October 26, 2008 — While Massachusetts nonprofits across the sector are preparing to absorb the impacts of the current financial crisis that has hit the state, along with the rest of the country, those impacts will be uneven, according to long-time observers.

Noah Berger, executive director of the Massachusetts Budget and Policy Center, which provides independent research and analysis of state budget and tax policies, and economic issues, said, “Those nonprofits that receive government funding to achieve important public purposes, such as providing needed human services, educational opportunities, and arts and cultural enrichment for children, are likely to see their state funding decline as the weakening economy reduces the tax revenue available to the state.”

Individual donors are likely to be key, according to Liam Day, director of communications of the Pioneer Institute, an independent, non-partisan, privately funded research organization.

“The wild card in all of this may be individual donors, particularly those who have already transferred portions of their wealth to charitable giving vehicles,” he said. “For this reason, those nonprofits that have long, established relationships with their donor bases are most likely to weather the current storm.

“I suspect that, for this reason, established nonprofits in arts/culture will be in the best position to survive. Less established arts/culture nonprofits, however, may struggle as they have most likely not yet acquired a broad, loyal donor base, and their missions may not seem as urgent during a time of economic need.”

David Shapiro, CEO of Mass Mentoring Partnerships, the umbrella agency for youth mentoring in Massachusetts, said, “Education and youth development have less endowments, so they’re more fragile. Global shifts can affect them more, since they don’t have enough to fall back on. It’s a more unnerving time for this sector, if you rely on direct mail solicitations coming in during November and December.”

Leslie Nicholson, state director for Stand for Children , a grass roots nonprofit that provides a political voice for children's issues, noted, “The biggest challenge is that donors and foundations are rattled by unprecedented bank collapses and market zig zags. They feel the financial assumptions that underlie their investment and giving principles are no longer valid. That will tend to result in less giving even if the market hypothetically came back to 2007 levels”

How nonprofits entered the current downturn will likely determine in large part how they fare.

According to Shapiro, “If you went into it living hand to mouth, it will be tougher.”

Day seconded the point, noting, “Ultimately, a nonprofit's ability to survive, or even thrive, during a period of economic uncertainty boils down to two questions: How strong are the organization's relationships with its current donors, and how urgently do they view the mission?”

Recommended Actions

The Nonprofit Finance Fund , a nonprofit lender to nonprofits, recommends that nonprofits:

1. Review and optimize three critical aspects of financial assets: cash deposit risk, concentration of investment risk, and concentration of revenue risk.

2. If a reliable revenue source seems questionable, consider ways to diversify revenue sources. Avoid over-diversification (i.e., new and multiple lines of business). These give rise to "mission creep," may carry high entry costs, and frequently increase fixed costs, therefore increasing financial risk.

3. Make contingency plans for downsizing if you know or suspect you will lose funding. Nonprofits frequently use furloughs, small across-the-board salary reductions, and consulting arrangements to offset temporary revenue reductions. However, if it looks like funding has disappeared for good, consider partnering or merging with other complementary or similar organizations. Be wary of partnerships that could ultimately increase costs.