2023: What Can Nonprofit Leaders Expect?
As January 2023 comes to a close most of you have a solid understanding by now of just how well your organization performed in the last calendar year. You’ve had enough time to enter all your organizational expenses and count every last dollar in revenue. (You may need to rethink your accounting infrastructure if this is proving to be a struggle).
Whether you’re counting your blessings at yet another successful year or licking your wounds after what proved to be a challenging 12 months, you’re asking the same question; how well are other nonprofits doing and what can we expect to see this year!?
In 2020 and 2021 we faced a prolonged global pandemic the likes of which I sang nursery rhymes about when I was a schoolkid in London. In early 2022 we witnessed the start of Russia’s war against the Ukraine, and by the end of the year we all had to contend with the highest rate of inflation in over 40 years (a 9.1% increase in consumer prices). We’re now being told by most economists to brace for a rough recession starting in 2023. What does this all mean for our beloved nonprofit sector?
Instead of sharing with you my own opinions regarding the current state and future of the sector, (highly valuable opinions of course based on anecdotal evidence and a subset of data small enough to fit through the eye of a needle), I’m going to share with you the findings of a report you should all become familiar with if you’re not already; Independent Sector’s Health of the U.S. Nonprofit Sector Report.
These quarterly reviews seek to shed light on the health of our sector which supplies millions of jobs to Americans (10% of US workforce work for a nonprofit organization) and represents a huge portion of the United States GDP (5.7%). They make for fascinating reading, conveying up to date information on the current health of the U.S. nonprofit sector, including nonprofit economy, jobs, and other recently released data. Independent Sector’s annual report also includes information on aspects of the sector’s health, including governance, public trust, public policy, and advocacy.
The Impact of the Last Recession
Before we talk about where we are today, and what we should expect this year, let’s remind ourselves what happened to our sector after the “great” recession of 2008. Thanks to the important work done by Nonprofit Quarterly, we know that:
- Total social sector revenue saw a slight decline between 2007 and 2010, when total revenue across charitable organizations outside of higher education and healthcare declined by 1.6%
- The number of organizations that halted operations increased by 3.3% between 2008 and 2010 when compared to the previous period
- Assets grew by 27.6% in higher education and healthcare organizations between 2007 and 2015. All other nonprofits gained 12.3% in assets.
- Revenue increased by 6.3% for human services organizations between 2007 and 2010, with these nonprofits seeing a 15% increase in donations more specifically.
The work of Nonprofit Quarterly shows us that while some nonprofit organizations never fully recovered, others ended up in better shape after the recovery. Overall, it appears that larger nonprofits ended up gaining ground, while smaller nonprofits lost ground during and after the 2008 recession. Most organizations not in education saw their revenues decline during the last recession, but health organizations (not in the category of meds) and human services organizations were the exception. Although the closure rate for public charities was slightly higher during the recession than immediately before or after the recession (mostly in international, public, societal benefit; religious; and mutual/membership benefit organizations), new nonprofits continued to emerge even as others closed (mostly environmental and human service organizations).
So where are we today and what should we expect?
- In the third quarter of 2022, growth in gross value added by nonprofits (3.2%) exceeded that of Gross Domestic Product (2.6%). That’s great to see and shows the sector is alive and kicking! The hope is that the growth we witnessed in the first half of 2022 indicates an accelerating recovery for our sector. Analyses of the sector’s recovery following the 2008 recession found most organizations saw a single year reduction followed by a recovery year. What’s impossible to know is whether 2022 will prove to be the hardest year, or if we’re about to experience even tougher economic circumstances this year.
- In terms of charitable giving, the second quarter of 2022 showed charitable giving continuing to return to pre-pandemic trends. The amount of money donated to charity increased in the second quarter, which is great, but the number of donors continued to decline significantly, resuming a 10+ year downward trend observed before the pandemic.
- While the amount of dollars given to nonprofits as of the second quarter of 2022 was higher than the same time in 2021, unfortunately the number of donors and retention of donors declined. The largest declines in donors were among those who gave less than $100 (-17.4%) and those who gave between $101-$500 (-8.0%). The gains in the amount donated to charity were due to donors contributing large gifts.
The stark reality is that research shows people often cut back their giving when they do not feel financially stable. If the high rates of inflation continue, and we officially find ourselves in a recession this year, you may want to focus much of your efforts and resources on your major donors who continue to give.
So What Can We do?
Unfortunately, none of us have a functioning crystal ball (I can never get mine to work). As the war in the Ukraine rages on, the threat to our food and energy security remains a real one. The World Bank slashed its 2023 global economy growth outlook to 1.7% from its earlier projection of 3%. According to the World Bank, this would mark “the third weakest pace of growth in nearly three decades, overshadowed only by the global recessions caused by the pandemic and the global financial crisis.”
We can see from historical data that a bad economy will continue to accelerate the downward trends we have been witnessing in donor retention levels and in small dollar donations. It’s prudent for all leaders therefore to diversify their sources of revenue as soon as possible, and to think seriously about where their fund-development resources are being directed to. Do you have the right fund-development strategies in place during these turbulent times?
As well as leading to less revenue, which means you investing in fewer interventions or services, tougher economic times will put a strain on our most important resource as nonprofits, our staff. As the cost-of-living crisis continues into 2023, nonprofit leaders have the challenging job of ensuring sensible financial planning on the one hand (creating cash reserves, decreasing program spend etc.), while also needing to look after their team members on the other (this means both retaining staff where possible as well as compensating them fairly).
This tension between senior management and staff, one that many organizations have been grappling with since before 2020, will unfortunately only get exasperated during a possible recession. At a time when generational changes in the workforce are taking place in the midst of a growing “culture war”, nonprofit leaders must delicately navigate these tensions while ensuring staff members and stakeholders all focus on the important missions they serve.
Nonprofit organizations have been part of the fabric of US life for over 250 years. Despite the challenging climate we find ourselves in, there is no doubt nonprofits will continue to provide essential services and programs for centuries to come. As custodians of these important missions however, we must do what we can to minimize any short-term harm to our organizations, while ensuring their long-term success. During such challenging times, we need our leaders to lead. Nonprofit leaders must work closely with their board directors and executives to ensure the right strategies are in place to weather this prolonged storm, and must be willing to make difficult decisions for the best interest of their organization and its mission.
