Did Nonprofit Organizations Focus More on Accumulating Profit Than on Generating Services at the End of the Recent Recession?

Background/Purpose: Profit accumulation in Nonprofit Organizations (NPOs) is a understudied subject, possibly because of the negative light such research could shed on how NPOs manage their finances. A few studies conducted on why NPOs might accumulate profit, as opposed to generating additional services, indicated that over time nonprofits mainly increased their profit. Data from the nonprofit sector during the recent recession supported this research (Calabrese, 2012; Ramirez, 2011); by the end of the recession the nonprofit sector grew from $801 billion to $3.22 trillion in total assets. One of the ways the sector could have done this is by allocating more revenue toward increasing their profit margin than toward increasing their services, when their revenue fluctuated during the recession. This study investigated whether revenue increased for NPOs from 2009 to 2010, and if NPOs used this fluctuation to focus more on accumulating profit than on generating services. 

Methods: This study used a sample of 150 private nonprofits that had between $500K and $100M in total assets during the time frame of 2009 through 2010. Data were collected from IRS 990 Forms. Major variables were calculated: Revenue and other financial variables (i.e., Services, Profit, and two Financial Reserves: Operating Margin, and Equity Balance). Operating Margin expresses as a percentage how well Revenue can pay operating costs; Equity Balance expresses how well Revenue can pay liabilities. Bivariate correlations were conducted to show associations between Revenue and the other financial variables. 

Results: Descriptive statistics showed Revenue increased 56%, Services increased 1.4%, Profit increased 43%, Operating Margin Decreased -15%, and Equity Balance increased 24%. The Spearman’s rho indicated the association of Revenue with Profit (=.756), Services (not significant), Operating Margin (=.357), and Equity Balance (=-.309).

Conclusions and Implications: NPOs in the sample focused more on accumulating profit rather than generating additional services. Half of NPOs in the sample are in the education field, during a time when education was needed for clients to compete for better jobs. NPOs at this time may have needed to focus more on profit accumulation because of how uncertain their environment was. However, the negative association of Revenue and Equity Balance indicates NPOs with higher revenue increase are more vulnerable to future financial shock. This kind of trend may vary among different types of NPOs. Therefore, further research can investigate if the type of environment NPOs were in at this time explains why profit was accumulated, and whether NPOs still focus more on accumulating profit than generating services. This study raised issues of social justice in how some NPOs manage their finances, as well as augmenting social workers’ understanding of how NPOs can successfully serve their communities. It is recommended that policies be formulated to regulate the amount of profit million dollar nonprofits accumulate. 

References 

Calabrese, T. D. (2012). The accumulation of nonprofit profits: A dynamic a dynamic

       analysis. Nonprofit and Voluntary Sector Quarterly, 41(2), 300-324    

       doi:10.1177/0899764011404080

Ramirez, A. (2011). Nonprofit cash holdings: Determinants and implications. Public

       Finance Review, 39(5), 653-681. doi:10.1177/1091142110381638