Disentangling the Financial Vulnerability of Nonprofits

This research analyzes the concept of financial vulnerability of nonprofits in depth. We review the definitions given by the prior literature, concluding that none of them is complete. We propose a definition in which financial vulnerability consists of three dimensions: operational (variation of net assets over time), leverage (relationship between total assets and debt), and liquidity (ratio of current assets to short-term debt). We use a sample of 212 Non-Governmental Development Organizations (NGDOs) from the United Kingdom to analyze these measures, observing a limited number of nonprofits simultaneously classified as vulnerable according to the different traditional concepts. Applying our proposed multidimensional model, we find that 6 % of the sample is highly financially vulnerable according to the three dimensions, and a high proportion (18 %) of nonprofits is simultaneously vulnerable in leverage and liquidity dimensions. Finally, we compare the obtained results using traditional variables and those derived from our model.     

The Dangers of Assessing the Financial Vulnerability of Nonprofits Using Traditional Measures

This article analyzes the financial vulnerability of 228 British nongovernmental development organizations (NGDOs) during the period 2008–2012. To do this, we use the Financial Vulnerability Index developed by Trussel et al. (2002). This index is commonly used in the literature on nonprofit organizations. However, we observe a very poor adaptation of the index to the reality of this industry, at least in predictive terms. The article goes deeply into each of the variables that are used to calculate this index, and we offer explanations of their inadequacy to this subsector of nonprofits.     

Is Bigger Really Better?

This study investigates the effect of a capital facilities project on nonprofit financial vulnerability metrics. The author employs a difference‐in‐differences technique to model the relationship between facilities investments and financial vulnerability indicators using data for a matched‐pair sample of nonprofit organizations that invested and did not invest in a facilities project. Overall the findings suggest that investments in facilities are associated with temporary increases in an organization's net assets ratio and decreases in its surplus ratio after a project is completed, and that the costs associated with facilities projects (for example, debt) place strain on nonprofit finances. The study's findings have implications for the financial management of nonprofit organizations, particularly in regard to the associated costs of capital expansion.     

Net impact of government funding on nonprofit fiscal health: burden or benefit?

This study examines the impact of federal grant awards on the financial health of recipient nonprofits. Although a modest body of research finds that government grants are beneficial to nonprofit fiscal health, a large Urban Institute study (2010, 2013, 2015) found that nonprofit managers receiving government grants consistently report fiscal harm due to awards that do not cover all program costs, late payments, and significant administrative burden. Those findings raise the question of whether government funding leads to net benefits or net harm for organizations given the administrative and fiscal burdens identified. This study tests that question using a large panel of federal grants to estimate the impact of government awards on three measures of nonprofit financial health. We find that government grants promote an increase in nonprofit size, improve operating margins, and increase financial reserves for recipient organizations. These benefits endure after the receipt of the award.     

Toward a valid approach to nonprofit efficiency measurement

Past literature in nonprofit management uses the overhead ratio of nonprofits as a measure of efficiency. Although the overhead ratio might measure top‐heaviness, we argue that it does not measure nonprofit efficiency. To investigate this, we use financial and operational data to rank the efficiency of Habitat for Humanity affiliates with the overhead and administrative ratio, as well as data envelopment analysis (DEA) and stochastic frontier analysis (SFA), two of the most popular efficiency measures. While the DEA and SFA rankings are statistically correlated, overhead ratio rankings are negatively correlated with both SFA and DEA rankings. We argue that nonprofit scholars, managers, and donors should move away from concepts and measures of efficiency based on financial ratios, and toward ones that embrace maximizing what nonprofits are able to make and do.     

Exploring the Nexus of Nonprofit Financial Stability and Financial Growth

Taking a unified approach to studying nonprofit financial health, this research tackles a key question that has remained unexplored in the literature: “What lies at the intersection of the two key dimensions of financial health–financial stability and financial growth?” Specifically, we identify and compare nonprofits that exhibit high levels of financial stability and growth (high financially performing) to those that exhibit low levels (low financially performing)? Overall, we find that high financial performers (HFPs) tend to be older and larger organizations (in terms of unrestricted net assets and total revenue). HFPs are also more likely to report capital assets, and report high levels of compensation. Finally, HFPs tend to contain their overhead spending by exercising efficiency by investing in talented officers (paying more than the rest), but limiting the share of officer compensation, administrative, and fundraising expenses, as a percentage of total expenses. The results of the study should be informative to stakeholders attempting to understand the profile of an organization that is successfully able to achieve both capacity growth and financial stability.     

The Uniqueness of Nonprofit Finance and the Decision to Borrow

Previous studies of nonprofit capital structure (borrowing relative to assets) support contradictory decision models of borrowing, but with no control for an endowment effect, which this article shows to be an important factor in the decision to borrow. Well‐endowed nonprofits borrow more relative to their physical assets. When endowment and investment income are backed out of the data, nonprofits are seen to optimize the balance between debt and physical assets.     

Unintended? The effects of adoption of the Sarbanes‐Oxley Act on nonprofit organizations

This article investigates the benefits and costs to nonprofit organizations emanating from the adoption of the Sarbanes‐Oxley Act (2002). The act was intended to stem financial malfeasance in the for‐profit sector; nevertheless the article finds that about half the surveyed nonprofits adopted provisions of the act and experienced effects in proportion to the level of adoption. About one in four of the nonprofits attributed benefits of better financial controls and reduced risk of accounting fraud to the adoption of the Sarbanes‐Oxley Act. More than one‐third of the nonprofit organizations reported increased fees for external audit, and about 15 percent cited “reallocation of resources from program to administrative expenses.” This article discusses the unintended positive and negative effects of public policy on nonprofit organizations.     

Charity Watchdogs and the Limits of Information-Based Regulation

Transparency concerns and the concomitant accountability challenges have motivated policy and legal scholars to explore information-based regulatory approaches. We examine their usefulness in the context of the nonprofit sector which tends to show signs of governance failure. Although nonprofits are required by law to disclose information on fund use, nonprofit donors face difficulties in accessing and interpreting information about how nonprofits are deploying resources. Charity watchdogs make this information available to donors in a convenient format. In theory, this should allow donors to reward nonprofits that devote resources to service delivery and to punish those that are less careful about controlling overheads. To test the relationship between charity ratings and donations, we examine 90 nonprofits in the state of Washington for the period 2004–2007. Drawing on ratings data provided by Charity Navigator, we find that changes in charity ratings tend not to affect donor support to these nonprofits. We explore this statistical finding via interviews with 10 charities located in Washington State. Supporting the statistical results, we find that charities believe that donors tend not to systematically embed ratings in their donation decisions. Instead, they believe that donors assess nonprofits’ effectiveness and trustworthiness via other means such as familiarity, word-of-mouth, or the visibility of the nonprofit in their community. In sum, the policy challenge is to provide information which users desire such as organizational effectiveness as opposed to basic fund allocation in the case of non-profits. What matters for policy efficacy is not how much information is provided but of what type.     

Running on Empty: The Operating Reserves of U.S. Nonprofit Organizations

Operating reserves allow nonprofit organizations to smooth out imbalances between revenues and expenses, helping to maintain program output in the presence of fiscal shocks. We know surprisingly little about why nonprofits might save operating reserves and what factors explain variation between organizations' savings behavior. Findings suggest that operating reserves are reduced in the presence of concentrated public funds, access to debt, fixed assets, and endowment. However, size is not an important predictor, indicating that the lack of reserves is not limited to small nonprofit organizations but is instead a sectorwide issue. Significant numbers of nonprofits maintain no operating reserves at all. One potential explanation is that organizations discount the benefits of reserves because they are evaluated on spending, focusing instead on the “benefits of costs.” This preference for spending over reserving may also help explain the general lack of liquidity in the sector beyond operating reserves alone.     

Predicting the Financial Vulnerability of Charitable Organizations

This article describes a model that can be used to predict which nonprofit organizations are vulnerable to financial problems. The model is based on financial indicators developed by Tuckman and Chang (1991), adapts methodologies that have been developed in the for‐profit sector to predict financial vulnerability, and was empirically tested using a multiyear Internal Revenue Service database provided by the National Center for Charitable Statistics. Both internal and external stakeholders can use the model when making allocation decisions during the strategic planning process and in evaluating financial risk.     

ANTITRUST TREATMENT OF NONPROFITS: SHOULD HOSPITALS RECEIVE SPECIAL CARE?

Nonprofit hospitals receive favorable tax treatment in exchange for providing socially beneficial activities. Extending this rationale suggests that nonprofit hospital mergers should be evaluated differently than mergers of for-profit hospitals because suppression of competition may also allow nonprofits to cross-subsidize care for the poor. Using detailed California data, we find no evidence that nonprofit hospitals are more likely than for-profit hospitals to provide more charity care or offer unprofitable services in response to an increase in market power. Therefore, we find no empirical justification for applying, as some courts have suggested, different antitrust standards for nonprofit hospitals. (JEL I11, L1, L44)     

What Affects the Strategic Priority of Fundraising? A Longitudinal Study of Art,Culture and Humanity Organizations’ Fundraising Expenses in the USA

Fundraising is a crucial activity for many nonprofit organizations. However, scant research has examined how the strategic priority of fundraising activities may vary across organizations and over time. This study addresses this gap in knowledge by examining how economic and organization-specific financial conditions predict the priority of fundraising in a nonprofit organization. In particular, this study examines the changes in the ratio of art, culture and humanities organizations’ fundraising expenses to their total expenditure during the period of 2005–2012, which includes the great recession of 2007–2009. The findings reveal that, when facing an economic crisis, the ratio of fundraising expense to total expenditure increases, suggesting that fundraising becomes a higher priority under a hostile economic condition. The analysis also reveals differences in nonprofits’ reaction to recession depending on their revenue mix, with donative nonprofits reacting more sensitively than commercial nonprofits.     

How well is debt managed by nonprofits?

Little is known about why nonprofits accrue debt, how much they owe, and whether the funds they borrow are used productively. This article distinguishes between productive, problematic, and deferred debt. Employing a data base representative of 114,726 tax-filing charitable nonprofits in the United States in 1986, it examines the pervasiveness of nonprofit debt and the relation between this debt and nonprofit financial health. The analysis finds that over 70 percent of the nonprofits hold debt, the distribution of this debt is highly concentrated, and the level of debt and leverage varies with asset size and type of activity. Nonprofits with higher leverage and absolute debt levels are financially healthier than those with lower levels. While the analysis does not determine whether financially stronger nonprofits are better able to borrow, the results support the view that borrowing in the nonprofit sector is economically efficient.     

Revisiting the Prediction of Financial Vulnerability

Whether or not a nonprofit organization is vulnerable to financial problems is a concern of all stakeholders of the organization. Recently, Greenlee and Trussel (2000) and Trussel and Greenlee (2001) expanded Tuckman and Chang's work (1991) to predict which organizations are financially vulnerable. This article extends the work of these authors by developing a model of financial vulnerability that includes four financial indicators, controls for the sector to which an organization belongs, and is based on a sample of over ninety‐four thousand organizations. The model is useful as a screening, monitoring, and attention‐getting device.     

Reporting Volunteer Labour at the Organizational Level: A Study of Canadian Nonprofits

Volunteer contributions in the production of services are an important resource internationally. However, few countries include volunteer contributions in their national accounts, even though many encourage their populations to engage in volunteering. At the organizational level, many nonprofit organizations using volunteers often limit their input to a footnote in annual reports acknowledging their contribution; few estimate their value in financial terms. As a result, their financial accounts lack information upon which to base decisions affecting the organizations and the communities they serve. Additional information is required to assess the impact of volunteers in individual nonprofits as well as the sector as a whole. This study focuses on Canada, one of the few countries that include volunteers in the national accounts, to examine to what extent nonprofit organizations estimate a financial value for these contributions and include this in their financial statements. This paper reports the results of an online survey of 661 nonprofits from across Canada. In order to understand why some organizations keep records for volunteer contributions and quantify them, two sets of explanatory factors are explored: organizational characteristics and the attitude of the executive director. We find larger organizations were more likely to engage in record keeping and estimating volunteer value, as were organizations with a relatively large group of volunteers and volunteer programs. The attitude of the executive director is important in determining which organizations engage in these practices.     

Resource Constraints or Cultural Conformity? Nonprofit Relationships with Businesses

Nonprofit interactions with businesses have become increasingly diverse, but which nonprofits establish relationships, and to what extent do relationships depend on the form or type of tie? Focusing on nonprofit collaboration with businesses and donations from businesses, we test arguments based on sociological institutionalism and resource dependence theory. We find that nonprofits relying on earned income, nonprofits led by individuals with management degrees, and rationalized nonprofits all are more likely to report collaborations with businesses, aligning with expectations from institutional theory. For donative ties between businesses and nonprofits, we find that rationalized nonprofits are more likely to have charitable gifts from businesses. However, nonprofits with earned income are less likely to have business donations, and funding diversity has a salient positive effect. These results reveal important but paradoxical institutional and resource dependence effects. We conclude with a discussion of our divergent findings and set an agenda for additional research on the topic.     

Nonprofit Leader Perceptions of Operating Reserves and Their Substitutes

This exploratory study has three objectives: (1) to understand the various ways academics, consultants, and practitioners conceptualize operating reserves; (2) to explore differences among academic findings, consultant recommendations, and nonprofit leader perceptions of operating reserves; and (3) to identify how practitioners operationalize operating reserves within their organizations. Using intensive interviews with nonprofit executives, we find that the operating reserve ratio (ORR) commonly used in the nonprofit literature does not accurately indicate whether an organization holds an operating reserve according to nonprofit leaders. In addition, results indicate that experienced nonprofit leaders perceive a variety of other fund types including endowment and investment savings as well as ability to borrow, other assets, sister foundations, and donor networks as legitimate substitutes for a reserve.     

Factors Attracting Individuals to Nonprofit Management over Public and Private Sector Management

Little research has sought to identify the distinct advantages that nonprofits offer employees, particularly managers. Drawing upon Weisbrod's theory of managerial sorting (1988), we test a series of hypotheses about the differences among nonprofit, public, and for‐profit organizations that may explain the preference of managers to work in one sector over the other. We use pooled cross‐sectional data from the General Social Survey to test managerial sorting. We find many similarities in the perceptions of managers in the nonprofit and public sectors as compared to the for‐profit sector. However, when we examine the sorting of managers into nonprofit versus public sector jobs, we find differences in work environment. Compared to those working in the public sector, managers in nonprofits report greater freedom in deciding how to carry out their job functions, more control over their work schedules, and greater opportunities for pay increases. We conclude with a discussion of the implications of these findings for the practice of nonprofit management.     

The Relationship between Provision of Membership Benefits and Fulfillment of Representational Roles in Nonprofit Advocacy Membership Organizations

This article explores the ways nonprofit advocacy membership organizations can manage their resource dependence on members and fulfill the organizations' representational roles, focusing on the provision of membership benefits. Membership organizations rely on financial or other resources from members and thus are constrained by them. For a nonprofit that aims to primarily speak for members, constraints by members may help to focus organizational attention on members' interests. Contrarily, for a nonprofit that aims to mainly represent broader constituents, members' constraints may hamper an organization's ability to advocate for broader constituents because members do not necessarily share the same policy goals with broader constituents. The provision of membership benefits can be a useful strategy for organizations to fulfill their representational roles and to satisfy and engage members, because people often join an organization to enjoy certain membership benefits. For an empirical analysis, this study collected a large‐scale data set through web and mail surveys of nonprofit advocacy organizations across the United States. The mixed‐mode surveys achieved a 57.5 percent response rate (729 responses). The survey and regression analysis results show that member‐serving nonprofits providing members with opportunities to participate in advocacy work are more likely to represent members' interests directly. Although broader constituency‐serving nonprofits tend to prioritize members' opinions, these organizations are more likely to adhere to the mandates of broader constituents when providing selective material membership benefits. However, when providing purposive membership benefits, these nonprofits are more likely to represent members' opinions.