I have been reflecting on what happens when nonprofits suddenly lose funding, especially as the federal government cuts so many grants right now. Years ago, I served on the board of a nonprofit where this happened with a state grant. I served on the board of another organization where a major individual donor drastically cut their funding. And I have heard stories from other organizations that had state, federal, or foundation grants they had received for years, suddenly stopped. As I think about these various cases, I am struck by how much of the outcome is determined by decisions made in the first few weeks — and by choices the organization made, often years earlier.

One Email Can Change Everything

The organization receives an email informing them that a grant – from the federal or state The organization receives an email informing them that a grant — from the federal or state government, or from a foundation or major donor — which had been successfully renewed three times over nine years, would not continue beyond the end of the fiscal year.

Often, those grants represent a significant portion of the organization’s budget. For the nonprofit whose board I served on, it was one-third of the budget. These grants usually fund many staff positions and can affect core programs.

Don’t Keep Quiet – Staff Want Transparency, not Silence

An ED’s first instinct will be to keep it quiet for a few days while figuring out a plan. Don’t do that. Call your board chair right away. Then develop a plan to inform the rest of the board, the staff, and your community — even before you have a solution. Be transparent. Don’t pretend to have answers you don’t have.

We usually think a leader’s job is to bring solutions, not problems. But in a crisis, that attitude can be dangerous. First, you cannot afford to wait two weeks to produce a proposal — chances are your staff and community will have heard rumors anyway, and the silence will erode trust. The story becomes “The ED is hiding something” instead of “We have a serious problem, and we’re facing it together.” Second, you would miss out on your staff’s good thinking.

So, within a week, tell the full staff exactly what you know: the size of the gap, the timeline, and the honest truth that you cannot promise there will be no layoffs. This may be one of the hardest meetings of your career. But you will find that your staff appreciates the honesty. They want transparency, not silence that breeds rumors.

Develop Scenarios

Convene a small working group — probably you, your board chair and treasurer, your CFO, your HR director, and a key program officer. Give yourselves three weeks to develop three scenarios. Something like: first, assume you replace half the lost funding within a year from other sources; second, that you replace none of it; and third, that the best path is to wind down the program, hand it off to another organization, or even merge your own organization with another. (I have another column on that decision: Should You Shutter Your Organizations?) Your scenarios might also account for losing staff you would very much like to keep.

As you build the scenarios, define in advance the triggers that would lead to specific actions. Consider months of reserves remaining, fundraising milestones, and program enrollment.

All these scenarios are difficult. But it is far better to prepare thoughtfully for the worst case than to make decisions in a rushed, panicked state. Later, you won’t be debating feelings. You will be measuring reality against thresholds you have carefully developed.

Honestly, if you have one or two very significant funders, you should develop these scenarios now. Don’t wait until they cut funding.

Cut Enough that You Don’t Have to Cut Again

If you must cut staff, every impulse will tell you to trim a little and hope. In reality, it is usually better to cut more deeply so you only have to cut once. Organizations that undergo multiple rounds of small layoffs often harm themselves in the process. After the first round, everyone who remains spends their energy wondering if they’re next. So, make one decisive reduction.

If possible, pair it with real severance and hands-on support to help people find new positions. Then, when you stand up in front of the remaining staff, you can say: “This is the budget. We are building from here.” You can speak with credibility because you believe it.

Be Strategic About Who You Cut

When funding for a specific program is cut, your first reaction will be to cut the people who work on it. But then you’ll think, “What about Chris, who is such a superstar? I’d hate to lose them!” You don’t have to.

Hopefully, you have a performance review system in place so you know who the stellar players are. As you do your scenario planning, think strategically about who you would keep and why.

In one nonprofit I know, they looked at performance. They also looked at skill sets — does one individual have a skill no one else has? You might want to keep that person. Likewise, some people have flexible, versatile skill sets, so you might want to keep them because they can work in multiple roles.

I think the staff appreciates this. Everyone knows who is most reliable and effective, and they want those people to stay on as colleagues.

Don’t Get too Comfortable with a Single Funder

Relying on a single funder for a significant portion of your budget is a risk, and one that should be examined. The board should be asking what would happen if that grant disappeared. And staff should be building scenarios long in advance.

Don’t become so comfortable that you underinvest in other funding relationships — with major donors, corporate donors, and foundations. Start now. Don’t be shy about asking for more from your current donors and work hard to develop new relationships and a diversified base. A common rule of thumb is that you don’t want more than 10 to 20% of your budget from any single source.

Lessons Learned

• Be transparent: Tell your board chair the same day. Tell your staff the same week.
• Develop thoughtful scenarios: Put the worst case on paper and create decision triggers.
• Cut strategically: If you must cut staff, cut so you only do it once — and be strategic about who you cut.
• Plan ahead: If you rely on one or two significant funders, do scenario planning now. Remember that approving a budget is not just a financial exercise; it is a risk-management exercise.
• Diversify your funding: All organizations should diversify their funding, but this is especially important if you rely on one or two big funders.