Top Challenges for Nonprofits – Part I

It’s a difficult time for the nonprofit industry. As organizations feel the effects of a slow recovery, they are repeatedly being squeezed from all sides. Over the past few years, we’ve seen nonprofits faced with the predicament of doing more with less, and at the same time, come under the lens for their expenditures and fundraising.

In this two-part post, we address the top challenges facing nonprofit organizations.

Declining Public and Private Support
Before the downturn began in 2008, donors were seeing better personal investment returns and had more funds available to give. Naturally, as the market declined and grew more volatile, donations fell too. Most individuals will forego a few luxuries to help others, but few will change their lifestyle or suffer financial difficulties. Nonprofits continue to struggle as investment earnings are nowhere near what they used to be. Combined federal and workplace giving campaigns are also suffering with decreased contributions. Many middle class workers that participate in these programs started to feel an impact from even the $10-$25 taken out of each paycheck for charities and scaled back. On the public side, the administration pumped a lot of dollars into the economy during the recession for nonprofit program activities, but as federal, state and local deficits build up, nonprofits are seeing drastic budget cuts.

Greater Scrutiny of Financial Information
With better technology, financial information has become more accessible to the nonprofit stakeholders. All Form 990s are publicly available to donors and stakeholders through nonprofit websites and Guidestar. More states are also requiring financials when an organization registers for charitable solicitation. But along with greater access, comes greater scrutiny — particular as donors become more selective with their limited dollars. Stakeholders and the government have a watchful eye on:
  • how a nonprofit’s executive compensation is determined compared to similar organizations,
  • the cost of fundraising,
  • and the ratio of dollars raised to dollars spent on programmatic activities.
Still, it’s difficult to apply these ratios equally across all nonprofits. A healthcare organization’s fundraising costs are different from a charity’s, for example. Within the nonprofit sector, there seems to be a move to be more open with financial information and to communicate the performance measurements of the organization versus releasing only the information that management believes the donors and stakeholders need.

Focus on Executive Compensation
Nonprofit executive compensation is being watched closely by the media, regulators and donors. Particularly as the government looks for programs to cut or trim, officials are examining executive pay to determine if they are forgoing an opportunity to earn taxes so that someone can earn a large salary. The increased scrutiny is mostly directed at large charities and nonprofit healthcare organizations. When looking at pay, stakeholders are asking if a healthcare executive’s pay should be equivalent to a top surgeon’s, and more often than not, the answer is no. As concerns mount, some states are taking action. In New York, Governor Cuomo recently created a new law governing pay levels at nonprofits.

Stay tuned for part II of this post, which will cover additional key challenges for the nonprofit industry.