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The Financial Health of the United States Nonprofit Sector: Facts and Observations

January 1, 2018

The Financial Health of the United States Nonprofit Sector examines the finances of more than 219,000 U.S. nonprofits for FY 2010-2014. The findings are sobering:Around 50 percent have less than one month of cash reservesSome 30 percent have lost money over three yearsSome 7-8 percent are technically insolventIn this report, we provide some context setting with a brief overview of the size and scale of the US nonprofit sector and why its financial health matters. We look at the financial vital signs of the sector, analyzing key financial metrics segmented by size, sub-sector, and geography1. We describe practical steps that trustees and their organizations can take to strengthen their financial position. Finally, we offer some long-term ideas for how funders and the rest of the ecosystem can actively reduce the risks of financial distress in the nonprofit sector. We conclude with an appendix of tables summarizing key financial health indicators for the sector.

The Financial Health of Philadelphia-Area Nonprofits

October 1, 2017

As nonprofit organizations in the five Pennsylvania counties of Greater Philadelphia (Bucks, Chester, Delaware, Montgomery and Philadelphia) emerge from the financial crisis of the last decade and head into a very different and hard-to-forecast political and economic environment in the future, financial discipline, smart growth and strong governance are more important than ever. Accordingly, many nonprofit executives and governing boards are asking new questions about the organizations they govern. What risks do we face?1 How risky are we in relation to our peers? Are we doing the right things to understand and mitigate our risks? How should we balance financial risk against programmatic reward? What should we do to reduce the potential hardships from financial distress?

Risk Management for Nonprofits

March 15, 2016

Our research, based on the first comprehensive financial analysis of New York's nonprofit sector, found that 10% of the city's nonprofits were insolvent and 40% had virtually no cash reserves. Less than 30% were financially strong. If anything, things are getting harder, given market volatility, the move to value-based payments in health care, and increased costs for real estate and labor.Fortunately, we also discovered that nonprofits can take a few concrete steps to reduce their risk of failure and sustain vital programs:Make risk management an explicit responsibility of the audit and/or finance committee.Develop a risk-tolerance statement, indicating the limits for risk-taking and the willingness to trade short-term impact for longer-term sustainability.Keep a running list of major risks and the likelihood and expected loss for each.Put in place plans for how to maintain service in the event of a financial disaster, or even a "living will" that specifies how programs will be transferred to other providers (or wound down in an orderly fashion) in the event that recovery is not possible.Brief trustees regularly about longer-term trends in the operating environment.Periodically explore the potential benefits of various forms of organizational redesign, such as mergers, acquisitions, joint ventures, partnerships, outsourcing, managed dissolutions, and divestments.Compare financial performance to peers on an annual basis.Develop explicit targets for operating results (margins, months of cash, etc.) and contingency plans if minimum targets are not met.Redouble efforts to build and safeguard a financial cushion or "rainy-day fund," even if doing so forces consideration of difficult programmatic trade-offs.Doing any of these will depend on a functioning partnership between capable management and a critical mass of experienced, educated and engaged board members. Therefore, organizations serious about risk management must work hard to recruit board members with a wide range of experience. They need to ensure ongoing education for both new and existing board members and to empower high-functioning committees. Many organizations, particularly large and complex ones, would also benefit from having an experienced nonprofit executive on their board.