The AICD’s Not-for-Profit Governance and Performance Study 2020 report has shown that despite the impact of COVID-19, the sector is showing optimism and resilience.

The AICD’s Not-for-Profit Governance and Performance Study 2020You probably don’t need another report telling you how much you’re struggled through the pandemic, but the Not-for-Profit Governance and Performance Study 2020 report into the governance and performance of the sector has also revealed how we’re planning for the future. This report is a joint publication from Commonwealth Bank, Baxter Lawley and the Australian Institute of Company Directors.

The study revealed that while the sector has been hit hard financially, many of you felt positively about your organisations’ responses to the crisis, as well as the overarching Commonwealth Government’s response. Similarly, future planning, occurring alongside a lot of uncertainty, is buoyed with optimism as many of you plan to grow and learn from changes brought on by the pandemic.

What is clear is that COVID-19 has amplified some of the existing challenges facing nonprofits – and created demand for these challenges to be tackled head on as soon as possible. While many of you are expecting less income for FY20, the survey also noted that profitability had been declining in the sector over the last four years. Almost 40% of organisations had made a loss in the previous three years. Surprisingly, a third of respondents this year stated that their financial position had not been negatively impacted by COVID-19.

You probably don’t need another report telling you how much you’re struggled through the pandemic, but the Not-for-Profit Governance and Performance Study 2020 report into the governance and performance of the sector has also revealed how we’re planning for the future. This report is a joint publication from Commonwealth Bank, Baxter Lawley and the Australian Institute of Company Directors.

The study revealed that while the sector has been hit hard financially, many of you felt positively about your organisations’ responses to the crisis, as well as the overarching Commonwealth Government’s response. Similarly, future planning, occurring alongside a lot of uncertainty, is buoyed with optimism as many of you plan to grow and learn from changes brought on by the pandemic.

What is clear is that COVID-19 has amplified some of the existing challenges facing nonprofits – and created demand for these challenges to be tackled head on as soon as possible. While many of you are expecting less income for FY20, the survey also noted that profitability had been declining in the sector over the last four years. Almost 40% of organisations had made a loss in the previous three years. Surprisingly, a third of respondents this year stated that their financial position had not been negatively impacted by COVID-19.

Factors influencing the financial impact of COVID-19

Different sub-sectors

Broken down by sub-sectors, two thirds of social services organisations indicated they were likely to make a profit in FY20; good news considering the increasing demand on their services. Every other sub-sector is expected to make a loss.

Luck and timing

But there was some luck, or lack of luck involved, with how the pandemic affected organisations. Sporting organisations with sports played in the summer months missed the brunt of COVID-19, while winter sports organisations were heavily impacted.

Similarly, arts organisations who managed to scrape through with their major events earlier in the year were in a much better financial position than those whose events had been cancelled.

Revenue source

Organisations heavily relying on government funding were less affected than their counterparts relying on philanthropy and fundraising.

Size of the organisation

While past reports seemed to indicate that larger organisations were more likely to make a profit, only 51% of organisations with a turnover greater than $20 million reported making a profit this year. At the same time, 56% of organisations with a turnover between $5 million and $20 million reported making a profit for the same period.

Financial performance pre-COVID-19

COVID-19 has no doubt made its mark, but there’s no denying there were sector challenges prior to the pandemic.

The aged care sector had seen declining profit for a number of years. The StewartBrown Aged Care Financial Performance March 2020 report showed that 60% of aged care homes recorded an operating loss for the nine months leading up to March 2020. This was also magnified in rural and regional settings.

This downward trend was also prevalent in Culture, Arts, Sport and Recreation, and Education and Research sub-sectors.

The AICD’s Not-for-Profit Governance and Performance Study 2020

Percentage of sub-sector organisations making a profit

Some respondent responses:

“COVID-19 brought to light some problems that had been bubbling in the background. It is our strong cash reserves that will help us invest to survive.”

“This is devastating to our business and has questioned the relevance of our primary mission for the next few years. We have too many ongoing costs to sustain a hibernation period with no foreseeable end. The next six months will be crucial for our sustainability.”

“COVID-19 made it very clear how much our organisation is at the mercy of government policy decision [and the] need to diversify revenue lines.”

Leadership during the pandemic

Most nonprofits took swift action when the pandemic hit. Boards were more involved in operational issues and stakeholder engagement. Organisations had to change with most obvious being the move to virtual.

77% of respondents said that their organisation significantly changed the way it operated. But how did this affect clients?

While 40% said that changes made to service delivery didn’t impact their clients, only 4% said that services had improved. 21% said that there was moderate impact on clients with some clients going without services, which overall, did not impact their health or wellbeing. 19% said that there was a high impact on clients, many missing out on services, which may have had an impact on their health or wellbeing.

The AICD’s Not-for-Profit Governance and Performance Study 2020

Organisational impact from COVID-19

But organisations felt that there were more effective than in previous years with 94% believing they were effective in achieving their stated purpose compared to 91% in 2019 and 93% in 2018.

An overwhelming majority of respondents felt they had responded effectively to COVID-19.

More time was spent on governance compared to last year with frequent meetings and communications. All organisations had to balance how involved their boards became in their operations. Boards have had to be more hands-on and support organisations outside of allocated meeting times, meaning knowing boundaries, when to intervene and when to offer support are crucial.

Mergers and winding up have paused

Mergers and winding up operations have been paused for now as organisations focus on the task at hand of making it through the pandemic. Only 3% of directors reported that they were currently undertaking a merger, the lowest since this study was first published in 2010.

Organisations currently discussing a possible merger dropped from 30% to 21% this year; however, it seems the likelihood of the merger in question happening has increased. 30% of respondents rated the likelihood of a merger as 50% or higher – a jump compared to 17% two years ago.

Despite the financial strain of COVID-19, ASIC has reported that there has been a significant reduction in organisations becoming insolvent or entering external administration. Only 2% of respondents stated that there were considering winding up their organisation, the lowest number recorded in the study’s history.

Longer-term, respondents feel that mergers and closures may be on the cards once they weather this immediate storm, but for now, it seems that nonprofits are holding on.

Similarly, collaborations are on hold as organisations look inwards and focus on surviving this crisis. In 2016, 70% of organisations collaborated on advocacy issues; around 40% had some form of MOU with other nonprofits.

The Government’s response

The AICD’s Not-for-Profit Governance and Performance Study 2020

My state/ territory government has handled the COVID-19 crisis well

The study showed that overall, directors felt positive when it came to the government’s response to COVID-19. Broken down across each state and territory, the numbers differed reflecting each state’s independent crisis response.

As we already know, JobKeeper was a lifeline for the sector. The study revealed that 55% are receiving JobKeeper payments, while 37% of respondents were not eligible.

Broken down across sub-sectors, those with non-cyclical funding models seemed to have the highest eligibility for JobKeeper. These sub-sector groupings may not take into consideration the highly casualised and contracted workforce for arts and culture organisations, making it less likely to qualify for assistance.

The future

Unsurprisingly, 87% of directors stated that there are worried about the Australian economy and are uncertain about the future. Despite this, organisations are committed to implementing change with all eyes are on the future as we move into the recovery phase.

One third of respondents are focused on major structural change. For some this is a response to issues that were present prior to the pandemic. While most organisations predict an increase in client numbers and service volumes, around 27% expect a decrease in clients. Organisations are planning to increase investment in service improvement and reduce planned capital investment.

While the future is shrouded is mystery, NFPs seem optimistic and keen to learn from this crisis.

Questions for nonprofits looking at the future:

  • Should organisations have a financial buffer for crises? If so, what is an appropriate amount?
  • What happens after JobKeeper ends?
  • How have changes to delivery models affected long-term outcomes and impact?
  • What were challenges prior to COVID-19?
  • Has the board become too involved in operations?
  • How are our staff coping?
  • What did the crisis reveal about our culture?

View the full report here.

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