Emerging from COVID-19 – financial strategies and lessons for NFPs

COVID-19 has had a big impact on donations for not-for-profits and their expectations for government support in the future. Scott Hawker, Perpetual’s National Manager of Not-for-Profit Endowments, looks at what not-for-profits are doing with their investments and spending strategies to survive the downturn.

It still seems early, perhaps, but Australia’s path through the Coronavirus crisis has been faster than might have been anticipated. Financial markets have already shown that they have a habit of looking through the valley to improved conditions beyond.

We are very much aware that many not-for-profits of every hue are still reeling from the shock of increased demand for services, potentially lower or threatened donations and savage moves in investment capital and income returns. As not-for-profit organisations operate on slim margins, the impact of these trends will have been substantial over the first part of 2020. The downward trend to 6.3% in net margin in 2018 from 8.7% in the previous year is already out of date and is likely to be significantly lower in the financial year just ended.¹

Protection has been afforded by the government’s additional spending, including JobKeeper, even if the process may have strained some cashflow requirements in the first instance. And there is likely to be a major challenge when the rules change again and financial support is reduced; both the private and the not-for-profit sectors will be right in the firing line at that point, and will need to be sensitive to changes in the operating environment.

Lessons from COVID-19

So what can we learn from this period of heightened anxiety? And how can not-for-profits prepare for the long road ahead? No one will come out of this period of crisis quite the same way they went in, and directors will have to reassess their risk frameworks.

From top to bottom, directors and senior executives of not-for-profits will be re-thinking governance, risk and their capacity to react to change at pace. Finance teams will be looking at revenue volatility, cash flows and reserves and fundraisers will be tripling their efforts to distinguish themselves in an ultra-competitive market for funding. Historical measures will be out-dated and at the least need to be revised.

Our key conclusion is that government support for the sector will need to be vigorously encouraged in the medium-term. Existing contracts for the delivery of service will need to be extended, and more provided. Smaller not-for-profits are at risk – as we say to our clients, critical mass is critical for the sector, and there is more pressure to come.

How have not-for-profits reacted?

Perpetual Private provides specialist strategic investment advice to the not-for-profit sector. We know that optimal financial outcomes are a result of patient long-term investing, and that the best way to protect and grow hard-won capital over the long term is to position quality assets in an appropriate asset allocation and to maintain the course over the long-term. Nevertheless, we are conscious that every not-for-profit is different, and liquidity needs, stakeholder pressure and critical mass will all influence short-term decisions.

Another household name charity that has meaningful investments built up over time took the decision to sell down before the worst of the market crisis hit in March and has been sitting on cash since then. Another has deferred all long-term investment decisions until September. Clearly cash reserves are critical under these conditions and while professional investors consistently seek opportunities for outperformance in market rebounds, not-for-profits and charities often consider that “investing for enough” may be enough. Cash is critical, capital is hard-earned and irreplaceable.

Apart from these specific cases, and others like them, we believe CFOs and finance teams will be looking at cash reserves in particular to ensure they are adequately provisioned – even to the extent that the JobKeeper allowance needs to be pre-funded and therefore creates pressure on liquidity.

Government support for not-for-profits

As always in balance sheet management, cash is critical. But it is also true to say that government funding has kept many not-for-profits operating under these conditions. Block and grant funding in support of established programs, alongside JobKeeper allowances, have allowed the larger operators to maintain momentum. The 48% of sector revenues provided by government² in support of contracts will likely loom larger this year and next and needs to be supported if major programs are not to fall by the wayside.

Ongoing lobbying of government will be critical to the fate of many mid-sized and smaller not-for-profits over the remainder of this year and into 2021. The constructive outcomes of discussions to increase potential contributions this year aided by a “credit” in future years, could be amplified by mechanisms such as donor guarantees or lending support. These are ideas that have not gained traction in the past but which now might have their day.

The full impact of COVID-19 for our society and not-for-profits is unpredictable. What’s clear however, is that all organisations need to re-assess their investment strategies in a time of high volatility and financial pressure. Speak to Perpetual today to discuss a spending and investment strategy to manage your endowments.