The federal funding freeze that took place for 48 hours following a government order on January 27, 2025, was eye-opening for many. Nonprofits and many government-funded organizations went on a two-day roller coaster hearing “you will not be funded- all payments are frozen” to “OMB order rescinded.” This short-term panic felt by many organizations in the industry has pointed out the fragility of a system that depends heavily on government funding. When cash flow is cut off, even for a short time, there can be significant impacts. Many not-for-profits experienced the fear of going from business as usual to accepting the possibility of needing to close up shop. As the not-for-profit industry serves the general public and many people in need, this business is an integral part of our society.
What Have We Learned From The Federal Funding Freeze?
- Funding might not be guaranteed as this freeze was done without an act of Congress, and many federally-funded entities expressed concerns as there were legally valid and binding contracts in place.
- Advocacy agencies and membership associations have nonprofit’s backs and are ready to fight on their behalf. In less than one day, legal actions were filed, resulting in a stay and, most likely, in the ultimate outcome of the Order being rescinded. Being engaged and involved with the organizations that support the industry is vital.
- Many contracts have a clause that the contracts can be rescinded. Although an organization has a legally binding agreement, the government has the power to execute a clause.
- The federal government sent a strong message that there will be streams of funding that could disappear. Nonprofits fear government funding appears to be at risk for funding overseen by certain federal agencies and funding of certain grant contracts that oppose the current administration's agenda.
- Several organizations started to consider a contingency plan related to how they would close their doors if funding remained halted.
- Programs that serve the most vulnerable seemed to be at risk. For example, it was noted that housing voucher programs were not exempted from the original order. This raises the question: What happens to organizations and individuals in these circumstances? Outcomes spanned the possibility that many people would have ended up without options, organizations would either have to subsidize that benefit, or it could result in significant numbers of potentially homeless families.
- Many organizations do not have significant liquidity, especially those fully or predominantly funded by government agencies. This raises concerns about how operations can be sustainable if cash is cut off.
- Maintaining open communications with your funding source and an open line of communication is essential when needing relevant information directly and timely.
What Proactive Steps Do Nonprofits Need To Take Now?
- Have your attorney, accounting firm, board, and business advisors on standby: When these situations happen, conversations need to occur immediately to determine a course of action.
- Have a line of credit in place and ready to go in the event drawdowns are needed to subsidize short-term cash flow needs: Under the former order, two weeks would be the initial period, and in general, organizations should try to achieve 3-6 months of free cash flow.
- Fundraise for the rainy day: In addition to current needs, attempt to build up a liquid reserve that’s set aside to cover short-term needs so you can be your own bank.
- Establish close relationships with similar organizations: If the stay had not been executed, some organizations would have needed to consider merging or closing to stay afloat and serve their constituents. Become friends with like-missioned organizations as you never know what opportunities may present themselves in the future to strengthen your organization.
- Plan a "break glass" scenario: Write out an action plan, similar to a disaster recovery policy, that includes what steps to proactively take and what needs to be in place in the event funding becomes restricted.
- Seek alternative funding: Although the current funding crisis for not-for-profits and federally funded agencies was averted, many feel it seems likely that the government will cut program funding in the future.
- Have formal communication plans in place: Use technology that affords you the opportunity to connect with your donors, board, consumers, and others in your ecosystem seamlessly.
- Button up your cash management policies: It proves more than ever that late grant reporting and delays in accounting and closing your books can have a detrimental effect on cash flow as submissions on time would result in the cash being received. Some organizations reconcile their books annually, some monthly, some weekly, some daily. It is important to have strong financial close and cash management procedures in place to ensure you receive your funds as timely as possible.
Nonprofits should use this event to check their financial and operational controls and prepare an action plan in the event this or a similar situation happens again. We will continue to share updates and guidance on this matter as events unfold.
This article aims to provide an unbiased and balanced perspective. We strive to present factual information and avoid any partisan bias. We do not endorse or oppose any political figure or party. Our commitment is to neutrality and fairness, ensuring that our analysis is objective.
Contact Us
For more information on this topic, please contact a member of Withum’s Not-for-Profit and Education Services Team.
