confirmations, bar/bat mitzvahs, etc.? Even when in-person group services can be safely resumed, should the communion ritual be altered? Should congregants still pass the peace during the service? (There should be an understanding so there will not be embarrassment if one person wants to shake hands or hug a neighbor, but the neighbor does not.)
Some facilities may need to be re-purposed. Convention centers and sports arenas are being used to help meet medical needs of cities. Now-empty college dormitories and dining facilities could be used for helping people in need due to job loss or homelessness.
Now is definitely the time to be thoughtful and creative.