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By David M. Rottkamp
As the stock market plummets and the U.S. seemingly careens into what could be a recession, the affordability crisis that’s been plaguing critical sectors like healthcare, housing, food, and education is only getting worse. Nonprofits with mission to help deliver vital services to those in need are being squeezed by higher operating costs and decreased funding. They will need to break out of old models and staid ways of doing business or potentially face major financial problems.
To survive, leaders at critical nonprofits need to tighten up financially and be willing to think disruptively about their own service models. In short order, nonprofit managers need to:
- Become stronger financial managers to weather the current storm;
- Make their employment brand and experience more attractive to keep great people on the job;
- Streamline and modernize their operations with technology to become more efficient; and,
- Look outside traditional donors and revenue streams to diversify funding.
Nonprofits are mission-driven, but they’re struggling. The Trump Administration has been relentless in cutting the staff and programs that support countless nonprofits. With federal funding still essentially frozen, nonprofits have been left in a lurch to try and cover their funding gaps.
Combined with a lower overall operating budget — now, five years on, all COVID funding that helped to sustain business operations has dried up — the funding gap for nonprofits is wider than ever before.
The composite picture isn’t pretty. Service delivery needs have gone up, while expenses are higher, and now any federal funding support is all but gone. A survey of nonprofit leadership Grassi Associates conducted last year found that 73% of respondents said demand for their programs and services has risen during the past 12 months, with just 4% reporting a decrease. A starling 81% of respondents reported higher operating costs during the same period, with an average cost increase of 15%.
Community-based social service organizations and healthcare nonprofits are seeing some of the biggest impacts. Leaders at these organizations have to raise salaries due to inflation and cost-of-living increases, but government funding isn’t increasing at the same level.
Other nonprofits rely on contributions, but fundraising has become more difficult, with more organizations competing for fewer dollars. That’s leading many managers to eat into organizational reserves, which is not sustainable in the long run.
Something has to give. Some nonprofits might reduce service delivery, but that’s hard when the need is so high. Others are looking at alternative revenue sources — seeking corporate donors, private foundations, or high-net-worth individuals who believe in their mission.
Can nonprofits turn to technology to automate processes and cut administrative costs so more dollars can go to service delivery? Some have, but technology costs money, too. Artificial Intelligence plays a role in many private sector transformations, but there’s a broad fear of technology in the nonprofit sector that continues to slow adoption.
Many nonprofit leaders worry they don’t know enough to implement new tools effectively, but the same fear exists in private sector leadership. Nonprofits should be cautious about the AI hype but realize that there are substantive benefits to be realized too.
That said, AI is being used in some areas, like fundraising and development, where it can help craft compelling stories to attract donors. Healthcare organizations are using AI for clinical notes and record-keeping. The larger technology focus right now is on automating back-office processes — bill paying, accounting, reporting –to save time and reduce costs.
Further complicating the technology transition is the chaos of government funding. Government funding approvals were already a slow process, but the added confusion over which funds are frozen and which aren’t means it’s even slower. It means that nonprofit managers generally aren’t able to move as quickly to transition as private sector companies.
With federal funding in many cases likely cut, and state funding unable to keep pace, these nonprofits are going to be hurting even more. Avoiding service cuts will be exceptionally difficult in many cases. To simply keep the lights on, leaders are going to have to turn to alternative options, including borrowing money, dipping into reserves, or paying high interest rates on lines of credit while waiting for what funds that do still exist.
That type of cash flow delay creates a financial burden that makes it even harder for nonprofits to invest in operational improvements, especially those driven by technology.
Given all that, what financial strategies should nonprofits be thinking about? Cash flow management is crucial, so leadership needs to understand when money is coming in and how it’s being spent. Prudent spending is also key — as it always has been — but leaders are now making tough decisions about existing programs that consistently operate at a loss.
Timely financial reporting is another must. If you are not regularly looking at finances, you might not realize you’re in trouble until you can’t make payroll. There has also been a shift in fundraising strategies, with fewer events and more focus on securing major donors, corporate sponsorships, and foundation grants.
In dynamic times like these, retaining resolute and capable employees is vital. They truly can serve as the glue that holds an organization together through challenging times. Replacing a worker can cost 30% more than simply giving a small raise.
Managers need to focus on employee culture, which can help make team members feel more connected to the mission. They can also undertake things like wellness programs, or small initiatives like yoga classes or other small-scale employee assistance programs, to help prevent staff burnout.
Looking to the financial future, going beyond traditional revenue streams remains important for nonprofits. Planned giving, corporate sponsorships, and capital campaigns can help create long-term sustainability. Shifting from event-based fundraising to securing major donors is another trend, and targeted campaigns for specific needs are being launched, such as building reserves or expanding programs.
Managers also need to engage volunteers and stakeholders in advocating for funding. Organizing lobbying days, meeting with legislators, and sharing compelling stories about their impact can influence funding decisions. Storytelling is a powerful tool, whether through public service announcements, social media, or donor communications, nonprofits need to showcase their work to attract support.
Finally, as is true in all forms of human endeavor, leadership matters greatly in difficult times. That goes for nonprofit executives and their boards of directors. Leadership must draw their board members into critical discussions about financial strategy, cost reduction, and innovative revenue generation.
Nonprofit leaders need to use every tool they have to succeed. By tightening financial management, making judicious investments in technology, binding team members closely to the organization and pulling boards more firmly into decision-making, nonprofits can weather the current storm and find smoother sailing ahead.
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David M. Rottkamp, CPA, is an audit partner and Nonprofit Practice Leader at Grassi Advisors.
