Given the fundraising and program revenue losses organizations have experienced due to COVID-19, some organizations are considering a temporary closure or dissolution. Before making this decision, it is important to evaluate the federal, state, and local government programs that are available to assist nonprofits in maintaining jobs. Learn more about the CARES Act.
Developing a financial projection
If your organization is at risk of going out of business it is important to develop a 6-12 month financial projection to determine if you can continue operating. Do this quickly; don't take the time to sweat the details. Focus on major cost areas like personnel and office rent and your most consistent revenue sources. We have created the 501 Commons Cash Position & Cash Flow Workbook which will help you with the calculations. Here are the steps:
1.Determine your current cash position. What cash or liquid assets do you have available?
2. Project your expenses on a monthly basis.
- Consider what costs could be reduced. Could you reduce office space or continue working from home?
- Determine your staffing needs. Remember to include employee benefits and employment taxes. It is illegal not to pay these costs in full.
3. Project your cash on a monthly basis
- Count grants only if you have received them on an ongoing basis or have been told you have a very strong likelihood of receiving the grant.
- Talk to donors and funders to see if you can raise additional funds. If you have a restricted grant or contract, talk to the funder to see if they can convert the grant into a general operating grant or change your performance requirements.
4. Develop a list of shut-down expenses that would still have to be paid if you temporarily or permanently close down. Liabilities include last paychecks, contributions to retirement accounts, unpaid employment taxes, and contractual obligations like leases.
- Set aside those funds in a separate shutdown account so that you can cease operations legally and ethically.
- You may be able to negotiate some payments to creditors but you are legally obligated to pay employees and taxes.
5. Calculate your monthly "run rate," the level of expenses needed to operate the organization for one month.
- Ideally you want to have at least two months of cash based on that run rate. This is especially important when you are navigating uncertainty.
- Calculate how long you can continue operating based on projected expenses revenues and any reserve or working capital you have left after setting aside the amount needed in your shutdown account.
Temporary Shutdown or Dissolution?
Once you decide whether you are going to shut down temporarily or dissolve the organization, develop a communications plan for staff, volunteers, and other internal audiences. Then develop a communications plan for external audiences, including funders, partner organizations and clients/members.
If you expect the shutdown to be temporary, disclose your timeline for deciding to reopen. Attempt to identify donors and funders that are willing to consider investing to restart the organization.
If you are going to dissolve the organization
Once you put your "shutdown fund" in a separate account, do not touch the funds until you are winding down. Doing this protects the board from liability for unpaid obligations.
If you do not have the funds needed to pay employees and settle with creditors, board members need to contribute the funds necessary for the shutdown. Board members should make these donations proactively, when the problem of insufficient shutdown funds is identified. Do not wait until shutdown is in process.
Dissolution requirements and processes differ from state to state. Consult with your state's Secretary of State - or the department that regulates nonprofits - and the Department of Revenue to determine requirements in your state.
- If you need help with a legal matter, email Communities Rise: firstname.lastname@example.org
- Termination of an Exempt Organization (Internal Revenue Service)
- Closing a Nonprofit Corporation (WA State Secretary of State)
- Creating a Comprehensive Plan to Dissolve a Nonprofit Corporation (University of San Diego)
- Nonprofit Dissolution: What to do when closing the doors (Nonprofit Quarterly)
- How to Dissolve a Nonprofit Corporation in Washington State (NOLO)