CFOs Get Comfortable With Thin Margins

May 9, 2013       Paul Clolery      

Chief financial officers at nonprofits appear to be feeling a lot like the scarecrow in The Wizard of Oz, pointing in both directions when asked a series of questions. Many describe their organizations’ overall financial health as good, yet have reserves of six months or less.

It appears that chief financial officers have become more comfortable running very, very close to the edge.

Slightly more than 100 financial executives responded to a survey from The NonProfit Times. They were asked eight questions regarding their organizations’ actual situation and then perceptions regarding the economy and general operations.

The sample shows that normal is no longer normal and that senior managers are adjusting the way they do business. For example, when asked revenue expectations for the next 12 months, exactly half said that revenue would increase; 37.5 percent said revenue will decrease somewhat, but not by a major amount; 6.8 percent said revenue will decline substantially; and, 5.7 percent said revenue will decline to the point of serious financial difficulty.

There wasn’t much left after all the bills were paid last year. Some 64 percent had six months or less of operating reserve. Drilling down further, 38.4 percent had three months or less of operating reserve. Almost 1 in 4 respondents (24.4 percent) had operating reserves of between six and 12 months while just 1 in 8 (11.6 percent) had more than 12 months.

But, when asked about the overall financial condition, only 2.4 percent were worried. Some 35.3 percent described the organization’s position as strong; 28.2 percent responded that the condition was good/middle of the road; 34.1 percent responded challenging with a plan; and, 2.4 percent said challenging without a plan.

“Overall, the results appear to indicate the continuing financial stress in the sector,” said John S. Griswold, executive director of the Commonfund Institute in Wilton, Conn. “Revenues, surprisingly, don’t sound like a serious problem, perhaps due to increased demand for services and in some cases increasing fees for service.”

John P. Langan, CPA, managing partner, 
Public Sector Group, for CliftonLarsonAllen LLP in Calverton, Md., thinks that the concept that revenue will increase has little foundation. “This economy is low growth with increasing competition for contributions, grants and from for-profit models. It seems like wishful thinking to me maybe not over the next 12 months but longer term,” he said.

Irv Katz, president and CEO of the National Human Services Assembly in Washington, D.C., likewise is concerned about the responses. “That’s not my take on the world. I believe in being bullish and optimistic but I worry that some nonprofit organizations don’t see the writing on the wall. Cuts in federal and state funding are just about certain, charitable giving is stagnant, foundation giving is increasingly targeted, as is corporate giving,” he said.

Katz’s concern about perception seems right on target. When asked to what extent the fiscal uncertainty in Washington, D.C., had affected organizations, 53.8 percent said that there hasn’t been a major impact or it hasn’t had a direct negative impact. But, respondents observed problems for other organizations and their beneficiaries. Roughly one-quarter (24.3 percent) responded that although they don’t rely heavily on government funding directly, there has been a negative impact on the organization. Just 21.6 percent of the respondents said that they rely heavily on government funds, so it has had a major negative impact.