For years I’ve been assuming 3% annual inflation in financial projections for nonprofit business planning clients. Though none have objected, more than a few felt that was a pretty liberal estimate—the era of nearly constant costs felt permanent. I’d point out that inflation will return, just a question of when.
I was right, though I’ll admit to never predicting disruption of global supply chains, a dwindling labor supply for many jobs, a flood of often unneeded government support or food and energy markets thrown into chaos by a European war. That all happened, though, and now we need to adapt.
Inflation has big implications for nonprofit management. Every organization I know of is dealing with inflation and its dominoes right now. Some realize that structural changes are needed, while others are waiting for the channel to change back to regular programming. While my crystal ball is a bit cloudy these days, I’m guessing this new era of inflation will be with us for a while. What actions can managers take now?
Here are a few ideas to consider:
Photo by Eth Olieman via Unsplash
1. Craft a Staffing Strategy
What is your underlying philosophy around staffing and compensation?
That may seem like an odd question in an article about inflation. What’s philosophy got to do with it? Don’t you just post needed positions, find the best applicant, hire them and hope they stay?
A staffing strategy looks at the long game, which starts with a philosophy. And that can have everything to do with managing inflation.
Many nonprofits brag about how committed their staff members are to their mission and the people they serve. There’s usually some truth behind this, but many of the same organizations had high turnover rates even before the pandemic kicked in. Stress and low compensation made for a challenging environment to recruit and retain staff. Whatever turnover was before 2020, it’s generally worse now. In 2022, nearly all employers are struggling to fill vacant positions and keep their best people on board.
Nonprofits have long offered rewarding work. That’s not enough in this market, where wages have risen and workers have choices. This is especially true for high-stress jobs.
A strategy should define your place in the labor market and clarify your value proposition to employees. It should also address how you will allocate staffing resources. A strategic approach must consider the costs of vacancies, recruitment and onramps for new hires, as well as the indirect costs of turnover—not the least of which is manager burnout. You can’t print money, but you can decide how to spend your money to get the best results.
An example of a philosophy that can anchor a staffing strategy is to hire the minimum number of people to accomplish your goals, pay them above the market median, offer generous health benefits and focus on a supportive work environment that favors autonomy and creativity, all of which may distinguish you from competitors. This approach emphasizes retention, and may involve eliminating or consolidating some existing positions. A lot is expected of staff members. But, in return, they are rewarded and nurtured.
This particular philosophy may not work for every organization, but a thoughtful, proactive strategy will likely yield better results than reactive tactics alone. It’s a crucial way to fight inflation, which, left on its own, will tend to make a bad labor situation worse.
2. Revisit Productivity
Productivity is one of those economic terms that make nonprofit folks cringe. “Our people are incredibly productive,” managers say. The proof? “Look how hard they work.”
That’s not what productivity is.
Productivity looks at outcomes as a function of staffing inputs. Some nonprofits are highly productive with just a handful of staff. Large staffs can also be very productive. And I bet you’ve seen the opposite, in both large and small organizations (including businesses). Productivity has increased steadily over many years in our economy. The sources can be better technology, improved operational systems and sometimes redesigned service delivery. Changes can be counter-intuitive and may involve giving up popular features, like high-touch personal interactions with clients or the public.
Inflation demands that nonprofit managers look at accomplishing more with less, and productivity improvements can be anti-inflationary. When service cuts are the alternative, everything should be on the table.
3. Take a Systematic Approach to Cost Containment
Expense management was easy in the low inflation era. Now this task is hard work—or at least it should be. Digging deep, exploring creative options, and even paying professionals to analyze costs or find alternatives may have favorable returns on investment now. Alien concepts like outsourcing may thinkable now—or at least they should be.
Nonprofits often neglect cost-containment dirty work, but it actually plays on a strength: thriftiness is in great supply in the sector.
Start with your largest expense items, identify the areas of potential impacts and dive in.
4. Raise Prices
Your costs are going up. You have to raise your prices.
This includes tickets to events, fees for services, rents, contract and reimbursement amounts and grant budgets. Yes, even grants and philanthropic requests imply pricing. This is true anytime you promise a result in return for a gift. Your ask amounts need to go up.
If you think you can’t or shouldn’t raise prices, consider alternate pricing structures, creative ways of subsidizing fee-based services or changes to your mix of clients, which may increase total income. In some cases there may be contractual or regulatory obstacles to pricing changes, and this may require longer negotiations or advocacy. Now is the time to start, and by all means aim to increase your income per unit of service and work the numbers to find the best solutions.
5. Put Your Money to Work
How much interest are you earning on your cash reserves?
Probably zilch or close to it. That’s what many banks and so-called money market funds offer, and they’ve trained their customers to expect nothing. Even in low-inflation times, that money was actually losing value every month. Now its real dollar value is in free fall.
It’s no longer necessary to earn nothing from your savings. Plenty of banks offer interest-bearing savings accounts and CDs (GICs in Canada). CD ladders can maximize returns while ensuring liquidity. This all requires less time than writing and reporting on a grant, with a potentially high upside. The big banks don’t want you to know this, but I do. So, shop around and move your money.
To clarify, I do not recommend putting operating reserves at risk. I’m talking about insured, risk-free accounts that help offset some of the bite of inflation.
Consider that the difference between $500,000 sitting in a no-interest acount vs. the same funds in insured accounts earning 2% is $10,000 a year. If you have more cash reserves (as many nonprofits do), multiply that out… as rates rise (which is almost certain), this differential will only grow.
And, speaking of reserves, please don’t dig into your unrestricted cash to pay the costs of inflation. That can get you into trouble in a hurry. Inflation may be bad, but a recession and/or stock market “correction” could be on the way—and both would be worse news for nonprofits. Maintaining your reserves is your best buffer, should either happen.
Instead, get out in front of this. The good news is that when inflation does settle down, many of the adjustments you make now can be gifts that keep on giving.
-Scott Schaffer