It is common in a struggling organization of any kind to cut costs in the midst of financial struggles. The logic seems impeccable. If you don’t spend, the savings will mount and create a more stable situation. In reality this is part of a dream theory whereby the implementation of a cash no-flow strategy will keep the organization solvent until some unfavorable economic conditions right themselves for the better. They never do. The solution is dependent on choices made by either management or the board of directors. And that brings us to Michael Kaiser’s Rule No. 3 in his Art of the Turnaround for a non-profit entity:
“You cannot save your way to health.”
He notes that it is common for a board of directors to cut costs as step number one in dodging the bullet of an economic downturn in an organization’s fortunes. Their assumption is that the problem obviously stems from too much pork in management’s operating expenses. The solution, therefore, is to cut out the fat. This may entail firing seemingly inept managers, which has the added appeal of reducing the largest expense item on any profit and loss statement, which is personnel costs. But it also does immeasurable damage to morale, which can have a crippling domino effect concerning the organization’s programming and its ability to generate revenue.
The truth is that most non-profits already operate on what we term shoestring budgets. We pride ourselves on doing more for less, so cuts in any aspect of our operations are always detrimental and too often prove to be fatal. My own view of why cutting costs is the first step, aka knee-jerk reaction, of any board is that it is the easiest remedy to impose. The real solution is much harder to implement as it is outside the realm of expertise of most directors. It is easy to issue edicts about turning off lights, turning down the heat in winter or the air conditioning in summer in search of elusive cost savings. But as Kaiser writes, “Revenue is the problem with most arts organizations, not cost.”
Once again we must understand that Kaiser is writing based on his experience working almost exclusively with performing arts organizations. But this principal remains the same for all non-profits. I have worked for three different museums, a family counseling and youth residential therapy program, and a nationally known student ministry and all of them have had this in common: The art of raising sufficient working capital is a talent which few staff and most board members are not willing to master.
Competent general managers in small organizations or program managers and development directors in larger ones, which can afford to be staffed with specialists, are priceless and hard to come by in the highly competitive marketplace where non-profits abound. But people with this type of economic insight and proficiency should be sought and cultivated as seriously as any major donor prospect. Whether they are on the board of directors or occupy staff positions is less important than the point that they are present in some performance capacity. They know as Kaiser knows that “Organizations focused simply on reducing costs will continue to get smaller and smaller and will never create the economic engine that is required for long-term stability and growth.”