Quality Doesn't Come Cheap: Financial Health Among Nonprofit Human Service Organizations and Program Quality

Background:

Despite Crosby’s 1979 assertion that “quality is free,” nonprofit organizations (NPOs) in human services struggle to innovate, evaluate, and monitor the quality of their programs without sufficient resources. Limited financial resources could intensify quality problems, which in turn, could limit NPOs’ ability to secure resources. This vicious cycle could trap NPOs with insufficient assets, potentially threatening their survival. However, little is known about the linkage between NPOs’ financial health and their quality improvement capacity. Informed by strategic management theory, this study addresses the gap by 1) describing the financial health of a regional sample of NPOs providing children behavioral health services, and 2) exploring the relationship between NPOs’ financial health and quality indicators.

Methods:

Survey data from 32 nonprofit children’s behavioral health organizations within an urban region in the Midwest were gathered and matched with publicly available IRS 990 forms from 2010 to 2014 on Guidestar.com. Three financial health measures were examined: revenue (to reflect size and growth), reserve ratios (reflects operating reserves, specifically the number of months NPOs could operate using unrestricted net assets in the absence of revenue), and mark-up rates (annual rates of change in unrestricted net assets relative to total expenses; reflects asset growth or loss). Online survey data from 2013 assessed quality indicators, including quality structures (accreditation, program evaluators, quality assurance [QA] professionals, and use of electronic records) and quality processes(proportion of programs that are “evidence-based practices” [EBPs], and fidelity monitoring practices). Univariate and bivariate analyses explored associations between financial health and quality indicators.

Results:

Over the four-year period, organizations reported 5% annual revenue growth. However, organizations only maintained a median 1.9 months of reserves, which is below the recommended minimum of three months. The mark-up rate fluctuated dramatically from a loss of -21% in 2012 to a 6.6% gain in 2014.

NPOs with quality structures reported greater financial health. Those with QA professionals and electronic records reported greater reserves and mark-up rates. NPOs with a program evaluator had higher reserve ratios (M=2.82 vs. 0.48 months). Also, accredited NPOs reported a 4% annual increase in reserves while non-accredited NPOs’ experienced an 18% reduction in reserves.

For quality processes, organizations with an above median proportion of programs that were EBPs reported a higher reserve ratio (M=2.08 vs. 1.80 months) and mark-up rate (M=5% vs. -12%) compared to those below the median. However, organizations that monitor fidelity reported lower reserve ratios (M=1.64 vs. M= 2.24) and higher mark-up rates (M=2% vs. -9%) than those that do not.

Conclusions:

NPOs in this sample struggled to maintain adequate reserve levels and we find an association between financial health and program quality. NPOs with more quality structures were financially healthier than those lacking capacity in key quality areas. However, results concerning financial health and quality processes were mixed. To attain better quality processes, NPOs may need to spend down unrestricted net assets. Doing this decreases reserves, which renders NPOs financially vulnerable. Future research is needed to further explicate the causal relationship between NPOs’ financial health and program quality.