The Consumer Price Index (CPI) rose by 7% in 2021 based on data from the U.S. Bureau of Labor Statistics (BLS). In fact, according to the BLS, this was the largest CPI gain in the United States since 1982.
In the near term, Goldin Groups CPAs believes the current wave of inflationary pressure—driven by the sharp economic recovery—will subside. Nevertheless, it’s prudent for nonprofit leaders to be prepared in case the current level of inflation lasts longer than expected or worsens.
In this article we take a closer look at how inflation impacts nonprofits, effective strategies for countering inflation at nonprofits, and five cost cutting tips for nonprofits during times of high inflation.
How Inflation Impacts Nonprofits
It’s important for nonprofit leaders to understand how inflation could potentially impact the financial health of their organization. At a high level, inflation can affect both revenue streams and expenses of nonprofits.
Inflation’s Effect on Revenue Streams
- Three of the most common ways inflation negatively affects fundraising are:
- Recurring donations of the same amount will decline in purchasing power over time.
- Increased costs for goods and services can eat into the discretionary income of donors resulting in smaller donations.
- The costs of holding fundraising events may increase, which can result in higher ticket costs and lower attendance.
- Fundraising events aside, inflation can cause your ongoing expenses to increase resulting in the need to raise membership dues. Higher dues along with lower discretionary income can cause some members to drop out.
- As inflation rises, the purchasing power of revenue streams declines. Grants, as a form of revenue streams, are not immune to this reduced purchasing power—especially if they are awarded as a fixed amount that is paid monthly, quarterly, or annually.
- If your nonprofit receives revenue from fees-for-service, this work is probably backed by contracts that don’t factor in cost-of-living increases. As a result, the revenue you received for the service may decline in value by the time the service is actually rendered.
Inflation’s Effect on Expenses
- As mentioned briefly above, inflation can also negatively impact your ongoing expenses—particularly in two ways:
- If the nature of your nonprofit requires the frequent and substantial use of supplies and materials such as building materials or food, your costs for these items could increase rapidly due to inflation.
- Your employees may be feeling the crunch from inflation personally in their everyday living expenses. As a result, they may demand higher wages or look elsewhere for their employment. This could force you to increase your wage expenses in order to retain your top talent.
Effective Strategies for Countering Inflation at Nonprofits
Reallocate a Portion of Your Investment Portfolio to Income Generators
If your nonprofit maintains an investment portfolio, it can be helpful to reallocate portions of your portfolio to income-producing investments such as REITs and sound dividend paying stocks during times of high inflation.
Know Your Actual Cash Position and Its Restrictions
Depending on which finance platforms your nonprofit uses, you may or may not have a real-time view of your current cash reserves. In order to weather an inflation storm, it’s imperative that your board and your CFO know your actual cash position and what portion of that cash is restricted so that you can make informed and timely decisions.
Get Help from Your Donors
In times of high inflation, it’s appropriate to ask donors to lift restrictions on their donations so that your nonprofit has enough unrestricted cash to ensure liquidity. While the idea of asking donors to lift restrictions may seem uncomfortable, the reality is your donors want your organization to thrive long-term.
5 Cost Cutting Tips for Nonprofits Experiencing Inflation
According to a study conducted by Bain & Company, organizations that made smart, judicious cost cuts under inflationary pressure experienced superior financial performance compared to organizations that did not. These results beg the question, which cost cutting tactics are best?
Here are five cost cutting tips for nonprofits experiencing inflation:
Inflationary pressures can create motivation to address inefficiencies in your nonprofit. You should work with your CFO or outsourced CFO to identify opportunities to consolidate roles within your team. It’s also helpful to analyze your processes to see if they can be streamlined for greater efficiency in order to capitalize on cost savings. While it’s beneficial to examine your organization for inefficiencies, be careful not to eliminate your most talented employees. In the current labor market, good talent is hard to find and costly to train.
Prioritize Team Morale and Protection Core Expenses
If pay cuts for your team members are necessary, make sure you are up front and communicate the changes in a timely manner. There is no better way to crush the morale of your team than surprising them at the last minute with pay cuts. Wage cuts and other expenses that run your core programs should be some the last expenses that you are forced to cut out of necessity.
Identify Small Expenses That Can Make a Big Difference
Closely managing many small expenses can add up and make a big difference. For example, you may want to turn off the autopay feature of many of your expenses so that you can more closely control the timing of payments and, thus, your cash flow. Moreover, if certain subscription expenses are not being used all that much, go ahead and eliminate them. As you scan your expense reports looking for small costs to cut, it’s best to retain any technology you use to enable remote work for your team. This technology is essential in the current workplace environment and most of these platforms are very economical.
Trim Marketing Associated with New Initiatives
Inflation causes many nonprofits to get back to their core mission. Over the years, your team may have added additional initiatives out of a passion for the community or the world. While not ideal, it may be best to trim back some of these added activities and delay new activities that were in planning stages. Marketing is often associated with spreading the word about new initiatives. While it’s critical to keep a close eye on your cash-flow, make sure you don’t cut your marketing costs entirely. It’s still imperative that you keep a sufficient level of awareness going in the communities you serve.
Have an Eye to the Future Evolution of Your Costs
It’s important to also consider the future as you analyze cost cutting opportunities. As your nonprofit evolves, you may or may not need the same level of expense for certain categories that you need today. For example, you may not need as much office space or certain legacy technology system that could be replaced be leaner, cheaper software-as-a-service (SaaS) systems.
Goldin Group CPAs Takes the Weight of Inflation Off Your Shoulders
If your nonprofit is under pressure from the rapidly evolving inflationary environment, reach out to the nonprofit experts at Goldin Group CPAs today by contacting Ariel Goldin, CPA, Director of Client Relations at firstname.lastname@example.org.