Six Signs That It's Time to Consider Going Out of Business

Contents

Six Warning Signs
  1. Loss of all or a significant portion of support from a key funding source
  2. “Chasing dollars” syndrome
  3. Sudden and dramatic expansion of services
  4. Falling behind on financial obligations
  5. Consistently unable to meet service and financial projections
  6. Departure of key board and staff
Conclusion

Where to Learn More

 

From Becky Andrews, Marketing Manager, Fieldstone Alliance:

MANY NONPROFIT EXECUTIVES tell us that belt tightening has gone as far as it can and the organization faces still more cuts. Furthermore, many people speculate that the full brunt of government funding cuts has yet to be felt. Some boards and staff are wrestling with the basic question, Can we and should we continue to exist?

This issue of Tools is not meant to scare or depress you. Rather, it's meant to shed light on an important, and yet poorly understood potential phase of an organization's life cycle—going out of business.

The information is excerpted from The Nonprofit Decline and Dissolution Report. This report summarizes a study done in 1986. The study was prompted by several recurrent issues that our consulting staff were seeing (and are still seeing today):

• Executives who were experiencing tremendous stress, shame, and isolation
• Boards who had become paralyzed and indecisive
• Staff who were anxious and uncertain about their future and worried about the future of their clients
• A lack of reference materials or information to help guide an organization through the dissolution decision-making process

We hope that the following six warning signs will help you determine whether or not your organization is heading toward decline and, if so, provide the opening for discussion of what to do next.

(You can download a full copy of the report—including the methodology used—by clicking here.)

Six Warning Signs
In the interviews and literature analysis done for the study, the researchers looked for patterns of issues, incidents, and circumstances which were present just prior to the decision to dissolve. The most striking and repetitive themes are described below.

1. Loss of all or a significant portion of support from a key funding source
A sudden change in the level of support from a key funder often demanded complete restructuring of the organization's financing. No single pattern or reason for defunding emerged but a distinct set of situational factors were often present:

• Federal, state, or local government spending priorities shifted.

• Organizations which represented minority clients or provided nontraditional service (often to a difficult-to-serve population) received start-up support in recognition of the need. These organizations, while attentive and responsive to client needs, did not develop the kind of organizational infrastructure, (e.g., accounting practices, evaluation mechanisms, reporting systems, personnel policies) which documents responsible management. Start-up funders, it appears, were willing to overlook this deficiency, up to a point. As these organizations grew and moved toward more traditional funding sources, the expectations for "good management" also grew. The organizations' inability to develop a credible management team and infrastructure were ultimately their downfall.

• Small and emerging organizations, which had effectively served an underserved population and focused the community's attention on this population, were no longer able to capture a large enough segment of the market because larger and more established multi-service providers began to absorb their clients.

These organizations also tended to be led by charismatic and passionate people whose Achilles' heel was a commitment to the mission and vision of the organization to the exclusion of practical concerns. Visionary zeal rather than cautious assessment ruled their decision making. The mission of these organizations tended to be focused on a narrow set of activities rather than a broad and compelling statement of their role in the community. This was especially lethal when combined with a weak or subservient board.

2. “Chasing dollars” syndrome
As financial pressures mounted, many organizations succumbed to the temptation of developing programs primarily to attract the available dollars. To some extent all nonprofits must shape services to meet the funder's needs since it is, in effect, the "marketplace" in which they operate. For some organizations however, it is clearly the beginning of the end. While initially, this "dollars-drive-the-program" approach was used to bridge a funding gap, it eventually became the normal operating procedure and paved the way for larger crises such as

• Widespread confusion about the direction, emphasis and philosophy of the organization.
• A lack of experience in budgeting for new programs leading to gross underestimation of the cost of the program and even larger deficits.
• Failure to reach service goals because the program was designed to reach an unfamiliar target group in which the organization had no foothold.
• Shifting of key staff from core programs to new programs sometimes leading to a loss of quality, clients, and credibility within mainstay programs.

3. Sudden and dramatic expansion of services
This was perhaps the most seductive and tragic scenario. It felt a great deal like success to the nonprofit. They were doing what was needed and lots of it. Government-funded expansion seems to be the most risky since it rarely covers the cost of expanded capability. Their unbridled commitment to serve led to several costly and sometimes fatal developments:

• Paying staff overtime to meet the demand, thereby driving up the cost of service without corresponding increases in revenue.
• Overworking and burning out staff in order to meet unrelenting client demands.
• Depleting cash reserves in order to meet short-term needs.
• Loss of service quality through rapid expansion and poor internal controls.

4. Falling behind on financial obligations
A precarious financial condition often set in motion a pattern of crisis management characterized by

• Missing payroll
• Frantic fundraising efforts
• Drastic and impetuous expense-cutting strategies which significantly reduced service capability and further eroded the organization's credibility
• Departure from sound accounting practices, (e.g., unsecured borrowing from restricted funds and nonpayment of payroll taxes),
• Key staff and board "abandoning ship"
• Rumors of the organization's impending demise
• Board deliberately uninformed or misinformed about the financial crisis

Organizations which deployed quick-fix financial strategies usually postponed their crisis but did not avert it.

5. Consistently unable to meet service and financial projections
Very often these organizations set unrealistic goals, based on a set of untested assumptions and without a well-thought-through plan for how to reach service and income targets.

6. Departure of key board and staff
This warning sign was often a byproduct of the organizational decline process. The exodus of key people was generally precipitated by

• A growing and unrelenting sense of hopelessness
• Repeated unsuccessful fundraising efforts
• Increased board involvement in staff activities
• Frustration and anger about the organization's problems
• A desire for secure employment in an organization with a future

Conclusion
One of the researchers from the decline report stated, "The point at which a nonprofit organization's mission is 'to survive' is the point at which the organization should consider going out of business."

If your organization is experiencing any of the warning signs above, it's not necessarily a predictor of decline. However, the ability to 'confront the brutal facts'* can either help your organization weather a problem, or, in the case of too many problems, put closure to the struggle. Organizations will either dissolve gracefully—or painfully. A graceful dissolution can smooth the transition to new endeavors and ensure that no client is left behind.

* One of the characteristics of a great company according to research by Jim Collins from his book Good to Great.

Where to Learn More

Fieldstone Alliance
Free articles:
185 Cutback Strategies
Financing for the Long-Term
Managing the End of a Funding Relationship
The Nonprofit Decline and Dissolution Project Report
Things to Do When the Budget Squeezes

Books:
The Five Life Stages of Nonprofit Organizations
This book also addresses decline and dissolution as a potential stage of an organization's life cycle. It includes a checklist of red flags for the organization as well as tips for moving through decline, if that's what's decided.

Good to Great
www.goodtogreat.com
This web site has many tools related to Jim Collins book, Good to Great. You'll find an assessment, as well as excerpts from his follow-up monograph "Good to Great and the Social Sectors."

 

All the Best,

Becky Andrews
Fieldstone Alliance

April 23, 2008

 

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