The CFO'S Perspective

How Will a Recession affect Nonprofits?

how-will-a-recession-affect-nonprofitsWhile some economists and business analysts claim we are already in a recession, many more believe we will be in one by the end of the year. The general consensus is that whether we are already there, or it is coming soon, for-profit and non-profit organizations alike will be affected. The question is how will they be affected and what will those effects look like? Essentially, what should they expect and to what degree should they expect to be affected?

Obviously, nonprofit organizations will feel the effects of a recession differently than the private sector, but the types of issues they are dealing with right now are the same: changing consumer behavior (purchasing and donating), increased costs, labor market changes, and increased reputational risk. How will nonprofits be affected?

Recessionary Challenges for Nonprofits

What does a recession hold for nonprofits?

Dwindling Donations

According to The Chronicle of Philanthropy, recent data shows that a significant reduction in donations is signaling that nonprofits may be in serious financial trouble when the recession hits:

“As the chances of an economic recession grow, nonprofits are losing the supporters who could help them navigate a downturn, according to a new report. The number of donors to organizations fell by 7 percent in the first half of 2022 compared with the first half of 2021. The decline is due largely to a ‘collapse’ in the number of small-gift supporters in those six months, the report says. The number of people making contributions of $100 or less dropped more than 17 percent, and 8 percent fewer donors made gifts of $101 to $500. The report is the latest evidence that weakening support for charities — a trend for more than a decade — continues. Although 2020 saw a pandemic-sparked uptick in giving and new donors in 2020, the number of individuals giving to charity has now shrunk for five straight quarters, according to the report. Researchers are particularly worried about donor-retention rates. The number of people who made a gift last year and again this year declined 4.2 percent — this after a 7.2 percent decline in 2021.”

This data reveals that fewer people are donating to nonprofits in alarming numbers! In fact, every quarter the problem seems to be getting worse as nonprofits are experiencing compounding donor loss. Undoubtedly, this is the biggest concern for organizations right now as we face an uncertain year economically.

Loss of Staff

For nonprofits a loss of staff typically accompanies an economic slowdown and subsequent slump. In many cases, this loss will be at the hands of cost cutting from the organizations themselves. As donations constrict budgets shrink and often headcount must be reduced. Unfortunately, in the nonprofit world, the result of this kind of decision is either cancelling programs or making do with less – stretching existing staff thinner to cover the gaps, increasing the chances that they will get burnt out and leave of their own accord.

Damaged Reputations

With reduced budgets and staffing, the offerings that nonprofits have become known for typically need to shrink as well, which can hurt their reputation in the community. Ending long-standing or beloved programs is inevitably going to upset some people. On the other hand, organizations that try to maintain their existing services or outreach may very well find that they are not able to provide the same level of quality as before, which can also raise the public’s ire against the organization. Either of which can alienate donors, frustrate existing staff, and deter volunteers. In short, a damaged reputation can deleteriously increase the size of the holes in a boat that is already taking on water.

How Nonprofits Survive a Recession

Recessions clearly put nonprofits in a precarious position. How should they respond?

Reevaluate Costs

Budgeting is always hard for nonprofits because most organizations have so many different programs and initiatives to include in the discussion and nonprofit personalities are often extremely passionate about their causes. Now, you start talking about cutting back on expenses and it is likely to get messy! Program managers will often push hard for their own projects to keep their funding, acting like their budgets are set in stone. However, the right leadership can get everyone to work together to come up with ways that the organization can save on some costs without cutting areas entirely. The Executive Director or Chief Operations Officer must get other leadership to realize that there is often far more wiggle room in the budget than they would like to admit. Use cost reduction initiatives to offset the reduction in donations by finding ways to avoid spending the money you don’t have!

Maintain & Recapture Donors

The one bright spot in donor management over the last year is that recaptured donors (those that had donated previously but had not donated in the last year) rose by 6.3%. Maintaining this trend alongside retaining existing donors is going to be key in weathering a recession because finding new donors is going to be hard to come by as the economy gets worse. In much the same way that for-profit companies invest in retaining current customers and upselling to their existing customer base, nonprofits need to be able to count on current donors to stay involved (and possibly even increase their contributions) to support the mission even as they are affected by financial uncertainty as well.

Focus on your top donors and expand what you consider your “top” to be. If you previously only heavily engaged with your top 5% or 10% of donors, pursue deeper donor management tactics with your top 20% or 25% of donors. Remember, even big givers will make cutbacks when the economy slumps, reducing their gift size or cutting organizations from their giving portfolio entirely. If you are going to increase your spending in any area, this is one place to strongly consider.

Meet the Greater Need

When times are tough it is easy for a nonprofit to focus on what is getting more difficult for the organization itself, but what you need to remember is that during a downturn, things are getting harder for everyone. As a result, recessions present an opportunity for nonprofits – an opportunity to serve more people, better, and in new ways. Include in your strategic discussions thoughts on what the need looks like right now in your community and how your organization can meet it.

Utilize Technology

Technology is more important now than ever before when it comes to fundraising. Social giving, donor matching, fundraising event management, volunteer coordination, and many other areas of nonprofit management are made easier with technological solutions these days. Lean on the right technology to bolster the efforts of your thinly stretched staff.

Focus on Long-Term Strategic Planning

It might seem obvious to say that nonprofits should do more of what works, but organizations need to remind themselves that they have already done this once. When the pandemic hit back in 2020, nonprofit organizations were hit with a sudden shut down of activities and a panicked giving freeze. Sure, there were government resources available to help, but they all needed to make a strategic plan to weather the storm – not just a today plan, but a tomorrow plan as well. Focus on long-term strategic financial planning to position the organization in a way that will equip it to survive in any economic conditions.

Communicate Transparently

Nonprofit leadership needs to have open communication with lower-level management as well as staff around funding and budgetary changes, but it does not end there. All stakeholders should be kept informed – the board, employees, donors, and volunteers. Let them know that the organization is aware of the current financial situation, and it has a plan to ensure that the organization will stay afloat. Communicate that to them to get everyone on board and leverage their collective input. The only way through a tough financial situation is with support from the entire team.

Strong financial management is a must-have for a nonprofit in any economic climate, but it is especially crucial during difficult economic times. Whether you need nonprofit financial consulting or executive-level nonprofit financial recruiting, we have the personnel to come alongside your organization and provide the financial leadership it needs. Contact us today to learn more!

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Topics: Non Profit Organizations, Economic Trends, Philanthropy, Planning

Topics: Non Profit Organizations Economic Trends Philanthropy Planning