Navigating Federal Funding Uncertainty: Financial Strategies for Nonprofits

Nonprofits across the country are facing an uncertain financial future as the federal funding freeze and shifting policies disrupt their budgets. Organizations that have long relied on stable government grants are now being forced to reassess their financial strategies, manage liquidity more carefully, and rethink how they maintain reserve funds.

Evaluating Financial Reserves and Liquidity

Understanding how to manage funds effectively in this climate is critical. For many, the immediate priority is assessing the availability and volume of financial reserves to fund unexpected revenue losses. If a nonprofit needs to rely on reserves to cover operations, leaders should evaluate their investment policies to ensure they have sufficient liquidity. A well-structured investment policy statement (IPS) should be reviewed and potentially revised to reflect new financial realities.

Nonprofits with investment portfolios should also revisit their asset allocation. Funds that were previously designated for long-term growth may need to be adjusted to accommodate short-term cash needs. In many cases, holding conservative assets such as cash, Treasury securities, or certificates of deposit (CDs) may be necessary to provide stability. Selling investments under unfavorable conditions may lead to losses, making it essential to plan ahead rather than react to funding shortfalls in real time.

Liquidity is another concern. Many organizations operate with governance structures that require board approval to access reserve funds. In times of financial stress, the inability to quickly approve cash transfers may delay essential payments, including payroll. Nonprofits should review internal financial controls and liquidity policies to ensure access to funds when needed.

Alternative Revenue and Financial Strategies

For organizations relying heavily on federal funding, diversifying revenue streams has become an urgent priority. Some are exploring increased donor engagement, capital campaigns, and alternative funding sources such as corporate partnerships or private grants. Others are restructuring expenses to align with a leaner operating model to ensure essential services continue even in the face of reduced funding.

Access to credit has also become more difficult. In recent months, many nonprofits have found that banks are unwilling to extend new credit lines or increase existing lines due to financial losses and rising operational costs. For nonprofits that own property, lending options may still be available, unless those real estate assets have already been leveraged. Those in need of financial flexibility should proactively engage with their banking partners to explore available options.

The broader economic and funding environment is adding to this uncertainty. Changes in government funding priorities and evolving tax policies all contribute to financial instability. Recent adjustments affecting federal funding, including reductions to NIH grants and Department of Education programs, are having a direct impact on many of our client organizations. Nonprofits relying on these funding sources should prepare for the possibility of ongoing disruptions, explore alternative funding options, and have “stop loss” strategies ready to implement. If replacing lost revenue is not feasible, organizations should assess which programs are generating the greatest financial strain and develop a plan to scale back or discontinue them to protect overall financial stability.

ESG and values-based investing have become increasingly relevant in this landscape. Some nonprofit boards may want to reassess investment strategies to ensure they align with their organizational values, particularly as economic and social dynamics evolve. Additionally, businesses and individual investors may wish to direct contributions toward nonprofits that share their social responsibility initiatives, helping to sustain critical services during times of financial strain.

AAFCPAs also advises that nonprofits consider how donor behavior may shift in response to financial and policy changes. While some donors may increase their giving to offset reduced government support, others may prioritize different causes. Nonprofits should engage with their donor base to understand giving trends and adapt fundraising strategies accordingly.

Despite these challenges, there are opportunities to strengthen financial resilience. By reassessing investment strategies, improving liquidity management, and exploring alternative revenue sources, nonprofits can better position themselves for financial stability. Business leaders and financially strong organizations may also consider contributing to nonprofits as a means for supporting essential community services during a time of heightened need. Proactive planning and strategic decision-making will be essential in navigating the months ahead.

How We Help

AAFCPAs has been advising nonprofits since 1973, providing strategic financial guidance tailored to the sector’s complex funding and regulatory landscape. We understand the pressures nonprofits face and work closely with leadership teams to develop sound financial strategies that support long-term sustainability. Our solutions help organizations strengthen their financial foundation, improve liquidity, and navigate changing funding environments with confidence.

Our team provides assurance, tax, and advisory solutions designed to help nonprofits optimize financial performance. We assist with budgeting and forecasting, investment policy reviews, endowment and reserve fund management, and compliance with evolving regulations. Additionally, we guide organizations through cost allocation methodologies, internal controls, and strategic planning, ensuring resources are used effectively to further their mission.

Beyond financial management, AAFCPAs helps nonprofits engage with stakeholders, from donors to board members, ensuring transparency and accountability in all aspects of financial reporting. Whether you need assistance with government audit requirements, tax credit opportunities, or developing sustainable investment policies, we provide the expertise and insight needed to navigate financial challenges.

If you have questions, please contact Courtney McFarland, CPA, MSA, 340B Apexus Certified Expert™ at 774.512.4051 or cmcfarland@nullaafcpa.com, Jonathan Bloom, CFP®, AIF®, Partner & Wealth Advisor at 774.512.4081 or jbloom@nullaafwealth.com, Kevin P. Hodson, CMT, CAIA, AIF®, Director of Investments & Wealth Advisor at 774.512.4173 or khodson@nullaafwealth.com—or your AAFCPAs Partner.