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Don’t Cut that Cost

Cost cutting, like most good things, can be taken too far.

Cost cutting and cost savings are two different things. Cost savings reduce costs. One simple example is printing on both sides of a piece of paper. Most of the time that saves money without affecting performance, efficiency, or service to the clients.

Cost cutting is eliminating a cost. It is usually an idea that originates in the accounting office. It is designed to save money and often helps to balance the budget. However, it rarely increases efficiency, effectiveness, adds value to the community, benefits the clients, etc. In other words, it is done primarily (solely?) for the financial benefit. While it provides an immediate benefit, its long-term effect is to reduce sustainability.

It is much better to allocate more funds to fundraising and increase income enough to balance the budget. Better still is to identify an initiative that will benefit the clients, raise efficiency, create added value for your community, etc. Then ask the donors to fund the initiative. In short, work your way out of the financial challenge rather than trying to save your way out.

When the deficit is 10% and cutting costs balances the budget, there is nothing left for growth. As a result, next year will be a more difficult problem to solve. Inflation will increase expenses but nothing was done this year to increase income or enable growth. Next year it will be necessary to cut costs again, sustainability declines, the mission is handicapped, and there is nothing new to attract new donors or increased donor loyalty, engagement, and generosity.

It is rare that an organization is able to cut its way to good health. Sometimes it appears as if that happens but if you look closely it is usually a different strategy at work. Let us assume a nonprofit has a 10% budget deficit. Cutting expense by 10% is one option. Another option is to cut expenses by 15% – 20% and use the surplus (5% or 10%) to fund an initiative that will increase donor generosity, client enrollment, community support, etc. In this case, the cost cutting wil fund growth, which will allow the cost cuts to be restored. Without growth it is impossible to restore any costs that were cut.

An alternative strategy is to use some of the surplus to fund new technology or processes to increase productivity. However, there must be growth. Without growth, the increase in productivity looks good on paper but fails to create value for the clients or community.

Money’s only purpose is to make your mission more valuable to your clients and community. When it does, it increases your nonprofit’s sustainability. When money is used for any other purpose, it lowers sustainability.

Next Step:

Add a new initiative to every budget (growth is critical to sustainability, remaining competitive, and keeping your mission relevant)

Identify cost savings before starting to create next year’s budget

Cut costs only as a last resort and cut more than enough to fund an initiative that will drive growth

Engage donors in the funding of new initiatives (never use the reserve to fund an initiative)

A new initiative each year ensures your nonprofit is always growing and serving more clients (remaining relevant). New initiatives provide donors with new ways to help your clients. New initiatives provide new challenges for your staff. New initiatives create additional value for your community, which attracts new supporters. New initiatives help drive sustainability.

Take It Further:

Ask your board to be courageous and trust donors to fund initiatives rather than look for ways to cut costs

Create budgets that create surpluses so you have a reserve and rarely need to cut costs

Ask you board to use the increased support your new initiatives create, rather than year-end budget numbers, to determine the success of your budgeting process

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