Nonprofit organizations are being buffeted by inflation this year as they try to raise funds from hard-pressed donors and are turning to their accountants for advice.
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"There was an unusual spike in reserve funds for many of the organizations as a result of a lot of the stimulus money," said Adam Cole, managing partner of the Greater New York nonprofit and health care practice at BDO. "What a lot of organizations tried to do this past year was to invest some of this money in their people and their infrastructure and into technology that would create efficiencies. The timing of that was great because as we went into a significant inflationary period with salaries, especially in nonprofits, we saw that more with the nonprofit industry this year. Human services organizations were competing for direct care staff with many of the large big box stores and distributors like Amazon, where they were giving base salaries of around $20 an hour and very good benefits."
"Not only is it just the stimulus funding, but last year we also had a tremendous increase in the financial markets, which this year has not sustained," said Andrea Espinola Wilson, managing partners and co-leader with Cole of BDO's nonprofit and education practice. "We've seen an inflection point that has hit the reserves of organizations."
The dip in reserves is not that unusual for nonprofits, which are used to seeing ups and downs in their finances. "If we go back over a few years, some of the reserve percentages were lower," said Cole. "This actually represents an improvement in their reserves."
In response to inflationary pressure, many nonprofits have needed to raise salaries, with 65% of nonprofits increasing wages and salaries to mitigate the impact of inflation on employees. Nonprofits also are taking steps to minimize inflation's effects on their organizations, from pursuing operational efficiencies (54%) to increasing fundraising (52%).
"Organizations are once again showing their agility when confronted with the challenges," said Espinola Wilson.
"The blueprint for this was really set during the pandemic when so many paradigms shifted," said Cole. "However, it wasn't immediate. Many of them waited months and months, but they did get additional cash flow. We did have a resurgence in the market, which helped as well, that and contributions. But I think organizations started to pivot in how they analyzed priorities and how they communicated results within the organization, so it prepared them for this double-headed inflationary impact that's coming to them now."
As costs rise, overhead cost coverage is becoming even more important, but only 19% of organizations say funders and donors generally accept their indirect costs, while 21% say funder ceilings on indirect costs are their biggest challenge with indirect cost recovery.
"For us that was a case of the starvation cycle being a real true problem in the sector," said Espinola Wilson. "As inflation and the costs of administration continue to increase, sustainability is going to be ever more important for the sector at large."
More nonprofits have become accustomed since the pandemic to more frequent remote meetings of their board of trustees.
"During the height of the pandemic, organizations operated in crisis mode, whether or not they would be able to operate their programs or provide the services that they would operate, so many of them shifted to virtual meetings with board members and they were having in some cases weekly board meetings," said Cole. "The amount of engagement with their stakeholders increased significantly. I sit on some boards, and I can tell you not many of them have moved back to in-person, because they realized how many more people they captured with virtual meetings. That translated into a transformation for many of the organizations into a more nimble reporting process."
