Good Cuts + Bad Cuts: Don't Let Your Non-profit Make These Budgeting Mistakes
Your nonprofit may have to make cuts this year. Maybe it was going to happen anyway, maybe it's related to the economic uncertainty, or maybe it's related to the change in Federal Grant priorities.
When it comes to making budget cuts at nonprofits, just like with haircuts, some cuts are good and some cuts are bad. The right cuts will allow your organization to survive and eventually recover. The wrong cuts could lead to closing your doors.
How did we get here?
The pandemic in 2020 led many profits to make serious cuts on short notice. The change in Federal grant priorities in 2025 did the same. Of course, in any given year many nonprofits will have to make cuts due to other circumstances that are not on the front page of the newspaper.
Don't do these things
When making cuts to your budget it is so easy to make a mistake. Let's name a few:
Across the board cuts. It might feel “fair” to treat every program the same, but few things can sink your non-profit more than making across the board cuts: basically cutting each program, each activity, by the same percentage. Doing this assumes that every activity has the same mission importance and the same financial impact as every other activity, and that simply cannot be true.
Clinging to legacy programs. Beloved legacy programs absolutely should continue into the future in some organizations and some circumstances. Unfortunately, some legacy programs that have outlived their usefulness yet continue on for years in some nonprofits in sort of a zombie state. To make the healthiest, most effective cuts you have to focus on those cuts that get you to financial health while preserving core mission.
Letting the squeakiest wheel win. Every organization has some stakeholders who are more vocal, and sometimes more drama inclined, than others. Letting those people dictate decisions is a recipe for making the wrong budget cuts. Instead successful nonprofits keep the mission and the organization's financial health as their North Star.
Misclassifying necessary and unnecessary expenses. It's easy to forget in difficult budget times for that time equals mission impact. As we’ll see shortly, some cuts can harm the organization in ways that don’t appear directly on the financial reports. For example, turning off heating and air conditioning in the office would definitely decrease your utility bill. But that choice could have a large negative impact that isn’t named on the financial reports: staff morale, productivity, and turnover.
Rushing. Very few people make the best decisions when tired, anxious, or under tight deadlines. In these circumstances, we can find it hard to think clearly and don’t have time to gather the information or group input that can lead to the best decisions. Instead, building a contingency budget allows you to carefully plan before the organization is in crisis. More on that here.
A winning combination: strategic cuts and strategic investments
Research has found that the organizations that made across-the-board cuts were the most likely close their doors during the 2008 recession. It might feel “fair” for them to treat all of their programs and activities equally, but the final impact was that even more people lost their jobs (which in the long-term seems much less fair, doesn’t it?).
What about organizations that were most likely to survive the recession? Those that made it through the strongest were those that made strategic cuts and strategic investments. We’ll dig in on strategic cuts in just a minute.
What are strategic investments?
Strategic investments for these organizations meant investing in things that were most likely to pay for themselves quickly through improved productivity and morale.
I’ve seen this in action myself. I once got to work with a great organization that had a blind spot in this area. They had smart leaders, skilled staff, and a blue-ribbon board, many of whom came from the tech sector. But staff all had computers that were all five or more years old: they processed slowly, needed frequent rebooting, and constant tech support, causing almost daily work distractions and delays. Then I connected the dots for leadership, helping them see that the lost staff productivity represented an invisible expense to the organization that we estimated, conservatively, at $1,500 per employee per year. When we compared that to the price of new computers, we saw that the new technology would pay for itself in less than six months!
Strategic investments can create big savings
Though it might sound counterintuitive, you sometimes must spend money to save money.
In our personal lives, low tire pressure in a car can lead to poor mileage and reduce the life of your tires. That’s why we should always be willing to take five minutes and spend a few quarters to keep the tires properly inflated, right?
When it comes to our nonprofits, the same investment in technology mentioned above can have more benefits: better employee engagement and retention.
Harvard Business Review found that, “Employees are 230% more engaged and 85% more likely to stay beyond three years in their jobs if they feel they have the technology that supports them at work.”
That increased engagement means more productivity.
The decreased turnover results in even bigger savings. Turnover can cost 50-100% (or even more) of annual employee compensation. Even a conservative estimate of reduced turnover can translate into significant savings.
Let’s add it up!
Based on what we know so far, we can make some conservative estimates about what sort of savings a nonprofit might expect if they say yes to technology investments and remote work.
The charts below, using conservative estimates, show how the Penny-Wise Agency spends more than double on technology compared with the Pound-Foolish Agency. Nonetheless, they end up saving money through reduced turnover and increased staff productivity.
Which cuts are strategic?
Part 1: The Matrix Map
One of my favorite tools to answer this question is the Matrix Map. You can involve your stakeholders in this exercise so that everyone can quickly see, on a grid, which activities are most mission-aligned and make the most money (and which do not).
Learn more about the Matrix Map in this brief video.
Which cuts are strategic?
Part 2: Your “Unique Value Proposition”
The Matrix Map alone might not get you to optimal clarity.
When you understand your nonprofit’s Unique Value Proposition (UVP), you can make cuts that are even more strategic. A UVP simply identifies and states what your organization does better than others.
Your community likely has other nonprofits with programs that overlap with yours. Austin, TX, for example, has more than a dozen nonprofits that work on hunger. While each of them does good, important work, they can’t all be the best at all aspects of addressing hunger, right? The UVP for each of those organizations might look very different:
Helping individuals sign up for SNAP benefits
Serving hot meals to the unhoused
Rescuing and redistributing surplus food from supermarkets and commercial kitchens
Operating a food bank with non-perishable items
A nonprofit that understands its UVP, and that focuses on that area, can:
Become more productive in that area, having more mission impact at a lower cost per person served
Have more effective marketing and communications
Get better measurement and evaluation of impact
Be more memorable to funders and other supporters
Make a stronger case for grant funding and donations
Most importantly, understanding your UVP, together with what sister organizations do, can make it easier to let go of certain programs. After all, if your UVP is serving hot meals to the unhoused, and at least three other organizations help individuals sign up for SNAP benefits, then why not drop your SNAP benefits program so you can focus (and potentially even expand) on what you already do best?
Which cuts are strategic?
Part 3: Collaboration
Even understanding your UVP plus the Matrix Map could leave you with some uncertainty:
If we cut X program, what will happen to the people it used to serve?
If we focus on Y program, will we end up competing with other agencies for limited resources?
This is where communication and collaboration can come into play. Go ahead and reach out to those sister organizations, talk to them, and explore those questions. More than likely, they’re also trying to figure out how they will navigate budget cuts as well.
For example, let’s say that your nonprofit and two others in your community serve the chronically unhoused, providing a broad spectrum of services to anyone in that population. After doing the Matrix Map and figuring out your UVP, you’ve become clear that your best financial strategy would have you focusing on just veterans. And you know that Agency B already does a lot of work with teens and young adults. So why not open a dialog with those other agencies? If they know your nonprofit wants to specialize exclusively in veterans, they may be happy to refer that population to you; especially if they know that you’ll refer youth to Agency B and all others to Agency C.
Pro Tip: An increasing number of funders actively support and encourage collaboration among organizations in the same general mission area. They see this as a path to stronger overall mission impact and often reward collaboration with funding. In addition to bringing this up with your current funders, take a look to see if you have a local chapter of the Sustained Collaboration Network that connect you with information and resources.
Conclusion
Nonprofit work is difficult enough without economic uncertainty, but we can only play with the cards we’re dealt.
As nonprofit leaders, we may feel pressure from our boards, funders, and staff to make cuts that might feel better in the short-term but that ultimately undermine the mission and the organization.
When we center the mission and financial health, that will make it easier to make decisions that
Additional reading