Financial Health of Nonprofit Organizations

Abstract

Nonprofit financial health is the least developed among the three sectors – public, private nonprofit --and often focuses on vulnerability, capacity, and stability (E. I. Altman, Haldeman, & Narayanan, 1977; Ashley & Faulk, 2010; Carroll & Stater, 2009; Chang & Tuckman, 1991, 1994, 2010; Chikoto & Neely, 2014; Foster & Fine, 2007; Greenlee & Trussel, 2000; Gronbjerg, 1992; Kingma, 1993; Pfeffer & Salancik, 2003; Trussel, 2002; Yan, Denison, & Butler, 2009). The definitions of each dimension, method of measurement, and their degree of importance in evaluating financial health have not been sufficiently clarified within existing research. At the level of nonprofit organization, these are important because financial position is closely tied to mission and quality programs. At the level of sector, the sustainability of nonprofits plays a significant role alongside public and private organizations, in better connecting people to themselves, their communities and opportunities for quality of life and well-being. This makes a study of nonprofit financial health one of practical assessment, economic and management theory, but also grounded in a normative connection to valuable role of nonprofits in the American system of organizational life. This research asks three questions. First, how can nonprofit organizations monitor financial measures to guard against financial distress? Second, how do successful organizations strategize to build stable and sustainable financial health? And third, how do membership associations build sustainable financial health? Three main limitations of previous research are addressed through empirical analysis. First, nonprofit research focuses on a very limited pool of financial ratios. Second, nonprofit studies fail to examine the factors that explain the difference between large organizations’ financial health and smaller organizations’ health (or lack thereof). Third, nonprofit research largely focuses on ordinary nonprofits, neglecting the other types of nonprofit organizations, including membership associations. These three limitations are the basis of the proposed empirical articles. A second gap in previous research concerns the consistent finding that larger organizations report better financial health (Carroll, 2005; Carroll & Stater, 2009; Chikoto & Neely, 2014). We do not yet understand which characteristics of larger organizations contribute to their better financial health. A more precise definition of financial health might provide insight into the differentiating factors that contribute to this finding, particularly inclusion of multiple time frames and management strategies such as nonprofit lobbying. Also, exploration of unique characteristics of nonprofits, including volunteer workforce may provide insights. The third gap addressed by this research is the lack of finance studies focused on a critical subset of nonprofits: membership associations. Scholarship broadly recognizes the role of nonprofit organizations in supplying goods and services, as well as acting at times as agents of the government in delivering on social needs. Berry (1999), however, has notably brought attention to the contributions of nonprofits to political life and discourse, and specifically that membership organizations are engaging more than ever within this space. Membership associations are categorized as expressive organizations that promote values, affiliative organizations that promote social intercourse, and instrumental organizations that provide useful services to members (Mason, 1996). These organizations are also likely to have more representational infrastructure, in terms of internal decision making, as well as produce more excludeable benefits. For these reasons, the determinants of financial health may be enabled and constrained in ways that cannot be presumed for all nonprofits.