Innovative Nonprofits in Challenging Times: Are They Financially Stable?
Given the complexity of social problems and shrinking government resources, many nonprofit organizations have struggled to survive while others appear to be innovating and thriving. One of the most critical components of a nonprofit organization’s success is its ability to sustain funding long term. Financial sustainability was particularly challenging after the 2008-2010 recession. By analyzing an identified group of recognized high performing organizations, our research seeks to identify how successful organizations have managed financially over time in order to enhance our understanding of best practices.
Identified research questions:
- Was the sample actually performing at or above industry standards?
- Was performance impacted by the 2008-2010 economic recession?
- Did the organization’s age, amount of assets, or service location impact financial performance over time?
Methods
Our sample consisted of 44 nonprofit organizations recognized in 2008 by Fast Company as award-winning social enterprises based on “A highly rigorous, data driven, comparative approach” (www.fastcompany.com/social/2008). We used a Bowman’s model (2011) to test financial sustainability based on seven indicators “for setting financial objectives and diagnosing the causes of success or failure in achieving them (p. 38).” Data from each organization’s IRS, Form 990 was obtained from the National Center for Charitable Statistics for two different time periods (2002-2004 and 2009-2011). Data was averaged for each time period and then compared to see how indicators changed over time. We used linear regression to determine if the organization’s age, amount of assets, or service location impacted financial performance across the time periods. We used Winsorization to reduce the impact of outliers.
Results
The sample nonprofits were performing near or above the industry standards. On indicators related to investments and assets, the sample showed effects of the economic recession, i.e. decreases especially for 2009. The sample showed growth in revenue over the time period; but the key indicator that reflects adjusted assets/revenue to expense ratios (status-quo markup) was stagnant.
Regression analyses showed the identified factors did not predict change in equity ratio, return on assets, months of spending, or markup. They did predict status quo markup change (r2 = 0.34, F = 4.57, p = .004) and change in nonprofit working capital (r2 = 0.26, F = 3.14, p= .026) and was suggestive for working capital change (rs2=.21, F=2.43, p=.065).
Conclusions and Implications
Even high performing non-profits have difficulty sustaining strong financial performance during periods of financial strain but other organizations may be much more susceptible to the impact of economic recession. Much of the existing literature focuses on the importance of diversified revenue streams without consideration of development of assets. Social work research on factors that enhance success for nonprofits needs to address these dimensions of financial performance. Future research should examine a wider sample of non-profits and include qualitative studies of how financial decisions are made along with programming decisions.
References
Bowman, W. (2011). Finance Fundamentals for Nonprofits: Building Capacity and Sustainability. John Wiley & sons, Inc., Hoboken, New Jersey.
Fast Company. 2008 Social Capitalist Awards. www.fastcompany.com/social/2008. Retrieved on March 1, 2014.