Payroll accounts for at least half of the budget of most nonprofits. When labor costs increase, organizations often look at ways to rein in expenditures, create more revenue, or manage a combination of the two. We sat down with Nonprofit Partner Bobby LaCour, CPA, to get his insights on why so many nonprofits are facing heightened labor costs—and what they can do to compensate.

The California minimum wage increase to $20 per hour for fast-food workers came into effect April 1, 2024. As organizations develop their budgets for the coming year, I’m seeing growing concern among executives and board members about the impact of this increase.

Even though the legal requirement hasn’t changed for everyone, the increase for fast-food workers means the minimum wage for everyone in California is essentially $20, if organizations want to stay competitive.

We’re still too early in the process to see the full implications, but we know this change will have a big budgetary impact. For example, an organization has 100 full-time employees making minimum wage and they need to increase everyone’s hourly wage by $3, that’s more than a $625,000 impact on a nonprofit’s budget annually. The concern is where is that money going to come from? What does the organization need to do to make up that shortfall?

They can start by thinking about their operations holistically: Is everything they’re doing critical to the success of the organization? If you have a program that’s non-essential to the organization’s mission and it’s not successful, not paying its own costs, you need to evaluate whether it should be continued.

During the COVID-19 pandemic, a lot of nonprofits started new programs to fill needs that were unmet in the marketplace. Those programs were ancillary to their mission: it was “We’re going to jump in and provide this needed service.” Maybe they received a specific grant to fund that service, and now it’s expiring. It’s time to think about whether that service is critical to the mission and if other providers can do it better.

Sometimes those programs become mission-centric. An organization I know in San Diego received a grant during the pandemic to help provide diapers in the community. That funding is coming to an end, but people are reliant on this now mission-critical service, so they’re looking for a new way to fund it.

And sometimes organizations picked up or started new services because of the pandemic and have found they’re actually better at providing those services than they were at their original mission. They’re successful as an organization because of the new focus.

All organizations need to take a hard look at where they’re most proficient and effective right now and making the biggest impact —not five years ago, not right before the pandemic, not three years ago. Look at it like a business owner would: “Is this specific program making money?” If the answer to that is no, there’s nothing wrong with that. But there needs to be another program that is making money.

Organizations should be seeking funding, including government grants and private donations, to cover specific programs or sections of the organization. I’m on the board of directors of an organization that’s decided to raise wages to match the fast-food minimum. Knowing this was coming, we tried to get out in front of it: We applied for and were awarded a new grant that will help offset that impact.

This is also a critical time to think about earned-revenue opportunities. What services is your organization providing that somebody would be willing to pay for? (For more on grant and earned-income initiatives, read about  how nonprofits can balance their revenue streams for greater financial stability.)

Special events have traditionally been significant opportunities for funding among nonprofits, often marked by annual galas with scant strategic consideration. However, the pandemic prompted a shift to virtual events that, despite their low cost, proved lucrative. Now, as live galas resume their pre-pandemic prominence, it is crucial to assess their true value.

Consider a scenario where an event generates $1 million but incurs $850,000 in expenses—is the net gain of $150,000 worth the effort, or could alternative fundraising strategies not only save on costs but also potentially enhance returns? For some organizations, achieving revenue neutrality through special events might suffice, particularly for brand visibility. Yet, for those reliant on these events for a significant portion of their annual fundraising, it’s imperative to question what distinguishes their gala in a sea of similar invitations. This reflection might be the impetus to devise more creative and engaging fundraising approaches that resonate more deeply with potential donors.

The nonprofits that will be most successful at managing rising labor costs are the ones that look carefully at each of their offerings, from programs providing individual services to special events. They’ll assess how the mix of elements contributes to their financial stability, eliminate nonessential programming, and seek out ways to raise new funding.

Rising labor costs are here to stay—and staying financially successful requires a multipronged cost-saving and revenue-raising strategy. If you’re ready for help navigating this new normal, let’s talk.