Financial Considerations for Nonprofits in the Wake of the COVID-19 Pandemic

by Amy Omand, CFO, NewSchools Venture Fund

In this time of economic turmoil, many organizations are wondering what steps they can take now to help safeguard their assets for uncertainty in the months ahead. As chief financial officer at NewSchools, my work is not often external facing. However, when I considered my experiences as a CPA, having spent 20 years in financial management roles at both for-profit and non-profit organizations, I thought I might have a vantage point that could be helpful to nonprofits who work in education or the social sector and are navigating these turbulent times.

This blog provides direction and offers suggestions about what to prioritize to ensure organizations can weather this storm and continue to deliver on their organizational mission in the future.

Cash is King

You should forecast your cash flow very conservatively, both in the short term, and the next 12 months, and restrict spending as much as possible.

• What are the commitments that you must meet — payroll, rent, committed contracts?
• If you are able to pay hourly employees at their regular schedules even as work has slowed/stopped, use a different pay code so that it can easily be tracked.
• Can you extend terms with some vendors without penalty? How can you reduce your “burn rate” while still meeting your impact commitments?
• How many weeks of cash on hand do you have?
• Do you need to work with your board to temporarily lift any restrictions on an operating reserve to meet your short-term needs?

Think through your Revenue Streams

The market volatility and potential recession will no doubt have an impact on donations to the nonprofit sector.

• Event-based fundraising is certainly hit hard, with the postponement or cancellation of events in the near future. See below for potential relief from your insurance policies.
• Individual donors and potentially institutional donors may affect future giving if overall market volatility leads to losses for these organizations. Stay in close contact with your program officers, and communicate how critical their continued support is.
• Earned Income streams will likely be reduced depending on your industry — if an overall recession hits and your customers are being more conservative.
• If your local community foundation is not already a donor, reach out to them — many of them are thinking through how they can mobilize most effectively now.

Generate liquidity from other sources

• If you had already secured a line of credit from your bank, now is the time to use it! Banks will look to right-size their balance sheets, however, so if you draw down on it now you can secure the funds for your use.
• For any outstanding debt you have (lines of credit or otherwise), pay attention to your financial covenants — many banks have the right to call back the loan if your organization hits certain metrics of financial distress. Don’t wait for this to happen — communicate early with your bank to discuss options.
• If you don’t already have a line of credit, it may be difficult to obtain now, as the global credit markets are tightening. Reaching out to banks that specialize in nonprofit lending would be your best bet:
• A B-Corp Bank, such as Beneficial State Bank
• A nonprofit lending aggregator, like LenDonate
• The SBA is offering Disaster Assistance Loans
• Reach out to trusted individual donors who may be able to help

Create a claim through your insurance policy

Contact your broker immediately to discuss what coverage you have, and what your options may be. If you find out through this process that you were under-insured, when the dust settles, make sure you find an insurance broker that can get to know your business and provide a proper risk assessment to get you on the right track.

The additional information below is from the website G2 Insurance, a trusted nonprofit insurance broker in the California Bay Area.

Do we have business interruption coverage if we decide to close because of the outbreak?

If you are taking a precaution by closing your organization to visitors or customers then you will likely not have coverage in place. Business interruption coverage typically does not respond where you make the decision to close your own doors without direct physical damage or contamination on-site.

Will we have business interruption coverage if ordered to close by local, state or federal government?

If there is a government closure of your facilities which results in an income loss, coverage will likely only apply if there is actual contamination or physical damage within a given radius of your location. This means that a precautionary shut down by the government of a locale is not likely to trigger coverage. Furthermore, whether the presence of coronavirus at a given location will be considered direct physical damage will depend on the facts, the wording in your policies and the jurisdiction in which the event takes place and your policy is considered under. Recovery for business income losses under these circumstances may not be a straightforward claim, but G2’s Claims team will be here to guide you through the process and advocate on your behalf. There may also be exclusions that apply to your policy for viruses or bacteria that remove coverage completely.

Will our business interruption cover us for the presence of coronavirus at a key supplier or customer’s location?

Many commercial property policies include contingent business income coverage for financial losses resulting from disruptions to an organization’s customers or suppliers, usually requiring that the cause of damage to the customer or supplier be of a type covered with respect to their own property. This means that the same requirement for contamination or physical damage to the supplier or customer’s location will apply to any contingent loss that you suffer.

We have a large event coming up, if we cancel it is there coverage in place for the lost income or extra expense associated with the event?

Unless you have a specific event cancellation policy with communicable disease coverage for this event, you may have limited coverage in place for these losses and expense. Some commercial package policies have a small sub-limit for cancellation of your own events or of third party conferences you are attending but these are typically small limits of $10,000-$25,000 and, again, many require actual damage or a specific government order to apply.

If we continue to operate or hold a large event and people contract COVID-19 at our event or facilities, do we have coverage for such claims?

For a third party who attended your facilities or your event, it would likely be an extremely difficult claim for them to bring to prove that you were responsible for their illness and that you were liable for them contracting a disease that is now spreading throughout communities. However, that may not stop someone from suing you if they so wish. General Liability policies do cover claims from third parties for bodily injury which this disease would be so your General Liability policy may provide some coverage here. Some General Liability policies though do have specific communicable disease exclusions which takes them outside the bounds of coverage.

If our employees get COVID-19 at work, will our Workers Compensation policy provide coverage?

While “ordinary diseases of life” (i.e., those to which the general public is equally exposed) are generally excluded from Workers’ Compensation insurance programs, if an employee can establish a direct causal connection to the workplace, there may be a valid argument for Workers’ Compensation insurance coverage. To the extent that other claims for employee-related coronavirus illness do not qualify for Workers’ Compensation benefits, coverage might still be afforded under certain General Liability insurance policies.

How might my D&O or EPLI coverages be impacted by COVID-19?

A company’s directors and officers may be subjected to shareholder suits alleging that their actions (or inaction) in response to COVID-19 caused the company to lose value. Shareholder suits could come in many forms but may focus on alleged failure to develop contingency plans, to follow government guidance or failure to disclose the risk that coronavirus or other pandemics could cause to their business. Directors & Officers policies may provide coverage for the costs and liabilities arising from these shareholder lawsuits. Your Employment Practices Liability policy may be impacted in the event of a sustained business income loss that results in a need for layoffs of staff or if there are allegations of discrimination or a hostile work environment for employees who have or are suspected to have.