A looming recession, sky-high inflation rates, and the possibility of stagflation pose real risks to the financial stability of nonprofit organizations.
While the economy has been on recession watch since early June, when the Federal Reserve implemented the highest interest rate hike in 28 years, forecast predictions regarding the timing of a recession are cloudy, at best. Some investment groups say the country is already in a recession, while other Wall Street players predict only a mild recession, placing the timing towards mid-2023.
Regardless of recession timing, charitable organizations are already feeling the squeeze of the country’s current economic state. Recent reports show that charitable giving in the United States is not keeping pace with inflation. That, coupled with an increase in material and operating costs and an escalated demand for critical nonprofit services (a time-tested reality of economic downturns) exposes many nonprofits—many of which were already operating on tight budgets—to serious financial and organizational challenges.
If your organization hopes to create proactive strategies in order to mitigate the damage of inflation and a potential recession: the time is now. Here are some steps to consider.
Prioritize employee benefits and open communication
Transparency is always the best strategy when it comes to management, but it’s particularly important in tough economic times. While your organization may not have the funds to provide cost-of-living increases to employer salaries during times of high inflation, there are other strategies—like improving benefits, pay transparency, and PTO policies—that can help support employees’ wellbeing and build a sense of trust in your organization.
Surveys show that more than 75% of Americans say they would accept a lower salary if the job offered flexible working hours, and 68% would accept a lower salary if their organization provided more pay transparency than their current company.
Additionally, employers should be prepared to address questions about compensation from employees who are concerned with cost-of-living increases. Establishing a culture of open communication with employees regarding your organization’s financial health needs to be a priority.
“While addressing compensation is a year-round, ongoing process, it is especially important to address employees’ salary concerns right now, as turnover is high across industries and inflation is causing some employees to question their pay for the first time,” Tanya Jansen, co-founder of beqom, told BenefitsPRO. “Since these conversations are designed to help curb pay concerns, employers should be familiar with their budget and understand salary benchmarks within the company and at the industry level, so that any confusion or questions can be cleared up efficiently.”
Create a savvy investment management strategy
Nonprofits with endowments must find ways to mitigate the impacts of inflation on their investment portfolios. Creating an inflation-adjusted spending policy by managing withdrawal rates is a key strategy in doing so, according to investment firm Manning & Napier. This approach uses the prior year’s spending as a base and adjusts it based on current inflation rates. While inflation-adjusted spending policies could lead to a temporary reduction in your organization’s funding, implementing shrewd cash flow modeling strategies can make up for the difference.
Organizations with investment portfolios should consider working with a financial planner to reallocate any surplus funds to income-producing investments that can historically stand up against inflation. Examples of these include:
- Real estate investment trusts (REITs): These investments tend to outperform inflation. In 2021, REITs outperformed the S&P 500 by 12.6 percentage points.
- Dividends: Unlike bond payments, dividends typically outpace inflation.
- Treasury Inflation-Protected Securities: These bonds offset the effects of inflation by adjusting their principal value as inflation rises.
In an interview with Barrons, portfolio manager Austin Graff of Texas-based Titleist Asset Management, recommends looking for individual stocks with strong balance sheets, consistent free cash flows, and savvy management teams that are committed to providing worthwhile yields.
Be upfront with donors
Donors understand the realities of inflation on their personal assets, but they may not fully comprehend the damage that rising prices wreak on charities. That’s why, as George R. Witowski writes in this article for the Chronicle of Philanthropy, “organizations must take it upon themselves to recast their appeals to address what’s happening.”
Thanks to the theory of money illusion, donors who typically give a set amount of money each month or year will keep doing so in times of inflation without realizing the decreasing purchasing power of their dollars. To that end, organization development officers need to revamp their messaging to donors in order to outline the tangible consequences of inflation on their budget.
It’s also a good idea to review the standard donation levels on donor appeals and online in order to ensure that the amounts are a true reflection of the current costs of service. Asking for increases in standardized gifts, like bumping up monthly donations from $25 to $50, could make a major difference in increasing your organization’s bottom line.
“It is up to the development staff to make donors aware that keeping the same gift size is in reality a reduction in their support. They can spell out exactly how they are meeting needs — and where their efforts are falling short as prices increase,” Witowski writes.
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. She writes weekly nonprofit-specific content for 501c.com.