By Lee Klumpp, CPA, CGMA
Six years after the start of the Great Recession, most not-for-profits (NFPs) are still trying to navigate through a troubled economy that continues to loom over most of the nonprofit sector. However, simply keeping the lights on is not the only issue facing NFPs. All nonprofits, including those with deep pockets and reserves for a rainy day, are likely to struggle with some of the following issues and their fallout throughout the remainder of 2014 and going into 2015. The following are the top 10 current trends for NFPs to watch for over the next couple of years:
1. Increased Competition for Financial Resources
This is a trend that began in 2008, with the start of the Great Recession, and has continued throughout 2014 with the scarcity of financial resources available for nonprofits to meet their programmatic needs. However, it has developed into increased competition for financial resources among nonprofits and has made it more important than ever
for boards of directors to participate in their organizations’ fundraising activities. We have observed an increasing number of nonprofit organizations adopting a policy of “pay to play,” which means that the board members need to either contribute to the organization or get others to contribute in order to be on the board. This works well for some prestigious community organizations, colleges and universities, and healthcare organizations but it doesn’t work for all nonprofit organizations.
2. Increasing Service Gap
Over the past couple of years there has been a significant decline in government funding of many nonprofit organizations’ programmatic activities by state and local governments and the federal government due to the recession. This has created a service gap due to the increased demand for services by communities and individuals that nonprofits provide. In 2013, more than half of the nonprofits surveyed by the Nonprofit Finance Fund reported they didn’t expect to have enough resources to meet increased community needs that they were projecting. This increased need for services and the lack of resources available to nonprofits has created a service gap for many nonprofits. This is likely to continue to increase until the economy improves.
3. Importance of Advocacy
Due to the changing environment in the nonprofit sector and the significance of the trends noted above, it is important now more than ever for nonprofits to advance their missions through advocacy. Advocacy is not the same as lobbying. Advocacy is the education and promotion of certain ideas, knowledge and needs of the NFP’s constituency to those that are in a position to change or shape current and future policy and legislation. Lobbying, on the other hand, is the act of attempting to influence decisions made by officials in the government, most often legislators or members of regulatory
agencies. The difference between the two is that advocacy shares information and educates policymakers on the needs of their communities and constituents.
4. Continued Scrutiny
There continues to be scrutiny and emphasis by stakeholders, regulators, watchdog organizations and donors for organizations to focus on good governance. This scrutiny of nonprofits is often in reaction to sensationalized stories about individuals or groups that abused their organization’s tax-exempt status. Therefore, it is more important
than ever that NFPs be transparent and adhere to ethical and accountable practices in all programmatic and financial areas including the very sensitive topics of fundraising and executive compensation.
5. Transparency About Outcomes
It continues to be important for nonprofits to be transparent not only about their finances, but also their outcomes. Donors want to know how their money is being spent. There has been a debate in recent years about outcomes and how outcomes should be managed, measured and reported. Part of the debate has been due to the subjectivity of outcomes
and the lack of a framework for measuring and reporting outcomes. Outcomes generally relate to how a nonprofit is making progress toward the change it is trying to accomplish related to its programmatic goals and mission.
6. Overhead Myth
The overhead myth dialogue between nonprofits and funders – in which organizations relay how much it really costs
to run their operations – remains under pressure by those calling for more effective performance metrics. In June 2014, three of the top watchdog agencies, Charity Navigator, GuideStar and BBB Wise Giving Alliance, announced in an open letter to American donors a joint initiative to shatter ”the overhead myth” once and for all, declaring that overhead ratios are not the best way to judge a nonprofit’s performance. We anticipate that the growing awareness around the overhead myth will help stakeholders focus on other more important measures about nonprofits’ performance.
7. Tell an Organization’s Story
We expect to see a continued increase in the use of data visualization, such as infographics, by NFPs and others to convey their story. Through the use of infographics and other such tools, many nonprofits show how they have met their programmatic objectives, outcomes and missions. Using pictures and graphics to tell a story or to get a reader’s
attention is becoming more popular and organizations must ensure they are using these tools effectively. Additionally, the Financial Accounting Standards Board’s project entitled, Financial Statements of Not-for-Profit Entities proposes various improvements to financial reporting of not-for-profit entities that focus on how NFPs communicate information
about their financial health and performance through the financial statements to donors, creditors and other stakeholders.
8. Crowdfunding and Online Giving
With the advancements of technology and its increased usage in our everyday life, nonprofits are now receiving donations via text message, mobile apps and various online giving platforms, including social media sites. According to a Pew Research Center study, 60 percent of adults use their phones to browse the internet. Thus, a charitable nonprofit that doesn’t have the capacity to receive contributions online and/or through a mobile device is seemingly at a competitive disadvantage. Additionally, there seems to be a trend developing among cause-oriented charities to use social media to attract volunteers. (An example of this scenario is discussed in Laurie Arena De Armond’s article on page 4.) Many organizations have revamped their websites to optimize viewing from mobile devices. Additionally, crowdfunding has become an intensely popular method for small entrepreneurs to raise the funds necessary to make their ideas for products a reality, and has started to migrate over to the NFP sector.
9. Technology Utilization
The cloud epitomizes the rapid increase in technology tools that offer NFPs a place to convene, converse and share/store data. In many cases, migrating to the cloud is less expensive than a new server and provides more protection from data loss. NFPs may need education and/or encouragement to understand the pros/cons of moving to the cloud. It is important for an NFP to understand that not all clouds are created equally. Before an NFP decides to move to the cloud, it is important that it does the appropriate level of due diligence. When contemplating cloud services, it’s critical that organizations keep in mind considerations such as data security, access controls, the ability to update and change software and the ability to implement contingency plans and disaster recovery plans, among many other issues. In trying to ensure that a third-party cloud service provider has the right internal controls in place to meet your needs, ask them for a report prepared under audit standard SSAE-16. This standard governs reporting on internal controls with a variety of potential objectives in mind. These reports are referred to as Service Organization Controls (SOC) reports and can vary with respect to purpose (financial reporting or internal controls reporting), extent of testing (evaluating design or testing operating effectiveness) and, in the case of internal controls reporting, specific control objectives may be selected depending on the nature of the services provided. Certain service providers may also report against different standards, including international controls frameworks or standards driven by compliance needs related to issues such as privacy or national security. Due diligence is necessary in evaluating potential cloud service providers and consultation with legal and financial experts should be considered.
10. Succession Planning
Several years ago, predictions were that the retirement of baby-boomers would leave a significant void in the leadership and the institutional knowledge of many nonprofits in the United States. As the workforce is infused with Gen Xers/millennials, they are enthusiastic and eager to make their mark on the world, but need to acclimate themselves
to their new roles and the nonprofit environment. Cross-generational empathy presents a new challenge. At the core of this trend is the heavy burden placed on staff leaders of any age requiring that they need to be good managers of people, gracious with demanding donors, tech wizards, advocates for their missions, equally savvy with legal issues and social media and, at the same time, strategists able to keep their nonprofit “on mission.” On top of all that, they are expected
to be world-class fundraisers.
For more information or questions on currents trends in the nonprofit sector, contact a Templeton advisor.
This article originally appeared in BDO USA, LLP’s “Nonprofit Standard” newsletter (Summer 2014). Copyright © 2014 BDO USA, LLP. All rights reserved. www.bdo.com