March 1, 2012

Midsize Nonprofits Fall Short in Financial Knowledge: New Study

Organizations seen shifting from break-even focus to sustainability

Gaps in financial knowledge exist among professionals at midsize nonprofits, with serious implications for those organizations and the donors who place their trust in them, according to a new study by the Center on Philanthropy at Indiana University.

“Seventy-six percent of financial managers at midsize nonprofits said they are knowledgeable about financial principles, but only a third correctly answered all three basic financial literacy questions asked,” Una Osili, director of research at the Center on Philanthropy, said in a statement. “Solid financial knowledge is critical to sound decision making as nonprofits strive for financial well-being and greater impact.”

The study, which was sponsored by Moody’s Foundation and released Wednesday, surveyed some 500 nonprofit professionals who are most responsible for their organizations' overall financial management.

The random sample comprised mainly human services nonprofits and those focused on health, civic matters, environment, arts and education with revenues of $1 million to $5 million. Hospitals and higher education institutions were not part of the sample.

According to the Center for Philanthropy, the survey is among the first to show a shift in financial priorities. Until recently, midsize nonprofits tended to focus on just breaking even. The findings indicate they are now emphasizing longer-term planning and sustainability.

The top three financial objectives among nonprofits surveyed were:

  • Maintaining a targeted level of cash reserves and financial flexibility (38%)
  • Ensuring an annual surplus so the mission can be achieved in down years (27%)
  • Breaking even financially (24%).

Forty-nine percent of midsize nonprofits had less than three months’ worth of cash reserves for operating expenses available. Twenty-six percent had four to six months’ worth on hand, while another quarter had more than seven months of operating expenses.

Other key findings:

  • Respondents said they were knowledgeable about negotiating with banks or lenders (78%), cash flow projections (75%) and financial scenario planning (72%).
  • Only 46% reported knowing about debt restructuring.
  • Financial literacy increased with the number of courses taken in accounting, economics, operations and financial management, and with the nonprofit’s revenue.
  • Boards were involved in accountability (66%), but less so in managing investments (38%), developing budgets (30%) and scenario planning (27%).
  • Less than 40% of nonprofits surveyed had an audit committee. 
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