NPQ is breaking with its own traditions to print a full publication by a collaborative comprising GuideStar, Oliver Wyman, and SeaChange Capital Partners. We found this publication to be unusually useful in that, though focused on Philadelphia, it provides a window into challenges that face nonprofits everywhere.
This report, The Financial Health of Philadelphia-Area Nonprofits, was commissioned earlier this year by The Philadelphia Foundation with the intention of presenting actionable information for nonprofit organizations, their leaders, funders, policymakers and the general public. This report follows a 2010 nonprofit study commissioned by The Philadelphia Foundation.
Residents of the five Pennsylvania counties of Greater Philadelphia rely on nonprofit organizations in many facets of everyday life and community. As nonprofits go, so go the services and amenities that impact quality of life, often health and safety. It is with this latter point in mind that The Philadelphia Foundation has focused much of its efforts over the last decade on “organizational effectiveness”—examining, promoting and funding sound fiscal, governance and leadership practices, especially among organizations serving the most vulnerable.
This report demonstrates that there is much more work to be done to strengthen nonprofit organizations in our area. Moving from “getting by” to “getting strong” requires that more attention and talent be dedicated to financial resilience by executives, boards and funders. Approximately 40 percent of organizations are not generating positive operating margins and will therefore find it difficult to focus on improving service outcomes. Seven percent of nonprofits are technically insolvent, yet neither the organizations themselves nor the wider community have a clear understanding of what it would meant for them to fail, or the implications of that failure for the populations they serve.
The authors, as experienced consultants, suggest sound approaches for addressing financial risks within organizations. They also suggest that funders self-critically examine the extent to which their restrictions on “overhead” or “administration” are contributing to the fragility of nonprofits. The groundwork is also set for more segmented or granular examinations of the region’s nonprofits, as others may wish to pursue in response to this study. This report is a good start.
We want to thank the authors and Nadya K. Shmavonian, the Director of the Nonprofit Repositioning Fund, for all they did to bring this report to fruition.
—Pedro A. Ramos, President & CEO, The Philadelphia Foundation
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?
Unfortunately, very few nonprofits have processes in place to address these issues of financial risk management. However, our research suggests that this can and must change.
- Nonprofits in the Philadelphia five county area are fragile: roughly seven percent are technically insolvent (i.e. liabilities exceed assets); over 20 percent have less than one month of cash reserves (i.e. virtually no margin for error); and over 40 percent have net operating margins of zero or less. In aggregate, we believe that fewer than 40 percent of nonprofits can be characterized as financially strong. Yet our experience in other geographies suggests that many executives and governing boards don’t fully understand the financial condition of their organizations or how they compare to peers.
- Practices such as scenario planning, benchmarking and self-rating, as well as setting explicit financial stability targets, can improve risk management. While we have seen a few organizations already doing these things, most are not.
- Distressed nonprofits have very limited ways to recover, so executives and governing boards must do all they can to reduce the risk that their organization becomes distressed in the first place. And they must take prompt, decisive action if it does.
In what promises to be a continuously volatile market for nonprofit organizations, we believe that executives and governing boards must make dramatic improvements in financial risk management over the next few years in order to bring more stability to vital programs and the communities they serve.
National concerns about risk and financial stability among nonprofits have been increasing recently, motivated by some high-profile nonprofit failures, the potential impact of rising interest rates, regulatory changes to health and human services systems, and rising real estate costs, to name a few factors. These concerns have only sharpened since the 2016 election, as nonprofits grapple with increased uncertainty around government funding levels and sources, and the possibility that tax code changes will reduce incentives for philanthropic funding. While planned dissolutions can be a responsible decision for some organizations to make, we can all agree that unanticipated closures in bankruptcy do not represent adequate fiscal stewardship of nonprofit organizations.
This report introduces important fiduciary steps that organizations can take to manage their financial health and their financial risks better. These recommendations build upon a similar 2016 s