CEP’s “State of Nonprofits 2026” confirms what many funders already sense: The sector is under severe strain. Burnout among nonprofit CEOs jumped to 46% this year, up from just under 30% in 2025. Fifty-seven percent of leaders say foundation grants are harder to get than before. And 39% of organizations ran a deficit in their last fiscal year, nearly double the 22% who did in 2022.
The easy reading of that data is a revenue story. Money got tighter, so deficits grew. Give more, and the deficits shrink.
Look again at the same report, and a second story appears. Among organizations that ran a deficit, the most common contributor was not lower foundation revenue. It was higher-than-expected costs, cited by 58% of those leaders, followed closely by lower-than-expected foundation revenue. Costs ran past the budget more often than grants fell short.
That difference matters because the two problems have different cures. You can close a revenue gap with a bigger check. You cannot close a cost gap you cannot see.
Here is the part the sector rarely says out loud: Most nonprofits cannot state what it truly costs them to serve one client. Not the program budget. The fully loaded cost, with a fair share of rent, insurance, leadership time, technology, and the finance staff who keep the lights on. The gap between that real cost and what a grant or a client actually covers is structural. It stays invisible until the year ends in red. I call it the Social Enterprise Gap.
Think of a couch advertised at $100. The real cost is $125, once you add $20 for delivery and $5 for tax. A nonprofit that prices its programs at the 100 number runs a quiet loss on every unit it delivers, no matter how hard it fundraises.
This is why the sector’s main response gives me pause. In CEP’s data, 88% of nonprofits are considering pursuing new funders, and 77% are leaning harder on existing ones. Active fundraising is the single most common action leaders report taking. The instinct is reasonable. But an organization that does not know its cost per client will set the wrong fundraising target, accept grants that lose money, and grow into a larger deficit. More money poured into an unmeasured model does not buy stability. It buys a bigger version of the same fragility.
One leader in the report names the trap exactly. Foundations, they say, “often do it at the same amounts each year, which means we are actually receiving less support due to inflation.” A flat grant against rising true costs is a cut. The leader can feel it. What they usually cannot do is size the gap, program by program, in a way a funder would find credible.
I saw this with a midsize direct-service nonprofit I advised. On paper, its flagship program looked healthy. When we built the fully loaded cost per client and set it next to the blended revenue per client, the program lost money on every person it served. That was not a fundraising failure. It was a pricing and cost-structure failure that no volume of new grants would have fixed. The board had been approving the expansion of the very program draining the organization.
Other researchers see the same strain. The Urban Institute found that half of nonprofit leaders were worried about their organization’s financial health in 2025. The worry is well-founded. The cause is often misread.
None of this faults nonprofit leaders. They are doing extraordinary work in the hardest environment in memory, “carrying the weight home every day,” as one CEO in the report puts it. The tools most of them were handed measure budgets, not unit economics. That is a design flaw in the system, and funders helped design the system.
So what can funders do?
- Fund the diagnostic, not only the program. A small grant to help an organization build its fully loaded cost per client returns more durable value than the same dollars added to delivery. Cost clarity is infrastructure. Pay for it like infrastructure.
- Prefer unrestricted, reliable support over restricted, one-year program grants. CEP found that organizations hit by foundation cuts are more likely to project a deficit in 2026. A restricted grant that covers only direct program costs quietly forces the grantee to subsidize your project from somewhere else. Flexible, predictable funding lets a leader manage the true cost structure instead of hiding it.
- Change one question in due diligence. Most funders ask what a program will achieve and what it costs to run. Add this: what does it cost you to serve one client, “overhead” included, and how does that compare to what you bring in per client? A grantee who can answer is running a model. A grantee who cannot is running on hope. Either answer tells you more than any overhead ratio.
This is not an argument against generosity. The need is real and growing, with 73% of nonprofits reporting higher demand for services and, by CEP’s own count, almost 90% of foundations reporting higher demand for their funding. It is an argument about sequence. Cost clarity should come before the bigger check, because the check works better once the math is known.
The sector does not only have a funding problem. It has a model problem that more funding alone will not solve. Funders are among the few actors with the leverage to change that. The first move is not more money. It is better math, and the willingness to pay for it.
Thaddaeus Hubbard is the author of “Bridging the SE Gap: Master Earned Income, End Grant Dependence, and Achieve Sustainable Social Impact for Nonprofits” and principal of BSEG Advisory.
