The Silent Struggle: Why Nonprofit Deficit Aversion Harms the Mission

Happy New Year! If you’re wondering why I’m wishing you Happy New Year on July 1, I guess you don’t work in the nonprofit sector. July 1 is Nonprofit New Year because it’s common for nonprofit organizations to end their fiscal year on June 30.

Why? Well, I always heard that nonprofits end their year on June 30 rather than December 31 like for-profit businesses because that means the accountants they depend on to do pro bono audits are more available because it’s their off season after doing corporate audits in January and personal taxes for April 15. But that may be apocryphal.

In any event, it’s now the “New Year” FY 26 for many nonprofits. With that turn of the calendar fundraisers are now at zero dollars raised and are starting all over again with their annual fundraising.

The run up to the year-end can be a frenzy to get enough gifts committed by June 30 to end the year break-even or in a surplus. That’s why you’ve been getting cheery emails from all the nonprofits you’ve ever donated to…yet they all have a sense of urgency you don’t quite understand.

That’s because the fundraising staff is feeling the pressure to get in enough money so that the nonprofit shows a break-even or surplus financial result for the 2024-2025 fiscal year. That’s a lot of stress – hence the urgent emails.

A significant contributor to this stress is the ingrained pressure on nonprofits to avoid an annual deficit at all costs. This mindset, while seemingly responsible, actually makes fundraising harder and undermines the very missions these organizations strive to fulfill.

Let’s unpack why this intense focus on avoiding a deficit is a problematic trap for the nonprofit sector.

The Underinvestment Trap

The U.S. nonprofit sector operates as a highly competitive marketplace, with nearly 2 million organizations vying for donations. Despite this, there’s a pervasive underinvestment in fundraising operations and overall nonprofit management. Donors and board members, often accustomed to the for-profit world where efficiency means more profit, tend to view nonprofit spending through the same lens. They observe what they perceive as inefficiencies – like clunky software systems – and fall into stereotypes about the nonprofit. They conclude that the organization must be a typical poorly run “second-rate” organization for not fixing these issues. This can lead them to believe the nonprofit isn’t worthy of larger donations, fearing their money would be wasted on their inefficient operations. Or, as my previous post in this series discussed, lead to board members withholding their connections for gift prospects.

Another way that nonprofits are discouraged by an underinvestment mindset trap is investing in people and systems that take more than one year to pay off. This is where the avoidance of a deficit really hurts nonprofits. Investing money in staff, (like an additional major gift officer) or technology (like a better CRM), or professional development, or consulting services, costs money that may not return in the same year – but will pay off in 2 to 3 to 5 years. If there’s so much pressure on not having a deficit in a single fiscal year, then nonprofits are discouraged from investing in themselves long-term, even if it would benefit them financially. Donors and board members are much more sensitive to the one-year timeline for nonprofits then they are for the businesses they own or work for, where it’s normal to make investments that take more than one year to yield financial results.

What many donors (and even some internal staff) fail to recognize is that financial constraints actively prevent spending on more efficient systems or activities that would enhance effectiveness. The goal becomes simply to spend less money, rather than finding optimal efficiency between spending and outcomes. Ironically, donors, who would invest in resources for efficiency in their own businesses, forget the lessons that are applicable from the private sector because their biases against the nonprofit sector get in the way. This creates a vicious cycle where under-funding perpetuates perceived inefficiency, further discouraging investment.

The Short-Term, Major Gift Obsession

This mentality of nonprofits not being “worthy of resources” leads to underfunding not only programs but also fundraising itself. Raising money requires spending money on staff, marketing, and events. Under pressure to meet annual revenue goals, fundraisers are incentivized to focus heavily on major gifts – the biggest donations from a few individuals – because these are tangible and seem efficient, but this focus on a handful of donors means that “major donors” receive most of the attention from leaders to the detriment of developing a broader base of supporters.

This short-term thinking and over-emphasis on major gifts comes at a significant cost:

• Neglect of Mid-Level Donors: Resources are diverted away from cultivating and stewarding the broader base of mid-level and lower-level donors. This means there aren’t enough donors “in the pipeline” to “move up the ladder” over time, impacting the organization’s long-term financial health.
• Reliance is Risky: Relying on a few large donors is inherently risky, as losing even one can severely impact operations and mission delivery.
• Donor Fatigue: Major donors can experience “donor fatigue” from constant requests, while “regular donors” may stop giving because they feel their smaller gifts “don’t matter”.

Fundraising as the Work Itself

The pressure to avoid a deficit also creates unrealistic financial expectations on fundraisers, leading to burnout and high turnover in the profession. Fundraisers operate in a high-pressure, under-resourced environment, often feeling unsupported. The collective belief that resources are fixed and can’t grow also hinders innovation and motivation within the organization.

The truth is, raising money is not a distraction from the work; it is an important part of the work of nonprofits. It guides organizations to be more strategic and produce meaningful results because donors want to know the impact of their donations. For the nonprofit sector to be truly effective, more respected, and attract more resources, it needs to abandon the scarcity mindset and the relentless pursuit of zero-deficit at the expense of long-term health of the organization.

A sustainable approach recognizes that investment in capacity, staff, and a diverse donor base (especially mid-level donors) is not a waste, but a necessity for achieving meaningful outcomes and building robust, resilient organizations that genuinely serve the public good. It’s time for leaders to acknowledge this core problem and courageously shift their organizations towards a model where robust investment in their operations is seen as essential for fulfilling their missions, not a sign of failure.