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 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 reserve 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.
Katz and Griswold were both taken by the fact that current issues are not the CFOs’ largest concerns. When asked about the greatest threat to nonprofit financial stability, the overwhelming majority (72 percent) said generational relevance to contributors and members. Slightly less than one-quarter of respondents (24 percent) said federal tax on reserves and endowments; 2.4 percent said state taxability of Internet sales; and, 1.2 percent said public disclosure of Internal Revenue Service (IRS) Form 990.
“It’s interesting that more than 70 percent responded that ‘generational relevance to contributors and members’ is the greatest threat to nonprofit sustainability. It might well be,” said Katz. “I wonder if we focused on mission sustainability rather than organizational sustainability we might assure greater relevance. If, for example, social entrepreneurs, donors and others are finding other ways of addressing the needs and issues that existing NPOs feel they have the corner on, maybe we should be watching and listening and talking with them,” Katz said. “There might be some great opportunities for mission sustainability and impact through collaboration and cooperation.”
The question and responses speak to the generational shifts going on within boards and donor populations, said Griswold. It’s “challenging boards and staffs to show more impact and social change, and this trend might have a big impact on governance in the future,” he said.
“For instance, if donors want more immediate impact from their gifts they might demand a higher payout rate, which could make it harder to build institutional endowment,” said Griswold. “This, in turn, might make it harder to weather future financial crises, forcing more mergers and strategic partnerships. That would probably be a good thing but we need to do more research on whether it’s happening now and what is the result.”
You’ll often hear griping by financial people that board members just don’t get it and are impediments to getting things done. Well, that’s only partially correct, according to respondents.
Said Langan: “83.4 percent say their board struggles to balance a budget or understand standard accounting policies and best practices. That’s not completely surprising but scary all the same. But when answering another question 40.3 percent cited ‘other members of management’ as their biggest challenge in managing the accounting/finance and only 6.5 percent said the board. This is the same board that can’t balance a budget or understand standard accounting policies and best practices?”
Katz saw some bright spots in the responses. “I am impressed that such a decent percentage of respondents report having any reserves at all. We’re in a field that, with the exceptions of those lucky institutions with big endowments, it is money in-money out every year,” he said. That more than 60 percent report having three months or more in operating reserves is encouraging, he said.
“I know that boards and auditors would like to see much more significant reserves but the nature of nonprofit funding is such that we typically have to account for the expenditure of every dollar received each year,” said Katz. “Developing sources of revenue that allow for ‘earnings’ and the discipline of socking money away whenever possible are practices that probably need more attention in the field.” NPT