Mitigating the risk of inflation for nonprofits

Inflation on nonprofits

Last week I talked about how you can use planning for tough times to prepare – to get fit – for growth. Like many of you, I'm involved with a local nonprofit in addition to my day job. I serve on the Board of the Men of Nehemiah, and while we are doing well with our year-to-date plan, I worry about how we should be thinking about the next six months.

On the cost side, nonprofits are like everyone else. While our income is variable, based on donations, many nonprofits have fixed budgets and revenue sources (such as grants) that are based on break-even. With inflation currently over 8%, many of these are currently underfunded for the cost of doing business.

We have a fixed capacity for the clients we can serve. For social services nonprofits (e.g., food banks, housing, transportation, healthcare, etc.) increased costs are placing financial pressure on the communities they serve. Many organizations are struggling to keep up with rising demand, and inflation has caused some of them to cut back on services or place new clients on waiting lists. In addition, the labor shortage that has plagued the for-profit sector has had a similar impact on nonprofits, with many being understaffed for the increased demand. For those with fixed revenue sources, their is little room to raise salaries with the result that many are unable to fill open positions due to competition with the for-profit sector.

Then there are donations. Apart from grants, many nonprofits are funded by private donations (as we are.) Take heart -- during economic downturns, donors have a history of continuing to give. The growth in charitable giving has outstripped the S&P 500 index since 1980 (see the chart below) although in the interim managing finances can be challenging. The donor segment I see most likely to be impacted is mid-level donors, who have recently been willing to increase their gifts, but the source of their giving might be current income versus financial assets.

So, what can nonprofits do to stay financially healthy and mission-focused? In my opinion, the workforce is key (just like the for-profit sector) so I would work to keep raises apace with inflation as best you can. At my nonprofit, we are giving 6.5% raises now, and we’ll look again in December (I don’t expect inflation to end the year at 8%, but then I am not an economist). Non-financial benefits can be valuable, like flexible work schedules and/or remote work. Look for ways to use volunteers to augment staffing levels. Have a conversation with grant providers to see if additional funds can be provided for unpredicted levels of wage and price inflation. As the prices of goods (food, clothing, transportation) increase, consider having goods donated rather than cash.

On the donations side, focus on the ends of your giving spectrum: major and small donors. For all donors, now’s a good time to publish an annual report that illustrates your accountability for funds used to support your mission. Until the financial markets settle (which may be at a new, lower normal for a while) it’s a good time to say, “thank you” and remind donors of the impact and efficiency you bring in funneling assistance to the communities you serve.

I’ll talk more about getting fit next week.