In the Detroit area alone, more than 22,000 nonprofits compete for funding, many of them with similar missions. Their operational costs and demand for services are up, and giving is down. These challenges come as no surprise to the hardworking organizations serving communities in need, but it’s worth examining the issues further to identify workable solutions.
Similar challenges affect nonprofits across the U.S. In a 2023 State of the Nonprofit Sector report from FORVIS, nearly half of nonprofits saw a decrease in 2022 net income due to increases in personal compensation and operational costs, decreases in state appropriations and an end to American Rescue Plan Act (ARPA) funding. These factors, coupled with a 68% surge in demand for programs and services, have left many nonprofits feeling overburdened by financial demands.
In Michigan, charitable foundations grant more than $2.5 billion annually to nonprofits. But competition is fierce, and many of these grants are restricted to programming. What many struggling nonprofits really need are more unrestricted operating grants to support salaries, rent and other overhead expenses.
A drop in individual giving has also taken a toll. After two years of record generosity during the pandemic, 2022 charitable giving in the U.S. fell to just under $500 billion, according to Giving USA’s 2022 Report on Philanthropy. Individual giving dropped 6.4 percent from 2021, although it still holds the majority at 64 percent.
And donors have become choosier, shifting their support to organizations that can clearly demonstrate impact. In a recent Fidelity Charitable study, 41% of donors changed their giving due to increased knowledge about the effectiveness of the nonprofit. Among the trends indicated, philanthropy has become more results-focused, with more donors looking for easier tools to research and fund charitable projects they deem worthy.
What Can Nonprofits Do to Navigate These Challenges?
Don’t Put All Your Eggs in One Basket
Charitable foundations undergo ever-changing strategic priorities and budget allocations. Reliable funding sources are no longer a given, so you have to plan for a rainy day, doing your best to retain existing donors while you pursue new avenues of giving.
- Diversify your funding sources. If you rely solely on government funding, for example, you need to develop a strategy for reaching out to other sources. Engage your board and staff to build new relationships and pursue new partnerships.
- Stay on top of foundations’ funding priorities. Don’t get blindsided if your regular funders shift their focus. Stay ahead of the game so you have more time to pivot to new sources if needed.
- Develop a strong donor retention strategy, recognizing and thanking donors and showing them how their giving directly impacts your program’s success. Keep in mind, however, that annual donor retention rates average about 45%. Your giving base should include 15% new donors each year.
Focus on Attracting & RETAINING Talent
Nonprofits don’t just compete for funding, they struggle to attract and retain talented leadership and staff members. Challenging economic times have prompted growing demand for salary increases, and many workers seek more flexibility. To position your organization for long-term success, consider the following:
- Keep tabs on industry salary data to make sure your compensation packages are competitive for new and existing employees.
- Establish a strong culture rooted in your organization’s mission and seek out individuals who fit the culture and have a passion for that mission.
- Value your employees in other ways, offering flexible hybrid work environments, training and development opportunities and other perks they value.
Prioritize Fiscal Responsibility
Rising inflation has caused a surge in operating costs for many nonprofits. To protect your organization and services for the long term, you have to create and maintain a disciplined approach to keeping your finances in check – even if that means making some difficult decisions in the short term.
- Set up an experienced finance committee to help you manage your operating costs. This committee can help you:
- Create 2- to 3-year budget projections,
- Set up rainy-day cash reserves,
- Develop a plan B if regular funding is not renewed.
Pursue Partnerships to Meet Increased Demand
Just as nonprofits have been hit by tough economic times, so have the people you serve. Underserved families struggle to earn enough to cover basic needs like food, housing and transportation. If your organization is stretched thin and struggling to meet community needs, it’s time to revisit your mission and take a hard look at your capacity.
- Avoid mission creep. Focus on programs that create the greatest impact and positive outcomes for those you serve.
- Form partnerships or networks that offer complementary wrap-around services that fill a community need. If you run a food pantry, for example, consider teaming up with an organization that provides clothing. These networks can pool resources and pursue funding as a partnership, which can strengthen the case for support.
Impact, Impact, Impact!
More and more donors are looking for results. With so much competition, how do you stand out from the crowd and make sure your mission resonates with key stakeholders?
- Develop a strong case for support. What obstacle does your community face and how are you helping people overcome that obstacle? Why should an individual or foundation fund your organization? What is unique and compelling about your organization?
- Nail your elevator speech and apply it consistently through all your communications.
- Share compelling stories that connect funding to specific outcomes, engaging partners when appropriate.
- Track valuable data that quantifies your community impact.
- Pursue opportunities to become a thought leader in your area of expertise.
With changing trends and shifting priorities, your organization can no longer rely on the status quo. These strategies can help you position your organization to not just survive, but thrive.