Responding to Financial Impact Amid Hyper-Change with Michael Gellman part II

This transcript has been lightly edited for readability and to correct obvious transcription errors while preserving the meaning of the original conversation.

Episode 68 — Part 2 with Michael Gellman
Clean Speaker-Labeled Transcript
Guest: Michael Gellman
Automated QA: Passed

00:00.108 Brandon Burton
Hey there, just real quick before we get into this episode, this is Brandon, and I just wanted to share a quick message. If you are listening to this, chances are good that you are a chamber professional. And guaranteed, if you're listening to this, you also listen to podcasts. Have you considered creating a podcast for your chamber and all the benefits that that can bring? Check out my free chamber podcasting guide at chamberchatpodcast.com/slash podcasting. to learn how you can get started with your own chamber podcast. This is the Chamber Chat Podcast, the show dedicated to chamber professionals to spark ideas and to get actionable tips and strategies to better serve your members and community.
00:53.966 Brandon Burton
Welcome to Chamber Chat Podcast. This is Brandon Burton, and it is my goal to introduce you to people and ideas so you can better serve your chamber members and your community. You guys are all joining us for episode 68, and this is the second part to a two-part series with my guest, Michael Gelman, who is the founder of Fiscal Strategies for Nonprofits. If you have not listened to episode 67 yet, I would highly encourage you to hit pause and go back to the previous episode. You'll want to listen to that discussion before you get into episode 68, which is where we are now. in episode 67, just as a reminder for everyone that listened to it, we did talk about a financial health assessment framework worksheet. And there was a little bit of a homework assignment. So if you're supposed to print out this worksheet and fill it out to start visualizing what the financial health of your organization looks like. So if you have not downloaded or printed that worksheet yet, why don't you go ahead and hit pause? You can go to the show notes page, chamberchatpodcast.com slash episode sixty-eight, and you can print it out from there. but highly encourage you to have that at least the top portion of that. worksheet filled out before you continue listening on the with this episode.
02:28.014 Brandon Burton
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03:41.88 Brandon Burton
But Mike, as as we resume this conversation, would you mind just taking us through a quick recap of what you covered in our previous episode?
03:52.558 Michael Gellman
Thank you, Brandon. so in the first part of the episode, we talked about that there's a five part process that we're going to go through. And we talked about part steps one and two. And this step one was finding a starting point. And the basis of the starting point was overweighting, over leaning on the impact of important decisions that we're making on the ground every day right now, their impact on financial health. financial position and financial use of re financial resources until we see a path of recovery. We can see a path of you know a light at the end of the tunnel, because at that time we will be able to go back. And we want to ensure the overall underlying premise there is we want to ensure the continuity of an organization. And if we look back to the you know nine eleven and the banking crisis, which were long-term changes back then, the one universal sort of mistake we think that most organizations made is they burned through more financial assets or got a weak in their position quicker than if if you know than they would have liked to have had. And we want to try to avoid that on in this disruptive time. Then the second step that we went through was to go through the three critical factors that we're going to look at on the framework template. And the three critical factors were broken into the following three areas an assessment of financial health, an assessment of the vulnerability of your funding sources, your cash flow, your sources of revenues, and then an assessment on demand volatility. And we see with most organizations that demand is going in both directions. It's going up for some things and down for others, as we see some events and things were canceled. And then there were in increasing demand for services based on the community or continuity and and such.
05:47.892 Brandon Burton
All right. And if they've printed out the worksheet, the framework, they should have that in front of them and be following right along with what you just summarized. So let's let's move on to the next step of this framework of the the timing and implementation.
06:06.41 Michael Gellman
And this we won't need the framework for the worksheet we'll come back to. This is a couple of concepts I want to talk with you about. And I've used these myself many times, and then we'll we'll pivot back to the the framework template. Okay. So under timing and implementation, there's a concept of two phases. And it's, you know, it helps give a sense of purpose, if you think of this, helps give a sense of action and a and a sense of calmness. And the two phases are my favorite one, which is what I call super short term and short term. So we're separating out super short term from short term. And the concept around super short term are there's a lot of things that organizations are facing right now. And they're even thinking about their biggest event that's going to be happening in the fall or something. And there's a I know there's decisions that have to be made even related to that that have to be made pretty soon and such. But as we go through the when we come back to the the framework template We're gonna put a check by a decision or a a strategy or a pivot, and we're gonna check either super short term or short term. And the super short term, you'll define it for your organization, but I usually look at it as things that we decisions we have to make now or in the next week or so. And short term or decisions we have to make in thirty to sixty days. And so And you see, I'm gonna talk a little bit about this towards the end, that we're really we're pivoting away from annual budgets right now temporarily to short term rolling 90 day or three month budgets. And again, it gives a sense of direction because there's like overwhelming how many decisions, but it the the dashboard will start to push both yourself and the board to concentrating on the super short term, the decisions that are right in front of you.
07:50.688 Brandon Burton
Okay.
07:53.068 Michael Gellman
And I just think it really gives a sense of order because people you know, especially you know, board members are volunteers, they get overwhelmed really quickly and it helps them to look at say, Okay, yeah, these are the things that are in front of us right now and we have to be watching over.
08:08.076 Brandon Burton
Makes a lot of sense. again, I d I think the value of just being able to have the snapshot to look at and say this is what the high demand, what the high you know, what the the current fire is you gotta go put out. And then here's something we can get to, you know, maybe a month from now or you know, still short term, but but not today. So that that that should help give some perspective as to to what needs to be have the focus today. versus what should have the focus next week or the following.
08:39.19 Michael Gellman
Good. So with that, Brandon, we'll go to the op the step number four, which is looking at operating reserves. And to me, it's the key, and you'll see this on the framework worksheet of doing a health assessment, a financial health assessment of the organization. I just want to talk about the concept of operating reserves. Okay. I think this is if I had to only look at one thing, which is unfair, organizations that are sitting on you know, operating reserves, a substantial amount of operating reserves, have a whole different set of tactics. options and just literally things they can do that organizations are in a financially weak position that don't have operating reserves. Okay. And so that and you know when we're talking with groups, it's funny when I'm in a room with a large group or doing a a large Y, you know, you know, webinar that's live, you know The gr you could see literally the groups that are, you know, financially weak don't want to hear about the tactics that the groups that are strong can do. And the groups that are strong don't want to hear about tax weak. So I do you know, I'll pause there for a second, Brenda, but I think it's really helpful. You gotta go back and look at your balance sheet. and you can tell the strong organizations are sitting on cash assets, they have operating reserves, they're having no trouble paying bills, meeting payroll. The weak organizations, you can tell them they're sitting on no cash, they're Operating reserves or their unrestricted net assets are underwater, and it's a struggle to go from pay period to pay period.
10:07.566 Brandon Burton
So maybe can we put a little bit of focus on the those that are maybe in that weak category to see maybe what some of those some examples of some of those options that they might have just to maybe spark some ideas of you know, areas to explore.
10:24.844 Michael Gellman
Right. Very good. So on the weak side, and you'll see this on the spreadsheet, you know, the tactics are different in the the in in their immediate, you know. so organizations and they all in and around cost containment. because we want to protect the continuity of the organization. We want the organization to live into the future because we can help more people if we can be around twenty or thirty years. But we're only gonna be around another two or three weeks. There's a limited number of people we can spend out our assets and be done, which means we'll probably be forced to do less right now in the short run until we see some sort of financial stability. And here's what the statement I wanna make. No operating reserve protects you from a long term change. They're protecting from short term changes, which is usually like thirty, sixty, ninety days worth of change. And we're probably for sure, I think we could bet the house that this economic, you know, medically, I hope we get our arms around the coronavirus as quick as we can. Economically, I think we're gonna be seeing a ripple effect of this for a while. It's gonna affect nonprofit budgets. It's gonna affect our funding sources. And so we need to pull back, no operating reserve protects you against a permanent change. It's almost like a permanent change. So we need to right size the budgets. So Brandon, all the tactics for weak organizations is to try to get that.
11:46.924 Brandon Burton
Well I might even suggest even if you are a strong financial organization, you have those reserves, pay attention, you know, for these what these weak organizations or weak financial standing organizations need to start implementing because you can't outlive most likely what your operating reserves are, especially if we see the financial impact of this going on for I don't even want to put a number of of months or time frame to it because it it's not encouraging. But to be able to be prepared, it's probably a good idea to listen what to what these financially weak organizations need to do because that may be where some of these financially strong organizations find themselves further down the road as they work through those operating reserves.
12:32.888 Michael Gellman
So, Brenda, you bring up a good point, because on the financial strong side, the tactics are different, but you can actually make more mistakes if you have a lot of assets. Because we're gonna second guess that when we look back and hopefully, you know, and see did we in you know, that was the big sort of mistake we made and especially in the banking crisis, how long it took to come out. Organizations that were really in strong positions survived, but they really started a weakened because they and there's a word I'd like you to write down. It's called metering out. It's a hyphenated word. And the groups that have operating reserves, and we're in the early phase of this COVID nineteen right now, is to figure out what kind what portion of our operating reserves we want to make available to to bridge when our funding sources have been disrupted because we had to cancel events and things. Because e j it's because even if you haven't canceled event, if you delayed or deferred an event to later in the year or even next year, that revenue stream to the outside public, you're gonna have it eventually. But you've lost that revenue stream now. And there's groups especially that in their that you know it doesn't you know every organization is seasonal where they've had some of their biggest events are happening right now. You know, and if you look at like the tennis tournament, you know, and if you're you know Wimbledon has been canceled, you know, and and and or it's gonna be moved or whatever, you know, it affects y that. So on that side, I really look it's a strategy. And and I call it the zero and the hundred percent rule. We're not gonna make zero of our reserves available, but we're gonna but we're not gonna burn we don't wanna burn through too many, definitely not a hundred percent. And so the framework worksheet will help us to go through a thoughtful process to say well, this is how much we want to expose at this time and why and what the ROI is on that.
14:18.602 Brandon Burton
All right. So as they try to meter out those financial reserves, I know it's important to look at the the framework template. When you don't know what an end to a hyper changing situation is that we find ourselves in now, what suggestions would you have for how they meter out those operating reserves?
14:42.648 Michael Gellman
Well, that's a really excellent question. I think if we pivot ourselves to walking through the framework worksheet, well, it's sort of in the f I think we can address it best through the worksheet.
14:56.384 Brandon Burton
Let's use that tool.
14:59.182 Michael Gellman
Okay. So I hope everybody has the the template in front of you. I really believe in the three sections of it. We're gonna walk through from the top down to the bottom. but I also encourage you to do some editing to make sure the worksheet, the dashboard meets the the the culture of your organization. And I will point out where because I've used this worksheet, it came out of you know, having this by my side. Literally when I started developing it early, like a few weeks ago. I just made like 10, 12 copies of it because as people as organizations were calling, I was literally with a pen writing in and using it. Such. So on the worksheet, you'll see step one is at the top of the worksheet. Step two is in the middle, and step three is on the bottom. And step one is at what I call the financial health section. And it's going to that's broken into three. And it goes from left to right across the page. And you'll see there's three boxes in the financial health assessment. And it's just to help you to make and less is better than more. You can quickly tell whether a balance sheet is sort of in a strong position or a weakened position. So box number one, we're going to list any f financial strengths of an organization. Strong organizations are might be sitting on substantial cash, investments, and but not substantial assets. I've seen financially weak organizations have millions of dollars tied up in buildings, but they're illegal liquid funds. So building could be a strength or a weakness, but we'll talk about that. And then you're listing weaknesses down below. Organizations that are financially weak, they would have a low cash position, counts payable is over 120 days. They might even have some debt on the books. A financially strong organization might have a weakness, might have hardly any weaknesses. If they've sitting on two, three years worth of reserves, they're liquid, they don't have a building. But they might have millions of dollars invested in the market. And as we saw, there was one point where the market was down over twenty-five percent for a couple of days. So if you just do the math, you have a million dollars in the market down twenty-five percent, you just lost a quarter of a million dollars. Yeah. And so we would want to protect that position. So as long as we don't have to pull some of those funds out of the market, you know, eventually that will come back. And then the last box on the reserve is to talk hyper.
17:25.384 Michael Gellman
focus people on operating reserves. And here I do this different for each organization. I do like to write the number months reserve goal. Most organizations have, you know, there's no one set reserve goal for any one organization. The NORI, the National Operating Reserve Initiative project done by the Urban Institute in the United Way, which a lot of people participated in, I participated in that. The only conclusion we could make after five years of studying that thing was that And I'm going say this slowly that organizations have less than three months of their annual budget in operating reserves, so one quarter of their budget put away, are in what we defined as a weakened position. We did not define the optimum position because that's different for organizations. So if you state the opposite of that, that organizations have more than three months of starting to get into a better or stronger position. I think a lot of C three. organizations, you know, publicly supported are in that three to six month range. C six membership organizations like chambers and such more in that six to twelve month range. And so we have a box here we put our goal would be six months. Our actual, well, where are you at? You know, at the end of the last year. Groups that are underwater will be minus two months. Groups that have substantial reserves might have 22 months. Okay. And so just the visual of that And the groups that have over, you know, and they're they're above the reserve goal, they're not gonna throw all those reserves to be used. You know, they might wanna, you know, and for example, I've been using this, I've been bifurcating that and saying we're gonna see, you know, groups that are sitting more than a couple of years will will set aside like no more than 10% up to two months that we can use to support operations over the next thirty to sixty days, but no more. And then we reserve a couple of months just to buffer the market. Because we know that market's going to swing up and down. And so we're trying to reserve, you know, in that organization that had about 24 months of reserves, we're taking about two plus four or six. You know, a quarter of those reserves are in play, part one to to buffer us against the market going up and down, and one to buffer our budget process while we pivot. So that's the first column. The second column is vulnerability of funding sources, and as we discussed in detail.
19:48.984 Michael Gellman
You'll see the three buckets. This I think speaks for itself. Rock solid, vulnerable, and shaky. rock solid is eighty percent to a hundred percent insurrey. These funds are not really affected. The vulnerable are the ones that you know have, you know, fifty to eighty percent effect, you know, that like registrations. I just was talking with a group this morning that was doing a a big marathon race. It's a big race. They get it's one of their second biggest revenue sources. they're going to a virtual online race, but right now, because they're gonna close registrations in about a week, but right now they usually have twelve hundred re registrants. They were down they're going to do it online, but only at two fifty. We'll cap out at like three fifty. You know what I mean? So it's good it's you know, that would go down into the shaky box because that's gonna be more than a fifty percent decline. Okay. Their sponsors are hanging in there.
20:32.777 Brandon Burton
wow.
20:45.422 Michael Gellman
So the sponsorships for the event are actually going to stay up in the rock south. Does that make sense? So you see, and this helps a board say, go to a board and say, we're gonna be down 20%. They're like, I hope so. And but this shows wow, they've really thought about the three different buckets they can see. There's and they're recognizing there's something that might be zero. That this event was canceled. We're getting no registrations on. And then we have vulnerable and then we have rock solid. I really l love this middle bucket. This has been my after I do the assessment on the balance sheet, I go here.
21:21.462 Brandon Burton
Yes. Question and maybe this is maybe a combination of that third column into the second, but where would any new sources of funding fall into? I mean, you may not I I guess if it's a new source, you're introducing it. Hopefully it's rock solid, right? You don't want to introduce a a shaky new funding source.
21:40.622 Michael Gellman
I think Brandon, as you said, I think the new sources really can show up visually in the third column, which is demand. Uh-huh. So there's a demand volatility both up and down. And although organizations tend to have lots of decreased demand, I th I've been finding more and more organizations have both. You know, an event that's cut then canceled or deferred, you know, that's a decrease in demand. But organizations, community based organizations, you know, providing services, there's an increase, you know, the community needs us and they're asking for more services and such. And some of those are leading to other funds. Some of them are leading to funds that are one offs from the federal government. And and the CARES Act, the payroll protection program, PPP. These are sets of funds that we didn't have before, okay. And so they would be a rock solid but a new fund. But I would list those funds in the demand volatility section. Exactly. This is a section to list one, two, three, four, what things are changing. And there's a box here that I don't use for all organizations, but I just want you to see you might find some comfort. It's helping the boards view things not just through the demand, but also whether it's controllable or uncontrollable. And what do I mean by controllable and uncontrollable? This is the last new concept.
22:38.635 Brandon Burton
Okay.
23:01.334 Michael Gellman
Is that some things you don't control. So if the if the governor of your state closed down, you know, all meetings over ten people, you know, an event that was supposed to be scheduled for April 14th isn't not happening. You don't control that. Okay. And it's probably not enough time to even pivot to doing it a different way or something. Now that same event that's supposed to happen on June 14th, you know, that would go into the controllable side. And I just like the I In messaging the boards, I say as we've gone through things, we've bifurcated and we had here's our controllable column, here's our uncontrollable, and in the uncontrollables we're reacting and we're not being shy about pulling back on it and such. So Brandon, you see how, you know, I think this that completes the top section, step one of the three. Yeah. And it's sort of a scorecard. I really like it. It's been invaluable and I think it'll help be a you know a real framework for people.
24:00.856 Brandon Burton
So hopefully if most people hopefully should have filled that out before listening to this, you know, second part of the series. But if not, it may, you know, benefit you to hit pause and and work through this before you you know listen to the how to fill out the rest of the worksheet. Mike, for the for everyone else who who has filled it out, do you want to move on to the to the next steps or do you have another thought you want to?
24:25.11 Michael Gellman
There's four steps. And I think you could be just as effective filling this out after listening to the podcast because it it might not be intuitive and you might based on some of the things you heard, you might change some of the titles of these sections. In general, they'd be the same. so step two is a pretty easy step. Based on that, looking at the balance sheet, you're gonna step, you're gonna check one of the three boxes. You're in a weakened position, which I'm defining as less than three months of operating reserves. You're in a neutral position, you have between three and six months of operating reserves, and you're in a strong position above six months. I do I've done this for a number of chambers. we tend to not have the neutral box and chambers tend to be on the higher side, so we just have a weak or strong. It's really up to you. that can be over 12 months, you know, you'll commen size it. But I do want that s a realistic, I think boards will take comfort. You know, are we in a weak position or are we in a strong position? Okay. Because it affects how you're going to react to what you listed up above. And then step three is where you can list your key action steps and and then you can check the box either super short term. These are things we're going to hit right away. And on the short-term box next to an action step to saying these are going to be sitting right behind the other ones. So we have the benefit of a couple of weeks before we have to do a go-no-go on an event. we can pivot to an online for an event. We can make that delay, not delay. decision and such. So the super short term, short term shows up on your fin your actions, you know, that you're going to take based on the above and get to list those.
26:05.324 Brandon Burton
That makes a lot of sense. And especially as you look at the framework. it it may not make a whole lot of sense for people that are just listening, but again, I highly encourage you to have this framework template in front of you and really makes a lot more sense with everything Mike's sharing with us today. so you've put a lot of thought and effort and energy into really condensing and simplifying this. to be a a framework template for organizations to really see their their strengths, their weaknesses, where those those funding sources are from, what the demand volatility looks like, so they can have a pulse on their organization. Normally towards the the end of the interviews that I do with with everyone is I I ask them how they see the future of chambers going forward. And I think given our our current economic situation and and maybe you with the discussion we've had here on the last couple episodes, maybe we need to shorten our focus and ask the question a little bit differently. maybe as we look at the situation in light of you know what we've discussed today, where would you suggest that a chamber should start so they can make sure that they have continuity as they move forward into the future?
27:29.006 Michael Gellman
Granted, it's a really important question. And, you know, I hate when people look at like I'm a CPA. It's not about the numbers, it's about where we're going. And I think this framework enables us to do one thing, which I call CNT, which is raise confidence and trust. The organization's going to be useful to its members and be around for a long time and be smart about it. So the assessment is a way for us to give the board confidence. That the senior management team has taken a thoughtful and objective approach to quantify near-term decision making with a conservative bias of protecting the organization's financial position, which will have the biggest chance of helping to ensure that we stay a safe and healthy organization going forward. During a chance of what's in the title, hyperchange, which, you know. I can't even predict where we're gonna be on you know, two days from now, you know, let alone where real planning happens, which is months and years down the road.
28:35.786 Brandon Burton
It's definitely a time of hyper change, a time to really have a pulse on on our organizations and be able to do the best that we can that's within our control. So the things that are outside of our control don't dominate what our our outlook and future looks like and to be able to to have that continuity. So Mike, I I want to thank you for spending time with us for the really these last two episodes. I think you've brought a lot of value that it is very timely for organizations, for chambers that are listening right now. If someone listening wanted to reach out or get in contact with you about what was discussed here or to maybe further this discussion or explore these ideas maybe offline, what would be the best way for them to to reach out and get in touch with you?
29:26.904 Michael Gellman
Thank you, Brendan. two ways. my you can find me through Fiscal Strategies for Nonprofits. is the is the founding organization. I would also encourage you to go to the new free platform Sustainability Education for Nonprofits, which is S E. S isn't Sam, E isn't education, the number four, nonprofits with an S dot com. articles related to this, the w the the the framework worksheet is here. email contact information is there. other collaborators who are working on the website are there with me. Ben Benjamin Takis is an attorney, really teaching alongside him for many years, and the legal and financial sides always bleed over into each other. We're posting articles, we're posting weekly thoughts, we're posting QA's. And then we're posting various things like the template worksheet, framework worksheet under the resource section.
30:31.968 Brandon Burton
All right. And I will I'll get both of those websites updated on the show notes page. again, chamber chat podcast.com slash episode sixty-eight. I I definitely would encourage everybody to check out sustainability education for nonprofits. So that's the SE four number four nonprofits dot com. A lot of good valuable information there. Mike's putting up regular content that's very timely. So please check that out. and and follow his his post there and as it it will be very relevant to you and and to your organization. But again, thank you, Mike. Thanks again for for spending the time today. And I hope that everyone listening got a lot of value out of what you had to share and and the the real thought that you've put into this.
31:21.26 Michael Gellman
Thank you, Brandon. I really enjoyed this. I I hope people reach out, call me, email me. I every situation is new. I learned from you as well. And hopefully we can battle together and get through this.
31:33.888 Brandon Burton
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