Many not-for-profits have seen relatively strong donations in recent years, but the support for future donations might be weaker than it seems.
“The headlines about the strength of contributions don’t tell the whole story. Once you look behind the curtain, you’ll see that the structure supporting those numbers is not very sturdy.”
“Philanthropy overall has been very high in spite of some challenges,” said Grant Thornton Not-for-Profit and Higher Education National Leader Dennis Morrone. “But the headlines about the strength of contributions don't tell the whole story. Once you look behind the curtain, you’ll see that the structure supporting those numbers is not very sturdy.”
Morrone said that recent philanthropy has been boosted by strong financial markets and high housing values that made home-owning donors feel like they had growing wealth. “People said, ‘My household balance sheet is looking strong right now — my retirement fund is looking good, and my home value is going up. I think I can give more.’”
In addition to generous individual donations, some organizations have received high-profile transformative gifts from billionaires who have recently buoyed philanthropy. Such high-profile donations have traditionally been tied to onerous restrictions on their use and could not be applied toward indirect or administrative overhead costs. However, “the pendulum has swung to where some people are giving support and capacity grants with no restrictions. That was previously uncommon,” Morrone said.
“Still, there is a large swath of people out there who believe contributions are stronger than ever and that the current giving patterns will continue,” Morrone said.
Factors foretelling a decline
As household finances have tried to adapt to post-pandemic norms, they have found that prices for staples (like food and utilities) and debt are relentlessly rising. The Federal Reserve Bank of New York’s Center for Microeconomic Data shows that the total household debt balance for US households is now setting new records every quarter.
“The continued rise in credit card delinquency rates is broad-based across area income and region, but particularly pronounced among millennials and those with auto loans or student loans,” said New York Fed Economic Research Advisor Donghoon Lee.
“Households have the most debt they've ever had,” Morrone said. “Household expenses are increasing, which means cash flows are going to be constrained and discretionary spending is going to be judiciously reconsidered — including contributions.” Morrone cited housing prices and increases across the range of typical household and other living expenses, all combining to create financial pressure, especially for younger donors.
“Look at what the data suggests and how donors are reacting,” Morrone said. “The decisions at the grocery store, prioritizing bills, paying the minimums on credit cards, worrying about increasing interest rates and planning for retirement. Any one of these points could be overcome, but not all of them.”
Growing debt, costs and interest rates could push younger givers to trade donations for other forms of support. “Younger givers aren’t demonstrating a propensity to give the way prior generations did. They want to give of their time and participate in the delivery of the mission. They don't necessarily want to finance the mission monetarily. We're seeing a sea change there, which I think is material.”
All of these factors are combining to turn the trajectory of donations. “These are all signs that individual donor philanthropy is likely to demonstratively decline,” Morrone said.
Considerations for today
“What I'm telling CFOs and finance committees is that they need to be attentive to a potential shift that is occurring, in terms of the financial willingness of individuals of younger generations to give,” Morrone said. As not-for-profit organizations form their budgets and forecasts, it could be time to consider some important options:
Funding mix
“Those organizations that have been reliant on individual donor dollars need to consider that past numbers are not necessarily a good indication of future giving patterns and levels.”
Most not-for-profits rely on a mix of support from foundations, private grants, corporate sponsorships, planned giving arrangements, individual donors, fees, special events, or other sources. An organization typically plans on a similar funding mix every year, but this might be the time to reconsider your mix. “Those organizations that have been reliant on individual donor dollars need to consider that past numbers are not necessarily a good indication of future giving patterns and levels,” Morrone said. To adapt, organizations might need to change the way in which they engage with both current and prospective donors to be more personal in nature, ensuring they are immersed in the mission and the impact their giving will have. “I’m seeing more organizations trying to encourage people to contribute monthly through means of direct debits.”
Some organizations might need to make larger adjustments. “This could point you toward altering your revenue mix if you've previously relied simply on individual donors, where now you might need to more intentionally pursue private foundation grants,” Morrone said. Most foundations are less affected by the economic factors that are pressing on individual donors. “Many organizations may need to pursue and rely more heavily on foundations as an alternate or complementing revenue source.”
Programming mix
If an organization cannot avoid declines in revenues and support, it might need to look at its outcomes. “An organization might need to shrink or sunset a program. If it has five programs, maybe it needs to focus on two, the ones that they are known for, and really differentiate themselves,” Morrone said.
Organizations might not want to make difficult decisions about their programs until necessary, but they can benefit from considering and discussing options in advance. These options can even include a merger for a common mission. “If you know that you are fighting for the same dollars from the same donors as another organization, then you might need to think about a way to bound together and say ‘Now, we’re not two distinct charities. We're one charity,’” Morrone said.
Staffing mix
Staffing might be the most complex consideration in this environment. Some organizations have development functions that are struggling to keep up, or are discovering untapped opportunities. “I am hearing from organizational leadership that they want to expand development functions,” Morrone said.
However, Morrone said that organizations need to consider a couple of factors before adding staff. He cited the concept of terminal velocity as a metaphor: When objects fall, they accelerate up to a point and then maintain that speed. Likewise, an organization can have a terminal velocity for fundraising that is set by its overall size, mission, brand, area of service and other factors. As long as those other factors remain the same, any effort to add people to the development function will reach a point of diminishing returns. Organizations need to ensure that their development function is appropriately sized in line with the other factors that define its potential support.
Secondly, organizations need to ensure that they can scale up or down their operations and related staffing complement to align with revenue ebbs and flows and programmatic needs. “If you’re going to make new investments, maybe first consider implementing new or further leveraging existing technology to enable additional efficiencies and capabilities rather than hiring more staff,” Morrone said. “If you need to change your mind about that in a couple of years, it’s easier to course correct.”
Awareness for the future
Beyond individual considerations, organizations need to be aware of possible donation declines as they develop their budgets and forecasts for the future.
“Organizations generally develop plans that include growth, but I think organizations need to be thinking about how they can still maintain relevance and program effectiveness while shrinking, or if they can alter their revenue sources to avoid concentrations of support,” Morrone said. “Organizations need to be in a continuous state of strategic planning and financial modeling.”
“Size your expectations in a way that is responsible, and avoid creating unrealistic expectations for performance,” Morrone said. “The organization and its board also need to be strategic in the way that they support and complement development team efforts to derive philanthropy.”
“Perceptive CFOs and development functions should understand this situation,” Morrone said. Leaders can prepare now by considering alternative revenue streams, scaling operations, merging, securing foundation grants and even redoubling efforts around special events. “Even think of the ways that your organization shares, reports and promotes its mission. Is it reaching the right demographics?” Morrone asked.
In light of recent philanthropy trends, now might be the opportune time to evaluate your operating cost structures, strategic plans, breadth of program offerings, revenue mix and the staffing complement of your development team, all with a keen eye toward program and brand optimization. Be aware of the possible challenges ahead and consider ways that you can react. By appropriately sizing your expectations and plans, you can be strategic about how you achieve your mission into the future.
Contact:
Dennis J. Morrone
National Managing Principal, Not-for-Profit & Higher Education Industries
Grant Thornton Advisors LLC
Partner, Audit Services, Grant Thornton LLP
Dennis Morrone is the National Managing Partner of Grant Thornton's Not-for-Profit & Higher Education Practices.
Iselin, New Jersey
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