The Proactive CFO’s Response to the COVID-19 Crisis
For many NFPs, executing their mission is more critical now than ever. Social services, behavioral health, faith-based and many other organizations are responding to this call to action with the dedication that characterizes the NFP industry. However, access to supplies and volunteers—and in many cases, warehouses, offices and clientele—is limited at best. The Proactive CFO will want to identify with his or her executive director and programmatic heads which of their programs are mission critical and can still be practically executed, given shelter-in-place and social distancing guidelines, potentially reduced funding and additional expenses. Once those programmatic decisions are made, the Proactive CFO should work with his or her management team to determine the best delivery of services. For example, consider staggering staffing at work sites to less than 25 percent capacity on alternating days of the week—both for employees and volunteers who are still willing and physically able to contribute to the organization’s mission.
The decision to temporarily or permanently suspend or contract programs is often a difficult one. The Proactive CFO should help ensure the organization’s ability to fund the programs deemed mission critical is first priority. This may mean eliminating or curtailing less critical programs or seeking additional funding sources. It also may mean prioritizing which funding sources the organization chooses to pursue. While it may be necessary to engage grant writers to pursue certain grants, take care to rank possible grant opportunities, pursuing those that are mission aligned and show a high/higher probability of success while forgoing others. The organization should do a cost benefit analysis on the expense of pursuing these grants against the likelihood of successful receipt.
Communication with employees during this time of heightened uncertainty is critical. With work from home now the default in most locations, the Proactive CFO should work with the NFP’s HR head to determine the best course of action to maintain productivity while still being sensitive to the unusual demands the pandemic places on employees and volunteers. Many NFPs are instituting a daily “check-in” with all employees led by the department head, supported by similar daily check-ins by department and programmatic leadership with executive management to relay results, issues and concerns and typically supplemented by a once- or twice-weekly all-hands call. Expectations about program slowdowns or stoppages should be communicated to employees, and departmental and programmatic heads should be responsible for finding alternative work streams for their staff to handle. Now is a great time to catch up on grant writing, update donor information in CRMs, re-evaluate key performance indicators and metrics on program data and identify other tasks that employees can be redirected to in the absence of their regular responsibilities. Many NFP CFOs report that while they’re trying not to micromanage employees during this crisis, they may insist on video check-ins—rather than dial-ins—to better gauge how employees are handling the upheaval and help ensure continued productivity during dislocation. In furtherance of monitoring and encouraging continued productivity, consider asking hourly employees to submit time sheets daily rather than weekly, so as to monitor recorded hours versus productivity goals on a timely basis, or asking both hourly and salaried employees to use a “charge code” (could be as simple as a 1 or 2) that identifies time lost to COVID-19-related issues.
Whether an NFP has decided to continue working from its headquarters or deliver its services via employees and volunteers in the community, safety is a top priority. The Proactive CFO should coordinate plans for regular cleaning and disinfecting of facilities. Many workplaces and healthcare facilities also are implementing a mandatory temperature check of all individuals who seek to enter a building. These precautions will go a long way to demonstrating the value the NFP places on individuals carrying out its mission.
In addition, now is a good time for the Proactive CFO to explore the multiple funding sources opening up to NFPs and small businesses at the federal, state and philanthropic levels. For example, the Families First Coronavirus Response Act, signed by President Trump on March 18, 2020, creates new tax credits for employers whose employees have taken sick leave and family leave related to COVID-19. Employers can take these tax credits against certain employer payroll taxes. Exploring small business loans is another funding source. The U.S. Small Business Administration is offering designated states and territories low-interest federal disaster loans to provide working capital to small businesses suffering substantial economic injury due to COVID-19. In addition, the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), passed by Congress and signed into law on March 28, 2020, provides a number of components designed to help employers maintain payroll during this time of uncertainty and potential illiquidity, such as the Paycheck Protection Program (PPP) and Economic Injury Disaster Loan (EIDL) provisions. The PPP, formerly known as the small business interruption loan, is a relief vehicle created by the CARES Act that provides for loans in the amount of 2.5 times trailing 12-month average monthly payroll and is expected to be available in fewer than three weeks. When used for payroll or other operational expenses necessary to maintain the organization’s ability to continue as a going concern, the loan will be completely forgiven with no need for repayment; forgiveness is subject to eligibility criteria and other restrictions. EIDL—expanded through the CARES Act—provides for 30-year, low-interest loans of up to $2 million, dependent upon various eligibility and financial calculations, including retaining employees’ jobs. The Proactive CFO should explore these options or contact a trusted advisor to better understand the requirements and limitations of these options and help ensure their organization’s eligibility and timely application, as appropriate.
What to pay? When to pay? How and how much to pay? The Proactive CFO should always ask these questions, but they take on a higher significance in a time of potentially disrupted liquidity. Doing a 13-week or 26-week (or even longer-term) cash flow projection is a critical exercise for the Proactive CFO at this juncture. Since cash is king, determining the organization’s projected liquidity is the Proactive CFO’s highest priority. Evaluating the anticipated timing of donor cash payments on pledges made is both an art and science in ordinary times. However, to estimate COVID-19’s potential effect on the organization’s donor cash flows, the Proactive CFO should consider encouraging all donors to honor their commitments despite potential postponements of events. Being able to secure those commitments—and, more importantly, to gauge the timing of cash in the door—is a way the Proactive CFO can more accurately plot out the organization’s cash inflow in the upcoming months. Obviously, these inflows will dictate availability of funds for necessary—and even discretionary—outflows and allow the Proactive CFO to work with other senior leaders in the organization to identify necessary spending reductions or delays.
In evaluating how to manage cash outflows, it’s important to recognize that certain expenses, such as payroll, rent, utilities and insurance, may be difficult to reduce in the short term. Often, some reduction in head count may be necessary to preserve cash flow. The Proactive CFO should contemplate not only head count right-sizing but also reductions in executive or management salaries, employee discretionary bonuses and reduction of hours for nonsalaried personnel, to the extent feasible. An informal poll of CFOs across industries indicates many have already pulled other levers, including reducing executive salaries, halting all capital expenditures and discretionary spending and instituting cost-saving measures such as limited (or no) travel and entertainment expenditures. Going into expense “hibernation” should enable the Proactive CFO to preserve cash flow for the long haul.
Another method for managing cash flow is when—and how much—to pay in respect of liabilities. Contacting vendors, creditors and other stakeholders early in the face of the pandemic can help the Proactive CFO get payment terms loosened, reporting deadlines extended and even lessen penalties on interest and fees on outstanding debt obligations. Being proactive in identifying opportunities to lengthen payment terms without significant penalty can provide access to cash during the immediate term and provide some forecasting certainty, which the Proactive CFO’s C-suite partners will appreciate.
In addition, most organizations have controls in place around cash disbursements—procedures such as requiring written approvals/sign-off on all payments. Given today’s prevailing remote working environments, consider whether and how those procedures may need to be modified to facilitate the smooth continuity of an organization’s payment processes. It also may make sense to work with your bank to set up—or fine-tune the processes around—the ability to make and receive payments through ACH or institute the use of features such as positive pay.
Removing restrictions on endowments where possible also can free up the organization’s free cash flow. Identifying such “rainy day” funds and discussing the possible need to access those funds with the organization’s board or key donors early may facilitate greater liquidity as well.
Consider creating a “high,” “base” and “low” case 13-week cash flow model to help plan out the organization’s cash flow over the upcoming months, as well as facilitate decision making if revenue expectations slip. The pandemic obviously makes this situation highly fluid and unpredictable, so the Proactive CFO would do well to use this time to identify options for responding to possible cash flow challenges so the organization is prepared to pivot as needed.
An organization’s “plant” may be its offices, a warehouse where it stores books for distribution to underserved school districts, a food bank for local communities in need or even a factory that supplies key medical supplies. The costs associated with operating these facilities, the personnel necessary to operate them and the decisions on when to run assembly lines are typically in the purview of the Proactive CFO in close consultation with the organization’s executive director and other executive management teammates. As mentioned above, many organizations are choosing to run a hybrid of reduced-staff production lines or warehouses and offices; others who are able to set up separate facilities are doing so with dedicated staff so a diagnosis or exposure of personnel in one location won’t shut down operations entirely.
For obvious reasons, many organizations are choosing to forgo all capital expenditures, improvements and expansions other than their most basic maintenance. In addition, the Proactive CFO should take this opportunity to identify supply chain readiness. From where do products come? Are there alternative sourcing opportunities? Can products or product assemblies be redesigned to have less reliance on goods from COVID-19-affected countries?
Now would be a good time for the Proactive CFO to investigate the terms of its insurance—is your business interruption coverage sufficiently broad to cover losses associated with COVID-19? A call to your broker to evaluate your coverage and identify what criteria your organization may need to show to obtain relief also may be a good idea. Many insurance policies have specific guidelines on what circumstances you’ll need to prove to make a claim, and the sooner you and the organization’s other leaders are aware of those facts, the sooner you can track them and keep proper records to support any eventual claim you may file.
Visit our COVID-19 Resource Center for regular updates on legislative efforts, funding opportunities, industry-specific resources and more. Watch for our second article in our Proactive CFO series, which will outline strategies in the following areas: Procedures, Philanthropy and (P)Financial Reporting.
As with most topics related to COVID-19, changes are being made rapidly. Please note that this information is current as of the date of publication. We invite CFOs and finance leaders to reach out to your BKD Trusted Advisor™ or submit the Contact Us form below for assistance in developing your own Proactive CFO game plan.