Challenges in the First Five Years & the Impact of the Pandemic
BryteBridge’s Essential Work of Emerging Nonprofits Study is the organization’s inaugural report. It is the first in a planned annual series of in-depth analyses that will pinpoint challenges and solutions for sustainability in the nonprofit sector.
More than 1.5 million nonprofit organizations are registered in the United States, contributing 5.6 percent of the country’s gross domestic product (GDP). The first five years of a nonprofit’s lifespan are critical to contributing to this growth and setting the stage for success.
Schlesinger Research Group and BryteBridge, a comprehensive nonprofit services organization, launched an investigation into the most prominent challenges facing nonprofits in their first five years. This report also distills key data points about the detrimental impact of COVID-19 on nonprofit business operations.
Survey results revealed four core challenges new nonprofits face: compliance, staffing, financial health, and fundraising.
Key Insights
Core Concerns of New Nonprofits
- The top 2 challenges nonprofits under five years old face are compliance concerns, and fundraising
- Securing 501(c)(3) status and planning fundraising programs are significant 1st year priorities
- 73% of organizations need help with volunteer management in their first year
- 60% of organizations have paid staff, and 82% of those with paid staff had a payroll within the first 2 years of operations
- Fundraising is the predominant concern going forward for 37% of nonprofits
The Pandemic’s Impact
- 79% of respondents report that their nonprofit suffered from a decrease in revenue attributed to the pandemic and 38% said that these revenue cuts were 50% or greater
- Only 25% of nonprofits said they had enough cash flow to comfortably cover expenses without any adjustments to spending
- Nearly 60% of nonprofits had to implement furloughs to survive the pandemic
Core Challenge #1: Compliance
Legal compliance issues are the biggest challenges for emerging nonprofits: 86% of nonprofits reported needing or seeking help in these areas in their first year and 20% cited establishing 501(c)(3) status as a top service needed in the first year of operation.
Federal Filings
Most tax-exempt nonprofits are required to file an annual public report with the IRS, known as the “Form 990.”
While nonprofits that have 501(c)(3) status don’t pay federal taxes, they still have to file a Form 990. This form gives the IRS an overview of a nonprofit’s activities throughout the last fiscal year and helps donors understand how they are operated and managed.
Filing Penalties and Revocation of Tax-Exempt Status
If a Form 990 or Form 990-EZ is not filed, the IRS may assess penalties on the organization of:
- $20 per day for late 990 or 990EZ forms, or forms missing required information or showing incorrect information
- $10,000 or 5 percent of the organization’s gross receipts for unfiled 990 or 990EZ forms
- $100 per day up to $50,000 for organizations with gross receipts exceeding $1,000,000
Core Challenge #2: Staffing
Staffing is a critical issue early in a nonprofit’s existence: 73% of nonprofits report seeking or needing support with volunteer management in their first year. This drops to 36% in later years as organizations build up their teams. On average, 82% of organizations with paid staff had a payroll within the first 2 years of operations.
Building in time to develop a solid and consistent volunteer base is important. Many new nonprofits report challenges finding not only the right volunteers but the right board and employees.
As a result of the pandemic, almost 60% of nonprofits had to furlough some or all of their staff, and over 20% had to implement layoffs. On average, nonprofits laid off or furloughed half their employees.
Core Challenge #3: Financial Health
Fundraising is the predominant concern going forward for 37% of organizations, and the greatest desire for outside help is with revenue-raising activities.
Financial health is the most significant indicator of a nonprofit’s success. Nonprofits typically operate with thin margins, and 48% of nonprofits do not have plans in place for business continuity.
The pandemic made revenue streams even tighter and disrupted nonprofits’ regular activities. 79% of nonprofits reported decreased revenue in 2020. 38% of those said that revenue cuts were 50% or greater. This decrease coincided with an increase in demand.
As of September 2020, just 25% of nonprofits said they had enough cash flow to cover future expenses. Nonprofits formed in the last five years were four times more likely to state that they were close to not being able to cover operating expenses than those with six or more years in existence.
The majority of nonprofits only have three months’ of operating expenses in savings.
Organizations that provide resources or services had to change course. Jessica, founder of a nonprofit that delivers school supplies to at-risk children, had to pause all activity.
Core Challenge #4: Fundraising
Sustainable fundraising practices can be difficult for fledgling nonprofits: 59% of nonprofits cited fundraising as the service with which they need the most outside assistance.
Raising money when much of the nation is struggling financially, like when the pandemic hit, can be especially daunting. Morgan, founder of Bellingham Rock Camp, didn’t know where to start:
33% of nonprofits said the COVID-19 pandemic has had a very or somewhat negative impact on donations. In economic downturns, people make fewer charitable donations. In a remote environment, donors who are willing and able to give money can be even harder to find.
Traditional fundraising methods, such as in-person galas or events, aren’t viable in the current environment. This has put a dent in the pockets of many nonprofit organizations who rely on charitable funding to stay afloat.
Why BryteBridge: Helping Nonprofits Survive and Thrive
As a nonprofit consulting firm, BryteBridge provides the specialized assistance needed to launch a successful and sustainable nonprofit organization. Over the years, the company has honed in on the unique challenges nonprofits face, especially during the critical start-up phase.
BryteBridge pairs nonprofits with consultants and experts with an average of seven years of nonprofit experience to assist with 501(c)3 or 4 status, scalability, compliance, and more. BryteBridge provides three core pillars of support to help nonprofits survive and thrive: Nonprofit Start-Up, Nonprofit Growth, and Compliance.
