Nonprofits improving their operating reserves

Accounting

Nonprofit organizations have been growing their operating reserves over the last year, despite the pandemic, while experiencing other positive changes, according to a new survey.

The survey from BDO USA found that while 28% of nonprofits had less than four months of operating reserves in 2020, 38% of the organizations polled said they now have over 12 months of excess cash on hand. Other positive changes cited by nonprofits included accelerated investments in technology (60%), new service or program offerings (43%), faster decision-making (43%) and an increased awareness of their mission (43%).

The pandemic initially stretched the finances of many charities and nonprofits that were forced to respond quickly to the spread of the pandemic in early 2020, but donors provided an outpouring of support. Government relief programs like the Small Business Administration’s Paycheck Protection Program and Economic Injury Disaster Loans, along with economic impact payments, also aided many organizations, both not-for-profit and for-profit, and gave their contributors who had enough of a financial cushion more money to spend on their favorite causes.

“There was an influx of capital almost never seen before in the nonprofit industry,” said Adam Cole, national co-leader of BDO’s nonprofit and education practice. “Many of the organizations took advantage of this opportunity to recapitalize and reprioritize so that they could really have a dynamic organization post-pandemic.”

Nevertheless, nonprofits faced many challenges from the pandemic, and the survey found that over half (54%) of them had to cancel their fundraising events as a result of COVID-19, and 47% experienced decreased morale, 45% saw decreased funding, and 40% had to cancel programs. That was despite the 36% who saw increased demand for their services. Another 36% had to impose hiring freezes, furloughs or layoffs, 17% had to lower employee compensation, 13% had difficulty meeting grant or funding requirements, and 5% experienced cyber breaches.

The canceled fundraisers may have been a blessing in disguise, as organizations took advantage of videoconferencing services like Zoom to hold online benefits that cost much less money than renting out an expensive venue and paying for the catering staff.

“Much of the fundraising and outreach that a lot of the organizations did, they did even more because they could do it virtually electronically,” said Cole. “They were able to do more and at next to no cost to organize and execute these events. Many of these events have very slim margins. They’re about branding, getting people together, and educating them at the event. Many of the organizations reduced the cost of raising dollars and ended up raising net more dollars as a result. Before, many of them were on direct mail and now they’re on Zoom, Teams and Google Meet calls on a regular basis. With everybody looking at their phone all day and on their computers, they had a more captive audience.”

Nonprofits nevertheless have been facing many challenges in dealing with the human toll from the pandemic. “A lot of the organizations were first responders, either because they were health care or human services organizations, so the demand for their services actually increased,” said Andrea Espinola Wilson, who co-leads BDO’s nonprofit and education advisory services practice. “Organizations dealt with a tremendous amount of uncertainty in their funding and the way that they typically fundraise. But what we saw was that organizations were dramatically resilient in the face of the ever-changing landscape of COVID.”

Government programs aided many nonprofits. “We saw that 69% of organizations accessed some sort of CARES Act or pandemic-related federal funding,” said Wilson. “That’s a very high number. Primarily that was attributable to the PPP. That significantly impacted the financial sustainability of these organizations, especially during the first year of the pandemic.”

Nonprofits that have managed to build up their reserves will need to think of appropriate ways to use the funds to serve their mission, and accountants can help their clients with advice. “Think about how organizations can put that to best use,” said Wilson. “In the survey, about 60% of organizations said they were increasing their investment in technology. It really was a time of the haves and have nots. If you were reliant on manual processing in those early days of the pandemic, it was really hard for you to close your books, send out payroll and what not. We see that organizations are taking the time and investing in technology. We’re also trying to lead them in a direction of thinking about what’s next. We have to be conscious of donor fatigue. When the pandemic first started, it was very obvious that individual contributors rallied around organizations, especially those that had to shut their doors. Think about museums and concert halls and things of that nature. But individual donors really get fatigued and say, ‘Hey, you have to figure it out after a period of time.’ So our advice to organizations is really to continue to be agile, and continue to use your technology and data in that decision-making process.”

The management teams and boards of trustees of many nonprofits are looking to see how they can plan ahead better if they have managed to accumulate greater reserves and are looking at how to use the funding during a time when it may be harder to retain employees at a time when jobs are plentiful and wages are going up, tempting many workers to change careers.

‘“Historically, many nonprofit organizations are founded based on a grassroots cause, and what differentiates them from commercial enterprises is they usually start with a lot of sweat equity and not a lot of capital,” said Cole. “Between the federal funding and some of the other increases by state and local governments, many organizations were able to recapitalize, which is evident in the increase in the amount of organizations with greater reserves. Some of them were well prepared because they had a capex budget for technology and a focus on those types of things. Now they’re thinking, what’s next? What can we do with investment in dollars in programs and people, maybe to offset some of those inflationary costs by producing programming and fundraising events with a greater margin because of the fact that you may not need as many individuals operating that. What can we do differently? How can we do this at a different cost? In many human service organizations, they’re competing for direct-care workers against Walmart and Amazon and many other organizations that are paying $18 or $19 an hour plus benefits for warehouse work and other things. Some of the organizations were two or three years ahead of this cycle and were already doing some of this, but for many, it was a good lesson in moving forward.”

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