Nonprofits throughout the United States have been operating in crisis mode for nearly 9 months, and as Coronavirus numbers continue to surge across the country, the question of economic recovery is becoming increasingly unclear.
A survey of more than 500 nonprofits in April 2020 found that 96.5 percent of respondents reported negative financial impacts related to the Coronavirus pandemic, including a drop in contributions.
The downturn in charitable giving throughout the Great Recession shines light on how the ongoing pandemic and consequent economic downturn could continue to impact donor behavior in the wake of COVID-19.
In the early 2000s, the Great Recession reduced total giving by 7.0% in 2008 and by another 6.2% in 2009, and the nonprofit sector is bracing for a similar — if not larger — financial hit in 2021.
With a return to economic and social normalcy nowhere in sight, nonprofits must strategize how to increase or maintain revenue in an era where typical funding dollars can’t be counted on. Here are some strategies to consider.
Explore earned revenue models
As donor behavior changes due to the COVID-19 pandemic, so must nonprofit earning models. While there was once a time where the concept of nonprofits charging money for goods or services was taboo, earned-revenue models are gaining popularity among organizations looking to become more sustainable and deepen the scope of their services.
The pot of money is too large to ignore — privately derived earned income, or income earned by nonprofits from the private sales of goods and services, is the largest source of revenue for the entire nonprofit sector, making up 45 percent of all revenue according to the Center on Nonprofits and Philanthropy.
The Girl Scouts organization is a great example of a business with an earned-revenue model. Each box of Girl Scout cookies sold contributes to the income of the organization and allows them to continue providing free programs and services. As long as a nonprofit’s activities are consistent with the organization’s purpose, any profit made from them isn’t taxable.
If your nonprofit has a strength, skill, or product that a business or the general public might pay for, consider diversifying its revenue sources through an earned revenue model.
Opt out of state unemployment insurance program
State unemployment taxes can cost nonprofits tens of thousands of dollars per year. These payroll taxes are charged by each state to fund the state unemployment insurance program and assigned to each employer based on turnover and involuntary termination rate.
But unlike for-profit businesses, 501(c)(3) organizations aren’t actually required to pay state unemployment taxes – they’re only responsible for paying any unemployment claims filed by former employees. Instead of paying tens of thousands of dollars a year in payroll taxes, nonprofits can choose to opt-out of state unemployment insurance programs and pay dollar-for-dollar based on any unemployment claims that may arise — a choice that could bring in savings around $30,000 per year.
Strategically reduce payroll expenses
Payroll expenses are oftentimes the largest cost accrued by employers, and it should go without saying that retaining employees should always be a top priority for managers and founders.
But there are strategic ways to reduce payroll expenses without laying off or furloughing employees — and being transparent with employees about the need to mitigate payroll expenses can go a long way in building a culture of trust within your organization.
- Temporarily cut CEO and executive salaries. The average salary of a nonprofit CEO in the United States is $185K, while the top 90 percent of CEOS make $271K a year. Temporarily reducing CEO salaries can result in tens — or even hundreds — of thousands of dollars saved and send a meaningful message to employees and the public about how to compassionately lead during a crisis.
- Use freelancer, contracted employees, or interns for specific projects or programs to save on employee onboarding, training and benefits costs.
- Temporarily defer raises and bonuses
- Cancel or reduce overtime hours. Talk to employees about delegating tasks in order to prevent overtime accrual.
Whatever strategies your organization chooses to pursue, it’s crucial to manage and track their implementation to ensure that they are helping to increase available revenue. COVID-19 has presented an unprecedented financial challenge to nonprofits everywhere, and understanding the financial implications of your organization’s structure and expenses is crucial.
About the Author
Lia Tabackman is a freelance journalist, copywriter, and social media strategist based in Richmond, Virginia. Her writing has appeared in the Washington Post, CBS 6 News, the Los Angeles Times, and Arlington Magazine, among others.