The Dangers of Assessing the Financial Vulnerability of Nonprofits Using Traditional Measures (original) (raw)
Divergent Patterns of Nonprofit Financial Distress
Nonprofit Policy Forum, 2013
Human service nonprofit organizations have increasingly been called upon to produce public services as governments have sought to devolve responsibility to private organizations. Just as stress tests have used accounting indicators to determine the distress of banks, this article uses measures of financial distress (Shumway 2001; Trussel and Greenlee 2004) to understand what types of human service nonprofits are facing difficulties. Joining NCCS Core Files with spatial data from the American Community Survey, I find that there is a positive relationship between financial distress and minority population. The article enters the debate as to how cutting public funding for human services may harm vulnerable communities.
The financial vulnerability of non-profit entities: A theoretical framework proposal
REVESCO. Revista de Estudios Cooperativos
NPOs (Non-Profit Organisations) are entities created to respond to the social needs of the economy, many of which fall into financial difficulties and are forced to close. Given the importance that these entities have both socially and economically, the study of their financial vulnerability is an area of special interest. It is important to highlight the factors that characterize this type of entity in a situation of vulnerability and also to anticipate future undesirable situations which could result in closure without timely supervision. In this way, the entity could redirect its management and make the necessary changes in its structure to ensure its continuity. Our study analyses the academic literature, from a theoretical perspective, in relation to this vulnerability allowing us to construct a pentagram of five dimensions, some interrelated, which we propose to be taken into consideration in the study of an entity’s vulnerability. These five dimensions are performance, operat...
Revisiting the Financial Vulnerability of Nonprofit Business Leagues Post-2007 Recession
2016
As early contributors to the literature on nonprofit financial vulnerability, Tuckman and Chang developed a fourfinancial ratio model that they argued could be used to predict the financial vulnerability of nonprofit organizations. Tuckman and Chang concluded that financially vulnerable organizations would most likely cutback services or cease to exist after experiencing substantial financial hardships. This current study described an empirical test of the usefulness of the Tuckman and Chang’s model in predicting the financial vulnerability of a population of nonprofit business leagues before the financial shock of the 2007 recession. This current study concluded that the Tuckman and Chang model could identify and predict the financial demise of certain types of nonprofit business leagues, but not all. The findings of this study have implications for nonprofit organizational stakeholders, and fill the gap in the literature on the practical application of ratio analysis in nonprofit ...
Predicting the Financial Vulnerability of U.S. Public Charities: A Test of the Tuckman-Chang Model
2021
Charitable organizations are significant contributors to the U.S. economy, and Americans invest billions of dollars into these organizations through their donations. Without these organizations, additional pressure would be placed on governmental agencies to provide certain services or those services would not be provided at all, indicating that these organizations’ long-term survival is necessary. In 1991, Tuckman and Chang published the seminal work on the financial vulnerability of nonprofit organizations and presented a model that describes a financially vulnerable organization. Subsequent studies of this model indicate that the model is predictive; however, those studies did not utilize an actual financial shock. This study tests the predictive ability of the Tuckman-Chang model by applying it to charitable organizations that survived and did not survive the Great Recession, an economic event that negatively affected the charitable sector. Charitable organizations listed in the...
Analysing the Financial Effectiveness of the Nonprofits. Case Study on Health Nonprofits
Procedia Economics and Finance, 2015
The effectiveness in nonprofit organizations has different meanings than in profit orientated companies. The study proposes to see how the financial effectiveness can be analyzed based on the data provided by their financial statements. Within the Income Statement, Romanian nonprofit organizations have to include the income and expenses realized as well as those estimated, so this is the source of information needed in our study. Our research is based on a sample of nonprofits, chosen from a database developed by CENTRAS (Assistance center for NGO). The financial effectiveness is calculated, using the ratios method, by reporting the realized elements to the targeted ones. The period of our analysis involves three fiscal years for the chosen sample. The results of this study involve measures of financial effectiveness for each entity studied, the effectiveness evolution over the studied period, identifying factors which influence both effectiveness and its evolution, and interpreting the results for the whole field.
What affects nonprofit survival?
Nonprofit management and Leadership, 1994
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).
mackcenter.org
This article reviews the literature on two critical aspects of nonprofit management, finance and evaluation. It is based on the assessment of 328 journal article abstracts derived from a total sample of 2013 articles located in the entire publication history of three major U.S. journals of nonprofit management. To survive and thrive in a changing political and economic environment, nonprofits have had to develop and sustain a diversified financial base. At the same time, the demands from funding sources and constituents for accountability have required nonprofits to develop systems to evaluate their service delivery and financial performance. The major themes include financial management, foundations and funders, fundraising, social enterprise, accountability, program evaluation and management information systems. The dual challenges and the rapid development of technology have pressured nonprofits to adopt mechanisms to integrate and evaluate service and financial and data. The review concludes with the beginnings of a research agenda related to revenue generation, resource allocation, and performance improvement.
Nonprofit Management and Leadership, 2003
Consensus about financial performance measurement remains elusive for nonprofit organization (NPO) researchers and practitioners alike, due in part to an overall lack of empirical tests of existing and new measures. The purpose of the current study was to explore potential similarities of financial performance measures derived from two sources: current NPO research and key informant interviews with NPO foundation constituencies. The authors examined financial performance measurement ratios with data from fifteen Internal Revenue Service (IRS) Form 990 line items. Using factor analytic techniques, they found three performance factors, each with two associated financial measurement ratios, to be present. They categorized the performance factors as fundraising efficiency, public support, and fiscal performance. This article discusses implications of the findings and future research. N ONPROFIT ORGANIZATIONS (NPOs) provide important services throughout the United States and beyond, but the degree to which such organizations are effective remains a much-
Nonprofit and Voluntary Sector Quarterly, 2000
The IRS 990 Return is becoming an increasingly prominent source of financial data underlying descriptions of the nonprofit sector and studies of nonprofit organizations. However, questions about the quality of the data continue to be of concern. This study of 350 nonprofit organizations investigates the adequacy, reliability, and appropriate interpretation of IRS 990 Return data through comparisons of selected entries with corresponding measures from each organization’s audited financial statements. Both quantitative and qualitative methods are used to examine and explain the consistency between the two data sources. The study concludes that the IRS 990 Return can be considered an adequate and reliable source of financial information for many types of investigations, but preparers and users of the data need a clearer understanding of its purposes to enable appropriate interpretations.
Toward a More Powerful Model of Assessing Financial Vulnerability
Effective nonprofit governance relies upon understanding an organization's financial condition and vulnerabilities. However, financial vulnerability of nonprofit organizations is a relatively new area of study. In this paper, we compare two models used to forecast bankruptcy in the corporate sector with the model used by nonprofit researchers (Tuckman and Chang 1991). We find that the Ohlson model has higher explanatory power than either Tuckman and Chang's or Altman's in predicting four different measures of financial vulnerability. However, we show that none of the models, individually or combined, are effective in predicting financial distress. We then propose a more comprehensive model of financial vulnerability by adding two new variables to represent reliance on commercial-type activities to generate revenues and endowment sufficiency. We find that this model outperforms Ohlson's model and performs substantially better in explaining and predicting financial vulnerability. Hence, the expanded model can be used as a guide for understanding the drivers of financial vulnerability and for identifying more effective proxies for nonprofit sector financial distress for use in future research.