Study Finds Nonprofits Are in Precarious Financial Shape
February 6, 2018 Despite relatively robust economic growth in recent years, nonprofits in every region of the country are in precarious financial shape, a recently completed analysis has concluded, with 30% having lost money over the last three years and about half having less than one month of operating reserves.
The scale of the problem is "vast," according to the report, and recent changes to the federal tax code "may exacerbate the issue, by changing charitable donations and/or by increasing the likelihood of future pressure on federal budgets for human services."
The report,The Financial Health of the United States Nonprofit Sector
, developed by Oliver Wyman, SeaChange Capital Partners, and Guidestar, was based on an analysis of 220,000 IRS Form 990 filings from nonprofits.
The report found that 7%-8% of nonprofits are technically insolvent with liabilities exceeding assets and 30% face potential liquidity issues with minimal cash reserves and/or short-term assets less than short-term liabilities.
It also noted the aggregate financial health profile is not evenly distributed: there are notable differences by subsector and size, though not by geography. In particular:
- Nonprofits reliant on government contracts and fee-for-service revenue (hospitals, health and human services, and educational institutions) use debt more often, operate in a tighter liquidity range, and have smaller reserves.
- Nonprofits more reliant on private philanthropy (environment and animal-related, science and technology, community capacity) have less debt and larger reserves.
Given the financially precarious position of many nonprofits, the report advised, nonprofit leadershiptrustees and executivesshould adopt practices that embed risk management into all levels of the organization, including the following:
- "Risk management should be an explicit responsibility of the audit and/or finance committees. And the organization, led by this committee, should develop an explicit risk appetite statement."
- "Organizations serious about risk management must redouble their efforts to recruit trustees with a wide range of experiences...Many organizations would benefit from an experienced nonprofit executive on the board with expertise in both program needs and the sub-sectors funding landscape."
- Nonprofits should compare their financial performance to peers based on annual 990 filings to see if challenges are unique to the organization or indicative of a shift for the whole sector.
- "Organizations should keep a running list of the major risks they face. For each, they should indicate the likelihood and expected loss in terms of unrestricted net assets. They should consider actions to reduce the likelihood of each risk and mitigate the potential damage."
- Everyone in the organization,, trustees as well as staff, should help manage risk, e.g., program staff should know when higher indirect costs in one area require subsidies from another other.
- "It is important to recognize that even the best risk management strategy does not guarantee survival," according to the report. "Consolidation, mergers and acquisitions, divestments, and orderly wind-downs are part of a healthy, evolving nonprofit sector. However, it is tragic when distress causes an organization to lose the capacitymoney and timeto make wise choices."