New Report: The Financial Health of Philadelphia-Area Nonprofits
Posted by The Philadelphia Foundation on December 18, 2017
TPF publishes report on fiscal health of regional nonprofits
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. Research commissioned by The Philadelphia Foundation 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 study on how to adapt private sector risk practices to New York nonprofits that was conducted by SeaChange Capital Partners, Oliver Wyman, and GuideStar. We have attempted to identify actions that will be high-impact and potentially transformative over time, but that are also practical and can be implemented now. We believe that the opportunity to create stronger, more stable nonprofits is real—but also that the risks of inaction are real, and substantial. Organizations that do not adopt risk management practices may find themselves in an increasingly precarious situation.
To view the full report, go here.
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