They represent the very best of America, providing a way to work together for a common good. They transform shared beliefs and bring hope into action making a profound impact on communities and our society.
America is home to more than 1.3 million charitable nonprofits that heal, inspire, nurture and enlighten people of every age, gender and race. Yet today they are facing very real challenges when it comes to the continued delivery of the goods and services to the people and communities that rely upon them.
Some challenges are related to internal issues such as governance, staffing and financial accountability. Others face challenges from issues like fundraising and operations. Most of the issues are caused by forces that are beyond their control.
Now, more than ever, nonprofits need our help. So, we asked professional organizations serving and tracking the industry as well as local nonprofits to help us identify the challenges facing their organizations.
In general, the challenges facing nonprofits today include: an increased demand for services; declining revenues; an increase in the cost of services; a decline in personnel; and staffing and succession planning — the latter two being issues that are essentially tied at the hip.
“But those issues are really just the tip of the iceberg,” says Rick Cohen, chief communications officer of the National Council of Nonprofits. “Each one of those issues has a subcomponent to it.
“Take revenue, for instance. Most people don’t realize that government grants and contracts make up about a third of the nonprofit sector’s revenue. But a lot of people focus on donations. However, donations from individuals and foundation grants only make up a little less than 11% of the nonprofit sector’s revenue.
“Government contracts often are set and locked in at the same rate year after year. Despite the fact that delivering the cost of services and goods goes up and up, the contract stays the same year after year. That is just one of the sub-wrinkles of the high-level issues that nonprofits are facing.”
That national trend is being seen here in Northeast Ohio as well.
“We happen to have an incredible nonprofit sector here in Northeast Ohio,” says Julie Clark, vice president of Nonprofit Engagement at Business Volunteers Unlimited (BVU), a Northeast Ohio-based organization focused on building partnerships between businesses and nonprofits that is celebrating its 30th anniversary this year. BVU works with between 700 and 800 nonprofits every year, according to Clark.
“Northeast Ohio is a community that is very generous and supportive of nonprofits and the sector is very large,” she adds. “But is it healthy? That’s a little harder to say. It really is another question.”
It’s a long-held axiom that the term “nonprofit” is a tax status, not a business model. Despite the most altruistic intentions of a founder, or founding board, nonprofits have to be run like a business — a healthy balance sheet is essential — otherwise the organization dies on the vine.
“I would agree that a healthy balance sheet for a nonprofit is absolutely essential,” says Helen Weeber, senior manager, director of HW&Co.’s Nonprofit Advisors Group. HW&Co. is a CPA and accounting firm headquartered in Cleveland with numerous clients in the nonprofit sector. “Nonprofits have to be run like a business so they can perform their mission.
“What it really comes down to today is the push and pull that many nonprofits are feeling. They are really getting it from both sides; one is a decrease in funds, the other is the increasing cost of the services or goods they provide. Add in the fact the that nonprofits are trying to attract people and stay competitive with wages — it really is something of a Catch 22.”
Part of the problem, at least according to some professionals serving the sector, is that nonprofits are often led by people who are passionate about their cause or mission, but who often lack business acumen or the desire to even run a business.
“I work with a lot of nonprofit executive directors,” says Danielle Locke, founder of Locke Step Partners and a seasoned nonprofit executive who provides fundraising advice and coaching. “There’s an expectation that foundations and nonprofits can do all things. In most cases, they are led by social workers, musicians or artists who have a passion about a cause. But when they start a nonprofit or come into one, they have to run staffing and facilities, write grants and grant reports, plan events and do donor cultivation — the list goes on and on.
“My heart really goes out to them. They often live and breathe the mission of their organization, whether they founded it or not. And they are usually experts in that mission. But they often struggle with the funding to provide for the staff or services and equipment and materials they need to fulfill that mission.”
Locally, Community Leader in partnership with HW&Co., asked nonprofits to identify their main sources of income. Forty-seven percent of respondents identified earned income, while 33% of income came from grants whether that was through government entities or foundations. A little over 6% came from corporate sponsorships, while another 13% was split between membership dues from membership dues.
“As a nonprofit, funding is always a need, but one of the biggest problems I see is one of staffing,” says Brandon Miller, CEO of HW&Co. “You can always say you need more people to donate and you need relationships with people in grant agencies to give money, but if you don’t have the staff and can’t show that you are providing the mission, you can’t get people or grant agencies to give you money.”
As a part of its company’s culture and DNA, HW&Co., promotes and encourages participation in nonprofits by all its key executives, giving the company valuable insight into that sector’s needs.
“Staffing is a big difficulty right now because there is simply a shortage of people,” adds Miller. “If you look at the supply and demand model, the request for higher salaries is off the charts. So right now, nonprofits are putting together break-even budgets or just trying to get a minor surplus because they can’t afford to pay these people. Professionals want more money, so nonprofits are losing out to the private sector. A lot of nonprofits are also competing with government agencies for staffing, and the government can offer wages that a lot of nonprofits simply can’t.”
When Community Leader asked nonprofits in the Greater Cleveland area about the issues of recruiting and retaining employees, 33% cited the ability to offer competitive wages as the most important challenge. Another 20% said they had trouble finding qualified candidates, while 40% said both issues were a big challenge. Only 7% of nonprofits in our area said they were not struggling with recruitment and retention.
“The big problem comes with an organization that loses somebody,” says Weeber. “Finding a replacement is rough, so keeping the people you have becomes that much more important. But you also have to make the pay and benefits attractive enough to entice new hires.”
Replacing people in an organization really ties together staffing and succession planning. Together the two issues combine to create a negative synergistic impact on an organization
“There is a certain psychology to succession planning, especially in the context of replacing a founding director,” says Weeber. “That’s really true when you have a founder or director who is approaching retirement but who might not want to give up leadership. And many times, these leaders have special knowledge and relationships that are of great importance to the organization.”
According to most professionals serving the industry, succession planning should not be an issue involving just nonprofit leadership, but all key people in an organization. So, succession planning and staffing really become a function of strategic planning for the entire organization.
“While you always want to be thinking about the future leadership of an organization, you also need to be thinking about the vulnerabilities and risks within the organization and its operations,” says Clark. “That might mean something like marketing, technology, data or social media. Anywhere there is not anyone else in the organization that has the skills and expertise to step right in, that could be a vulnerability for the organization if they decide to leave.”
“None of us can predict the future. None of us can predict someone getting hit by a bus tomorrow morning,” adds Cohen. “You don’t want to be in a position where nobody knows where the toner cartridges are, or in a larger example, knowing about the banking information or who the contacts are at the government agencies you are contracted with, the QuickBooks information or invoicing. You don’t want to be incurring penalties because the bills are not being paid on time.”
All of which brings up the very important issue of emergency succession planning.
“In addition to planned departures where somebody is thinking about retiring or stepping back in five years, you also need to be thinking about what to do if someone is going to be out of pocket for 30, 60 or 90 days,” says Clark. “You need to know how to move forward if there is a departure without notice, how to keep the organization moving forward.”
In the months ahead, you’ll be reading more about the challenges facing the nonprofit sector from HW&Co. and Community Leader, including board governance, working with government contracts, audits and providing tax forms such as Form 990.
“I work with many of our clients on filing Form 990,” says David Reape, principal and director of Tax Services at HW&Co. “It’s basically just a form you have to file with the IRS, but for that reason alone you have to make sure all the information on it is very accurate.
“But it is an outward facing, public document. So many donors and government agencies are able to see it. That’s why you not only want to make sure it is accurate, but also tell a great story about your organization and what it does.”
HW&CO. has announced that it will be offering webinars on some of those nonprofit topics in the near future as well.