Like most people, organizations get into difficult financial straits from time to time. Don't panic. Panicking, searching for who is to blame, and whining will not solve your problem. What you must do first is carefully analyze the nature of the financial problem and how you got into it. The results of this analysis will help create a strategy for getting out of the trouble you're in.

Financial troubles range from simple cash flow problems to serious mismanagement or even embezzlement of funds. These major types of financial problems are discussed in the following sections. It is important, however, to recognize that financial problems are usually symptomatic of deeper management difficulties. These difficulties usually show up first, and often most seriously, in the areas of fundraising and spending. The root cause may be the failure of the board of directors to plan the year thoroughly and thus anticipate the financial crisis, or it could be the reluctance of a staff person to discuss the finances of the organization honestly and fully with the board, leading the board to approve an unrealistic budget. Sometimes the deeper problem is that fundraising projections are inaccurate because not enough research was done to make reasonable estimates of income. Whatever the problem, it must be addressed and solved. If the financial problem is solved without addressing any underlying organizational issues, the financial problems will recur with increasing severity.

There are four main types of financial problems: cash flow problems, deficit spending, serious accounting errors or mismanagement of funds, and embezzlement of funds.

CASH FLOW PROBLEMS

A cash flow problem occurs when anticipated income is not coming in fast enough, creating a temporary lag in income in relation to spending. A cash flow problem has an end in sight. You know that when a certain major donation or grant payment comes in, or when a reimbursement from the city, county, or state is received, you will be able to pay your bills and say goodbye to your problem. Until that time, however, the organization has to draw on its reserves; once the organization exhausts any savings it might have, then it is in a bind.

You have several choices at that point. You can try to freeze spending. You can attempt to stall your creditors by paying bills in installments and by postponing paying as many bills as possible. In that case, call creditors and explain your situation, giving them a date by which you will pay the bill. Creditors will often allow you to postpone payment if they believe you will have the money soon. Another option is to borrow money to cover your expenses and repay the loan when your cash flow improves. You can do this by using a company credit card, getting a line of credit from a bank or, ideally, obtaining a loan from a loyal board member or major donor who will charge little or no interest and create no publicity. You may ask foundations and corporations in your community if they have emergency loan funds to help groups weather cash flow difficulties.

A cash flow problem is largely a logistical one and often can be avoided in the future by setting aside money in a reserve account in anticipation of such situations. Every organization should have both a line of credit and a credit card. The time to open these is when you have cash on hand so that the bank or credit card company believes you will be able to pay your debts. Then the organization needs to have clear guidelines about who can use the card, who is authorized to draw against the line of credit, and how much can be charged or borrowed. These policies are not hard to set up, and your accountant or a consultant can help you create them.

DEFICIT SPENDING

A deficit is a chronic cash flow problem or, more accurately, a situation in which you are spending more than you are raising with no end in sight. Irresponsible or short‐sighted organizations finance their deficit with money from their savings, if they have any, or with money earmarked for special programs, a practice that is then problematic for the special program and may cause distress to the person or grantmaking source for the program. Commingling funds that were restricted for one purpose with funds restricted for another purpose is unethical and, depending on how you commingle funds from different sources, can be illegal. At some point, however, the organization will run out of money and no longer be able to finance the deficit. There are only three solutions to deficit spending: create an ongoing way to raise more money, cut down on spending, or do some of each. Examine where you might be overspending and put a freeze on those areas. In addition to the person who may authorize expenditures, designate an additional staff person or board member to look at all requests for more than $500 and, working together, try to identify a spending pattern that can be cut. (In small, very frugal organizations, this may be an impossible task.)

Obviously, the organization's fundraising plan and income reports will have to be carefully examined and strengthened. Raising more money, however, is the only viable long‐term solution. Deficits require immediate attention because the longer they continue the worse they get. Once you are out of the deficit, avoid the situation in the future by spending no more money than you raise.

SERIOUS ACCOUNTING ERRORS, MISMANAGEMENT OF FUNDS, OR EMBEZZLEMENT

In cases of even more serious financial errors, mismanagement, or embezzlement, the entire board must be notified immediately and the people responsible for the error or crime must be dealt with swiftly.

In the case of serious error, some mitigating circumstances may be taken into account, such as if the person had never made an error before, the person admitted it immediately and took steps to remedy it, or the error was clearly a mistake and not indicative of carelessness or deception. Nevertheless, the person should probably be suspended until the situation is resolved.

Board members should prepare a brief statement on what happened and what the organization is doing about it. This statement can be sent to funding sources and used as a response should the story get into the media. Honesty and swift action are the best ways to ensure the fewest repercussions.

Mismanagement is different from a serious error because it indicates an ongoing problem, and generally one that is caused by actions of the ED or other leadership. In grassroots organizations, mismanagement often takes the form of the executive director authorizing expenses and telling people (including themselves) that Donor X or Foundation Y has “pretty much promised” to make a gift or a grant, or there is a sense of “build it and they will come.” Mismanagement generally occurs in these areas: unauditable records, unsupported costs, highly inaccurate fiscal reports or program reports, payroll discrepancies, and lack of good internal control procedures. Mismanagement indicates ineptitude. It is not uncommon that longtime executive directors or founders become guilty of mismanagement because the organization has grown past their skill level. If the ED is otherwise very valuable and the errors are correctable, then sending that person for training as well as building in more redundancy to your accounting systems may solve the problem. If their financial incompetence is indicative of other incompetence, then more serious measures will have to be taken.

If embezzlement has occurred, the person committing the crime must be fired; the board will have to decide whether to take legal action against the person or people responsible.

In any case of financial problems, the board must act! Ask for help and get the problem under control.

From the point of view of this book, the problem that must be solved is how to make up the loss of money that such an error, incompetence, or crime has caused. Options include asking major donors who are close to the organization for extra gifts; seeking loans; and instituting spending freezes, vacation without pay, or pay deferments for staff. As a last resort, staff layoffs may be necessary.

If the financial situation cannot be improved by any of these means, the organization should consider closing. An organizational development consultant or a facilitator will be helpful in leading the board to a proper decision.

The most debilitating problem in the case of serious mismanagement or theft is the decline in morale. Very little work goes on when everyone in the organization is depressed and shocked. Morale will be boosted when the staff and board have decided on a course of action. If the organization is to stay alive, a plan must be made quickly and implemented immediately. A crisis of this magnitude can pull people together and strengthen the organization as long as those remaining agree that keeping the organization going is of the utmost importance.