The Dangers of Assessing the Financial Vulnerability of Nonprofits Using Traditional Measures (original) (raw)
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We examine the predictive validity of existing models used by researchers and by professional rating agencies of nonprofit organizations to assess financial vulnerability, on a sample of performing arts organizations. The models tested include Ohlson's (J Account Res 18(1):31-109, 1980) ''business'' model, Tuckman and Chang's ''nonprofit'' model (Nonprofit Volunt Sect Q 20:445-460, 1991), and a ''practitioner'' model based on the guidelines of two nonprofit ranking and rating agencies (Copps and Vernon, The little blue book, NPC's guide to analyzing charities, for charities and funders. New Philanthropy Capital, London, 2010; Midot, Midot guide for effectiveness. Midot-Analyzing and Rating NPOs. Tel Aviv, 2013). Since there is considerable criticism over the effectiveness of existing models in predicting financial distress, we propose that a new model is needed which can improve our ability to predict financial vulnerability. The findings reveal that the Tuckman and Chang model provides the best prediction of financial vulnerability; and a reduced version offers an even better prediction. Implications for financial management and particularly for revenue diversification, increased overhead costs (particularly management costs), and surplus accumulation are discussed.
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This article describes mortality patterns for nonprofit organizations in a major U.S. metropolitan area between 1980 and 1988. Twenty percent of the nonprofits in a paneZ ceased operations during this period. Mortality rates were found to vary widely. In some instances, high mortality was found in parts of the sector that were growing rapidly. Overall, nonprofits that ceased to operate were younger and smallet; used fewer strategies to attract funders, and had less diversvied income streams than survivors. These patterns also varied substantially. The results point to the drawbacks of using limited or commonsense information and the necessity of theory-based research. HILE there has been an increase in scholarly interest and writing on the subject of organizational decline (for exam-W ple, Cameron, Sutton, and Whetten, 1988), little of this focus has dealt systematically with nonprofit organizations (Cameron, Kim, and Whetten, 1987; Singh, House, and Tucker, 1986; Selle and Oymy-r, 1992 are exceptions). This lack of attention is unfortunate because the nonprofit sector has recently faced a series of financial constraints brought on by cutbacks in public expenditures during the Reagan administration, continued low levels of public expenditures during the Bush adrmnistration, and recessions in the early 1980s and 1990s. In addition, the sector's mission and accountability have increasingly been scrutinized by the public, government, and business (Estes, Binney, and Bergthold, 1989; Goss, 1993), and major institutional funders have, in some cases, reevaluated and changed their funding priorities (Millar and Moore, 1991; Millar, 1991).