Nonprofits Should Stress Test Funding on a Regular Basis

Stress testing a nonprofit organization’s funding seems like a frightening proposition, conjuring images of doom and gloom. This is not the case at all. Regular stress testing of funding will enhance strategic planning, raise awareness of changing conditions, and stimulate an earlier call to action. All funding sources, both strong and weak, will benefit from these regular efforts.

The key to stress testing of funding (STF) is to consider all funding sources, not just funding sources that are weak, exposed and/or experiencing declining performance. Even a small change in a minor funding source could have a potentially big impact on operations and the bottom line. Consequently, it is important that your stress test include all sources of funding, such as earned revenue, contributions, sponsorships, grants, as well as other sources of business and miscellaneous revenue (for example,rents, royalties, administrative fees, and advertising).

The following two basic tactics will make STF more effective and efficient. First, schedule your STFs to occur on a regular semi-annual basis. Second, use STF surveys to gather information, check the temperature, and monitor changing conditions.

Traditionally, STFs are completed once a year as part of the annual budget preparation process (if performed at all). I prefer more frequent stress tests that are performed on a regular semi-annual basis, with the initial STF scheduled in conjunction with the preparation of next year’s annual budget, followed by a second STF scheduled six months later.

The budget preparation STF will be forward-looking based on where funding is expected to trend. The off-budget-cycle STF will concentrate more on analysis of current funding performance and isolating factors both internal and external that lead to performance changes. This will give your organization two different perspectives (current vs. forward), at two different times of the year, and eliminate long gaps between STFs.

STF surveys give you a standard information gathering and benchmarking tool that can be both broad and easy to implement. I recommend designing two sets of surveys: (1) a general survey; and (2) one or more specific surveys. 

The general survey is designed to be completed by all management and senior staff (rather than specific to one department or funding source). Include in the general survey funding organized by major categories or activities. Consolidate funding categories into five to seven groups or classifications. List the largest category first, with the remaining categories listed in size order and finishing with a general “other income” category covering any remaining funding sources. The intent of general STF surveys is to obtain a broad perspective on where staff see funding trending, even for areas over which they have no responsibility or control.

The specific surveys are designed to focus on individual departments and/or activities and not to be distributed to all management and staff. Each of these surveys will be more detailed, containing subcategories of funding that are specific to a particular department or activity. The intent of specific STF surveys is to obtain the perspective of the managers and staff directly responsible for acquisition of that source of funding and managing the use of those funds. Trends related to acquisition and use of funds seldom shift in the same direction (a very popular program could lose a major sponsor while another program that has a strong funding base could experience declining community engagement), so it is important to get input on these metrics from both viewpoints.

For both general and specific surveys, use simplified three-tier performance scales such as Green / Yellow / Red or, as described in our article on Planning for the Next Annual Budget Cycle: Rock Solid / Vulnerable / Shaky.

Planning Tip – Stress testing of funding (STF) should be integrated into an organization’s enterprise risk management (ERM) efforts. Describe your regular STF process in detail in your ERM plan, including sample STF surveys and recent trend analysis. Auditors, insurance professionals, and joint venture partners will gain trust and confidence that the organization is active in identifying funding risks and proactive in finding solutions. This can lead to lower audit and insurance costs while strengthening risk management.

Finally, remember that STF is not just about identifying funding weaknesses. Regular STF efforts will also raise attention and awareness to positive funding trends. It is equally important to be proactive with positive funding trends, moving quickly to take advantage of new funding sources, meet increases in demand for services, and improve brand recognition.