The first in a three part series on financial trends for NPOs in Canada, this post tackles how the economy and government funding are impacting nonprofit organizations.
Both the economy and government policies can have a significant impact on nonprofit organizations (NPOs). Without a doubt, economic factors will impact organizations differently depending on location, size, specific mission, and service delivery model of the organization.
The goal of this post is to encourage leaders of NPOs to think about the changing landscape and the potential risks and opportunities for their NPO.
Overall Economic Slowdown
The implications of an economic slowdown are complex and multi-faceted.
Some specific ongoing considerations include:
1. Stock market volatility
The Canadian stock market took a nosedive in late 2018 on fears of a global economic slowdown, but after a period of volatility in late 2018, the Canadian stock market, as measured by the S&P/TSX Composite Index, reached new all-time highs in 2022, but then declined considerably from those highs.
A strong stock market can increase the value of investments held by nonprofits, allowing them to generate more income through dividends or capital gains. This can provide additional funding for their operations and help NPOs achieve their mission. That said, a volatile or declining stock market can reduce the value of nonprofit investments and decrease their available funding, which can make it more challenging for organizations to meet their financial obligations and achieve their goals. A volatile stock market may leave donors feeling less financially secure, and consequently donations may decline. A declining stock market can also reduce overall giving considering that donations of securities has become a common donation vehicle in Canada.
Of course, this will have a more significant impact on NPOs that hold large portfolios of equities.
2. Changes in the Real Estate market
The housing market in Vancouver and Toronto has cooled off. After several years of strong growth, the Canadian housing market as a whole saw a slowdown in 2018, due in part to changes in government regulations and increased interest rates. This slowdown was particularly pronounced in the Vancouver and Toronto markets, which had previously been among the hottest in the country. Recently, prices in these cities have stabilized, and in some cases declined, leading to a more balanced market.
Housing prices can have diverse impacts on an NPO. For one, high prices can drive talent out, and many NPOs provide hands-on services that cannot be delivered remotely. In addition, NPOs that provide housing and shelter may not be able to meet their objectives as market prices increase.
Declining real estate values, like declining stock markets, can lead to lower donations and endowments or decreased returns that impact revenues and consequently, the ability to deliver services.
3. The lasting impacts of global pandemic
COVID launched us into a period of long-lasting uncertainty. The rapid spread of the virus and subsequent lockdowns led to widespread job losses and economic disruptions, which have had long-lasting effects on many individuals and organizations. The COVID-19 pandemic highlighted existing inequalities and created new ones, and its impact will likely be felt for some time to come.
In addition to the direct effects the pandemic has already had, the ongoing unpredictability surrounding the course of the pandemic, the availability and distribution of vaccines, and the timing and nature of government response measures have all contributed to a sense of uncertainty that is likely to persist for some time.
While the world has made significant progress controlling the spread of Covid and restarting economic activity, it has had a significant impact on the way we work. There have been a number of “forced” changes, many of which are likely here to stay. Whether that be a shift from in-person to virtual events, in-office to remote work, or just how employers handle health issues in the workplace, it’s likely that Covid will leave its mark well into the future.
NPOs can take advantage of many of these opportunities; from remote work to greater acceptance of technology, new opportunities exist to deliver services in a more cost effective and efficient way. On the other hand, depending on the nature of the NPO, these changes may lead to the opposite if face-to-face service delivery cannot be replaced.
The Freelance/Outsourcing Economy
Many nonprofits are outsourcing more as a way to reduce costs, increase efficiency, and access specialized skills and expertise in non-core functions, but outsourcing can be both positive and negative for nonprofit organizations. On the positive side, outsourcing certain non-core functions like administrative tasks, bookkeeping and back office functions, or IT support makes great sense and can allow NPOs to save money and focus resources on the folks that are core to delivering on their mission.
Outsourcing core roles and functions, however, can create cultural and communication challenges if the organization relies on staff who are not familiar with or “bought into” the organization's values and goals.
Ultimately, the impact of outsourcing on nonprofit organizations will depend on the unique circumstances and how organizations plan for, communicate, and manage the process.
Increasing cost of doing business
As costs increase, it can be challenging for nonprofits to stay within budget, which can lead to a reduction in services, staff cuts, and other setbacks. Where for-profit companies can more easily increase prices or shave out unnecessary expenses, organizations that receive donations as their main source of funding get squeezed as households struggle to keep up with rising costs. This is exacerbated by rising costs associated with salaries, rent, utilities, and other expenses. This can put vital services delivered to communities at risk and can limit expansion opportunities.
Increase in competition for donations from individuals and corporations
It’s well known that the nonprofit sector in Canada is becoming more competitive as the number of organizations competing for donations continues to grow. This has made it even more important for nonprofits to differentiate themselves and clearly communicate their value proposition to donors.
There are a number of reasons for the increase in competition for donations from individuals and corporations:
- There are more nonprofits overall: The number of nonprofits in Canada has increased in recent years, leading to more competition for donor dollars.
- More awareness and activism: Social media and other digital channels have made it easier for people and organizations to learn about, and support the causes they care about.
- Shifting donor demographics: As younger generations get more involved in philanthropy, they bring different points of view and preferences for how they want to get involved and support causes.
- Economic factors: Economic uncertainty, including the pandemic, lead to fluctuations in funding and donations, which often increases competition for a smaller pool of resources.
- Political/Legal factors: Changes in government regulations and tax laws can affect the amount and types of donations available, leading to increased competition for donations.
Overall, the increase in competition for donations mirrors the changing landscape of philanthropy and the growing importance of the nonprofit sector in Canada.
Increased competition for donations can have the following effects:
- More pressure on nonprofits to communicate their value proposition and differentiate themselves from other organizations.
- A focus on more strategic fundraising practices to stay ahead of the competition.
- A focus on building stronger relationships with donors to secure longer term relationships.
- Innovative and more creative approaches to fundraising that enable organizations to stand out.
- A stronger online presence and social media strategy
Potential Decrease in Government Funding
The Canadian government has gone on record with their commitment to reduce the Canadian Debt-to-GDP ratio. Mounting pandemic deficits “must be reduced” according to Minister of Finance Chrystia Freeland. There is no doubt that this will impact funding for nonprofits, although the details are not yet clear.
Looking ahead, the biggest challenge for the nonprofit sector in Canada is likely to be the continued uncertainty around government funding. With many social programs facing possible cuts, nonprofits may need to find other sources of revenue to maintain their operations.
NPOs can also be impacted by how government funding changes abroad. The new tax laws in the United States could have a negative impact on Canadian nonprofits that rely on donations from Americans. Furthermore, a change in political administration may lead to greater uncertainty in funding, or outright decreases in government spending.
Increased government regulation and scrutiny
Canadian nonprofits are under increased scrutiny from government. This has led to more regulations and a greater compliance burden, as well as increased expectations around transparency. The good news is that this added scrutiny leads to a better understanding of the important role that NPOs play in our society. As a result, they are more widely recognized as key players in solving social challenges.
The one certain in all of this, is uncertainty itself. With a possible recession on the horizon and a pandemic that shows no signs of ending, the future is anything but clear for Canadian nonprofits.
A recent Ipsos poll suggests that 22% of Canadians are “completely out of money” and can no longer pay more for household necessities. To make matters worse, another 32% say that when it comes to inflation and the rising cost of household necessities (food, clothing, transportation and shelter), they would have to make major changes to how they spend their money in order to pay for increased costs. That means that 54% of Canadians will be unable to handle additional price increases.
So if one thing is crystal clear in all of this, it’s that more and more Canadians will be turning to the nonprofit sector for support.
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