Survey: Organizations Face “Starvation Cycle”
June 13, 2018 Andy Segedin
It is the ambition of many nonprofit executives and board members to grow their organizations — more revenue, more programming, and more constituents served. Heavy lies the crown, however, according to a new survey conducted by The BDO Institute for Nonprofit Excellence. Larger organizations tend to face greater liquidity challenges and are more likely to maintain a lower level of reserves as compared to moderate-sized organizations.
The survey, “Nonprofit Standards,” benchmarks 100 organizations by size: midrange (annual revenue of less than $25 million), upper-midrange ($25 million to $75 million), and large ($76 million and greater). The authors found that across sizes approximately 46 percent of organizations maintain six months or less of operating reserves, with just 35 percent possessing over a year of reserves. The portion of organizations with reserves to last more than a year is greatest among midrange organizations (50 percent) as compared to upper-midrange (30 percent) and large (33 percent) organizations. No midrange organization reported zero reserves, while 7 percent of upper-midrange and 8 percent of large organizations have nothing set aside.
Liquidity similarly favors midrange organizations. One quarter (25 percent) of all organizations identified that maintaining liquidity is a moderate or large challenge. Midrange organizations (10 percent) have had less such trouble, however, than upper-midrange (33 percent) and large (25 percent) organizations.
Half of all midrange organizations (50 percent) increased revenues substantially in 2017, significantly above upper-midrange (28 percent), large (22 percent), and all (30 percent) organizations. Just 5 percent of midrange organizations experienced revenue decreases as compared to 14 percent each for upper-midrange and large nonprofits.
Adam Cole, partner and national co-leader of BDO USA’s Nonprofit & Education Practice, pumped the brakes on notions that more moderate-sized organizations are in inherently better financial position. Smaller organizations might appear to be in better financial position for strategic reasons, such as an organizational unwillingness to tie reserves into illiquid investments. About 20 percent of all organizations still face what Cole referred to as the “starvation cycle,” underfunding that leads to organization leadership underinvesting in necessary infrastructure.
“The overall thread of the survey is that the nonprofit sector overall is struggling to achieve financial sustainability,” Cole wrote in an email. “Most nonprofits are undercapitalized when compared to a commercial enterprise. This fact, combined with the current economics facing many nonprofits resulting in the reality of operating programs with razor-thin margins to meet programmatic mandates, creates liquidity issues.”
Laurie De Armond, fellow co-leader of the practice, added that one of the main sources of volatility in 2017 was uncertainty around social issues such as human rights and environmental organizations. Some organizations saw spikes in support from constituents who believed that certain social norms were under attack.
Organizations, in response, are evaluating opportunities to partner or merge with for-profit and fellow nonprofit entities, upper-midrange organizations representing the most likely group to do so within the next two years.
Almost one-quarter (23 percent) of respondents from upper-midrange organizations reported that their organizations were somewhat or very likely to partner with a for-profit entity and 5 percent reported a similar likelihood of merging with a for-profit. No midrange or large organization’s respondent indicated that it was very likely that their organization would merge with a for-profit and partnerships are likely among just 5 percent of midrange and 11 percent of large organizations.
A larger portion of respondents stated that their organization was somewhat or very likely to partner with a fellow nonprofit, 30 percent among mid-range organizations and 39 percent each for upper-midrange and large nonprofits. None of the midrange organization representatives surveyed reported a moderate or high likelihood of merging with another nonprofit, as opposed to 12 percent of upper-midrange and 8 percent of large organizations.
Cole said that larger organization’s interest in partnering and merging is not necessarily an indication of financial hardship, but rather a willingness to look beyond the four corners of a nonprofit’s offices to find better means of advancing missions. Nonprofit leaders are often too quick to dismiss mergers and partnerships, he said. Mergers and partnerships can be seen as an innovative tactic for larger organizations to evolve and maintain relevance, De Armond added.
De Armond described the survey as a jumping-off point for nonprofit leaders to have meaningful discussions about questions such as whether organizations are positioned for financial success, can afford to leverage new technologies, and the like.
“And if the answer is no, the conversation then shifts to: what steps can we take to change our financial situation and set ourselves up for sustainable growth,” she said.