The phrase “over the horizon” has taken on a whole new and ominous meaning recently. Many associate it with current military doctrine and the deadly drone attacks conducted in the war on terrorism. Not for Profit (NFP) directors and managers think it might be safe to come out of their bunkers after the COVID pandemic, but they need to be aware of the ominous and scary threats lurking over the horizon. None of these should cause NFP management to hit the panic button yet, but smart managers will always scan the horizon for threats. Some of those looming menaces are:
- A shaky economy. Inflation is running over 8% and as of the date this is being written we are waiting for the Second Quarter GDP announcement. Some economists predict a mild increase to some predicting a mild decrease in GDP. A decrease in GDP over two quarters is the technical definition of a recession. It remains to be seen if charitable giving will continue in these circumstances as some families will tighten their belts.
- Higher interest rates. It also remains to be seen how high the Federal Reserve Board will hike interest rates to combat inflation. Rising interest rates could further erode the balance sheets of many NFP organizations with outstanding debt and stress cash flows of these entities.
- The weak condition of the stock market. NFP organizations lucky enough to have endowments will also suffer further budgetary stress. The stock market has fallen (it doesn’t matter what index you use. All the major indexes have fallen) this year. Financial planners will tell you proper financial management will permit the use of only a small percentage of the endowment in any year. As the endowment shrinks because of stock market losses, so does the available funds for operations or projects.
- Recent Supreme Court decisions could impact certain NFP organizations. Without being political in any way, it is safe to say that a decrease in the abortion rate may stress NFP organizations in those states that move to restrict abortion. Absent an increase in government assistance to new mothers, families and NFP groups will be required to step up to the plate and help out. On the even more distant horizon, the impact of the West Virginia vs. EPA decision could have some long range and unpredictable consequences. In this case, the Supreme Court used the “major questions” doctrine to prevent the Environmental Protection Agency from implementing new regulations that could have closed coal fired power plants. The details of this case are irrelevant here except to say the exact limits of the major questions doctrine have not been explored. Can this doctrine be used to prevent additional regulation issued by, say, the Department of Health and Human Services? Only time will tell how this plays out. The only sure thing is there is now some new uncertainty in the regulatory world.
- The FASB is looking at new standards for cryptocurrency and Non-fungible tokens. While most NFPs are not big enough to actively deal in such markets, these assets are becoming more and more prevalent. NFP owners will need to keep an eye out for new accounting pronouncements that could result in a swing in asset valuations.
It is impossible to say which of these possibilities will pan out, if any. How can NFP entities deal with this type of uncertainty? My suggestion is to use scenario planning. While it is beyond the scope of this little article, scenario planning assumes managers are not able to provide valid estimates of the likelihood of discrete future events. A scenario is not a forecast of the future but of only one possible future. Scenario planning considers a range of plausible contingencies. In essence good scenario planning will provide the basis for a plan if any one or more of the contingencies discussed come true. For instance if the economy slows down more, scenario planning might call for a reduction in discretionary spending until the economic situation is clarified. As an added benefit, scenario planning also aids in fighting groupthink, a problem in decision-making that all hierarchical organizations must deal with. If you are interested in learning more about scenario planning, please contact me for additional information.