Nonprofit organizations operate to fulfill their missions and benefit their communities. To continue to be able to serve the public, responding to sector trends is paramount. There are several developments nonprofits should watch in 2024, including fiscal challenges due to macroeconomic trends, ongoing digital transformation and talent shortages.
Being able to navigate these evolving trends will help nonprofits ensure their operational success. This article provides more information on these trends and offers tips on how to adapt to them.
Challenges From Inflation and Interest Rates
Macroeconomic conditions, such as inflation and high interest rates, can have significant financial impacts on nonprofits. Although inflation has decreased significantly since its recent peak, it still poses challenges for the nonprofit sector. Nonprofits face the issue of increased costs for goods and services, which reduces the purchasing power of every dollar raised. The value of donations may erode over time, further complicating the financial landscape for nonprofits.
Additionally, donor behavior may shift towards a more cautious spending approach, which could potentially reduce charitable contributions. The Federal Reserve has taken steps to address the issue of inflation by increasing interest rates.
However, such a move can often hinder economic growth and even push an economy into a recession. So far, the economy has shown resilience to these actions, and a prolonged recession has not yet materialized. Nevertheless, if the economy becomes unstable, these higher interest rates may lead to donors having less money to give to charitable causes.
At the same time, nonprofit organizations are likely to experience increased demand for their services during economic slowdowns, particularly in areas with high levels of social welfare usage.
The negative impact of these higher interest rates may also extend to nonprofits that depend on loans or credit lines, as increased interest expenses can worsen existing cash flow problems. Additionally, the indirect consequences of high interest rates may include potential reductions in government grant funding for nonprofits since these rates can affect government budgets.
As a whole, the intricate interplay of inflation and high interest rates significantly shapes the financial landscape for the nonprofit sector, necessitating strategic adaptability to navigate the evolving economic terrain. Organizations should focus on innovative solutions and effective risk management techniques to help ensure their financial strength. Best practices include diversifying funding sources, leveraging technology to increase efficiencies, improving donor relations, aligning with partners to maximize the pool of potential benefactors and developing a communication strategy to reach target audiences while not overwhelming them.
Technology and Digital Transformation
Like many other businesses and organizations, nonprofits have invested in technology for strategic growth. The role of generative artificial intelligence (AI) and machine learning continues to impact this sector, and such organizations are moving toward digitization.
Machine learning and generative AI can provide various uses for nonprofit organizations. Machine learning can analyze existing data to make predictions, and generative AI can create new data from data inputs. These technologies can be utilized to engage current and potential donors efficiently and personally, and to understand donor preferences and behaviors. They can also be used in the grant application process.
Along with the use of machine learning and generative AI, nonprofits are increasingly working toward digitization. According to a survey conducted between June and July 2023 and commissioned by software company Unit4, 86% of U.S. and U.K. nonprofit professionals are looking to transform to fully cloud-based enterprise resource planning, finance and HR applications within two years. Such digitization can help improve operational efficiency, decision-making and sustainability.
However, as technology use grows, data privacy issues and ethical concerns arise. For example, increased use of internet-connected technology results in heightened exposure to data breaches and cyberattacks. Additionally, ethical considerations regarding informed consent, transparency and algorithm biases may surface with AI use. With these concerns about AI emerging, nonprofits are vulnerable to liability exposures, regulatory penalties and reputational damage due to inappropriate utilization.
Many nonprofit organizations operate on a limited budget, so investing in robust cybersecurity measures to avoid cyberattacks or recovering from a compliance issue may be more difficult for them than for other organizations. Yet, many cyberattacks can be prevented by providing comprehensive training, securing systems and communications, keeping software updated and patched, and vetting staff and volunteers. Nonprofits should prioritize the ethical use of AI and other technologies by establishing and adhering to strict governance policies regarding their responsible utilization; such organizations should also conduct regular audits of their systems to identify and remedy biases. These measures can help ensure data privacy, protect the organization from damaging misuse claims and demonstrate its commitment to social responsibility.
Talent Shortages
A tight labor market and ongoing labor shortages have increased talent competition, leaving many nonprofit organizations understaffed. A survey from the National Council of Nonprofits conducted in April 2023 found that 74.6% of responding nonprofit organizations reported job vacancies. Since these organizations may find it difficult to offer competitive salaries and benefits, they may lose employees and candidates to higher-paying jobs in the for-profit sector. The same survey found that 72.2% of respondents noted salary and competition impact their ability to recruit and retain employees.
Inadequate staffing at nonprofit organizations may lead to service delays or the complete inability to provide services. In fact, the National Council of Nonprofits survey reported that 28.1% of respondents have a longer waitlist for their services than they did before the pandemic. In addition to issues with providing services, inadequate staffing can lead to financial instability, damaged reputations, cybersecurity incidents, inadequately trained staff and board member liability issues.
To help attract and retain staff, nonprofits can offer enhanced pay and benefits as well as improved workplace advancement opportunities, upskilling events and flexibility. Organizations can also diversify their searches to help attract talent from new talent pools.
Conclusion
Several trends are currently impacting the nonprofit sector this year. By watching these developments and taking steps to mitigate their associated exposures, nonprofit organizations can effectively position themselves to maintain long-term growth and operational success.
Contact us today for additional, industry-specific risk management guidance.
