As we continue to witness the ripple effects of recent federal spending cuts, nonprofit organizations face mounting pressure to ensure their financial resilience. These spending reductions will place significant strain on nonprofits’ revenue streams, operational stability and ultimately the impact they are able to make. The disruptions are so significant and vast it’s hard for nonprofits and funders alike to know how to respond at any given moment. What we do know is that the nonprofit sector is essential to the health, prosperity and stability of the country.

Kresge’s Social Investing Practice invests across the sector from community development financial institutions (CDFIs) to social enterprises, human service organizations, environmental justice groups and virtually everything in between.  No organization is immune to disruption, and many of our partners are already taking steps to strengthen their financial foundation to protect the impact of their future work. We’ve compiled a list that is by no means comprehensive, but it offers a starting point for taking decisive action in the face of all the uncertainty.

1. Review your directors and officers (D&O) insurance policy

One often-overlooked aspect of financial resilience is the protection offered through directors and officers insurance. This coverage helps safeguard board members and executives from personal liability in the event of lawsuits or claims arising from their decisions. With increased scrutiny on nonprofits during times of fiscal uncertainty, reviewing your D&O policy for coverage is essential. Ensure your policy limits are adequate, especially if you’re dealing with more complex financial situations, and that it covers potential risks tied to spending cuts and new operational challenges.

For further information on D&O insurance, the National Council of Nonprofits offers helpful resources.

2. Diversify banking relationships

Many nonprofits rely heavily on one bank or financial institution. In times of financial strain, this can be risky. To improve liquidity and financial flexibility, nonprofits should consider diversifying their banking relationships. Having accounts with multiple institutions can support access to credit lines, potentially better terms on loans and reduce the likelihood of disruptions to operations.

For guidance on where your nonprofit should keep its operating cash, the National Council of Nonprofits offers a helpful article on choosing the right financial institution for your organization: Where Should My Nonprofit Keep Its Operating Cash?

3. Open lines of credit for liquidity

In the face of spending cuts and potential cash flow disruptions, it’s prudent for nonprofits to have established lines of credit as a liquidity cushion. Lines of credit can help you bridge gaps between cash flow cycles or fund urgent expenses without dipping into reserves. By building relationships with financial institutions ahead of time, you’ll be better prepared in the event of funding delays or unexpected costs.

For more information on loans and borrowing options for nonprofits, Propel Nonprofits provides a comprehensive guide to help organizations navigate the borrowing process: Loans: A Guide to Borrowing for Nonprofit Organizations.

4. Review cost allocations on current grants

Reviewing how you allocate costs across various grants is another key strategy. Federal spending cuts often mean that you must stretch existing resources further. This might require reallocating costs or renegotiating budget allocations with funders. Carefully examine which expenses are allowable under current grants and whether any overhead costs can be shifted to unrestricted funding sources.

To help refine your cost allocation practices, consider best practices in nonprofit cost allocation methodologies. CFO Selections offers an insightful perspective on these strategies, which can improve your approach to managing costs: Best Practices in Nonprofit Cost Allocation Methodologies.

5. Speak with funders about converting project support to general operating support

In the current climate, grant funders may be more open to shifting from restricted project funding to unrestricted general operating support. General operating grants offer nonprofits more flexibility to cover core operational expenses, providing greater financial stability. It’s worth initiating conversations with your funders about transitioning a portion of your project-based grants into general operating support to better navigate fiscal uncertainty.

The Council on Foundations provides a Sample Agreement for Converting Project Grants to General Operating Support, which can help guide these discussions and formalize the transition.

6. Budget scenarios: Planning for uncertainty

In uncertain financial times, it’s essential for nonprofits to assess different budget scenarios to understand the impact of potential changes in revenue or funding. Scenario planning involves developing several budget models based on varying assumptions and predicting how different financial realities could affect your operations. By testing multiple scenarios, you can better prepare for any unforeseen challenges and adjust your strategy accordingly.

The Nonprofit Finance Fund (NFF) offers a Nonprofit Budgeting Scenario Planning Tool to help nonprofits create and assess multiple budget scenarios. This tool is designed to support you in understanding the financial impact of potential changes and navigating uncertainty.

A long road ahead

We must acknowledge that these are unprecedented times for the nonprofit sector and taking steps to strengthen financial resilience is crucial but not a guarantee of financial stability. The road ahead will undoubtedly remain uncertain, and many nonprofits will continue to face significant obstacles. Yet by uniting as a sector, we can support one another and fortify the essential work we do. Strengthening our financial footing is key to ensuring we continue serving the most vulnerable communities in our country, even in the face of adversity.

For additional resources on nonprofit sustainability, visit the Center for Nonprofit Advancement, which offers a range of free tools and articles to help organizations adapt.