Nonprofits plan to expand, but may lack financial strength to fuel sustainable growth

Expanding programs is on the two-year horizon for nearly 50% of nonprofits, yet many organizations may lack the financial strength to fuel sustainable growth. This is among the top findings of Nonprofit Standards, a benchmarking survey designed to give nonprofits a useful barometer to measure performance across a variety of areas including strategic planning, human resources, operations, scope and impact and governance matters.

The BDO Institute for Nonprofit Excellence’s second annual nonprofit benchmarking survey reveals that nonprofits’ hearts may be bigger than their wallets.

Managing growth registers as a concern for 2 in 5 nonprofits, but the sector overall could be underestimating the road ahead. Some of the financial warning signs in the survey findings include:

• Nonprofits are not prioritizing liquidity - a crucial safety net to weather any funding disruptions. More than half (51%) of nonprofits have less than 6-months of operating reserves. While the right level of operating reserves varies by organization size and sector, establishing a 6-month supply of operating reserves is best practice overall. Despite this gap, executives remain unfazed by low liquidity levels: 34% say maintaining adequate liquidity poses no challenge, and 40% say it is a low-level challenge.
• About 1 in 5 nonprofits could be at risk of falling into the starvation cycle: underfunding necessary infrastructure - new technology, employee training, and fundraising expenses - in favor of high programmatic spending. These organizations spend between 90-99% of expenditures on program-related activities, compared to the average nonprofit that allocates 77%. “High programmatic spending can look deceptively positive on a statement of activities, but the model is unsustainable. While meeting a community, national, or global need is the mission of nonprofit organizations, it is not productive - for the nonprofit or the people it supports - to undermine the organization’s long-term viability,” said Adam Cole, partner and co-leader of BDO’s Nonprofit & Education practice. “Investment in new technology, which has the potential to streamline operations and reduce costs over time, is often the first cut in the starvation cycle.”
• Nonprofits are still held to unrealistic standards for overhead spending: About 3 in 5 nonprofits say rising overhead costs is a moderate-to-high level challenge, and pressure to minimize overhead costs is likely driving high program-related spending at the expense of investment in infrastructure.
• Nonprofits could be underestimating long-term financial challenges. While nearly half (46%) of nonprofits say declining revenue or funding is a high-to-moderate level challenge, more than one-third of nonprofits say maintaining adequate liquidity poses no challenge, and 40% rank it as a low-level challenge.

“Program expansion is not always the right choice for nonprofits. A desire to demonstrate impact and growth can sometimes lead nonprofits to divert resources away from their core mission-focused services,” said Laurie De Armond, partner and co-leader of BDO’s Nonprofit & Education practice. “Maximizing impact in a sustainable way often comes down to making smart choices about which programs are right to fund.”

Other top findings include:

Mergers & collaboration

Nonprofits could be dismissing mergers or strategic partnerships as an avenue to achieving financial sustainability too quickly. Nearly 4 in 5 nonprofits say merging with a similar nonprofit is not at all likely.

Collaboration is not at the forefront of nonprofit’s future plans, but more than one-third of nonprofits say it is somewhat likely or very likely they will enter into a strategic partnership with a similar nonprofit in the next two years.

Human resources

Compensation remains the number one employee satisfaction issue: 59% consider it a moderate-to-high level challenge.

Recruiting and retaining nonprofit staff and employees are a high or moderate challenge for 3 in 5 nonprofit organizations.

Technology

A nonprofit’s ability to keep pace with changing technology is a growing employee satisfaction issue: About 3 in 5 nonprofits say it is a moderate-to-high level challenge.

Cybersecurity and changing technology are among the top challenges for nonprofit boards, identified by 54% and 48% as a moderate-to-high level challenge, respectively.

Scope & impact

Tax reform and the myriad of accounting changes (lease accounting, revenue recognition, changes to the presentation of nonprofit financial statements) are top of mind. More than 2 in 5 nonprofits consider the time and effort required to deal with government regulations and legislative changes a moderate-to-high challenge.