How to tame funding volatility in not-for-profits

The unpredictability of not-for-profit funding is a fiscal challenge brought on by many interconnected forces, including economic shifts, donor preferences, shrinking government support, and increasing demand for services. One factor, however, stands out.

“There’s such a reliance on governmental funding, reductions and delays can really have a significant impact on not-for-profit organizations because we’re living close to the margins,” said Amy West, CPA, CGMA, executive vice president and CFO at AHRC, a New York City not-for-profit that provides critical services to people with intellectual and developmental disabilities.

While problems may be complex, some tried-and-true solutions are straightforward — such as diversifying funding streams, pursuing intentional cost cutting and investment, and widening donor bases. Implementing them requires creative problem-solving, interdepartmental collaboration, flexibility, and proactivity.

DIVERSIFICATION BRINGS OPPORTUNTY AND COMPETITION

In tight economic times, relying on one or two funding streams is no longer enough.

“Individual giving is down,” West said. “We’re seeing prices go up. … We can’t, as not-for-profits, pass that on to our customers as for-profits would be able to do.”

Not-for-profits instead need to diversify their funding sources. Options include monthly giving drives and programs, foundation giving, fee-based services, corporate partnerships and sponsorships, major gifts, and board engagement. (Also see “Guiding Not-for-Profits Through Post-Pandemic Challenges,” JofA, July 1, 2024.)

The creation of additional funding streams opens an opportunity to understand donor behavior and motivations because it creates more competition for donors’ already stretched dollars.

“All of a sudden, you’re going to have [not-for-profits] that typically haven’t done a lot in the fundraising realm because they’ve relied on government funding finding themselves having to figure out fundraising strategy and how they’re going to attract additional dollars,” said Deb Nelson, CPA, nonprofit industry leader at Eide Bailly LLP, a CPA and business advisory firm based in Minneapolis.

As a result, Nelson believes donors will expect more transparency to evaluate the organizations to which they donate.

A PROACTIVE APPROACH TO DONOR SHIFTS

An organization’s donor base naturally shifts. To widen the donor base, not-for-profit finance leaders can take a proactive, collaborative approach to identify key drivers, shore up new support, and explore new strategies.

“I do see what other organizations are doing and how their finance, development, and program teams are all working together to tell their organizational story because that’s key,” West said. “You want to attract donors. You need to be able to demonstrate the outcomes that you have, and that’s really important.”

An impactful story is the backbone of strong donor appeals. West admits the finance department likely isn’t “driving the bus” of storytelling efforts, but “finance needs to be at the table, and everyone needs to collaborate. That is absolutely key.”

“If donors have a really good understanding of the challenges an organization is facing, more often than not, they’re going to figure out how to help,” Nelson said.

In addition to behavioral factors, new legislation may influence the composition of an organization’s donor base. Nelson predicts the implementation of H.R. 1, P.L. 119-21, known as the One Big Beautiful Bill Act, will affect private donations positively and negatively.

Starting in tax year 2026, a deduction for cash contributions by nonitemizers of up to $1,000 ($2,000 for married couples filing jointly) per year could entice more smaller-scale donations “because people now realize that there is a benefit up to that threshold regardless of if they’re itemized,” Nelson said. This group may be interested in, for example, monthly donor subscriptions, she added.

“On the flipside, we saw increases in the standard deduction. People who are still going to itemize are going to get hit possibly from that angle with the new floor put in,” Nelson said. “But organizations need to have awareness of [the effects of H.R. 1] and need to start thinking about who their donor base is.”

That new floor is equal to 0.5% of the donor’s contribution base for the tax year, disallowing that portion of the donor’s charitable contributions as an itemized deduction.

Donations can fluctuate at any given time, and having sound communication strategies, and the data to back those up, are invaluable for finance leaders to plan accordingly. Nelson suggests that leaders invest in customer relationship management (CRM) software, which can make it easier to “identify better trends around their donor base … or the appeals that are going to resonate with various types of donors.”

One of those trends, for example, is an aging donor base. Donors age 71½ and older may direct trustees of their traditional IRA to make qualified charitable distributions that are excluded from taxable income while satisfying required minimum distributions (RMDs). Also, not-for-profits can partner with organizations providing independent, no-obligation financial planning to donors seeking advice for wills and trusts. The not-for-profit pays the adviser for working with the donor, who is not required or expected to make a charitable contribution, helping to ensure donor independence and avoid inducement concerns.

PLANNING FOR BEST-, MID-, AND WORST-CASE OUTCOMES

Funding instability makes it difficult for a not-for-profit finance leader to compile a realistic budget. A budgetary plan at the beginning of the year often gets tweaked and recalculated — and that’s OK, Nelson said. Budgets shouldn’t be stagnant.

“There’s always been that level of need to thoughtfully calculate where risks [to the budget] are,” Nelson said. “I think the difference is today there really isn’t any stable revenue source, where in the past you may have been able to say, ‘I’m very confident that this revenue is coming in and not going to change.'”

For not-for-profit finance leaders, scenario planning complements budgeting, as it can help anticipate risks, identify opportunities, and add more flexibility into decision-making. Leaders subsequently adapt quicker to situations as they arise.

“The organizations that set themselves apart are the ones that plan for different scenarios,” Nelson said. “They’ve already done the upfront ‘What’s the worst-case scenario that could happen this year?’ They plan for that and then plan for a best-case scenario and maybe a couple in-betweens.”

Scenario analysis is West’s go-to tool and offers a form of predictability in an unpredictable environment. It helps her determine if a program or service needs to be discontinued or temporarily put on hold. Discontinuing a program is a less-favorable solution, West said, but it’s an option that leaders need to recognize.

“In a for-profit, if you have a line of business that is seriously just bleeding money, you’re going to stop it,” West explained. “In not-for-profits, we don’t do a good job of that and realizing we can no longer do [a program].”

CULTURE BECOMES A COMPETITIVE ADVANTAGE

The cost of talent is a recurring issue for West. She estimates that 70% of a not-for-profit’s spend is on workforce and benefits.

“As a sector, we are struggling with recruiting and retaining talent. Turnover is expensive,” West said. “People’s costs are going up, and therefore their living wage should be going up, too.”

Not-for-profit organizations need sound strategies to recruit and retain talent. West believes in offering a menu of benefits to new hires that include traditional and nonfinancial options: health insurance, retirement options, professional development, flexible work schedules, hybrid working arrangements, and childcare.

“What we did at AHRC is recognize that culture is such an important part of why people want to work for an organization,” West said. “You can really make an effort to build a culture where you become a not-for-profit that people really want to work for.”

“[I’m] not going to be able to pay what an analyst makes at JPMorgan Chase, but what I can do is tap into a generation that really wants to make a difference,” she said.

CUT SMARTER, NOT DEEPER

When costs go up, a common reaction from leadership is to reduce staff, West said, but she cautions against it.

“I think that kind of knee-jerk reaction is a mistake,” she said.

There are hidden costs associated with workforce reduction — lower productivity, decreased morale, loss of institutional knowledge, and retraining costs. Instead, West recommends looking at discretionary costs first. This avoids negative long-term impacts and operational inefficiencies.

While it may seem counterintuitive to make technological investments while considering cost cutting, West and Nelson suggested it as an alternative to layoffs. Not-for-profit teams are often small, and new technology ensures teams are working efficiently with accurate data to help with budgeting, forecasting, and scenario analysis.

“I can’t tell you how many organizations still use manual Excel spreadsheets. The [new] technology is there to make our lives easier,” Nelson said. “Given the nature of [not-for-profits], I think there’s always been this tendency that any extra dollars that we have we’re putting right back into the programs that we offer. There hasn’t been that priority around building the infrastructure to actually continue your organization in a sustainable way.”

Technology improvements should be worked into the budget “because the rate of return on it for [organizations] is going to be fantastic,” Nelson said. It will be easier to convince the board of directors with a well-researched proposal that includes funding considerations, a business case for investment, and a rate of return. “We’re at capacity shortage with resources,” she added. “It’s trying to think about what are those tasks that we can take off someone’s plate, have technology help with it, and provide that human lens that is still very much needed.”

TURNING PERSISTENT PRESSURES INTO PURPOSEFUL PROGRESS

These financial pressures don’t exist in isolation and neither will the solutions: Diversified funding, smarter cost decisions, stronger donor strategies, and collaboration across teams must work in concert. While funding pressures may be cyclical and persistent, not-for-profit finance leaders have the opportunity to pause, rethink long-standing approaches, and move forward with renewed clarity.

Those willing to adapt now and repurpose familiar solutions will be the ones best positioned to sustain the future.

“What is so important, and what I appreciate so much about the [not-for-profit] sector, is the ability to figure it out,” Nelson said. “Organizations collaborate. They strategize, they lean on their boards, and they figure out how to continue to deliver the services that the community so desperately needs.”

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About the author

Jamie J. Roessner is a senior content writer for the JofA. To comment on this article or to suggest an idea for another article, contact Jeff Drew at Jeff.Drew@aicpa-cima.com.

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