Financial Literacy for the Long Term: To ensure a strong future, nonprofits need to close the gaps in their fiscal knowledge.
From Philanthropy MattersUntil recently, the financial focus of midsize nonprofits was simply to break even. That focus has shifted, changing the ways nonprofits operate and placing greater emphasis on nonprofits’ financial knowledge—and gaps in that knowledge.
Nearly two-thirds of midsize nonprofits—those with $1 million to $5 million in revenues—now strive for sustainability over mere subsistence, according to new research from the Center on Philanthropy at Indiana University. In a survey of more than 500 midsize nonprofits, the top two financial objectives cited by respondents were maintaining cash reserves and financial flexibility (38 percent) and assuring an annual surplus for down years (27 percent). Meanwhile, 24 percent wanted to break even.
“This is the first large-scale study to document a dramatic refocus in nonprofits’ financial priorities,” says John Zietlow, a professor of finance at Malone University in Canton, Ohio, who also teaches financial management for The Fund Raising School. “They’re looking past survival and working toward securing a position of financial strength, so they can better serve their mission, even during economic downtimes.” Financial Literacy and Knowledge in the Nonprofit Sector (PDF) was sponsored by The Moody’s Foundation to help nonprofits understand and increase their levels of financial knowledge and improve their effectiveness. The Center surveyed nonprofit professionals who are most responsible for their organizations’ overall fiscal management. Respondents represent a random sample of primarily human services nonprofits, as well as health, civic, environmental, arts, and education nonprofits. The findings reveal not only a shift in financial priorities, but also an obligation for nonprofits to fortify their financial skills to better forecast future needs, navigate economic instability, and manage risk. “The post-2008 world is a much tougher world for nonprofits,” says John Nelson, managing director of the public finance group for health care, higher education, and not-for-profits at Moody’s. “In an era of scarcity, nonprofits especially want to optimize their financial resources to efficiently and expeditiously serve their mission, sustain their organization, and preserve the good faith of their stakeholders.”
Mind the Gaps
To measure financial literacy, respondents were asked three basic financial questions, covering bond prices and interest rates, investment risk, and diversification. Although 76 percent of the financial managers said they were knowledgeable in financial principles, just over a third correctly answered all three questions. “This disconnect suggests nonprofits need more help to identify gaps in their knowledge and build their financial capacity,” says Una Osili, director of research at the Center on Philanthropy. For example, only one in two respondents correctly answered the question about bond prices and interest rates, key risk factors in both investing and financing. Financial literacy increased with the number of courses taken in accounting, economics, operations, and financial management—making a compelling case for nonprofit professionals to seek supplemental education at universities or through online courses. Nearly 50 percent of respondents who had completed five or more courses answered all three questions correctly, versus 37 percent who had taken one or two classes.
Empower Your Board
Another way nonprofits can improve their financial performance is to recruit more financial expertise to their boards. Two-thirds of nonprofits reported their boards were actively involved in financial accountability. In general, though, boards were less attuned to their organizations’ financial futures: 53 percent were highly involved with strategic planning, 43 percent with audit and risk management, and 27 percent with financial scenario planning. “It’s too easy to get bogged down in financial reporting, compliance, and regulatory issues and undercut the strategic role of the board,” Zietlow says. He suggests that nonprofits enlist one or two financially astute board members to train the others, so all can ask good questions, assess risks, develop policies, and guide financial planning.
Consider Your Cash Reserves
Even with more focus on financial planning, nearly 50 percent of midsize nonprofits had less than three months’ worth of cash reserves available for operating expenses. Just over a quarter had four to six months’ worth, while just under a quarter had more than seven months of cash reserves. Unless a nonprofit has very consistent cash flows and reliable standby sources of funds, Zietlow advises building a cash reserve equal to three months of operating expenses. Nelson agrees—but recognizes the conflict many nonprofits face in operating with a surplus. “You want to deliver every penny of service and value to your recipients, but economic uncertainty has awakened nonprofits to the need to operate at a surplus, if possible, to stabilize the organization and help it get through tough economic times,” he says.
Contact Una Osili at firstname.lastname@example.org, John Zietlow at email@example.com, and John Nelson at John.Nelson@moodys.com. Read the report (PDF)