Many Nonprofits Lack Financial Strength for Sustainable Growth

Almost half of nonprofits in the U.S. hope to expand their programs in the next two years, but many organizations may lack the financial strength to fuel sustainable growth.

This is among the top findings of Nonprofit Standards, a benchmarking survey designed to give nonprofits a useful barometer to measure performance across a variety of areas including strategic planning, human resources, operations, scope and impact, and governance matters.
 
 The BDO Institute for Nonprofit Excellence‘s second annual nonprofit benchmarking survey reveals that nonprofits’ hearts may be bigger than their wallets. 
 
Managing growth registers as a concern for 2 in 5 nonprofits, but the sector overall could be underestimating the road ahead. Some of the financial warning signs in the survey findings include:
 
1. Nonprofits are not prioritizing liquidity—a crucial safety net to weather any funding disruptions. More than half (51 percent) of nonprofits have less than 6-months of operating reserves. While the right level of operating reserves varies by organization size and sector, establishing a 6-month supply of operating reserves is best practice overall.
 
Despite this gap, executives remain unfazed by low liquidity levels: 34 percent say maintaining adequate liquidity poses no challenge, and 40 percent say it is a low-level challenge.
 
2. About 1 in 5 nonprofits could be at risk of falling into the starvation cycle: underfunding necessary infrastructure—new technology, employee training, and fundraising expenses—in favor of high programmatic spending. These organizations spend between 90-99 percent of expenditures on program-related activities, compared to the average nonprofit that allocates 77 percent.
 
“High programmatic spending can look deceptively positive on a statement of activities, but the model is unsustainable. While meeting a community, national, or global need is the mission of nonprofit organizations, it is not productive—for the nonprofit or the people it supports—to undermine the organization’s long-term viability,” said Adam Cole, partner and co-leader of BDO’s Nonprofit & Education practice. “Investment in new technology, which has the potential to streamline operations and reduce costs over time, is often the first cut in the starvation cycle.” 

3. Nonprofits are still held to unrealistic standards for overhead spending: About 3 in 5 nonprofits say rising overhead costs is a moderate-to-high level challenge, and pressure to minimize overhead costs is likely driving high program-related spending at the expense of investment in infrastructure.